accession stringlengths 20 20 | filename stringlengths 29 29 | text stringlengths 1.01k 4.37M | type_filing stringclasses 223 values | type_attachment stringlengths 2 20 | date timestamp[s] | ts_accept timestamp[s] |
|---|---|---|---|---|---|---|
0000912057-96-000542 | 0000912057-96-000542_0011.txt | WHEREAS, Nuclear Metals, Inc., a Massachusetts corporation ("Borrower"), owns the trademarks and trademark applications shown on the attached SCHEDULE I (the "Trademarks"), for which there are recordings or applications in the United States Patent and Trademark Office under the numbers shown on SCHEDULE
WHEREAS, pursuant to (i) a Credit Agreement dated as of March 3l, 1995 by and among the Borrower, State Street Bank and Trust Company ("Bank") and Carolina Metals, Inc. ("CMI"), a wholly-owned subsidiary of the Borrower, as amended by First Amendment to Credit Agreement dated as of June 30, 1995 ("Amendment"); (ii) a certain letter agreement dated the date hereof by and among the Borrower, the Bank and CMI; and (iii) a Joint Security Agreement dated as of March 31, 1995 by and among the Borrower, the Bank and CMI, as amended by the Amendment and the First Amendment to Joint Security Agreement dated the date hereof (as further amended, modified, supplemented and/or restated from time to time, the "Security Agreement"), the Borrower is obligated to the Bank; and
WHEREAS, pursuant to the Security Agreement, the Borrower has granted to the Bank a security interest in the Trademarks, all proceeds thereof, all rights corresponding thereto and the recordings and applications therefor and all goodwill of the business to which each of the Trademarks relates.
NOW, THEREFORE, for good and valuable consideration, receipt of which is acknowledged, the Borrower does hereby assign unto the Bank and grant to the Bank a security interest in and to the Trademarks, and proceeds thereof, all rights corresponding thereto, the recordings and applications therefor and the goodwill of the business to which each of the Trademarks relates, which assignment and security interest shall secure all of the "Obligations" as defined in the Security Agreement in accordance with terms and provisions thereof.
The Borrower expressly acknowledges and affirms that the rights and remedies of the Bank with respect to the assignment and security interest granted hereby are more fully set forth in the Security Agreement.
In WITNESS WHEREOF, the parties hereto have executed this Trademark Assignment under seal as of on the date first above written.
Dated: Boston, Massachusetts NUCLEAR METALS, INC.
Witness: By: /S/ JAMES M. SPIEZIO
Witness: STATE STREET BANK AND TRUST
By: /S/ WILLIAM R. DEWEY IV Name: William R. Dewey IV
Suffolk, ss. September 26, 1995
Then personally appeared, before me, the above-named James M. Spiezio the Vice President Finance of Nuclear Metals, Inc. and acknowledged the foregoing instrument to be the free act and deed of said corporation.
My Commission Expires: May 24, 2002
Suffolk, ss. September 26, 1995
Then personally appeared, before me, the above-named William R. Dewey IV the Vice President of State Street Bank and Trust Company and acknowledged the foregoing instrument to be the free act and deed of said corporation.
My Commission Expires: May 24, 2002
TRADEMARK REGISTRATION NUMBER REGISTRATION DATE | 10-K | EX-10.(O) | 1996-01-16T00:00:00 | 1996-01-16T17:13:10 |
0000079326-96-000002 | 0000079326-96-000002_0005.txt | WAIVER UNDER ESOP CREDIT AGREEMENT
WAIVER dated as of December 29, 1995 under the $130,022,336 Amended and Restated Credit Agreement dated as of November 29, 1994, as amended (the "Credit Agreement") among POLAROID CORPORATION (the "Company"), the BANKS party thereto (the "Banks"), ABN AMRO BANK N.V., as Co-Agent and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
WHEREAS, on December 19, 1995 the Company announced a restructuring plan that will result in a total pre-tax special charge of $195 million, of which $155 million will be charged in the fourth quarter of fiscal 1995 and $40 million in fiscal
WHEREAS, the Company has asked the Banks to waive compliance with the financial covenants set forth in Section 5.07, 5.08 and 5.09 of the Credit Agreement until February 29, 1996 to allow the Company and the Banks time to negotiate an amendment to the Credit Agreement dealing with issues raised by said special charge (the "Proposed Amendment");
NOW, THEREFORE, the undersigned parties hereto agree as follows:
SECTION 1. Definitions, References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement.
SECTION 2. Waivers. The undersigned Banks waive any Default or Event of Default arising from any failure by the Company to comply with the provisions of Sections 5.07, 5.08 and 5.09 of the Credit Agreement during the period from and including December 19, 1995 to and including the earlier of (i) February 29, 1996 and (ii) the date on which the Proposed Amendment becomes effective.
SECTION 3. Governing Law. This Waiver shall be governed by and construed in accordance with the laws of the State of New York.
SECTION 4. Counterparts; Effectiveness. This Waiver may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Waiver shall become effective when the Agent shall have received from each of the Company and the Required Banks either a counterpart hereof signed by such party or telex, facsimile or other written confirmation that such party has signed a counterpart hereof.
IN WITNESS WHEREOF, the undersigned parties hereto have caused this Waiver to be duly executed by their respective authorized officers as of the day and year first above written.
By /s/ Graham M. Brown, Jr.
By /s/ Deborah A. Brodheim
By /s/ Alta M. Fleming
By /s/ R.E. James Hunter
CREDIT LYONNAIS NEW YORK BRANCH
By /s/ Michael C. Mast Title: Member of Sr. Management
By /s/ Robert G. Brookby
DEUTSCHE BANK AG, NEW YORK BRANCH
By /s/ Stephan A. Wiedemann
DEUTSCHE BANK AG, CAYMAN ISLANDS BRANCH
By /s/ Stephan A. Wiedemann | 8-K | EX-10 | 1996-01-16T00:00:00 | 1996-01-16T15:48:09 |
0000950132-96-000009 | 0000950132-96-000009_0001.txt | THIS AGREEMENT (the "Agreement"), dated November 18, 1995, among ARMSTRONG WORLD INDUSTRIES, INC., a Pennsylvania corporation ("Parent"), ARMSTRONG ENTERPRISES, INC., a Vermont corporation ("Seller"), and INTERCO INCORPORATED, a Delaware corporation ("Buyer").
WHEREAS, Seller, a wholly-owned subsidiary of Parent, owns beneficially and of record all of the issued and outstanding shares (the "Shares") of Common Stock, par value $1.00 per share, of Thomasville Furniture Industries, Inc., a Pennsylvania corporation (the "Company"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell to Buyer, the Shares upon the terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained in this Agreement, Seller and Buyer, intending to be legally bound, agree as follows:
PURCHASE AND SALE OF SHARES
At the Closing (as defined in Section 0), Seller shall sell, assign, transfer and deliver to Buyer, and Buyer shall purchase and accept from Seller, the Shares for the aggregate purchase price of $331,200,000 (the "Purchase Price"), payable as provided in Section 0. The Purchase Price is subject to adjustment as provided in Section 2.3.
The Purchase Price shall be paid by Buyer to Seller on the Closing Date by wire transfer of same day immediately available funds.
The Closing; Post-Closing Purchase Price Adjustment.
The closing ("Closing") of the sale and purchase of the Shares contemplated hereby shall take place at the offices of the legal counsel for Buyer's lead lender described in the Financing Letters (as defined in Section 4.5) in New York, New York, at 10:00 a.m. local time on December 29, 1995 or, if later, the date that is five business days following notice from Buyer to Seller of the anticipated satisfaction of the condition set forth in Section 7.7, or on such other date and such other place as the parties may agree, but in any event not later than January 31, 1996 ("Termination Date"); provided, however, in the event that any of the conditions set forth in Sections 6.4, 6.5, 7.4 and 7.5 shall not have been met or waived in writing by the Termination Date, such date shall be extended to the first to occur of (i) the satisfaction or written waiver of all such conditions or (ii) March 15, 1996. The day of Closing is referred to hereinafter as the "Closing Date."
At the Closing, Seller shall deliver to Buyer stock certificates representing all of the Shares, duly endorsed in blank or accompanied by stock powers executed in blank, in proper form for transfer, together with any required transfer stamps.
Within 60 days after the Closing Date, Buyer will prepare and deliver to Seller a consolidated balance sheet (the "Closing Date Balance Sheet") for the Company and the Subsidiaries as of the close of business on the Closing Date (determined on a pro forma basis as though the parties had not consummated the transactions contemplated by this Agreement). The Closing Date Balance Sheet will be audited by KPMG Peat Marwick ("Peat"), whose opinion will be appended thereto. The Closing Date Balance Sheet will be prepared in accordance with generally accepted accounting principles applied on a basis consistent with the preparation of the Latest Balance Sheet (as defined in Section 3.3. below); provided, however, that (i) inventories will be calculated at cost (first-in, first-out) or market, whichever is lower, (ii) intercompany receivables, intercompany payables and notes payable to affiliates will be excluded, (iii) any asset or liability of the Company and the Subsidiaries retained by Seller pursuant to this Agreement will be excluded and (iv) any other adjustments shall be made which were made in the calculation of Target Net Worth attached hereto as Schedule 2.3 (iv) (Subsections (i), (ii), (iii) and (iv) hereof collectively referred to as the "Balance Sheet Adjustments"). Representatives from both Seller and Buyer shall be entitled to participate in the taking of any physical inventories conducted with respect to the Company and the Subsidiaries on or after the date of this Agreement. The fees and expenses of Peat will be paid by Buyer.
On or prior to the date 20 business days after delivery to Seller of the Closing Date Balance Sheet (the "Adjustment Date"), Seller and Buyer shall mutually agree upon the "Adjusted Closing Net Worth". The "Adjusted Closing Net Worth" shall mean the Shareholder's Equity of the Company and the Subsidiaries reflected on the Closing Date Balance
Sheet. In the event that Seller and Buyer are unable to agree on the Adjusted Closing Net Worth within such 20 day period, Seller and Buyer shall submit the dispute to Arthur Andersen & Co. (the "Arbiter"), for resolution. Promptly, but no later than 20 days after its acceptance of its appointment as Arbiter, the Arbiter shall determine, based solely on presentations by Seller and Buyer, and not by independent review, only those issues in dispute and shall render a report as to the dispute and the resulting computation of the Adjusted Closing Net Worth which shall be conclusive and binding upon the parties. The fees, costs and expenses of the Arbiter shall be borne by each party in proportion that the aggregate dollar amount of such disputed items so submitted that are unsuccessfully disputed by such party bears to the aggregate dollar amount of the items submitted by the Arbiter.
To the extent the Adjusted Closing Net Worth is less than the "Target Net Worth" in an amount that is greater than $2,000,000, Seller shall pay the amount of such difference in excess of $2,000,000 to Buyer (plus interest from the Adjustment Date through the date of payment at the prime lending rate of Bankers Trust Company from time to time prevailing ), as an adjustment to the Purchase Price, by wire transfer of immediately available funds within two business days of the final determination of Adjusted Closing Net Worth. The "Target Net Worth" shall mean $250,895,000, which is the Shareholder's Equity reflected on the Latest Balance Sheet, adjusted to give effect to the Balance Sheet Adjustments. In the event the Adjusted Closing Net Worth is equal to or greater than $248,895,000, no adjustment to the Purchase Price will be made.
Seller will make its books, records and personnel available to Buyer and its accountants and other representatives, and Buyer will cause the to make their respective books, records and personnel and Peat's work papers and back-up materials used in preparing and auditing the Closing Date Balance Sheet available to Seller and its accountants and other representatives, at reasonable times and upon reasonable notice at any time during (A) the preparation by Buyer of the Closing Date Balance Sheet, (B) the review by Seller of the Closing Date Balance Sheet and (C) the resolution by the parties and, if necessary, the Arbiter of any disputes involving the Closing Date Balance Sheet.
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that the statements contained in this Article 3 are correct as of the date of this Agreement, and will be correct as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article 3).
Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Vermont. Except as set forth in Schedule 3.1, each of the Company and the Subsidiaries (as defined in Section 3.14) (i) is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation and (ii) is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the character of the properties owned or leased by it or the nature of the business conducted therein requires it to be so qualified except where the failure to qualify would have a material adverse effect on the Company and the Subsidiaries, taken as a whole. Schedule 3.1 sets forth each state in which the Company or the Subsidiaries are qualified to do business as a foreign corporation. Seller has full corporate power and authority to execute, perform this Agreement and to consummate the transactions contemplated hereby. Each of the Company and the Subsidiaries has full power and authority to carry on its business as conducted at the present time and to own and use the properties owned and used by it.
This Agreement has been duly authorized, executed and delivered by Seller and constitutes a valid and legally binding agreement of Seller, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles.
Delivered contemporaneously herewith to Buyer are the following financial statements:
the (i) audited statements of income and cash flows for the years ended December 31, 1992, December 31, 1993 and December 31, 1994 and (ii) the audited consolidated balance sheet of the Company and the Subsidiaries as of December 31, 1993, and December 31, 1994, together with the notes thereto and the reports thereon of KMPG Peat Marwick; and
the unaudited consolidated balance sheet of the Company and the Subsidiaries as of October 31, 1995 (the "Latest Balance Sheet") and the related statement of income and cash flows for the ten-month period then ended.
Except as set forth on Schedule 3.3, each of the foregoing financial statements (including in all cases the notes thereto, if any) fairly presents the financial position of and the results of operations for the entities reported on and is consistent with the books and records of the Company and the Subsidiaries and has been prepared in accordance with generally accepted accounting principles, consistently applied, subject in the case of the financial statements referred in (b) above to changes resulting from normal year-end adjustments. The books and records upon which the foregoing financial statements are based are true and complete.
Except as set forth on Schedule 3.4, neither the Company nor any of the Subsidiaries has any material obligation or liability (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due) other than (a) liabilities set forth on the Latest Balance Sheet (including the notes thereto), (b) liabilities and obligations which have arisen after the date of the Latest Balance Sheet in the ordinary course of business , (c) obligations not arising from a default under contracts or commitments described on any Schedules hereto or not required to be described thereon because of the nature and amount of such contracts or commitments, and (d) other liabilities and obligations expressly disclosed in the other Schedules to this Agreement.
There has not been any material adverse change in the financial position or results of operation of the Company and the Subsidiaries since the date of the Latest Balance Sheet; except, however, for changes (i) in the furniture industry in general, (ii) in the economy in general, or (iii) as a result of the seasonality of the business of the Company and the Subsidiaries, or any of them. In addition, except as expressly contemplated by this Agreement or as set forth on Schedule 3.5, since the date of the Latest Balance Sheet, there has not occurred any of the following events without the prior written consent of Buyer:
the issuance of any notes, bonds or other debt securities or any
the borrowing of any amount of money or the incurring of or becoming subject to any liabilities, except (i) current liabilities incurred in the ordinary course of business, and (ii) liabilities under contracts entered into in the ordinary course of business;
the discharge or satisfaction of any lien or encumbrance or the payment of any obligation or liability, other than current liabilities paid in the ordinary course of business;
the mortgage or pledge of any properties or assets or the subjection of any property or asset to any lien, security interest, charge or other encumbrance, except liens for current property taxes not yet due and
the cancellation of any debts or claims except in the ordinary
the sale, assignment or transfer of (i) any tangible assets, other than the sale of inventory in the ordinary course of business, or (ii) any trademarks, service marks, trade names, copyrights, trade secrets or other
any capital expenditures or commitments therefor that aggregate in excess of $2.5 million per calendar quarter;
any loan or bonus payment to an officer, director, shareholder or affiliate of the Company or any of the Subsidiaries;
the adoption or entering into, or the amendment, modification or termination of, any collective bargaining agreement, Employee Benefit Plan, or Employee Benefit Arrangement (as such terms are defined in Section 3.25 hereof), or the granting of any increase in compensation or the making of any other material change in employment terms for any of its directors, officers or employees outside of the
any loans or advances to, or guarantees for the benefit of, any persons in excess of $150,000 in the aggregate, other than endorsements of negotiable instruments made for collection;
any material charitable contributions or pledges;
any theft, damage, destruction or casualty loss exceeding in the aggregate $500,000, whether or not covered by insurance;
any conduct of the business of the Company and the Subsidiaries outside the ordinary course of business;
any new elections or change in any current election with respect to Taxes (as defined in Section 3.22 hereof) affecting the Company or the
any commitment on the part of the Company and the Subsidiaries to any of the foregoing.
Schedule 3.6 sets forth a complete list and summary description of all real property, leases, subleases and other rights or interests of record in real property and improvements thereon, wherever located, owned, leased, occupied or used by the Company or any of the Subsidiaries (the "Real Property Interests"), together with a description of the instruments or other documents by which the same were acquired and the recording data applicable thereto. Within ten (10) days of the execution of this Agreement by the parties hereto, Seller will deliver to Buyer true and correct copies of all deeds, leases, subleases, documents of title, title opinions and title insurance policies relating to the Real Property Interests which are in the possession of Seller. Except as set forth on Schedule 3.6 and except for: (a) liens for current ad valorem taxes not yet delinquent, (b) covenants, conditions and restrictions of record which are not violated by existing uses or improvements and which do not materially interfere with the use of the Real Property Interests and do not adversely affect the merchantability of the title to the Real Property Interests and (c) statutory liens with respect to current obligations not yet delinquent (other than for current ad valorem taxes not yet delinquent) and other title defects which do not materially interfere with the existing use of the Real Property Interests and do not materially adversely affect the merchantability of the title thereto, the Company and the Subsidiaries have good and marketable title to the Real Property Interests, free and clear of any mortgage, security interest, lien, lease, encumbrance, option or agreement and there are no pending or, the knowledge of Seller, threatened condemnation or eminent domain proceedings, lawsuits or administrative actions, special assessments or changes in assessed valuation (other than routine changes to assessed valuations and tax rates) relating to the property affecting materially and adversely the current use or occupancy . Except as set forth in Schedule 3.6, each of the Real Property Interests listed and described in Schedule 3.6 is in full force and effect, and there is no material default by the Company or any of the Subsidiaries or, to the knowledge of Seller, by any other party under any such Real Property Interests.
The Company and the Subsidiaries have good and marketable title to all of the equipment, machinery, motor vehicles, furniture and fixtures, inventory and supplies and other tangible personal property owned or leased by the Company and the Subsidiaries, free and clear of any mortgage, liability, security interest, pledge, lien or encumbrance of any kind or nature whatsoever except as set forth in Schedule 3.7 and except for liens for current ad valorem taxes not yet delinquent. All such tangible personal property used at present in the operations of the Company and the Subsidiaries is in good operating condition and repair (subject to normal wear and tear).
All of the inventories and supplies of each of the Company and the Subsidiaries are reflected on the Latest Balance Sheet, at standard cost, or latest purchase price when inventoried, whichever is lower, and all such inventories and supplies, together with inventories and supplies acquired since the date of the Latest Balance Sheet, are of sufficient quality and quantity for the normal operation of the business of the Company and the Subsidiaries, and are free and clear of any claim, security interest, pledge or lien or encumbrance of any kind or nature whatsoever.
Schedule 3.9 sets forth a true and correct list of all of the patents (including all reissues, divisions, continuations, continuations-in-part and extensions thereof), applications for patents, patent disclosures docketed, inventions, improvements, trademarks (including service marks), trademark applications, trade names, copyrights and copyright registrations owned by the Company or any of the Subsidiaries, and all licenses, franchises, permits, authorizations, agreements and arrangements that concern the same or that concern any intellectual property owned by others and used by the Company or any of the Subsidiaries. True and correct and complete copies of all such intellectual property, licenses, franchises, permits, authorizations, agreements and arrangements will be delivered by Seller to Buyer within ten (10) days of the execution of this Agreement by the parties hereto. The use of such intellectual property rights by the Company and the Subsidiaries does not conflict with the rights of others, nor, to the knowledge of Seller, is any third party infringing upon the intellectual property rights of the Company or any Subsidiary. Each of the Company and the Subsidiaries owns or is the licensee of all rights to all patents, patent applications, inventions, improvements, trademarks, trademark applications, trade names, copyrights or other intellectual property necessary to conduct its present business operations.
The accounts and notes receivable reflected on the Latest Balance Sheet are owned by the Company and the Subsidiaries free and clear of any security interest, pledge or lien or encumbrance of any kind or nature whatsoever except as set forth on Schedule 3.10 and, subject to the amounts reflected in the Latest Balance Sheet for bad debts or doubtful accounts, are collectible in the normal course of business. The accounts and notes receivable of the Company and the Subsidiaries created from and after the date of the Latest Balance Sheet to the Closing Date will be free and clear of any pledge, security interest or lien or encumbrance of any kind or nature whatsoever except as set forth on Schedule 3.10 and, subject to the amounts which are reflected in the books and records of the Company and the Subsidiaries for bad debts or doubtful accounts and which are consistent with the past practices of the Company and the Subsidiaries with respect to the bad debts or doubtful accounts, will be collectible in the normal course of business.
For each of the Company and the Subsidiaries, the title, par value, number of authorized shares, number of issued and outstanding shares of each class of capital stock and the persons owning beneficially and of record the outstanding shares of each such class of capital stock are set forth on Schedule 3.11. No other class of capital stock of the Company or any Subsidiary is authorized or outstanding. All of the issued and outstanding shares of each of the Company and the Subsidiaries, including the Shares, are duly authorized and are validly issued, fully paid and nonassessable and none of such shares have been issued in violation of any preemptive rights of shareholders, the provisions of the applicable Articles or Certificate of Incorporation or any applicable law. The Shares constitute all of the issued and outstanding shares of capital stock of the Company.
There is no outstanding right, subscription, warrant, call, unsatisfied preemptive rights, option or other agreement of any kind to purchase or otherwise to receive from the Company, any Subsidiary or Seller any shares of the capital stock or any other security of the Company or any Subsidiary, and there is no outstanding security of any kind convertible into such capital stock.
Seller owns and holds beneficially and of record, free and clear of any lien or other encumbrance, or owns of record and has full power and authority to transfer and dispose of free and clear of any claim, suit, proceeding, call, voting trust, proxy, restriction, security interest, lien or other beneficial interest or encumbrance of any kind or nature whatsoever (other than created by Buyer), all of the Shares and, upon delivery of and payment for such Shares as herein provided, Buyer will acquire good and valid title thereto, free and clear of any claim, suit, proceeding, call, voting trust, proxy, restriction, security interest, lien or other beneficial interest or encumbrance of any kind or nature whatsoever.
The sole first tier subsidiary corporation of the Company is Thomasville Enterprises, Inc., a Vermont corporation (the "First Tier Subsidiary"). The sole subsidiary corporations of the First Tier Subsidiary are as set forth on Schedule 3.14 (collectively, the "Second Tier Subsidiaries"). The First Tier Subsidiary and the Second Tier Subsidiaries are referred to hereinafter collectively as the "Subsidiaries" and individually as a "Subsidiary". Except as set forth on Schedule 3.14, neither the Company nor any of the Subsidiaries owns, directly or indirectly, any shares of capital stock or any other security or interest in any other corporation, partnership, entity or person. The Company has good and valid title to all of the issued and outstanding shares of stock of the First Tier Subsidiary, free and clear of any claim, suit, proceeding, call, voting trust, proxy, restriction, security interest, lien or other encumbrance of any kind or nature whatsoever, and the First Tier Subsidiary has good and valid title to all of the issued and outstanding shares of the stock of each of the Second Tier Subsidiaries, free and clear of any claim, suit, proceeding, call, voting trust, proxy, restriction, security interest, lien or other encumbrance of any kind or nature whatsoever.
The Company and the Subsidiaries have complied in all respects with all laws, statutes, rules, regulations and orders of, and have secured all authorizations and licenses issued by, federal, state, local and foreign agencies and authorities, applicable to their business, properties and operations. This Section 3.15 does not relate to matters with respect to labor matters, tax matters, employee benefit plans or environmental matters, which are the subjects of Sections 3.20, 3.22, 3.25 and 3.27, respectively.
Except as disclosed on Schedule 3.16, the execution and delivery of this Agreement by Seller, consummation of the transactions herein contemplated and compliance with the terms of this Agreement do not conflict with or violate any provision of the charter documents or bylaws of Seller, the Company or any Subsidiary; nor do such actions (a) conflict with, (b) result in a breach of the terms or conditions of, (c) constitute a default under, (d) result in the creation of any lien, security interest or encumbrance upon any of the capital stock or assets of the Company or any Subsidiary, (e) give any third party the right to accelerate any obligations under, or (f) require any filing or the consent or approval under any material agreement, contract, lease, license, permit, instrument or other arrangement to which the Company or any Subsidiary is party or by which any of them are bound or any of their assets are subject, or any law, statute, rule or regulation to which Seller, the Company or any Subsidiary is subject, or any order, judgment or decree to which Seller, the Company or any Subsidiary is subject, or require Seller to make any filing with or obtain the approval or consent of any foreign, federal, state, county, local or other governmental or regulatory body, except for the filing with the Federal Trade Commission and Antitrust Division of the Department of Justice of Notification and Report Forms pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and the rules promulgated of the waiting period and any extension thereof required to expire under such Act and rules; provided, however, Seller makes no representations with respect to the application to this Agreement and the transactions contemplated hereby of antitrust laws or other laws or regulation dealing with competition or restraint of trade.
Except as disclosed in Schedule 3.17, there are no legal or governmental proceedings, actions, suits or arbitrations pending or, to the best of Seller's knowledge, threatened with respect to which the Company or any Subsidiary is a party or to which any property of the Company or any Subsidiary is subject. Neither the Company nor any of the Subsidiaries is in violation of any order, decree or judgment of any court or arbitration tribunal or governmental board, commission, instrumentality or agency.
Schedule 3.18 sets forth all oral and written contracts, commitments, or other agreements to which the Company or any Subsidiary is a party or to which the Company's or any Subsidiary's assets or properties is bound or subject (a) having an annual cost to the Company or any Subsidiary of $50,000 or more, (b) under which the Company or any Subsidiary is entitled to receive $50,000 or more annually, (c) covering indebtedness of the Company or any Subsidiary in the principal amount of $50,000 or more, (d) covering the employment of any employee of the Company or any Subsidiary where the annual salary required is $50,000 or more or involving any obligation to pay severance to any employee (regardless of amount), (e) covering any other matter material to the business of the Company and any Subsidiary, (f) which obligates Seller, the Company or any Subsidiary to act as a guarantor irrespective of the amount involved,
(g) involving any franchise, dealer, showroom, distributor or manufacturer's or sales representative contract which is not terminable by the Company and its Subsidiaries on six months (or less) notice without penalty, (h) restricting competition on the part of any of the Company or any Subsidiary, (i) which is terminable by the other party thereto upon a merger or change of control of the Company and its Subsidiaries or (j) involving any purchase order which has an annual cost to the Company and the Subsidiaries in excess of $250,000 and which has a term of 6 months or more. Buyer acknowledges and agrees that, except for purchase orders required to be disclosed in (j) above, no purchase order shall be required to be disclosed on Schedule 3.18. There are no contracts, agreements, purchase orders, commitments, leases, agreements, including loan arrangements, between the Company or any Subsidiary and any of their officers, directors or shareholders, or any related or affiliated person, corporation or other entity, except as set forth on Schedule 3.18 (a true and correct and complete copy of each such written document and a true and correct and complete written description of each such oral relationship having heretofore been delivered by Seller to Buyer), and none shall be entered into by the Company or any Subsidiary from the date hereof through the Closing Date without the prior written consent of Buyer. Each such contract, commitment or other agreement is legal, valid, binding, enforceable obligation of the Company and/or the Subsidiary or Subsidiaries which is a party thereto. Neither the Company nor any of the Subsidiaries nor, to the knowledge of Seller, any other party thereto, is in material breach or material default of any such contract, commitment or other agreement nor has any event occurred which with notice or lapse of time would constitute such a breach or default or permit termination, modification or acceleration by any third party thereunder.
The Company and the Subsidiaries have all licenses, permits and other authorizations from federal, state, local and other governmental or administrative authorities necessary for the conduct of their respective businesses and all present business activities of the Company and the Subsidiaries. Except as set forth in Schedule 3.19, (a) each of said permits, licenses and other authorizations is in full force and effect, (b) the Company and the Subsidiaries are in compliance with the terms, provisions and conditions thereof, and (c) there are no outstanding violations, notices of noncompliance, judgments, consent decrees, agreed orders or judicial or administrative action(s) or proceeding(s) affecting any of said permits, licenses and other authorizations. This Section 3.16 does not relate to matters with respect to environmental matters, which are the subject of Section 3.27.
No union is certified as collective bargaining agent to represent any employee of the Company or any Subsidiary. Except as set forth in Schedule 3.20, the Company and the Subsidiaries are in compliance with all applicable laws pertaining to employment and employment practices, terms and conditions of employment, and wages and hours. Except as set forth on Schedule 3.20, neither the Company nor any Subsidiary (a) is a party to, involved in or threatened by any labor dispute, work stoppage, unfair labor practice charge, labor arbitration proceeding or grievance proceeding, (b) is currently negotiating any collective bargaining agreement or (c) is aware of any threatened work stoppage, strike or filing by any employee or employee group seeking recognition as a collective bargaining representative or unit. This
Section 3.20 does not relate to matters with respect to employee benefit plans, which are the subject of Section 3.25.
True and complete copies of the charter documents and bylaws of the Company and the Subsidiaries (and all amendments thereto at any time prior to the date of this Agreement), and the minute books thereof have been provided to Buyer. The minute books of the Company and the Subsidiaries contain true and complete originals or copies of all minutes of meetings of and actions by the stockholders, Boards of Directors and all committees of the Boards of Directors of the Company and the Subsidiaries. The aforesaid charter documents and bylaws are true, correct and complete as of the date hereof, and there will be no amendments or additions thereto prior to the Closing without the prior written consent of Buyer.
Except as set forth on Schedule 3.22(d), the Company and the Subsidiaries have properly prepared and filed, or have caused to be properly prepared and filed, in a timely manner, all Returns required to be filed by them on or prior to the date hereof, and have paid (or withheld and paid over) or will pay all of such Taxes shown as due and payable on such Returns. All such Returns that have been filed are true, complete and correct in all respects.
The Company and the Subsidiaries have properly accrued and reflected on the Latest Balance Sheet, and have thereafter to the date hereof properly accrued all liabilities for taxes and assessments, and will timely and properly file all such federal, state, local and foreign Returns which it is required to file for any taxable period ending on or before the Closing Date, either on its own behalf or on behalf of its employees or other persons or entities, all such
Returns to be true and correct and complete in all respects, and will pay or cause to be paid when due all Taxes which have become due and payable pursuant to such Returns for all taxable periods ending on or before the Closing Date.
Member of Affiliated Group. Since 1988, the Company and the Subsidiaries have been members of an affiliated group of corporations within the meaning of section 1504 of the Code, with respect to which Parent is and at all times has been the common parent, and have joined in or will join in the filing of Parent's consolidated federal income tax returns for all its taxable periods ending on or prior to the Closing Date. Since 1988, neither the Company nor any of the Subsidiaries have been a member or any other affiliated group of corporations within the meaning of section 1504 of the Code.
Statutes of Limitations. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of the Company, the Subsidiaries, Parent, Seller or any Tax Affiliate.
Tax Audits. The United States Internal Revenue Service has examined the consolidated federal Income Tax Returns of Parent which include the Company and Subsidiaries for all years up to and including the year ended December 31, 1992. The separate state, local and foreign Income Tax Returns of the Company and the Subsidiaries for taxable periods ending on or after December 31, 1991 have been audited as set forth in Schedule 3.22(d). The combined state and local income Returns in which the income of the Company and the Subsidiaries are included for taxable periods ending on or after December 31, 1991 have been audited as set forth in Schedule 3.22(d).
Except as set forth in Schedule 3.22(d), no audit is in process, or pending with respect to the Company, the Subsidiaries', Parents', Seller's or any Tax Affiliate's Returns, nor is any audit in process, or pending in which issues have been raised specifically in connection with present or former assets of the Company and the Subsidiaries. To the knowledge of Seller, no audit is threatened with respect to the Company's, any Subsidiary's, Parent's, Seller's or any Tax Affiliate's Returns nor is any audit threatened in which issues have been raised specifically in connection with present or former assets of the Company and the Subsidiaries. All such issues raised in connection with any past audits have been fully resolved or finally settled and any deficiency in Taxes associated with such issues has been satisfied.
Returns Furnished. Seller has furnished to Buyer or its counsel true and complete copies of (i) relevant portions of tax audit reports, statements of deficiencies, closing or other agreements received by the Company, the Subsidiaries, Parent or Seller on behalf of the Company or the Subsidiaries relating to the assets or business of the Company or the Subsidiaries from the Internal Revenue Service, or from any other taxing authority (sometimes collectively referred to as a "Taxing Authority") and (ii) all pro forma separate federal, state and local income Returns of Company and Subsidiaries and the relevant portions of all pro forma separate federal, state, local and foreign Income Tax Returns of any Tax Affiliate relating to the assets of Company and Subsidiaries for the Company and the Subsidiaries taxable periods ending on or after December 31, 1991.
Affiliated Group Allocation Agreement. The Company and the Subsidiaries are parties to an unwritten affiliated group consolidated return tax allocation agreement with Parent and its Tax Affiliates.
Foreign Taxes. None of the Company, the Subsidiaries, Parent or Seller is liable for taxes to any foreign taxing authority. Except as provided in Schedule 3.22(g), Company and Subsidiaries do not have and have not had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country, any branch operation in a foreign county or any other taxable presence in a foreign jurisdiction. The Company, each Subsidiary, Parent and Seller have evidence of payment of all Taxes of a foreign country, if any, paid or accrued from the date of formation of each of them, respectively.
Accounting Methods. None of the Company, or the Subsidiaries nor any Tax Affiliate is required to include in income any adjustment under (S)481(a) of the Code by reason of a change in accounting method initiated by the Company, the Subsidiaries or any Tax Affiliate and the Internal Revenue Service has not proposed any such adjustment or change in accounting method.
Definitions. For purposes of this Agreement the following definitions shall apply:
"Code" shall mean the Internal Revenue Code of 1986, as amended, and/or, where appropriate, its predecessor, the Internal Revenue Code of 1954, as amended, or any successor thereto.
"Income Tax" shall mean (i) federal, state, local or foreign income or franchise taxes or other taxes measured by income and all other taxes reported on Returns which include federal, state or local income or franchise taxes or other taxes measured by income, together with any interest, penalties or additions to tax imposed
with respect thereto and (ii) any obligations under any agreements or arrangements with respect to any Income Taxes described in clause (i) above.
"Returns" shall mean all returns including without limitation all returns, declarations, forms, reports, estimates, information statements, schedules, any amendments thereto and returns relating to or required by law to be filed by the Company or the Subsidiaries in connection with any Taxes and, in the case of consolidated or combined tax returns, by Parent on behalf of the Company or any Subsidiary, and all information returns (e.g., Form W-2, Form 1099) and reports relating to Taxes of the Company or any Subsidiary. Any one of the foregoing Returns shall be referred to sometimes as a "Return."
"Tax Affiliate" shall mean, with respect to a company, any member of an affiliated group as defined in section 1504 of the Code or member or a combined or unitary group of which such company is or was a member (other than such company).
"Taxes" shall mean (i) all taxes (whether federal, possession, state, local or foreign or any governmental unit, agency or political subdivision of the foregoing) based upon or measured by income and any other tax whatsoever, including, without limitation, gross receipts, profits, sales, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, employment, excise, real estate gains, real estate transfer or property taxes, customs duties, levies or other charges, and any other governmental charges of the same or similar nature or in lieu thereof, together with any interest or penalties or additions to tax imposed with respect thereto and (ii) any obligations under any agreements or arrangements with respect to any Taxes described in
clause (i) above. Any Taxes, penalties or interest payable as a result of an audit of any Return or any other adjustment with respect thereto shall be deemed to have accrued in the period to which such Taxes, penalties or interest are attributable.
The Company and the Subsidiaries have been self-insured or have carried workers' compensation and employer liability insurance coverage as required by applicable workers' compensation laws or regulations covering all employees employed by the Company and the Subsidiaries.
Schedule 3.24 sets forth: (i) each insurance policy under which the Company and the Subsidiaries or their assets or properties is a direct or indirect beneficiary; (ii) the name of the insurer with which such policy is or was carried; (iii) the liabilities covered thereunder; (iv) the amount of coverage thereunder; (v) the period of coverage thereunder; (vi) a designation of which policies provide coverage on a "claims made" basis and which provide coverage on an "occurrence basis"; and (vii) a designation of whether such policy is carried by the Company and the Subsidiary, or by any other person. Schedule 3.24 also contains a description of any program of self-insurance maintained by Seller or by the Company or the Subsidiaries to cover claims against or losses incurred by the Company or the Subsidiaries arising on or prior to the Closing Date. All insurance policies and programs of self insurance listed on Schedule 3.24 will be maintained or will be replaced with substantially equivalent policies or programs and such coverage will not be canceled or terminated prior to the Closing. Seller shall have no obligation to continue any such insurance after the Closing.
Whenever any of the terms set forth below is used in this Agreement, it shall have the following meaning: (i) "COBRA" means any liability or obligation to provide continued health care coverage under ERISA Section 601 or in Code Section 4980B; (ii) "Employee Benefit Arrangement" means any employment, severance, or similar contract, arrangement, or policy (exclusive of any such contract, arrangement or policy which is terminable within 30 days without liability), or any plan or arrangement providing for severance benefits, insurance coverage (including pursuant to any self-insured plan or arrangement), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, fringe benefits (other than retirement benefits, deferred compensation, profit sharing and compensation benefits), sick leave, maternity, paternity, family leave or other leave, bonuses, stock options, stock appreciation rights, or other forms of incentive compensation or post-retirement insurance or welfare benefits, any employment consulting, engagement or retainer agreement, in each such case other than any Non-U.S. Employee Benefit Arrangement; (iii) "Employee Benefit Plan" has the meaning set forth in ERISA Section 3(3); (iv) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended; (v) "ERISA Affiliate" means any entity which would be treated as a single employer together with the Company and any Subsidiary under Code Section 414; (vi) "Multi-Employer Plan" has the meaning set forth in ERISA Section 3(37) or ERISA Section 4001(a)(3); (vii) "Non-U.S. Employee Benefit Arrangement" means any employment, severance, or similar contract arrangement, or policy, whether or not considered legally binding, or any plan or arrangement providing for severance benefits, insurance coverage (including pursuant to any or arrangement), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, fringe benefits, sick leave, maternity, paternity, family leave or other leave, retirement benefits, deferred compensation profit-sharing, bonuses, stock options, stock appreciation rights, or other forms of incentive compensation or post-retirement insurance, compensation, or benefits, any employment, consulting, engagement or retainer agreement for the benefit of non-U.S. employees, non-U.S. former employees or non-U.S. consultants; (viii) "PBGC" means the Pension Benefit Guaranty Corporation, or any successor agency ; (ix) "Prohibited Transaction" has the meaning set forth in ERISA Section 406 in Code Section 4975; and (x) "Reportable Event" has the meaning set forth in ERISA Section 4043.
Schedule 3.25(b) lists each Employee Benefit Plan covered by or subject to ERISA that any of Parent, Seller, the Company, and/or any Subsidiary maintains or administers, or to which any of them contributes, in each such case covering any employee or former employee of the Company and/or any Subsidiary. There are no retirement benefit, deferred compensation, profit sharing or compensation benefit plans that any of Parent, Seller, the Company and/or the Subsidiaries maintains or administers, or to which any of them contributes, in each case covering any employee of the Company or former employee and/or any Subsidiary, which is not an Employee Benefit Plan. There are no negotiations, demands or proposals which are pending or threatened which concern matters now covered, or that would be covered, by any Employee Benefit Plan.
Each such Employee Benefit Plan (and each related trust, insurance contract, or fund) complies in form and in operation with the applicable requirements of any and all statutes, orders or governmental rules or regulations currently in effect, including but not limited to ERISA, the Code, and other applicable laws. Parent, Seller, Company and each of the Subsidiaries has performed all obligations required to be performed by them under, and are not in default under or in violation of, the terms or any of the Employee Benefit Plans.
All required notices, reports and descriptions (including Form 5500 Annual Reports, Summary Annual Reports, Forms PBGC-1, and Summary Plan Descriptions) have been filed or distributed where required with respect to each such Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and of Code Sec. 4980B as well as the applicable provisions of the Social Security Act and the Public Health Service Act have been met with respect to each such Employee Benefit Plan that is a group health plan (within the meaning ERISA Sec. 601 and Code Sec. 4980B).
All contributions (including all employer contributions and employee salary reduction contributions), premiums and administrative charges which are due and payable with respect to any Employee Benefit Plan for all periods ending prior to the Closing Date have been or will be made prior to the Closing Date by Parent, Seller, the Company, and/or the Subsidiaries in accordance with applicable law and the terms of each such Employee Benefit Plan.
Each such Employee Benefit Plan which is an employee pension benefit plan and which is intended to meet the requirements of a qualified plan under Code Sec. 401(a) has either (i) received a favorable determination letter from the Internal Revenue Service covering such Employee Benefit Plan as amended for the Tax Reform Act of 1986, the Unemployment Compensation Act of 1992, and the Omnibus Budget Reconciliation Act of 1993 (and the related trust has been determined to be exempt from taxation under (S)501(a) of the
Code), or (ii) timely applied to the Internal Revenue Service for a favorable determination letter covering such Employee Benefit Plan. No amendment made (or the failure of such amendment to be made) to any such Employee Benefit Plan subsequent to the date of such determination letter has adversely affected the qualified status of any such plan, and Seller knows of no fact or set of circumstances that would adversely affect such qualification prior to the Closing.
Seller has delivered to Buyer correct and complete copies of the current plan document and summary plan description, the most recent favorable determination letter received from the Internal Revenue Service, the most recent Form 5500 Annual Report filed with the Internal Revenue Service, the three most recent actuarial reports, and all related trust agreements, insurance contracts, and other funding agreements which implement or evidence each such Employee Benefit Plan, in each case as applicable to such Employee Benefit Plan. In addition, to the extent applicable with respect to each Employee Benefit Plan, Seller has delivered to Buyer (i) correct and complete copies of any Form 5310 and related filings with the PBGC; (ii) ruling letters and any outstanding requests for ruling letters with respect to the tax exempt status of any VEBA which is implementing any Employee Benefit Plan; and (iii) general notification to employees of their rights under Code Section 4980B and form of letters distributed upon the occurrence of a qualifying event described in Code Section 4980B, in the case of an Employee Benefit plan that is a "group health plan" as defined in Code Section 162(i).
There have been no Prohibited Transactions with respect to any such Employee Benefit Plan (and there is no fact or circumstance which may lead to the occurrence of any such Prohibited Transaction) and no plan fiduciary nor any officer, director, or employee of Parent, Seller, the Company or any of the Subsidiaries has any liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of or otherwise involving any such Employee Benefit Plan. No action, suit, arbitration, proceeding, hearing, claim, or investigation with respect to the administration of or otherwise involving the assets of any such Employee Benefit Plan (other than routine claims for benefits) is pending or, to the knowledge of any facts which would or could give rise to any action, suit, grievance, arbitration or other manner of litigation, or claim.
Schedule 3.25(i) lists any Employee Benefit Arrangement providing medical, health, or life insurance or other welfare-type benefits for currently (or future) retired or terminated employees, their spouses, or their dependents (other than in accordance with Code Sec. 4980B) which any of Parent, Seller, the Company and the Subsidiaries maintains or administers, or to which any of them contributes, in each case covering any employee or former employee of any of the Company and the Subsidiaries.
With respect to each Employee Benefit Plan which is an employee pension benefit plan subject to Title IV of ERISA that any of the Parent, Seller, the Company, the Subsidiaries, and their ERISA Affiliates maintains or administers or ever has maintained or administered, or to which any of them contributes, ever has contributed, or ever has been required to contribute, in each such case since January 1, 1990:
No such employee pension benefit plan has been completely or partially terminated or been the subject of a Reportable Event as to which notices would be required to be filed with the PBGC, and no proceeding by the
terminate any such employee pension benefit plan has been instituted or threatened.
None of the Company, the Subsidiaries, and their respective ERISA Affiliates has any liability to the PBGC (other than for PBGC premium payments) or otherwise under ERISA or under the Code (including any withdrawal liability or any accumulated funding deficiency, whether or not waived, within the meaning of ERISA (S)302 or Code (S)412, or any termination liability under ERISA (S)4062 or 4063).
Neither Parent, Seller, the Company, nor any of the Subsidiaries contributes, ever has contributed, ever has been required to contribute, or has ever been a participant in a Multiemployer Plan in each such case during the period since January 1, 1985 and covering any employee or former employee of any of the Company and the Subsidiaries.
Schedule 3.25(l) lists each Employee Benefit Arrangement other than those described in Schedule 3.25(b) that has been entered into, maintained, or administered, as the case may be, by any of Parent, Seller, the Company, and the Subsidiaries and that currently covers any employee or former employee of any of the Company and the Subsidiaries. Each such Employee Benefit Arrangement and the administration thereof complies with its terms and with the requirements of applicable statutes, orders, rules, and regulations.
Since January 1, 1990, neither Seller, the Company nor the Subsidiaries has terminated or taken action to terminate any Employee Benefit Plan covering any employee or former employee of the Company and the Subsidiaries.
The statements of assets and liabilities of the Employee Benefit Plans covering any employee or former employee of any of the Company and the Subsidiaries as of the end of the most recent three fiscal years for which information is available, and the statements of changes in fund balances, financial position and net assets available for benefits under such Employee Benefit Plans for such fiscal years, copies of which have been certified by Seller and furnished to Buyer, fairly present the financial conditions of such Employee Benefit Plans as of such date and the results of operations thereof for the year ended on such date, all in accordance with GAAP applied on a consistent basis. The actuarial assumptions used for funding purposes have not been changed since the last written report of actuaries on such Employee Benefit Plans, which written reports have been furnished to Buyer.
With respect to any Employee Benefit Plan covering any employee or former employee of any of the Company and the Subsidiaries which is a welfare plan as defined in Section 3(1) of ERISA; (i) each such welfare plan which is intended to meet the requirements for tax-favored treatment under Subchapter B of Chapter 1 of the Code meets such requirements; and (ii) there is no disqualified benefit (as such term is defined in Code Section 4976(b)) which would subject the Company or Buyer to a tax under Code Section 4976(a).
Each Employee Benefit Plan covering any employee or former employee of any of the Company and the Subsidiaries and each Employee Benefit Arrangement covering any employee or former employee of any of the Company and the Subsidiaries may be amended or terminated by Parent, Seller, the Company or the Subsidiaries or Buyer on or at any time after the Closing Date.
The Company and the Subsidiaries have no liability under ERISA or the Code as a result of their being members of a group described in Code Sections 414(b), (c), (m) or (o).
Neither Parent, Seller, the Company nor any Subsidiary contributes, ever has contributed, ever has been required to contribute, has ever been a participant in, or has any obligations or liabilities under any Non- U.S. Employee Benefit Arrangement covering any employee or former employee of the Company or any Subsidiary.
All expenses and liabilities relating to the Employee Benefit Plans have been, and will on the Closing Date be fully and properly accrued on the books and records of the Company and the Subsidiaries and the financial statements of the Company and the Subsidiaries reflect all of such liabilities in a manner satisfying the requirements of GAAP applied on a consistent basis.
The Company and the Subsidiaries own, lease, or have the valid and enforceable right to use all rights, properties and assets, tangible or intangible, which are presently used in the conduct of their respective businesses as presently conducted and as presently proposed to be conducted until the Closing Date and, to the knowledge of Seller, immediately following the Closing Date the Company and the Subsidiaries will have the same rights with respect to such rights, properties and assets.
Except as disclosed in Schedule 3.27:
the Company and the Subsidiaries have obtained and hold all Environmental Permits, each of which is listed on Schedule 3.27;
the Company and the Subsidiaries are in substantial compliance with all terms, conditions and provisions of all (i) Environmental Permits and
there are no pending, or to the knowledge of the Company or the Subsidiaries: (i) threatened Environmental Claims against the Company or the Subsidiaries; and (ii) neither the Company nor the Subsidiaries are aware of any facts or circumstances which are likely to form the basis for any Environmental Claim against the Company or the Subsidiaries;
no Releases of Hazardous Materials (except in material compliance with applicable Environmental Laws) have occurred at, from, in, to, on, or under any Site during the time when the Company or the Subsidiaries owned, leased or operated thereon and, no such releases of Hazardous Materials occurred prior to the time that the Company or the Subsidiary owned, leased or operated thereon, that could give rise to an Environmental Claim against the Company or the
neither the Company nor the Subsidiaries (including any predecessor thereof) nor any entity previously owned by the Company or the Subsidiaries, during the time when the Company or the Subsidiaries owned such entity and to the knowledge of the Company and the Subsidiaries prior to the time the Company owned such entity, has transported or arranged for the treatment, storage, handling, disposal, or transportation ofany Hazardous Material to any off-Site location which is an Environmental Clean-up Site.
No Site is on the National Priority List or any state equivalent list, or to the knowledge of Seller, a proposed Environmental Clean-up Site;
There are no liens arising under or pursuant to any Environmental Law on any property currently owned, leased or operated by the Company or any Subsidiary and, to the knowledge of Seller, there are no facts, circumstances, or conditions that could reasonably be expected to restrict, encumber, or result in the imposition of special conditions under any Environmental Law with respect to the ownership, occupancy, development, use, or transferability of any such
there are no underground storage tanks, polychlorinated biphenyl- containing equipment or friable or damaged asbestos-containing material at any property now owned, leased or operated by the Company or the Subsidiaries not in substantial compliance with applicable Environmental Law; and
to the knowledge of Seller, the currently anticipated aggregate expenditures, solely of equipment, of the Company and the Subsidiaries are not in excess of $1,000,000 to comply with applicable Maximum Achievable Control Technology ("MACT") standards, National Emissions Standards for Hazardous Air Pollutants ("NESHAPs"), or Reasonably Available Control Technology (RACT) under the existing Federal Clean Air Act and existing state laws regulating air emissions.
Within 72 hours following the execution of this Agreement by the parties hereto, Seller will deliver or make available to Buyer all environmental investigations, studies, audits, tests, reviews or other analyses with respect to any Site (including any properties owned, leased or operated by any predecessors of the Company or the Subsidiaries or any entities previously owned by the Company or Subsidiaries) ("Environmental Reports") conducted by, on behalf of, and which are in possession of the Company, the Subsidiaries, Seller or Parent.
For purposes of this Agreement, the following definitions shall apply:
"Environment" means all air, surface water, groundwater, or land, including land surface or subsurface, including all fish, wildlife, biota and all other natural resources.
"Environmental Claim" means any and all administrative or judicial actions, suits, orders, claims, liens, notices, notices of violations, investigations, complaints, requests for information, proceedings, or other written communication, whether criminal or civil, pursuant to or relating to any applicable Environmental Law by any person (including but not limited to any Governmental or Regulatory Authority, private person and citizen's group) based upon, alleging, asserting, or claiming any actual (i) violation of or liability under any Environmental Law, (ii) violation of any Environmental Permit, or (iii) liability for investigatory costs, cleanup costs, removal costs, remedial costs, response costs, natural resource damages, property damage, personal injury, fines, or penalties arising out of, based on, resulting from, or related to the presence, Release, or threatened Release into the Environment, of any Hazardous Materials at any location, including but not limited to any off-Site location to which Hazardous Materials or materials containing Hazardous Materials were sent for handling, storage, treatment, or disposal.
"Environmental Clean-up Site" means any location which is listed or proposed for listing on the National Priorities List, or on any similar state list of sites requiring investigation or cleanup, or which is currently the subject of any pending or threatened action, suit, proceeding, or investigation related to or arising from any alleged violation of any Environmental Law or Release or threatened or suspected Release or a Hazardous Material.
"Environmental Law" means any and all current, federal, state, local, provincial, and foreign, civil and criminal laws, statutes, ordinances, orders,
Environmental Permits, judgments, decrees, injunctions, or agreements with any Governmental or Regulatory Authority, relating to the protection of health and the Environment, and/or governing the handling, use, generation, treatment, storage, transportation, disposal, manufacture, distribution, formulation, packaging, labeling, or Release of Hazardous Materials, now existing, including but not limited to; the Clean Air Act, 42 U.S.C. (S) 7401 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq.; the Hazardous Material Transportation Act, 49 U.S.C. (S) 1801 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. (S) 136 et seq.; the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. (S) 6901 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S) 2601 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et seq.; and the state analogies thereto, and any common law doctrine, including but not limited to, negligence, nuisance, trespass, personal injury, or property damage related to or arising out of the presence, Release, or exposure to a Hazardous Material and, with respect to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. (S) 9601 et seq. ("CERCLA") any reauthorization, reenactment or replacement thereof to the extent the same is no more stringent than the provisions of CERCLA last in effect.
"Environmental Permit" means any federal, state, local, provincial, or foreign permits, licenses, approvals, consents or authorizations required by any Governmental or Regulatory Authority under or in connection with any Environmental Law and includes any and all orders, consent orders or binding agreements issued or entered into by a Governmental or Regulatory Authority under any applicable Environmental Law.
"Governmental or Regulatory Authority" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, country, city or other political subdivision.
"Hazardous Material" means petroleum, petroleum hydrocarbons or petroleum products, petroleum by-products, and any other chemicals, materials, substances or wastes in any amount or concentration which are now defined as or included in the definition of "hazardous substances", "hazardous materials", "hazardous wastes", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "pollutants", "regulated substances", "solid wastes", or "contaminants" or words of similar import under any Environmental Law.
"Release" means any current or prior spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing of a Hazardous Material into the Environment.
"Site" means any of the real properties currently or previously owned, leased or operated by the Company (including any predecessors thereof) or the Subsidiaries (including any predecessors thereof), including all soil, subsoil, surface waters and groundwater thereat for purposes of this Section 3.27 of the Agreement.
No representation or warranty of Seller in this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading.
NO REPRESENTATION OR WARRANTY WHATSOEVER, OTHER THAN THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE 3, IS MADE BY SELLER. SELLER EXPRESSLY HEREBY DISCLAIMS ANY OTHER SUCH REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that the statements contained in this Article 4 are correct as of the date of this Agreement, and will be correct as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Article 4).
Buyer (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (b) is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions where the failure so to qualify would have a material adverse effect on Buyer. Buyer has full corporate power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by Buyer and constitutes a valid and legally binding agreement of Buyer, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles.
The execution and delivery of this Agreement by Buyer, consummation of the transactions herein contemplated and compliance with the terms of this Agreement will not conflict with or violate any provision of the Articles of Incorporation or Certificate of Incorporation, as the case may be, or any bylaw of Buyer; nor to the best knowledge of Buyer, do such actions constitute a default of or require the consent or approval under any agreement or instrument to which Buyer is a party or by which Buyer's assets are bound, or require Buyer to obtain the approval or consent of any foreign, federal, state, county, local or other governmental or regulatory body, except for the filing with the Federal Trade Commission and Antitrust Division of the Department of Justice of Notification and Report Forms pursuant to the HSR Act and the rules promulgated thereunder, and the expiration of the waiting period and any extension thereof required to expire under such Act and rules; nor will such actions materially violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, presently applicable to Buyer; provided, however, Buyer makes no representations with respect to the application to this Agreement and the transactions contemplated hereby of antitrust laws or other laws or regulation dealing with competition or restraint of trade.
There exists no investigation by any governmental or regulatory authority, request for information or action by any third party or legal proceeding, known to Buyer which seeks to prohibit or restrain the consummation or performance of this Agreement or the transactions contemplated hereby.
Buyer has provided to Seller copies of bank commitments and other financing letters attached hereto as Schedule 4.5 (the "Financing Letters") relating to the financing described in Section 7.7 below which have been executed by Buyer and delivered by Buyer to the lenders named therein. The Financing Letters have not been revoked or modified. Buyer does not presently anticipate that it will not satisfy the conditions to the financing set forth in the Financing Letters (other than any conditions that relate directly to the Company and the Subsidiaries).
Buyer is acquiring the Shares solely for its own account and for the purpose of investment only and not with a view to any distribution thereof. Buyer acknowledges that the Shares are not registered under the Securities Act of 1933, as amended, and that such Shares may not be transferred or sold except pursuant to the registration provisions of such Act or pursuant to an applicable exemption therefrom and pursuant to applicable state securities laws and regulations.
From the date hereof through the Closing Date, Seller shall cause the Company and the Subsidiaries to conduct their respective businesses in the ordinary course of business consistent with past business practices, and shall use its commercially reasonable efforts to cause the Company and the Subsidiaries to preserve their business organizations intact, keep available the services of their present employees, consultants and agents, maintain their present suppliers and customers and preserve their goodwill.
Seller covenants and agrees that from and after the date hereof, neither the Company nor any Subsidiary will, except with the prior written consent of Buyer:
Propose or effect a split or reclassification of its outstanding capital stock or a recapitalization;
Mortgage, pledge or otherwise encumber any assets, or dispose of, or make any agreement with respect to the disposition of, any assets except for the sale of the same in the ordinary course of business;
Make any capital commitment or expenditure of more than $500,000 for any single commitment or $2,500,000 in the aggregate, or incur or become liable for any other obligation or liability except current liabilities in the
Adjust in any way, either directly or indirectly, the compensation or benefits paid or payable to any shareholder, officer, director, consultant, agent or employee of the Company or any Subsidiary except for such adjustments as may be made in the ordinary course of business and except as required under existing agreements described in one or more of the Schedules hereto or enter into any employment or severance agreement with any of the
Take any action, or enter into contract commitment or other agreement, which if taken or in effect on the date hereof, would be required to be disclosed on any Schedule hereto.
Federal Taxes for Periods Through the Closing Date. Subject to Section 5.3(c) below, Seller will include the income of the Company and the Subsidiaries (including any deferred income triggered into income by Treas. Reg. (S) 1.1502-13 and Treas. Reg. (S) 1.1502-14 and any excess loss accounts taken into income under Treas. Reg. (S) 1.1502-19) on its consolidated federal Income Tax Returns for all periods through the Closing Date and pay any federal Income Taxes attributable to such income. Buyer will cause the Company and the Subsidiaries to furnish information to Seller for inclusion in Parent's consolidated federal Income Tax Return for the period which includes the Closing Date in accordance with Parent's past custom and practice. Seller will allow Buyer an opportunity to review and comment upon such Income Tax Returns (including any amended Returns) to the extent that they relate to the Company or the Subsidiaries for taxable periods ending after the Closing Date. Subject to Section 5.3(c) below, the income of the Company and the Subsidiaries will be apportioned between the period up to and including the Closing Date and the period after the Closing Date by closing the books of the Company and the Subsidiaries as of the end of the Closing Date.
State, Local and Foreign Income Taxes. Seller shall be liable for all state, local and foreign Income Taxes of the Company and the Subsidiaries for all periods through the Closing Date. Seller shall file returns for tax periods which end on or before the Closing Date. Seller shall file such returns on a basis consistent with past practice except for differences in filing that are required by the effect of the Section 338(h)(10) elections on such returns. Buyer shall file returns for tax periods which end after the Closing Date. If any such return filed by Buyer includes any period which begins on or before the Closing Date, Seller shall be liable for taxes attributable to income in such return arising on or before the Closing Date. The income of the Company and the Subsidiaries will be apportioned between the period up to and including the Closing Date and the period after the Closing Date based upon closing the books of the Company and the Subsidiaries as contemplated in Section 5.3(a) hereof. To the extent that the liability for such Income Tax is reflected on a Return filed by Buyer, Seller shall pay to Buyer its share of the tax shown on such Return as provided in Section 5.4 hereof.
Except as otherwise provided in Sections 5.3(a) and 5.3(b), Buyer shall be responsible for filing all Returns required to be filed by or on behalf of Company and Subsidiaries, after the Closing Date.
With respect to any Income Tax Return required to be filed by Buyer for a taxable period of Company and Subsidiaries which includes (but does not close on) the Closing Date, Buyer shall provide Seller and its authorized representatives with copies of such completed Income Tax Return and a statement certifying the amount of Tax shown on such Income Tax Return that is allocable to Seller pursuant to Section 5.3(b) hereof (the "Statement") at least 30 calendar days prior to the due date for the filing of such Income Tax Return, and Seller and its authorized representatives shall have the right to review and approve such Income Tax Return and Statement prior to the filing of such Income Tax Return. Seller and Buyer agree to consult and resolve in good faith any issues arising as a result of the review and approval of such Income Tax Return and Statement by Seller or its authorized representatives and to mutually consent to the filing of such Income Tax Return. No later than 5 business days before the due date for payment of Taxes with respect to such Income Tax Return, Seller shall pay to Buyer an amount equal to the Taxes shown on the Statement as being allocable to Seller pursuant to Section 5.3(b) hereof.
338(h)(10). After the Closing, Buyer, Seller and Parent will make an election under Section 338(h)(10) of the Code, and any corresponding elections under state, local, or foreign tax law (collectively a "Section 338(h)(10) Election"), with respect to the purchase and sale of the capital stock of the Company and the Subsidiaries indicated on Schedule 5.5(a) hereto. Seller will pay any Tax attributable to making the Section 338(h)(10) Election, regardless of the taxable period in which such Tax is payable.
Allocation of Purchase Price. The parties agree that the Purchase Price, the liabilities of the Company and the Subsidiaries, and any adjustments thereto will be allocated among the assets of the Company and the Subsidiaries in accordance with the provisions of a Schedule of Tax Allocations (which will be prepared in accordance with the provisions of Tres. Reg. (S) 1.338(h)(10)-1(f)). Schedule 5.5(b) hereto sets forth Buyer and Seller's preliminary estimate of such tax allocations as of the date hereof. The Schedule of Tax Allocations as of the Closing Date shall be agreed to by Seller and Buyer as soon as practicable after the Closing Date. If Buyer and Seller are unable to agree on such Schedule, the Schedule of Tax Allocations shall be determined on the basis of an appraisal prepared by KPMG Peat Marwick. In the event of an adjustment to the Purchase Price in accordance with this Agreement by reason of an indemnity payment or pursuant to Section 2.3 hereof, such adjustment shall be made to the Purchase Price of the assets of the Company or the assets of the particular Subsidiary to which the indemnity payment of Section 2.3 adjustment relates or from which it arose. If such indemnity payment or
Section 2.3 adjustment cannot be allocated to the Company or a particular Subsidiary, such adjustment shall be allocated to the assets of the Company. The parties will file all Returns (including amended Returns and claims for refund) and information reports in a manner consistent with such allocation.
Information. Upon Buyer's reasonable request, from time to time, Seller shall deliver or make available to Buyer all information (including, without limitation, all work papers, schedules, memoranda and other information prepared by Parent, Seller or its affiliates, subsidiaries and agents, relating to the assets of the Company and the Subsidiaries) reasonably available to Seller or Parent and necessary to the preparation of Company and Subsidiaries' Returns for periods ending after the Closing Date. Seller shall also provide to Buyer, upon Buyer's written request and after they become available to Seller or Parent, copies of the Company and the Subsidiaries' separate pro forma federal income and state Income Tax Returns for all tax years of Company and Subsidiaries ending on or after December 31, 1988, together with any data or schedules reasonably necessary to support the computations and information shown on such returns. In the event of an audit of Buyer, the Company or the Subsidiaries by a taxing authority with respect to any Return for any taxable period or periods ending subsequent to the Closing Date, Seller shall provide Buyer with such information which Seller or Parent possesses as Buyer may reasonably request, in writing, with respect to the Company and the Subsidiaries and shall otherwise provide such assistance as Buyer may reasonably request in connection with such audit. Seller and Parent shall maintain and preserve their respective tax records with respect to the Company or the Subsidiaries for at least seven years from the Closing Date. Upon Seller's reasonable request, Buyer shall deliver or make available to Seller all information reasonably available to Buyer and necessary to the preparation of Seller's Returns for periods ending on or before Closing Date. In the event of an audit of Seller, the Company or any of the Subsidiaries by a taxing authority with respect to any Return of the Company or a Subsidiary for any taxable period or periods ending prior to the Closing Date, Buyer shall cause the Company and the Subsidiaries to provide Seller with such information which the Company or the Subsidiaries possess as Seller may reasonably request, in writing, with respect to the Company and Subsidiaries and shall otherwise provide such assistance as Seller may reasonably request in connection with such audit. Buyer shall cause Company and Subsidiaries to maintain and preserve their tax records with respect to the Company or the Subsidiaries for at least seven years from the Closing Date.
Tax Audit. Buyer will allow Seller and its counsel to participate at Seller's expense in any outside tax audit of the Company's or the Subsidiaries' state and local Tax Returns to the extent that such audits relate to a tax or tax period for which the Seller has any liability hereunder. Seller shall not settle, resolve, compromise or otherwise resolve any state or local tax audit of the Company or any Subsidiary on or before the Closing Date without the prior written consent of Buyer, which consent will not be unreasonably withheld.
Participation. Seller will allow Buyer and its counsel to participate at Buyer's own expense in any outside tax audits of Parent's consolidated federal Income Tax Returns to the extent that such audits relate to a tax or tax period for which the Company and the Subsidiaries have liability hereunder.
Termination of Existing Tax Sharing Agreements. All tax-sharing agreements or similar agreements, whether written or not, with respect to or involving the Company or the Subsidiaries shall be terminated prior to the Closing Date.
Tax Elections. No new elections with respect to Taxes or any changes in current elections with respect to Taxes affecting the Company or the Subsidiaries shall be made by Seller or Parent after the date of this Agreement without the prior written consent of Buyer.
Transfer Taxes. Seller shall pay all transfer taxes imposed in respect of the transactions contemplated by this Agreement.
On the Closing Date, all intercompany account balances between the Company and the Subsidiaries, on the one hand, and Seller, Parent and their respective subsidiaries and affiliates, on the other hand, will be canceled and marked to zero without any payment by the Company and the Subsidiaries or Seller, as the case may be.
Each of Buyer and Seller shall give prompt notice (written upon reasonable request) to the other of (i) to the extent known by Buyer or Seller, as the case may be, the existence of any state of facts, the occurrence or failure to occur of any event, the existence, occurrence or failure of which to occur would be likely to cause (1) any representation or warranty contained in this Agreement to be untrue or inaccurate at any time from the date hereof to the Closing Date, (2) any condition set forth in Article 6 or Article 7 to not be satisfied (ii) any failure of the notifying party or its officers, directors, employees, or agents to comply with or satisfy any covenant, condition, or agreement to be complied with or satisfied by it under this
Agreement, and (iii) in the case of Seller, any known material claims, actions, proceedings, or investigations commenced or threatened, involving or affecting any of the properties or assets of the Company and the Subsidiaries; provided, however, that no such notification or failure to notify shall affect the representations, warranties, covenants or indemnification obligations of the parties or the conditions to the obligations to the parties hereunder.
Reasonable Efforts and Certain Filings.
Subject to the terms and conditions of this Agreement, Buyer and Seller each will use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable to consummate the transactions contemplated by this Agreement (including satisfaction, but not waiver, of the closing conditions set forth in Articles 6 and 7 below including those relating to Buyer's financing). Buyer and Seller shall cooperate with one another and use their respective best efforts in preparing and filing the necessary notification and report forms under the HSR Act by November 22, 1995. Without limiting the generality of the foregoing, Seller will take, or cause to be taken, all actions and do, or cause to be done, all things necessary and desirable to obtain all material consents required for the consummation of the transactions contemplated by this Agreement, including without limitation consents required under the High Point Showroom Lease, the Appomatox Town Center Lease and the Industrial Revenue Bonds issued by the Industrial Development Authority of Fluvanna County, Virginia (collectively the "IRB").
Continuation of Benefits. With respect to any individuals who after the Closing Date continue to be employees of the Company and the covered by an employee welfare benefit plan and/or qualified defined contribution pension plan maintained by Seller, Buyer will, effective as of the Closing Date (i) establish a similar plan providing comparable benefits as well as comparable pre-existing condition, waiting period, co-insurance, and deductible provisions (collectively "eligibility provisions"), or (ii) provide benefits comparable to the benefits afforded similarly situated employees of Buyer. For purposes of satisfying any eligibility provisions under such plans, Buyer will credit such employees with all past service with Seller, the Company and the Subsidiaries. Buyer shall waive any pre-existing condition limitation under any such group health plan and the amount of any expenses incurred before the Closing Date by employees of the Company or any Subsidiaries before the Closing Date shall be taken into account for purposes of satisfying the applicable deductible, coinsurance and maximum out-of-pocket and lifetime maximum provisions of such group health plan.
Certain Statutory Requirements. As of the Closing Date Buyer will assume and be solely responsible for any liability or obligation that any of Seller and its affiliates may have for providing continued health care coverage under COBRA with respect to all individuals who are COBRA beneficiaries of the Company or any Subsidiary as of the Closing Date under any health plan that covers employees of the Company and the Subsidiaries, to the extent that the Company and the Subsidiaries, in accordance with past custom and practice, were responsible for such liability or obligation prior to the Closing Date.
Employee Pension Benefit Plans. As soon as practicable after the Closing Date, and after giving and receiving appropriate governmental notifications and approvals, the Parties shall take the following actions with regard to those Employee Benefit Plans listed on
Schedule 3.25(b) (or shall cause the following actions to be taken by the trustees, custodians, and, where appropriate, actuaries and other professionals retained by such plans) in which any participant was an employee of, was terminated with a deferred vested benefit from, or was a retiree from any of the Company and the Subsidiaries (or their respective predecessors) prior to the Closing Date (such participants, together with their beneficiaries, are referred to collectively herein as "Company Participants"):
With respect to those Employee Benefit Plans (indicated by an "A" in parentheses alongside its listing in Schedule 3.25(b)) which are non-qualified defined benefit plans, non-qualified defined contribution plans, qualified defined benefit plans, deferred compensation plans or employee stock option plans, Parent, Seller, the Company, and the Subsidiaries shall amend the Employee Benefit Plans to provide, effective as of the Closing Date, that each employee of the Company and the Subsidiaries who is a participant in any such Employee Benefit Plan shall have a fully vested and nonforteitable right to any benefit or account accrued in his or her name, in each case as of the Closing Date. Effective as of the Closing Date, the Company and the Subsidiaries shall cease sponsorship of and participation in such Employee Benefit Plans and such Employee Benefit Plans shall be sponsored solely by
Seller. Parent, Seller and the Company and the Subsidiaries shall take all actions necessary to terminate the sponsorship and participation of the Company and the Subsidiaries in such Employee Benefit Plans and to ensure that Seller sponsors such plans as of the Closing Date, and Seller shall be solely responsible for all liabilities and obligations with respect to such plans following the Closing. With respect to those Employee Benefit Plans which are qualified or non-qualified defined benefit plans, Seller shall take all actions necessary to amend such plans to provide that for purposes of determining participants' eligibility for early retirement benefits, service will include service with Buyer and retirement from employment with Buyer shall be treated as retirement from active employment with Seller.
With respect to each Employee Benefit Plan (indicated by a "B" in parentheses alongside its listing on Schedule 3.25(b)) which is a tax-qualified defined contribution pension plan (other than an employee stock ownership plan) and which covers Company Participants as well as other participants ("Non-Company Participants"), Seller shall direct to Buyer's successor plan and trustee a
securities (other than securities of Seller or any affiliate), other property, or any combination thereof as agreed upon by the Parties pursuant to good faith bargaining (or in particular investments (other than securities of Seller or any affiliate) if such plan permitted participant directed investments and both such plan and Buyer's successor plan and trustee will permit such transfer of particular investments) of that portion of such plan's assets (including all outstanding Company Participant loans, if any, and including allocable earnings and losses of such plan or, in the case of participant-directed investments, including earnings and losses of the individual Company Participant accounts), valued as of the date of such transfer, allocable to those Company Participants with a benefit or account (whether or not vested) under such plan (other than benefits or accounts which have been distributed in the normal course as of the date of such transfer). Thereafter Buyer shall assume (or the applicable Company or Subsidiary shall retain) all liabilities and responsibilities relating to such Company Participant benefits and accounts and the assets so transferred. With respect to all such directions for transfer, Buyer shall provide to Seller
counsel, in the form attached hereto as Exhibit A, to the effect that each and every successor plan and trust to which transfer is requested is (A) tax-qualified under applicable provisions of Code Secs. 401(a) and 501(a) and (B) complies in all applicable respects with Code Sec. 414(l). With respect to all benefits accrued as of the date of the transfer of assets, Buyer shall preserve under all such successor plans all optional forms of benefits which are protected under Code Sec. 411(d)(6). From and after each such transfer of assets with respect to each such Employee Benefit Plan, Seller shall cease to have any liability or responsibility for all liabilities and responsibilities that Buyer has assumed (or that the Company and the Subsidiaries has retained) with respect to such plans, their assets, and the Company Participants.
Seller will make available any and all necessary records for the purpose of computing or establishing all employee benefits, and such other employee benefits information or records as to provide for a smooth and orderly transition, including but not limited to statements of accrued benefits as of the Closing Date under the defined benefit pension plans and
statements of account balances as of the Closing Date under the defined contribution plans.
Other Employee Plans. Except as otherwise provided in subsections (e) 4and (f) below, Buyer shall be responsible for any liabilities or obligations with respect to events which occurred and claims incurred prior to the Closing (including liabilities and obligations for incurred but not reported claims outstanding as of the Closing Date, for disabilities or periods of sickness commencing prior to the Closing Date, and for workers' compensation claims arising prior to the Closing Date) with respect to Employee Benefit Arrangements covering individuals who were employees (including any employees on leave) of, or terminated or retired from, the Company and the Subsidiaries prior to the Closing Date.
Post Employment Obligations. With respect to employees of any of the Company and the Subsidiaries who terminated employment with the Company and the Subsidiaries prior to the Closing Date, Buyer shall (except as provided in Sections 5.9(c)(i) and 5.9(f)) be solely responsible for any and all liabilities and obligations reflected as FAS 106 and 112 liabilities on the Closing Date Balance Sheet and Seller shall (except as provided in Section 5.9(c)(ii)) be solely responsible for any and all other post employment liabilities and obligations arising under the Employee Benefit Plans and the Employee Benefit Arrangements.
Thomasville Group Insurance Plan. Seller shall be solely responsible for any liabilities or obligations with respect to events which occurred and claims incurred prior to the Closing Date (including liabilities and obligations for incurred but not reported claims outstanding as of the Closing Date, and for disabilities or periods of sickness commencing prior to the Closing Date) by individuals who were employees (including any employees on or terminated or retired from, the Company and the Subsidiaries and their dependents with respect to the Group Insurance Plan for Employees of Thomasville Furniture Industries, Inc. in accordance with the terms thereof, which plan encompasses the Group Life Insurance Program for Hourly Employees of Thomasville Furniture Industries, Inc., the Group Life Insurance Program for Salaried Employees and Marketing Representatives of Thomasville Furniture Industries, Inc., the Group Long Term Disability Insurance for Salaried and Commissioned Employees of Thomasville Furniture Industries, Inc., the Group Dental Assistance Plan for Employees of Thomasville Furniture Industries, Inc., and the Group Medical Care Benefits for Employees of Thomasville Furniture Industries, Inc.
Liabilities Triggered in Connection with the Transaction. To the extent that either the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby (i) results in any payment (including, without limitation, severance, unemployment compensation, deferred compensation, golden parachute or otherwise) becoming due to any officer, director, employee or other person from the Company or any of the Subsidiaries under any Employee Benefit Plan, Employee Benefit Arrangement or otherwise, (ii) increases any benefits otherwise payable under any Employment Benefit Plan or Employee Benefit Arrangement, or (iii) results in the acceleration of the time of payment or vesting of any such benefits, Seller shall be solely responsible and liable for such payment, increased benefits or acceleration of benefits.
No Third Party Beneficiaries. Nothing contained in this Section 5.9 or elsewhere in this Agreement shall grant or create in any person not a party hereto any right to be offered, or to continue, employment or to receive any benefit as an employee or former employee. Without limiting the generality of the foregoing, after the Closing neither Buyer, the Company nor any of the Subsidiaries shall have any obligation arising out of this Agreement to continue the employment of or provide any benefit to any person who was or is employed by the Company or the Subsidiaries, and neither Buyer, the Company nor the Subsidiaries assumes any liability or obligation under any Employee Benefit Plan established or maintained by Seller except as set forth in this Agreement.
Seller and Parent will not, and shall use their respective best efforts to cause their investment bankers, attorneys, accountants and other agents retained by Seller or Parent not to, solicit, initiate, or encourage, directly or indirectly, the submission of any proposal or offer from any third party or engage in negotiations or discussions with, or furnish any information or data to, any third party, relating to the acquisition of any capital stock or all or substantially all of the assets of any of the Company and the Subsidiaries (including any such acquisition structured as a merger, consolidation, or share exchange), or respond to or discuss such a proposal or offer if made.
With respect to any person who is an executive, management or supervisory employee of the Company and the Subsidiaries on the date hereof, for a period of 18 months following the Closing, neither Parent (or any division or subsidiary of Parent) nor Seller will, without the prior written consent of Buyer, hire such person or solicit, encourage, entice or induce such person to terminate his or her employment by the Company and the Subsidiaries.
As an inducement for Buyer to enter into this Agreement, Seller and Parent agree that for a period of three years following the Closing Date (the "Non-Competition Period"), neither of them (nor any division or subsidiary of Parent) shall directly or indirectly own, manage, operate, assist, join, control or participate in the ownership, management, operation or control of, or be connected as a partner, consultant or otherwise with, any third party that directly or indirectly competes with, or is about to compete with, the business of the Company and the Subsidiaries as it shall exist on the Closing Date. In recognition that the business of the Company and the Subsidiaries is currently conducted throughout the world, the restrictions set forth in the foregoing sentence shall have no geographic limits. In the event the restrictions set forth in this subsection (5.12) shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending over too great a period of time or over too great a geographical area or by reason of its being too extensive in any other respect, it shall be interpreted to extend only over the maximum period of time for which it may be enforceable and/or over the maximum geographical area as to which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. Nothing contained in this subsection (5.12) shall restrict Seller, Parent or Parent's pension plan from owning 5% or less of the corporate securities of any third party which securities are listed on any national securities exchange or authorized for quotation on the Automated Quotation System of the National Association of Securities Dealers, Inc., if none of them has any other connection or relationship, direct or indirect, with prevent Parent or any division or subsidiary of Parent from conducting their business as currently being conducted.
Prior to, at and, at Buyer's sole out-of-pocket cost and expense, for a reasonable period subsequent to the Closing, Seller and Parent shall cooperate with Buyer in connection with (i) the initiation by Buyer of administrative, legal and management functions previously provided by Seller, Parent or their affiliates with respect to the businesses of the Company and the Subsidiaries, (ii) the efforts by Buyer to complete its financing with respect to this transaction (including the provision of information and access to Parent's accountants and auditors and the reasonable assistance of management of the Company and the Subsidiaries), (iii) the making of future filings with the Securities and Exchange Commission, including the assistance and cooperation of Parent and its auditors in the preparation of financial statements for such filings and the provision of any necessary consents in connection therewith and (iv) Buyer's handling following the Closing of any liabilities and obligations of the Company and the Subsidiaries with respect to which Seller has no responsibility pursuant to Section 8.1 or otherwise. Such cooperation shall include, but not be limited to, the provision by Seller and Parent of any documents (or copies thereof) reasonably requested by Buyer.
Seller, at its sole cost and expense, shall obtain and maintain following the Closing for a period of 4 years general liability insurance providing coverage on substantially the same terms as the general liability policy maintained by the Parent on behalf of the Company and Subsidiaries prior to Closing (the "GLI Policy") naming Seller as an insured and naming the
Company and the Subsidiaries as additional insureds and loss payees (as their interests may appear) in respect of any insured events under the GLI Policy arising out of occurrences occurring prior to the Closing Date ("GLI Claims"). With respect to GLI Claims which are not covered by the GLI Policy, Seller will remain liable for, and will indemnify and hold Buyer, the Company and the Subsidiaries harmless from and against, all such Claims incurred on or prior to the Closing Date. Notwithstanding any other provision of this Agreement to the contrary, Buyer acknowledges and agrees that except as explicitly provided in the immediately preceding sentences of this Section 5.14, with respect to any and all occurrences arising after the Closing Date and any and all other claims made after the Closing Date, Buyer shall have sole liability therefor (without regard to when the occurrence or occurrences giving rise to such claims arose). In this regard, without limiting the provisions of the immediately preceding sentence, Buyer shall have sole liability for worker's compensation claims which are made on or after the Closing Date.
Notwithstanding the foregoing, from and after the Closing, Seller shall make claims and receive recoveries for the benefit of the Company and the Subsidiaries under any "occurrence basis" insurance policies maintained (including, automobile insurance) at any time prior to the Closing by Seller (collectively, the "Pre-Closing Insurance Policies"), in respect of any insured events of the Company and the Subsidiaries that relate to or arise out of occurrences prior to the Closing Date (an "Insurance Claim"); provided, however, that any recoveries received by Seller in respect of such insured events shall be promptly paid by Seller to or as directed by Buyer, and Seller will have no right or interest therein. The Company and the Subsidiaries will have the sole and exclusive right, in their own names, to make directly any
Insurance Claims with respect to insured events under any Pre-Closing Insurance Policies maintained at any time prior to, on or after Closing by the Company and the Subsidiaries and to receive directly any recoveries thereunder, and other than with respect to matters for which Seller has retained responsibility pursuant to this Agreement, Seller and its affiliates will have no right or interest therein.
In order to implement Section 5.14(a), Seller shall (i) cooperate fully and cause its affiliates to cooperate fully with Buyer and the Company and the Subsidiaries in submitting good faith Insurance Claims and GLI Claims on behalf of the Company and the Subsidiaries under the Pre-Closing Insurance Policies or the GLI Policy, as the case may be, and (ii) pay promptly over to or as directed by Buyer any and all amounts received by Seller or its affiliates under the Pre-Closing Insurance Policies and the GLI Policy with respect to Insurance Claims and GLI Claims, as the case may be.
Effective as of the Closing Date, except as expressly provided herein, Seller will cause the Company and the Subsidiaries to be removed from any insurance policies or self insurance programs maintained prior to the Closing by, and Buyer and the Company and the Subsidiaries will be solely liable for asserted claims as provided herein.
Parent and Seller acknowledge that the Confidential Information (as defined below) of the Company and the Subsidiaries is valuable and proprietary to the business of the Company and the Subsidiaries and agree not to (and to cause their affiliates not to), directly or indirectly, use, publish, disseminate, describe or otherwise disclose any Confidential Information of the Company and the Subsidiaries without the prior written consent of Buyer. For this Agreement, "Confidential Information" shall mean with respect to the Company and the Subsidiaries all confidential information of the Company and the Subsidiaries existing on or prior to the Closing Date that is not otherwise publicly disclosed or generally available, including information delivered in confidence by others to the Company and the Subsidiaries. Without limiting the generality of the foregoing, Confidential Information shall include: (i) customer lists, lists of potential customers and details of agreements with customers; (ii) acquisition, expansion, marketing, financial and other business information and plans; (iii) research and development performed exclusively by or for the benefit of the Company and/or the Subsidiaries; (iv) computer programs and computer software; (v) sources of supply; (vi) identity of specialized consultants and contractors; (vii) purchasing, operating and other cost data; (viii) special customer needs, cost and pricing data; and (ix) employee information. Confidential Information also includes information recorded in manuals, memoranda, projections, minutes, plans, drawings, designs, formula books, specifications, computer programs and records, whether or not legended or otherwise identified as Confidential Information, as well as information that is the subject of meetings and discussions and not so recorded. Seller shall also fully exercise all of its rights, contractual or otherwise, to retrieve from third parties all Confidential Information (which for this purpose shall be deemed to include all information subject to applicable confidentiality agreements) of the Company and the Subsidiaries which has been delivered to such third parties, whether in connection with the contemplated sale by Seller of the Company and the Subsidiaries or otherwise.
Buyer shall use its best efforts (and Seller shall cooperate with Buyer) from and after the date hereof to cause Sovran Bank, N.A., as Trustee under that certain Indenture of Trust dated as of November 1, 1986, pursuant to which the IRB was issued (the "Trustee"), to permit the substitution by Buyer of (i) a letter of credit to be issued by a lender which is chosen by Buyer and which is satisfactory to the Trustee (the "Substitute LOC"), for (ii) that certain Irrevocable Letter of Credit issued by Union Bank of Switzerland, New York Branch (the "Bank") in favor of the Trustee (the "Union LOC") relative to the IRB. In the event the Substitute LOC has not been issued on the Closing Date, Buyer, from and after the Closing Date, shall (i) indemnify and hold Parent harmless from and against any and all liabilities, obligations, losses, claims, and expenses (including attorney's fees and costs of suit) incurred by Parent and arising under or in connection with that certain Guarantee dated November 1, 1986, made by Parent in favor of the Bank and (ii) as security for the foregoing indemnity of Buyer, cause to be issued and maintained in effect until the first to occur of the expiration of the term of the Union LOC or the issuance of the Substitute LOC an irrevocable letter of credit in favor of Parent (the "Indemnity LOC") by Bankers Trust Company, Nations Bank or such other lender which is chosen by Buyer and which is satisfactory to Parent in the exercise of its sole discretion and the Indemnity LOC shall be in an amount and for a term equal to the Union LOC and contain such other terms as are satisfactory to Parent. Notwithstanding the provisions of the first sentence of this Section 5.16, in the event the substitution of the Substitute LOC for the Union LOC would, by itself, adversely impair the tax exemption of interest on the IRB or cause the IRB to not remain outstanding after the Closing Date in accordance with the terms of the IRB, Buyer's sole obligation under this Section 5.16 shall be to provide to Parent the indemnity and Indemnity LOC contemplated by the second sentence of this Section. In the event Buyer is unable to cause the substitution of the Substitute LOC for the Union LOC and the term of the Union LOC expires prior to end of the term of the IRB, Parent shall use its reasonable commercial efforts to renew the Union LOC or assist Buyer in obtaining a Substitute LOC so that the IRB remains outstanding until the expiration of its term.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
The obligations of Seller hereunder are subject to the fulfillment of the following conditions, any of which may be waived by Seller:
All representations and warranties of Buyer contained herein shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. Buyer shall have performed and complied in all material respects with all covenants and agreements contained herein and required to be performed or complied with by it on or prior to the Closing Date.
Buyer shall have delivered to Seller a certificate signed by its President or any Vice President, dated as of the Closing Date, to the effect set forth in Section 0.
Seller shall have received an opinion of Bryan Cave LLP, counsel for the Buyer, dated as of the Closing Date, substantially in the form attached hereto as Exhibit B.
There shall not be any pending action, suit, or other judicial proceeding brought by the United States Federal Trade Commission or by the Antitrust Division of the United States Department of Justice against any of the parties hereto with respect to any of the transactions contemplated by this Agreement, and no order or decree prohibiting or restraining the consummation of this Agreement shall have been issued by any court or governmental or regulatory body.
The parties shall have filed with the Federal Trade Commission and the Antitrust Division of the Department of Justice notification and report forms with respect to the transactions contemplated hereby pursuant to the HSR Act and the rules promulgated thereunder, and the waiting period required to expire under such Act and rules, including any extension thereof, shall have expired prior to the Closing Date.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
The obligation of Buyer to enter into and complete the Closing is subject to the fulfillment of the following conditions, any of which may be waived by Buyer:
All representations and warranties of Seller contained herein shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. Seller shall have performed and complied in all material respects with all covenants and agreements contained herein and required to be performed or complied with by it on or prior to the Closing Date.
Seller shall have delivered to Buyer a certificate signed by its President or any Vice President, dated as of the Closing Date, to the effect set forth in Section .
Buyer shall have received an opinion of Buchanan Ingersoll Professional Corporation, counsel for Seller, dated as of the Closing Date, substantially in the form attached hereto as Exhibit C.
There shall not be any pending or threatened action, suit, or other judicial proceeding brought by the United States Federal Trade Commission or by the Antitrust Division of the United States Department of Justice against any of the parties hereto with respect to any of the transactions contemplated by this Agreement, and no order or decree prohibiting or restraining the consummation of this Agreement or imposing any conditions to the consummation of this Agreement which are burdensome in any material respect to Buyer shall have been issued by any court or governmental or regulatory body.
The parties shall have filed with the Federal Trade Commission and the Antitrust Division of the Department of Justice notification and report forms with respect to the transactions contemplated hereby pursuant to the HSR Act and the rules promulgated thereunder, and the waiting period required to expire under such Act and rules, including any extension thereof, shall have expired prior to the Closing Date.
Since the date of the Latest Balance Sheet, the Company and the Subsidiaries shall not have suffered any loss on account of fire, flood, accident, strike or other calamity which has had or may have a material adverse effect on the financial condition or assets of the Company and the Subsidiaries, taken as a whole, whether or not such loss shall have been covered by insurance.
Buyer shall have closed on financing for the purchase of all of the Shares and consummation of the related transactions contemplated in the Financing Letters.
Buyer shall have received resignations from each member of the Board of Directors of each of the Company and the Subsidiaries, who is not otherwise an employee of the Company or the Subsidiaries.
Parent shall have executed and delivered to Buyer a Trademark License Agreement, in a form mutually agreeable to Parent and Buyer , pursuant to which Parent shall grant to the Company and the Subsidiaries a royalty free license to use the "Armstrong" name solely in connection with the business operations of the Company and the Subsidiaries for a period not to exceed eighteen (18) months following the Closing Date.
Buyer shall have received the consents and approvals set forth on Schedule 7.10.
Buyer shall have received the final Phase One Study described in Section 9.3, from an environmental consultant selected by Buyer and agreed to in writing by Seller, such agreement not to be unreasonably withheld, with respect to the properties currently owned or operated by the Company and the Subsidiaries which does not reveal environmental remediation costs and compliance costs (exclusive of Known Environmental Losses, as hereinafter defined) which are reasonably likely to exceed $20,000,000. This condition shall be deemed satisfied on December 29, 1995 (effective as of the Closing Date), unless on or before such date Buyer notifies Seller in writing that this condition is not satisfied.
Seller shall indemnify Buyer, its affiliates, the Company and the Subsidiaries and their respective directors, officers, shareholders, employees, agents, representatives, successors and assigns (collectively, the "Buyer Indemnitees") against any and all claims, losses, liabilities, damages, expenses, including reasonable attorney's fees and costs of suit ("Losses"), resulting from or related to: (i) any breach of Seller's covenants, warranties and representations contained in this Agreement and (ii) any item disclosed on Schedule 3.27 (exclusive of Known Environmental Losses, as hereinafter defined) ("Other Environmental Losses"); provided, however, that with respect to breaches of the representations and warranties of Seller set forth in Article 3 (other than with respect to breaches of representations and warranties set forth in Sections 3.2, 3.11, 3.12, 3.13, 3.14 and 3.22) and including Other Environmental Losses, (i) the Buyer Indemnitees will not be entitled to indemnification until the aggregate of all such claims exceeds the sum of $2,500,000, and then only to the extent of any amount in excess of $2,500,000 and (ii) Seller's aggregate liability to indemnify the Buyer Indemnitees shall not exceed $30,000,000 (the "Seller's Indemnity Cap"). Buyer and Seller acknowledge and agree that, notwithstanding the foregoing provision of this Section 8.1, in the event the Phase One Study described in Section 9.3 discloses environmental remediation costs (exclusive of Known Environmental Losses, as hereinafter defined) and compliance costs which are in excess of $5,000,000, then the Seller's Indemnity Cap shall be increased by an amount equal to the amount of such environmental remediation costs and compliance costs in excess of $5,000,000 but in no event shall such increase exceed $15,000,000 ("Excess Environmental Indemnity").
Buyer shall indemnify Seller and its affiliates, directors, officers, shareholders, employees, agents, representatives, successors and assigns (collectively, the "Seller Indemnitees") against any and all claims, and losses, liabilities, damages, expenses, including reasonable attorney's fees and costs of suit, to Seller (i) resulting from or related to any breach of Buyer's covenants, warranties and representations contained in this Agreement and (ii) resulting from, relating to or in connection with the operations of the Company and the Subsidiaries subsequent to the Closing Date, including without limitation, the sale of products by the Company and the Subsidiaries under the "Armstrong" brand name subsequent to the Closing Date (other than with respect to infringement actions by third parties relative to the use of the "Armstrong" brand name).
Every person seeking indemnification hereunder shall correct or mitigate, to the extent commercially reasonable, any loss suffered by such person for which indemnification is claimed hereunder, and the indemnifying party shall be liable only for the amount thereof which is net of any insurance proceeds and other amounts paid by, or offset against any amount owed to, any person not a party to this Agreement (including any costs or expenses incurred to so correct or mitigate); provided, however, with respect to matters, including without limitation, known Environmental Losses, Other Environmental Losses, and Environmental Warranty Losses, for which Seller is required to indemnify Buyer pursuant to this Agreement, Seller shall indemnify and hold harmless Buyer with respect to such matters upon receipt of notice of such claim notwithstanding the existence of a pending claim for recovery of insurance proceeds (including any proceeds from any applicable state underground storage tank fund). In the event Buyer recovers insurance proceeds with respect to matters that Seller provided indemnity pursuant to this Agreement, Buyer shall reimburse Seller for its expenditures in an amount equal to the funds recovered by Buyer from such insurer. If a person which has a right of indemnification under this Article 8 reasonably can, by expenditure of money, mitigate or otherwise reduce or eliminate any loss for which indemnification would otherwise be claimed, such person shall take such action and shall be entitled to reimbursement for such expenditures and all related expenses. The parties acknowledge and agree that, except as provided in Sections 8.5, 8.7, 9.2, 9.11 and 9.21, the indemnification provided under this Article 8 shall be the sole and exclusive remedy of the parties with respect to the breach of any covenant, representation or warranty contained herein. Notwithstanding the foregoing, nothing in this Agreement shall relieve Seller or Buyer from any liability arising from an intentional breach of any of its representations, warranties, covenants or agreements set forth in this Agreement.
If any third party (including any governmental agency or authority) shall notify any Buyer Indemnitee or Seller Indemnitee, as the case may be (the "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against either Buyer or Seller, as the case may be (the "Indemnifying Party") under this Article 8, then the Indemnified Party shall promptly notify the Indemnifying Party thereof in writing.
The Indemnifying Party shall, within 30 days after receipt of the notice described in Section 8.4(a), assume and thereafter conduct the defense of the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party at the sole expense of the Indemnifying Party; provided, however, that the Indemnified Party may participate in such settlement or defense through counsel chosen by such Indemnified Party, provided that the fees and expenses of such counsel shall be borne by such Indemnified Party; and provided, further, that the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably) unless the judgment or proposed settlement involves only the payment of money damages by the Indemnifying Party and does not impose an injunction or any other equitable relief upon the Indemnified Party.
Unless and until the Indemnifying Party assumes the defense of the Third Party Claim as provided in Section 8.4(b) above, however, the against the Third Party Claim in any manner it reasonably may deem appropriate, but shall not thereby waive any right to indemnify therefor pursuant to this Agreement; provided, however, that the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably).
The specific provisions of Sections 5.5(c), 5.5(d), 8.5 and 8.7 will govern in the event of any conflict with the general provisions of this Section 8.4.
In addition to any other indemnification granted herein and notwithstanding the survivability or limits, if any, of any representation contained herein or the absence of any representation herein, Seller agrees to indemnify, defend and hold harmless the Buyer Indemnitees from and against all loss, liability including the Company and the Subsidiaries' liability for its own Taxes or its liability, if any (for example, by reason of transferee liability or application of Treas. Reg. Section 1.1502-6) for Taxes of others, including, but not limited to, Seller or any Tax Affiliate or any majority- controlled foreign affiliate, damage or reasonable expense (including but not limited to reasonable attorneys' fees and expenses) (collectively, "Costs") payable with respect to Taxes claimed or assessed against the Company and the Subsidiaries (i) for any taxable period ending on or before the Closing Date or (ii) for any taxable period resulting from a breach of any of the representations or warranties contained in Section 3.22 hereof
With respect to any indemnity payment under this Article 8, the parties agree to treat, to the extent permitted by law, all such payments as an adjustment to the consideration paid for the sale and transfer of the stock of the Company and the Subsidiaries, to be allocated to the Company or the Subsidiary in respect of which the adjustment arose, and if the source of any such adjustment cannot reasonably be determined, such adjustment shall be allocated to the Company.
Identified Properties. Seller agrees to indemnify, defend and hold harmless the Buyer Indemnitees from and against all existing and future claims, losses, liabilities, damages and expenses, including, without limitation, claims, losses, liabilities, damages and expenses for personal injury, property damage, reasonable costs of investigation, attorneys' fees and costs of suit and reasonable consultant fees, resulting from or related to (i) the direct or indirect disposal by the Company or any of its Subsidiaries of wastes or other materials in the Buckingham County, Virginia landfill site ("Buckingham") and (ii) the former Pleasant Garden, North Carolina facility of the Company heretofore sold to Hooker Furniture Corporation pursuant to an agreement dated February 17, 1993 (including but not limited to releases of volatile organic compounds) ("Pleasant Garden") (hereinafter Buckingham and Pleasant Garden referred to together as the "Identified Properties") ("Known Environmental Losses"); provided however (i) with respect to the first $4,000,000 of Known Environmental Losses relating to the Identified Properties, Seller and Buyer shall each pay fifty percent (50%) of such $4,000,000 of such Known Environmental Losses and (ii) thereafter, the Buyer Indemnities will be indemnification for additional Known Environmental Losses with respect to the Identified Properties up to an aggregate amount, including such $4,000,000, not to exceed $30,000,000. Thereafter, Seller shall have no further obligation to Buyer or any other person relating to the Identified Properties. This Section 8.7(a) sets forth Buyer Indemnitees' sole and exclusive rights of indemnification for Known Environmental Losses.
Period of Indemnity. Seller's Indemnification obligations in Section 8.7 (a) herein shall apply only to Known Environmental Losses actually incurred by the Buyer Indemnities before the tenth anniversary of the Closing Date. Thereafter Seller shall have no further obligation to indemnify Buyer or any other person for Known Environmental Losses.
Lowest Cost Response. Notwithstanding anything in this Agreement to the contrary, Seller's indemnity obligation for breach of any warranty in Section 3.27(a)-(h) ("Environmental Warranty Losses"), Other Environmental Losses and Known Environmental Losses (collectively "Environmental Losses") for which Seller has an indemnity obligation pursuant to this Agreement shall be satisfied by implementation or indemnification for implementation of the Lowest Cost Response. The Lowest Cost Response shall mean any compliance activity or any investigation, cleanup, remediation, removal action or other response activity that (1) satisfies applicable Environmental Laws that are in existence at the time of the contemplated activity, (2) is acceptable to Governmental Authorities having jurisdiction over the site, (3) is consistent with the operations being conducted at the site, and (4) can be achieved for the lowest financial cost as compared with other potential response activities.
Limitation. Notwithstanding anything in this Agreement to the contrary, Seller's indemnity obligation for Environmental
Losses shall be limited solely to Environmental Losses arising out of or resulting from (1) investigative or remedial action required by Environmental Law or Governmental Authorities, (2) third-party claims, or (3) the discovery of the presence or Release of a Hazardous Material as a result of: (i) a facility expansion or renovation (ii) in the ordinary course of operations, including pursuant to a corporate environmental compliance program (except for findings resulting from soil or ground water sampling pursuant to such programs), (iii) an investigation done in connection with a bona fide offer received after the Closing Date to purchase or lease any of the real property currently owned or leased by the Company or the Subsidiaries and in particular to the Armstrong Furniture Division of the Company ("AFD"), a bona fide offer to purchase or a board approved organized sale, disposition or bidding process to sell all or substantially all of the assets of AFD (which for purposes hereof the real property shall only include the real property listed on Schedule 8.7(d)(3)(iii) hereto) (the "Assets") or the stock of a subsidiary of the Company owning directly or indirectly no real property other than the Assets, or (iv) an investigation or remedial action which in the reasonable business judgment of Buyer is required to protect human health or safety. For purposes of Article 8, no indemnification is provided by Seller for asbestos removal costs solely associated with renovation of any property currently owned, leased, or operated by the Company or any Subsidiary.
Confidentiality. Buyer shall use its best efforts to maintain in strict confidence, the existence and terms of Seller's indemnity obligation with respect to the Identified Properties set forth in Section 8.7(a) provided, however, Buyer may disclose the terms and existence of such indemnity obligation (1) to any financial institution that is considering or actually provides financing to Buyer, and (2) to the extent required by law. In the event Buyer discloses the existence or terms of Seller's indemnity obligation pursuant to Section 8.7(a) to a financial institution, Buyer shall take reasonable and appropriate measures to ensure that such financial institution is familiar with the confidentiality requirement set forth herein and agrees to comply with its terms.
Procedures Relating to Environmental Indemnity by Seller.
Subject to the provisions of Section 8.7 (a) and (b), the continued defense, settlement or compromise of the claims giving rise to Known Environmental Losses shall continue with existing counsel or other counsel selected by Seller and reasonably acceptable to Buyer under the direction of Seller; provided, however, Buyer Indemnitees shall have the right to retain, at their own expense counsel and consultants of their own choosing to work with Seller's current defense counsel and consultants.
As a condition of the indemnity for Environmental Warranty Losses and Other Environmental Losses Buyer shall, promptly after becoming aware of facts that will likely result in such Environmental Warranty Losses or Other Environmental Losses being incurred for which Buyer Indemnitees are entitled to indemnity hereunder ("Environmental Losses Claim"), submit to Seller a written notice thereof within four years of the Closing Date, which notice shall describe in reasonable detail the date when and circumstance by which Buyer became aware of the Environmental Losses Claim; the nature of the Environmental Losses Claim, and the basis for the alleged liability. Seller shall have no obligation to Buyer for any Environmental Warranty Losses or Other Environmental Losses for which a notice as described above is not received before the fourth anniversary of the Closing Date.
With regard to any Environmental Losses Claim, Seller may, at its option, defend such Environmental Losses Claim with counsel or consultants selected by Seller reasonably acceptable to the Buyer Indemnitees. If Seller does not elect to defend any such Environmental Losses Claim, the Buyer Indemnitees shall defend such Claim with counsel or consultants selected by the Buyer Indemnitees reasonably acceptable to Seller. Seller shall provide Buyer with copies of all correspondence, reports and other documentation, including but not limited to settlement communications or documents (excluding matters subject to confidentiality) (draft or final) relating to any Other Environmental Losses or Environmental Warranty Claims, excepting such documents as are routinely filed. If Seller elects to defend such Environmental Losses Claim, Seller shall retain control of the defense, compromise or settlement (including without limitation the nature and scope of any work to be performed; the contractors, consultants or engineers to be performing any work; the making of any admissions against interest; the making of any decision whether work should be performed voluntarily by the Buyer Indemnitees or their contractors, consultants or engineers or, alternatively, by an authorized governmental entity; and the making of any decision whether to enter into any consent decree, consent order or consent agreement and the terms of such decree, order or agreement) thereof; provided, however, that if Buyer reasonably determines that the defense, compromise or settlement of an Environmental Losses Claim may reasonably be expected to materially and adversely affect the business or operations of the Buyer Indemnitees, the Buyer Indemnitees shall have the right to approve, such approval not to be unreasonably withheld, the defense, compromise or settlement of such Environmental Losses Claim. If the Buyer Indemnitees are conducting the defense, compromise or settlement of such
Buyer Indemnitees shall have control over the defense, compromise or settlement; provided, however, that Seller shall have the right to approve the defense, compromise or settlement (including without limitation the nature and scope of any work to be performed; the contractors, consultants or engineers to be performing any work; the making of any admissions against interest; the making of any decision whether work should be performed voluntarily by the Buyer Indemnitees or their contractors, consultants or engineers or, alternatively, by an authorized governmental entity; and the making of any decision whether to enter into any consent decree, consent order or consent agreement and the terms of such decree, order or agreement) if the Environmental Losses Claim may reasonably be expected to exceed $250,000 in Environmental Warranty Losses or Other Environmental Losses in any one or more years. The party conducting the defense, compromise or settlement of an Environmental Losses Claim shall inform the other party in a timely manner of any material information concerning the Environmental Losses Claim or the defense, compromise or settlement thereof and provide copies of correspondence, reports and other documentation (draft or final) relating thereto.. If at any time Seller is not satisfied with the defense being provided by the Buyer Indemnitees with regard to any Environmental Losses Claim that may reasonably be expected to exceed $250,000 in Environmental Losses Losses in any one or more years, Seller shall have the right, at its option, to assume control of the defense, compromise or settlement of such Environmental Losses Claim, including without limitation the appointment of new counsel or consultants if Seller so elects; provided, however, if Buyer reasonably determines that the defense, compromise or settlement (including without limitation the nature and scope of any work to be performed; the contractors, consultants or engineers to be performing any work; the making of against interest; the making of any decision whether work should be performed voluntarily by the Buyer Indemnitees or their contractors, consultants or engineers or, alternatively, by an authorized governmental entity; and the making of any decision whether to enter into any consent decree, consent order or consent agreement and the terms of such decree, order or agreement) of such Environmental Losses Claim may reasonably be expected to materially and adversely affect the business or operations of the Buyer Indemnitees or result in not insignificant Environmental Warranty Losses or Other Environmental Losses to the Buyer Indemnitees, the Buyer Indemnitees shall have the right to approve the defense, compromise or settlement of such Environmental Losses Claim, such approval not to be unreasonably withheld. Regardless of the party conducting the defense of any Environmental Losses Claim, the parties agree to cooperate in the defense, compromise or settlement of such claim. Where Seller decides that the taking of any action to test, investigate, remove, remediate or restore any environmental conditions with regard to a property owned or operated by the Buyer Indemnitees is necessary to protect Seller's interests under this Agreement, Seller shall provide advance written notification to the Buyer Indemnitees of the nature of and reasons for such action. The Buyer Indemnitees shall allow Seller to perform all or part of any such action at Seller's option, using Seller's own counsel, consultants, contractors and/or engineers reasonably acceptable to the Buyer Indemnitees. Seller and the Buyer Indemnitees will cooperate in attempting to minimize any disruption of operations of the Buyer Indemnitees caused by such actions. In connection with the obligations of Seller pursuant to this subsection 8.8(c) the Buyer Indemnitees shall cause the Company and its Subsidiaries to deliver to Seller copies of all documents reasonably to environmental or other state or federal regulatory matters with respect to which Seller may be required to indemnify the Buyer Indemnitees hereunder.
Each party to this Agreement shall pay its own expenses (including, without limitation, the fees and expenses of their respective agents, representatives, counsel and accountants) incidental to the preparation, negotiation, and consummation of this Agreement and the transactions contemplated hereby. All filing fees required to be paid under the HSR Act and the rules promulgated thereunder shall be paid by Buyer.
Buyer has not employed a finder or broker or other person entitled to a brokerage commission or fee in respect of this Agreement and the transaction contemplated hereby. Seller has engaged Goldman, Sachs & Co. to act as its financial advisor in connection with the transactions contemplated hereby and shall be solely responsible for the payment of such firm's fees for such services.
Access to the Company's Properties.
Seller will, and will cause the Company to accord Buyer and its authorized representatives reasonable access to all of the books, records, personnel and properties of or pertaining to the Company and the Subsidiaries commencing not later than the date of this Agreement. Such access shall include, but not be limited to, the right to conduct, at Buyer's sole expense, an environmental investigation (which shall not include performance of soil, groundwater, surface water and air sampling and analysis without the prior
Seller), at any of the properties currently owned or operated by the Company and the Subsidiaries; provided however, that Buyer acknowledges that such environmental investigation and report issued thereon (the "Phase One Study") contains confidential information of the Seller with respect to the Company and the Subsidiaries, and Buyer agrees to not directly or indirectly use, publish, disseminate, describe or otherwise disclose the Phase One Study to any person other than its attorneys, accountants, financial institutions or other advisors directly involved in the transaction contemplated by this Agreement without the prior written consent of Seller. Buyer agrees to cause any person to whom it discloses such Phase One Study to be bound by the confidentiality provisions contained herein. Prior to finalizing any Phase One Study, including any estimation of environmental remediation or compliance costs, Buyer shall provide Seller with an oral and an executive summary of the proposed Phase One Study on or before December 8, 1995 and shall provide a copy of such Phase One Study to Seller for meaningful review and comment by no later than December 27, 1995. Buyer shall have the right to make copies of any such records, files, tax returns and other materials as it may deem advisable. Seller will cause the respective personnel of Seller and the Company to assist Buyer in making such investigation, and will make its counsel, accountants and other representatives available for such purposes. All stock record books and all minute books of the Company and the Subsidiaries will be delivered to Buyer at the Closing. All other books and records of the Company and the Subsidiaries in the possession of Seller will be delivered to Buyer at the Closing.
Seller (as it reasonably requires) and any taxing authority in the United States shall have access for a period of six (6) years after the Closing hours, to personnel of the Company and the Subsidiaries and to all books, records, files, documents and other data relating to the business of the Company and the Subsidiaries conducted prior to the Closing Date in connection with any proceedings with any governmental authority.
All notices or other communications given under this Agreement shall be in writing and transmitted by registered or certified mail, postage prepaid, or by telegram. Any such notice or communication given hereunder shall be sent as follows:
c/o Armstrong World Industries, Inc. 313 West Liberty Street, Lancaster, PA 17603 Attention: Larry A. Pulkrabek, Senior Vice President
Attn: Chairman of the Board
Any party may send notice or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice or other communication shall be deemed to have been duly given unless and until it actually is received. Any party may change the address to which notices and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth.
This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. This Agreement or any part thereof, may not be assigned without the prior written consent of the other party, which consent may be withheld in the sole discretion of the other party; provided, however, that Buyer may (i) assign any or all of its rights and interests hereunder (but not delegate any or all of its duties hereunder) to one or more of its affiliates and (ii) designate one or more of its affiliates to perform its obligations hereunder (in any or all of which cases in subparagraphs (i) and (ii) Buyer nonetheless shall remain responsible for the performance of all of its obligations hereunder). References to Buyer and Seller shall include their respective successors and permitted assigns.
This Agreement supersedes all prior agreements and understandings between the parties or any of their respective affiliates (written or oral) relating to the subject matter (except for that certain Confidentiality Agreement between the parties dated June 30, 1995), and is intended to be the entire and complete statement of the terms of the agreement between the parties, and may be amended or modified only by a written instrument executed by the parties. The waiver by one party of any breach of this Agreement by the other party shall not be considered to be a waiver of any succeeding breach (whether of a similar or a dissimilar nature) of any such provision or other provision or a waiver of any such provision itself. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. Notwithstanding anything to the contrary contained herein, any matter set forth or referred to or disclosed on any Schedule hereto shall be deemed also to be set forth, referred to and disclosed on all schedules, and deemed to be the disclosure under all Sections and provisions of this Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by either party hereto.
Buyer may, without liability, terminate this Agreement by written notice to Seller as follows:
If Seller fails to comply with Section or to satisfy at or prior to Closing in all material respects any of the conditions to Closing specified in Article 7 which are required to be performed or satisfied by Seller at or prior to Closing, and if any such failure either is not waived in writing by Buyer or cured by Seller within twenty days after written notice thereof by
If the Phase One Study prepared pursuant to Section 9.3 discloses environmental remediation costs and compliance costs which are in excess of $20,000,000, Buyer may, without liability, terminate this Agreement by written notice to Seller on or before December 29, 1995.
Seller may, without liability, terminate this Agreement by written notice to Buyer as follows:
If Buyer fails to comply with Section or to satisfy at or prior to Closing in all material respects any of the conditions to Closing specified in Article 6 which are required to be performed or satisfied by Buyer at or prior to Closing, and if any such failure either is not waived in writing by Seller or cured by Buyer within twenty days after written notice thereof by
If Buyer fails to obtain financing as required by Section 7.7 on or before January 16, 1996 and Buyer does not waive the condition set forth in Section 7.7 thereon or before such date; or
If the Phase One Study prepared pursuant to Section 9.3 discloses environmental remediation costs and compliance costs which are in excess of $20,000,000, and Buyer provides the notice set forth in Section 7.11, Seller may, without liability, terminate this Agreement by written notice to Buyer on or before January 3, 1996.
If no Closing occurs by March 15, 1996, and the failure to close is not the result of Seller's or Buyer's failure to satisfy in all material respects any of the conditions to Closing specified in Articles 6 and 7 at or prior to Closing, each of Buyer and Seller shall have the right to terminate this Agreement upon written notice to the other.
If this Agreement is terminated pursuant to Sections 9.8, 9.9 or 9.10 above, all rights and obligations of the parties hereunder shall terminate without any liability of any party to the other party under or with respect to this Agreement; provided, however, that nothing in this Section 9.11 or elsewhere in this Agreement shall impair or restrict the rights of any party to any and all remedies at law or in equity in the event of a breach of or default under this Agreement by the other party. If this Agreement is terminated as provided herein all filings, applications and other submissions made pursuant to this Agreement shall, to the extent practicable, be withdrawn from the agency or other persons to which they were made.
Survival of Representations, Covenants and Warranties.
The representations and warranties made by Seller and Buyer herein shall survive the Closing for a period of two years; provided, however, that the representations and warranties made by Seller in Section 3.27(a)-(h) above shall survive the Closing and continue in full force and effect for a period of four years; those contained in Sections 3.2, 3.11, 3.12, 3.13 and 3.14 above shall survive the Closing and continue in full force and effect forever thereafter (subject to any applicable statutes of limitations); and those contained in Section 3.27 (i) shall not survive the Closing. The covenants and agreements set forth in the Agreement shall survive Closing, each in accordance with its terms.
In the case of any representation or warranty of Seller in Section 3.22 and any other representation or warranty relating to or affecting the liability for Taxes (the "Surviving Representations") whether the Company's or the Subsidiaries' Taxes or their liability, if any (for example, by reason of transferee liability or application of Treas. Reg. Section 1.1502-6) for the Taxes of others including, but not limited to Seller or any former or present affiliate or subsidiary thereof, the same shall survive until the later of the final resolution of any judicial or administrative proceeding involving any such Tax or expiration of any statute of limitations (including any suspensions, tollings or extensions thereof).
The Section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.
This Agreement shall be interpreted and governed by the laws of the Commonwealth of Pennsylvania without giving effect to any choice or conflict of law provision.
This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument.
Each of the parties shall execute such documents and other papers and take such further actions as may be reasonably required to carry out the provisions hereof and the transactions contemplated hereby. Each party shall use its reasonable efforts to fulfill or obtain the fulfillment of the conditions to the Closing.
Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition and unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
Seller and Buyer agree to keep the terms of this Agreement and any amendments to it or transactions arising from it confidential except as required by law or as otherwise agreed by the parties. The parties hereto agree that before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated hereby, the content of any such disclosure shall be communicated between the parties and agreed to prior to the release thereof, except as required by applicable law or government regulation.
Neither this Agreement nor any provision hereof is intended to confer upon any person (other than the parties hereto and their respective successors and permitted assigns ) any rights or remedies hereunder.
Each party agrees to bring all judicial proceedings against the other arising out of or relating to this Agreement or any of the Delaware or the appropriate state court located in New Castle County, Delaware. In addition, each party accepts, generally and unconditionally, the exclusive jurisdiction of such courts and waives, to the fullest extent permitted by law, any objection (including any objection that jurisdiction, situs, or venue is inconvenient or improper) which it may now have or may hereafter have to the laying of venue or the convenience of the forum of any action with respect to bringing, prosecution or defense of any such judicial proceeding in any such court.
Buyer and Seller acknowledge and agree that failure by the other to perform its obligations under this Agreement would cause such party or parties to be materially and irreparably injured and to suffer material loss; and that such injury and loss cannot be fully or adequately compensated by the payment of money or by an award of damages and each shall be entitled to the specific performance of this Agreement, in addition to all other remedies that each might have, and that each of them will not object to and will not hinder or delay the entry of a decree of specific performance against it in any action or suit brought under or in respect of this Agreement.
All leases, licenses, contracts, and other agreements between any of the Company and the Subsidiaries on one hand and any of Seller or any of its affiliates on the other hand shall be deemed terminated as of the Closing and will have no further force or effect.
Parent hereby unconditionally and irrevocably guarantees the full and prompt performance by Seller of all of its obligations under this Agreement.
As used herein, the phrase "knowledge of Seller" shall have the meaning, and be limited to the persons, as set forth on Schedule 9.24.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
ATTEST: ARMSTRONG WORLD INDUSTRIES, INC.
/s/ L. A. Pulkrabek /s/ George A. Lorch L. A. Pulkrabek, Secretary Title: Chairman & CEO
/s/ D. D. Wilson /s/ L. A. Pulkrabek D. D. Wilson, Secretary Title: Vice President
/s/ D. A. Patterson /s/ R. B. Loynd D. A. Patterson, Secretary Title: Chairman of the Board
Schedules to Stock Purchase Agreement
Pursuant to (S) 229.601(b)(2) of Regulation S-K of the Securities Act of 1933, the Registrant has omitted the schedules to the Stock Purchase Agreement. The Registrant hereby agrees to furnish supplementary a copy of any omitted schedule to the Commission upon request. | 8-K | EX-2 | 1996-01-16T00:00:00 | 1996-01-16T16:34:27 |
0000315066-96-000097 | 0000315066-96-000097_0000.txt | <DESCRIPTION>EFFECTIVE DATE - JANUARY 3, 1996 - BALLY GAMING
Item 1: Reporting Person - FMR Corp. - (Tax ID: 04-2507163) Item 6: Commonwealth of Massachusetts
The filing of this Schedule 13D is not, and should not be deemed to be, an admission that such Schedule 13D is required to be filed. See the discussion under Item 2.
Item 1. Security and Issuer.
This statement relates to shares of the common stock, $0.01 par value (the "Shares") of Bally Gaming International Incorporation, a Delaware corporation (the "Company"). The principal executive offices of the Company are located at 6601 S. Bermuda Road, Las Vegas, NV 89119-3605.
Item 2. Identity and Background.
Item 2 is amended as follows:
This statement is being filed by FMR Corp., a Massachusetts Corporation ("FMR"). FMR is a holding company one of whose principal assets is the capital stock of a wholly-owned subsidiary, Fidelity Management & Research Company ("Fidelity"), which is also a Massachusetts corporation. Fidelity is an investment advisor which is registered under Section 203 of the Investment Advisors Act of 1940 and which provides investment advisory services to more than 30 investment companies which are registered under Section 8 of the Investment Company Act of 1940 and serves as investment advisor to certain other funds which are generally offered to limited groups of investors (the "Fidelity Funds"). Fidelity Management Trust Company ("FMTC"), a wholly- owned subsidiary of FMR Corp. and a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, serves as trustee or managing agent for various private investment accounts, primarily employee benefit plans and serves as investment adviser to certain other funds which are generally offered to limited groups of investors (the "Accounts"). Various directly or indirectly held subsidiaries of FMR are also engaged in investment management, venture capital asset management, securities brokerage, transfer and shareholder servicing and real estate development. The principal offices of FMR, Fidelity, and FMTC are located at 82 Devonshire Street, Boston, Massachusetts 02109.
Members of the Edward C. Johnson 3d family are the predominant owners of Class B shares of common stock of FMR representing approximately 49% of the voting power of FMR. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR. Mr. Johnson 3d is the Chairman of FMR. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Comany Act of 1940, to form a controlling group with respect to FMR. The business address and principal occupation of Mr. Johnson 3d is set forth in Schedule A hereto.
The Shares to which this statement relates are owned directly by eight of the Fidelity Funds, and eight of the Accounts.
The name, residence or business address, principal occupation or employment and citizenship of each of the executive officers and directors of FMR are set forth in Schedule A hereto.
Within the past five years, none of the persons named in this Item 2 or listed on Schedule A has been convicted in any criminal proceeding (excluding traffic violations or similar misdemeanors) or has been a party to any civil proceeding and as a result thereof was or is subject to any judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to federal or state securities laws or finding any violations with respect to such laws.
Item 3. Source and Amount of Funds or Other Consideration.
Item 3 is amended as follows:
The Fidelity Funds which own or owned Shares purchased in the aggregate 1,527,315 Shares for cash in the amount of approximately $21,919,459, including brokerage commissions. The Fidelity Funds used their own assets in making such purchase and no part of the purchase price is represented by borrowed funds. Proceeds from 990,716 Shares sold aggregated approximately $14,607,244.
The Accounts of FMTC which own or owned Shares purchased in the aggregate 243,550 Shares for cash in the amount of approximately $0, including brokerage commissions. The Accounts used their own assets in making such purchase and no part of the purchase is represented by borrowed funds. Proceeds from 0 Shares sold aggregated approximately $0.
Item 4. Purpose of Transaction.
Item 4 is amended as follows:
The purpose of Fidelity and FMTC in having the Fidelity Funds and the Accounts purchase Shares is to acquire an equity interest in the Company in pursuit of specified investment objectives established by the Board of Trustees of the Fidelity Funds and by the investors in the Accounts.
Fidelity and FMTC, respectively, may continue to have the Fidelity Funds and the Accounts purchase Shares subject to a number of factors, including, among others, the availability of Shares of sale at what they consider to be reasonable prices and other investment opportunities that may be available to the Fidelity Funds and Accounts.
Fidelity and FMTC, respectively, intend to review continuously the equity position of the Fidelity Funds and Accounts in the Company. Depending upon future evaluations of the business prospects of the Company and upon other developments, including, but not limited to, general economic and business conditions and money market and stock market conditions, Fidelity may determine to cease making additional purchases of Shares or to increase or decrease the equity interest in the Company by acquiring additional Shares, or by disposing of all or a portion of the Shares.
Neither Fidelity nor FMTC has any present plan or proposal which relates to or would result in (i) an extraordinary corporate transaction, such as a merger, reorganization, liquidation, or sale of transfer of a material amount of assets involving the Company or any of its subsidiaries, (ii) any change in the Company's present Board of Directors or management, (iii) any material changes in the Company's present capitalization or dividend policy or any other material change in the Company's business or corporate structure, (iv) any change in the Company's charter or by-laws, or (v) the Company's common stock becoming eligible for termination of its registration pursuant to Section 12(g)(4) of the 1934 Act.
Item 5. Interest in Securities of Issuer.
Item 5 is amended as follows:
FMR, Fidelity, and FMTC, beneficially own all 1,980,149 Shares.
(a) FMR beneficially owns, through Fidelity, as investment advisor to the Fidelity Funds, 1,736,599 Shares, or approximately 14.47% of the outstanding Shares of the Company, and through FMTC, the managing agent for the Accounts, 243,550 Shares, or approximately 2.03% of the outstanding Shares of the Company. The number of Shares held by the Fidelity Funds includes 1,200,000 Shares of common stock resulting from the assumed conversion of 1,200,000 shares of the Warrants (1 share of common stock for each Warrant). Neither FMR, Fidelity, FMTC, nor any of its affiliates nor, to the best knowledge of FMR, any of the persons named in Schedule A hereto, beneficially owns any other Shares. The combined holdings of FMR, Fidelity, and FMTC, are 1,980,149 Shares, or approximately 16.50% of the outstanding Shares of the Company.
(b) FMR, through its control of Fidelity, investment advisor to the Fidelity Funds, and the Funds each has sole power to dispose of the Shares. Neither FMR nor Mr. Johnson has the sole power to vote or direct the voting of the 1,736,599 Shares owned directly by the Fidelity Funds, which power resides with the Funds' Boards of Trustees. Fidelity carries out the voting of the Shares under written guidelines established by the Funds' Board of Trustees. FMR, through its control of FMTC, investment manager to the Accounts, and the Accounts each has sole dispositive power over 243,550 Shares and sole power to vote or to direct the voting of 183,904 Shares, and no power to vote or to direct the voting of 59,646 Shares owned by the Accounts.
(c) Except as set forth in Schedule B, neither FMR, or any of its affiliates, nor, to the best knowledge of FMR, any of the persons named in Schedule A hereto has effected any transaction in Shares during the past sixty (60) days.
Item 6. Contract, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.
Neither FMR nor any of its affiliates nor, to the best knowledge of FMR, any of the persons named in Schedule A hereto has any joint venture, finder's fee, or other contract or arrangement with any person with respect to any securities of the Company.
The Funds and Accounts may from time to time own debt securities issued by the Company or its direct or indirect subsidiaries, and may from time to time purchase and/or sell such debt securitites.
Item 7. Material to be Filed as Exhibits.
This statement speaks as of its date, and no inference should be drawn that no change has occurred in the facts set forth herein after the date hereof.
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.
DATE: January 15, 1995 By: /s/Arthur
The name and present principal occupation or employment of each executive officer and director of FMR Corp. are set forth below. The business address of each person is 82 Devonshire Street, Boston, Massachusetts 02109, and the address of the corporation or organization in which such employment is conducted is the same as his business address. All of the persons listed below are U.S. citizens.
Edward C. Johnson 3d President, Director, CEO Board and CEO, FMR
J. Gary Burkhead Director President-Fidelity
Caleb Loring, Jr. Director, Director, FMR
James C. Curvey Director, Sr. V.P., FMR Sr. V.P.
William L. Byrnes Vice Chairman Vice Chairman, FIL Director & Mng.
Abigail P. Johnson Director Portfolio Mgr -
Robert C. Pozen Sr. V.P. & Gen'l Sr. V.P. & Gen'l
David C. Weinstein Sr. Vice President Sr. Vice President
Gerald M. Lieberman Sr. Vice Pres. - Sr. Vice Pres. - | SC 13D/A | SC 13D/A | 1996-01-16T00:00:00 | 1996-01-16T09:47:26 |
0000898430-96-000132 | 0000898430-96-000132_0004.txt | SHARES OF TUBOSCOPE VETCO INTERNATIONAL CORPORATION
This Voting Agreement dated as of January 3, 1996 (this "Agreement"), among D.O.S. Ltd., a Bermuda corporation (the "Company"), and each other entity listed on the signature page hereof (each, a "Stockholder").
WHEREAS, each Stockholder owns the number of shares of Common Stock, $.01 par value ("Common Stock") of Tuboscope Vetco International Corporation, a Delaware corporation ("Parent"), set forth opposite such stockholder's name on the signature page hereto (all such shares of Common Stock now owned and which may hereafter be acquired by such Stockholder prior to the termination of this Agreement being referred to herein as the "Shares"); and
WHEREAS, as a condition to the willingness of the Company to enter into that certain Agreement and Plan of Merger, dated of even date herewith (the "Merger Agreement"), by and among Parent, a Delaware corporation, Grow Acquisition Limited, a wholly-owned subsidiary of Parent ("Sub"), and the Company, providing for the merger of Sub into the Company (the "Merger"), the Company has required that each Stockholder agree, and in order to induce the Company to enter into the Merger Agreement, each Stockholder has agreed, to enter into this Agreement; and
WHEREAS, all capitalized terms used and not defined herein shall have the meanings given to such terms in the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows:
REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS
Each Stockholder hereby severally represents and warrants to the Company as follows:
1.01 Authority Relative to this Agreement. Such Stockholder has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby have been duly and validly authorized by such Stockholder, and no other proceedings on the part of such Stockholder are necessary to authorize the execution and delivery of this Agreement or to consummate such transactions. This Agreement has been duly and validly executed and delivered by such Stockholder and, assuming the due authorization, execution and delivery by the valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general principles of equity.
1.02 No Conflict. The execution and delivery of this Agreement by such Stockholder do not, and the performance of this Agreement by such Stockholder will not, (i) conflict with or violate any voting or trust agreement, charter or other organizational document of such Stockholder, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to such Stockholder, (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of its Shares pursuant to any note, indenture, agreement, lease, license, permit or other instrument or obligation to which such Stockholder is a party or by which such Stockholder or its Shares are bound or affected, or (iv) require any consent, approval, authorization or permit from any governmental regulatory body, except where such breach or default or failure to obtain such consents, approvals, authorizations or permits or to make such filings would not prevent or delay the performance by such Stockholder of its obligations under this Agreement.
1.03. Title to the Shares. Such Stockholder is the record holder of the Shares set forth opposite its name on the signature page hereto, free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, charges and other encumbrances of any nature that would prevent or delay the performance by such Stockholder of its obligations hereunder. Such Stockholder has not appointed or granted any proxy, which appointment or grant is still effective, with respect to its Shares. Such Stockholder has sole voting power with respect to its Shares, and the persons executing this Agreement on behalf of such Stockholder have the power to direct the voting of such Stockholder's Shares.
2.01. Voting Agreement. Each Stockholder hereby agrees that prior to the termination of this Agreement, at any meeting of the stockholders of Parent, however called, and in any action by consent of the stockholders of Parent, such Stockholder shall(i) vote its Shares in favor of the Parent Share Issuance and the Charter Amendment and any of the other transactions contemplated by the Merger Agreement and (ii) not solicit, encourage or recommend to other stockholders of Parent that (w) they vote their shares of Common Stock in any contrary manner, (x) they not vote their shares at all, (y) they sell, transfer, tender or otherwise dispose of their shares of Common Stock or (z) they attempt to execute any statutory appraisal or other similar rights they may have.
2.02. No Solicitation. Each Stockholder hereby agrees that prior to the termination of this Agreement, such Stockholder shall not, and shall not permit any officer, director or employee, attorney, investment banker or other agent or or of any general partner of such Stockholder to, initiate, solicit, negotiate, encourage or provide confidential information to any third party in order to facilitate any Parent Acquisition Proposal.
2.03. No Inconsistent Agreement. Each Stockholder hereby covenants and agrees that, except as contemplated by this Agreement, such Stockholder shall not enter into any voting agreement, grant a proxy or power of attorney with respect to its Shares or vote its Shares in a manner which is inconsistent with this Agreement.
2.04. Transfer of Title. Each Stockholder hereby covenants and agrees that such Stockholder shall not transfer ownership of or pledge any of its Shares unless the transferee or pledgee agrees in writing to be bound by the terms and conditions of this Agreement.
2.05. Grant of Proxy. In furtherance of the foregoing and concurrently with the execution and delivery of this Agreement, each Stockholder hereby grants to the Company or its designees an irrevocable proxy and power of attorney or pledgee (which may be in the form attached hereto as Annex A or such other form consistent with the terms hereof and thereof as specified by the Company) to vote the Shares, to the extent such Shares are entitled to vote and hereby specifically agrees not to revoke such proxy granted under any circumstances:
(i) at any and all meetings of stockholders of Parent, notice of which meetings are given prior to the due and proper termination of this Agreement, with respect to matters presented to Parent's stockholders for vote which relate to or affect the Merger or the Merger Agreement, the Parent Share Issuance or the Charter Amendment or the approval of such
(ii) with respect to action to be taken by written consent of the stockholders of Parent which relates to or affects any of the foregoing, and which consent is solicited prior to the due and proper termination of this Agreement.
3.01. Termination. This Agreement shall terminate upon the earliest of (i) termination of the Merger Agreement, (ii) the consummation of the Merger or (iii) with respect to Brentwood Associates IV, L.P. only, the later of (A) May 15, 1996 or (B) the first date that Brentwood Associates IV, L.P. distributes all or substantially all of its shares of Common Stock that it owns to its partners. No termination of this Agreement shall relieve any party hereto of any liability for a breach of this Agreement which occurs prior to such termination.
3.02. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity.
3.03. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. No amendment of the Merger Agreement shall affect the obligations of the Stockholders under this Agreement.
3.04. Amendments. This Agreement may not be amended except by an instrument in writing signed by all of the parties.
3.05. Certain Fiduciary Party Matters. The parties hereto acknowledge and agree that none of the provisions herein set forth shall be deemed to restrict or limit any fiduciary duty the undersigned or any partner of the undersigned or any of their respective affiliates may have as a member of the Board of Directors or an executive officer of Parent, or as counsel to Parent; provided that no such duty shall excuse the undersigned from its obligation as a stockholder of Parent to vote the Shares, to the extent that they may be so voted, as herein provided and to otherwise comply with the terms and conditions of this Agreement.
3.06. Severability. If any term or provision of this Agreement is invalid, illegal or incapable or being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon determination that any term or provision is invalid, illegal or incapable of being enforced, the parties hereby shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.
3.07. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflict of laws thereof.
3.08. Descriptive Headings. 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.
3.09. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. Upon execution of this Agreement, counterpart signature pages may be delivered by facsimile transmission.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have caused this Agreement to be duly executed on their respective behalf by their respective trustees thereunto duly authorized, as of the date and year first above written.
Shares of Common Stock STOCKHOLDERS:
1,305,064 BRENTWOOD ASSOCIATES IV, L.P.
By: Brentwood Venture Partners, L.P., | 8-K | EX-99.3 | 1996-01-16T00:00:00 | 1996-01-16T17:09:04 |
0000745933-96-000001 | 0000745933-96-000001_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 SIX 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 September 17, 1984, as supplemented
PAINE WEBBER INCOME PROPERTIES SIX 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-6
Item 9 Changes in and Disagreements with Accountants on Accounting
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 and
Item 13 Certain Relationships and Related Transactions III-3
Item 14 Exhibits, Financial Statement Schedules and Reports
Financial Statements and Supplementary Data F-1 to F-29
Paine Webber Income Properties Six Limited Partnership (the "Partnership") is a limited partnership formed in April 1984 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a diversified portfolio of existing income-producing operating properties such as apartments, shopping centers, office buildings, and other similar income-producing properties. The Partnership sold $60,000,000 in Limited Partnership units (the "Units"), representing 60,000 units at $1,000 per Unit, from September 17, 1984 to September 16, 1985 pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-91080). Limited Partners will not be required to make any additional contributions.
As of September 30, 1995, the Partnership owned, through joint venture partnerships, interests in the operating properties set forth in the following table:
Name of Joint Venture Date of Name and Type of Property Acquisition of Type of Location Size Interest Ownership (1)
Regent's Walk Associates 255 5/15/85 Fee ownership of land and Regent's Walk Apartments units improvements (through Overland Park, Kansas joint venture)
Kentucky-Hurstbourne 409 7/25/85 Fee ownership of land and
Gwinnett Mall Corners 286,000 8/28/85 Fee ownership of land and Mall Corners Shopping Center leasable joint venture) Guinnett County, Georgia sq. ft.
(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.
As further discussed in Notes 4 and 6 to the financial statements accompanying this Annual Report, the Partnership originally owned joint venture interests in five operating investment properties. The Partnership previously owned an interest in Bailey N. Y. Associates, a joint venture which owns the 150 Broadway Office Building; a 238,000 square foot office and retail building located in New York City. The Partnership sold its interest in the Bailey N. Y. Associates joint venture on September 22, 1989 for cash and notes receivable. Due to a deterioration in the commercial real estate market in New York City, which adversely impacted property operations, the maker of the notes receivable held by the Partnership defaulted on its obligations during fiscal 1990 and filed for bankruptcy protection in July 1991. During fiscal 1993, the Partnership reached a settlement agreement involving both the first mortgage lender and the owner. Under this agreement, which was approved by the bankruptcy court and declared effective on June 15, 1993, the Partnership agreed to restructure its second mortgage position. As discussed further in Item 7, during the current fiscal year the Partnership agreed to assign its second mortgage interest in the 150 Broadway Office Building to an affiliate of the borrower in return for a payment of $400,000. Subsequently, the borrower was unable to perform under the terms of this agreement and the Partnership agreed to reduce the required cash compensation to $300,000. The Partnership received $200,000 of the agreed upon sale proceeds during the second quarter of fiscal 1995. The remaining $100,000 was funded into escrow on May 31, 1995 upon the final execution of the sale and assignment agreement. The $100,000 is to be released from escrow subsequent to the resolution of certain matters between the borrower and the first mortgage holder. During fiscal 1992, the Partnership forfeited its interest in the Northbridge Office Centre as a result of certain uncured defaults under the terms of the property's mortgage indebtedness. The mortgage lender took title to the Northbridge property through foreclosure proceedings on April 20, 1992, after a protracted period of negotiations failed to produce a mutually acceptable restructuring agreement. Furthermore, the Partnership's efforts to recapitalize, sell or refinance the property were unsuccessful. The inability of the Northbridge joint venture to generate sufficient funds to meet its debt service obligations resulted mainly from a significant oversupply of competing office space in the West Palm Beach, Florida market. Management did not foresee any near term improvement in such conditions and ultimately determined that it was in the Partnership's best interests not to contest the lender's foreclosure action.
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 Limited Partners' capital; (iii) achieve long-term appreciation in the value of its (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 from operations totalling approximately $13,302,000, or $232 per original $1,000 investment for the Partnership's earliest investors. A substantial portion of the cash distributions paid to date has been sheltered from current taxable income. The Partnership reinstated the payment of regular quarterly cash distributions effective for the quarter ended June 30, 1994 at an annualized rate of 2% on original invested capital. Distributions had been discontinued in 1990 primarily due to the cash deficits associated with the Partnership's two commercial properties, Northbridge Office Centre and the 150 Broadway Office Building, which investments have since been disposed of, as discussed further above. As of September 30, 1995, the Partnership retains an interest in three of its five original investment properties. The loss of the investment in Northbridge, which represented 25% of the Partnership's original investment portfolio, in all likelihood, will result in the Partnership's inability to return the full amount of the original invested capital to the Limited Partners. The amount of the original capital that will be returned will depend upon the proceeds received from the final liquidation of the 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. At the present time, real estate values for retail shopping centers in certain markets have begun to be affected by the effects of overbuilding and consolidations among retailers which have resulted in an oversupply of space. Currently, occupancy at the Partnership's retail shopping center, located in the suburban Atlanta, Georgia market, remains high, and operations do not appear to have been affected by this general trend.
All of the properties securing the Partnership's 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 shopping center also competes for long-term commercial tenants with numerous projects of similar type generally on the basis of rental rates, location and tenant improvement allowances.
The Partnership has no operating property 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 Sixth Income Properties Fund, Inc. and Properties Associates 1985, L.P. Sixth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber, is the managing general partner of the Partnership. The associate general partner of the Partnership is Properties Associates 1985, L.P. (the "Associate General Partner"), a Virginia limited partnership, certain limited 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.
The Partnership has acquired interests in 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
Regent's Walk Apartments 97% 95% 97% 98% 97%
Hurstborne Apartments 94% 93% 92% 94% 93%
Mall Corners Shopping Center 94% 93% 93% 93% 93%
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 Sixth Income Properties Fund, Inc. and Properties Associates 1985, L.P. ("PA1985"), 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 Paine Webber Income Properties Six Limited Partnership, PaineWebber, Sixth Income Properties Fund, Inc. and PA1985 (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 Paine Webber Income Properties Six Limited Partnership, also allege that following the sale of the partnership interests, PaineWebber, Sixth Income Properties Fund, Inc. and PA1985 misrepresented financial information about the Partnership's value and performance. The amended complaint alleges that PaineWebber, Sixth Income Properties Fund, Inc. and PA1985 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 Sixth Income Properties Fund, Inc., PA1985 and their affiliates for costs and liabilities in connection with this litigation. The General Partners intend to vigorously contest the allegations of the action, and believe 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 4,132 record holders of Units in the Partnership. There is no public market for the resale of Units, and it is not anticipated that a public market for Units will develop. The Managing General Partner will not redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of the amount of cash distributions made to the Limited Partners during fiscal 1995.
Item 6. Selected Financial Data
Paine Webber Income Properties Six Limited Partnership (In thousands, except per Unit data)
1995 1994 1993 1992 (1) 1991
Revenues $ 361 $ 106 $ 47 $ 2,849 $ 6,211
Operating loss $ (60) $(1,302) $(2,412) $ (2,494) $(11,450)
of assets at foreclosure - - - $(17,248) -
consolidated venture - - - $ (423) $ 224
Gain on sale of venture interest - - - $ 23 $ 50
(losses) $ 322 $ 522 $ 581 $ (4) $ (593)
extraordinary gain $ 262 $ (780) $(1,831) $(20,145) $(11,769)
of debt obligation - - - $ 29,842 -
Net income (loss) $ 262 $ (780) $(1,831) $ 9,696 $(11,769)
extraordinary gain $ 4.33 $(12.86) $(30.20) $ (332.22) $(194.09)
Extraordinary gain - - - $ 492.13 -
Net income (loss) $ 4.33 $ (12.86) $ (30.20)$ 159.91 $(194.09)
Partnership Unit $ 20.00 $ 5.00 - - -
Total assets $ 9,100 $10,036 $ 11,160 $ 13,044 $ 59,657
Notes payable - - - - $ 1,412
(1) On April 20, 1992 the mortgage lender took title to the Northbridge Office Centre through foreclosure proceedings. As a result the Partnership's fiscal 1992 net operating results reflect an extraordinary gain from the settlement of the debt obligation and a loss on transfer of assets at foreclosure.
The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report.
The above per Limited Partnership Unit information is based upon the 60,000 Limited Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
The Partnership offered Units of Limited Partnership interests to the public from September 17, 1984 to September 16, 1985 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $60,000,000 were received by the Partnership, and after deducting selling expenses and offering costs, approximately $51,889,000 was originally invested in five operating investment properties through joint ventures. As of September 30, 1995, the Partnership had joint venture investments in three remaining operating properties, which consist of one retail shopping center and two multi-family apartment complexes. At the present time 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.
The Partnership's portfolio of joint venture investment properties continued to perform strongly in fiscal 1995, as evidenced by the occupancy levels which remained in the mid-to-high 90% range for all three operating properties. High occupancy levels have been maintained at the Regent's Walk apartment complex while simultaneously implementing gradual rent increases throughout the year. The performance of Regent's Walk reflects the continued gradual improvement in the multi-family residential market during fiscal 1995. This performance was achieved despite the competition from the single family home market prompted by the availability of low home mortgage interest rates. The absence of significant new construction of multi-family apartments over the last several years 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 higher stabilized occupancy levels and increasing rental rates, which have had a positive impact on cash flow levels and, consequently, property values. The occupancy level at the Hurstbourne Apartments averaged 93% during fiscal 1995 as compared to an average of 94% achieved in fiscal 1994. Recent marketing efforts have resulted in an increase in the number of potential tenants visiting the property. In addition, the property's management team has undertaken a capital improvement program designed to make the apartment units more attractive to these potential tenants. At the present time, real estate values for retail shopping centers in certain markets have begun to be affected by the effects of overbuilding and consolidations among retailers which have resulted in an oversupply of space. Currently, occupancy at the Mall Corners shopping center, located in the suburban Atlanta, Georgia market, remains high, and operations do not appear to have been affected by this general trend.
During fiscal 1995, the Partnership refinanced the 9% first mortgage note secured by the Regent's Walk Apartments, which had a principal balance of $8,390,000 and was scheduled to mature on May 1, 1995. The new long-term debt consists of a first mortgage note with an initial principal amount of $9,000,000 which bears interest at a fixed rate of 7.32% per annum. Monthly payments of interest and principal, based on a 30-year amortization schedule, are due through maturity on October 1, 2000. The principal balance of the loan will total approximately $8.5 million at maturity. Because the debt service on the prior loan called for interest-only payments, the venture's monthly debt service will not change significantly as a result of the refinancing transaction despite the decrease in the interest rate. In connection with the refinancing of the mortgage loan, $500,000 of the loan proceeds were deposited in an escrow account to provide funds for the remodeling of kitchens and bathrooms in the apartment units. It is anticipated that these improvements will be completed over the next few years as new leases for the apartments are signed. In accordance with the escrow agreement, the balance of the escrow account is invested in bank certificates of deposit.
During fiscal 1994, a medical office tenant occupying 20,000 square feet, or approximately 7% of the net leasable space at Mall Corners, informed management of the joint venture of its intention to vacate its space upon the expiration of its lease in October 1994 in order to relocate to its own building. During the quarter ended December 31, 1994, this space was repositioned for retail use and a lease for 12,000 square feet was executed with a patio furniture and related accessories retailer. Management has been actively marketing the remaining 8,000 square feet of this space to several retail tenants in addition to actively marketing the other 13,000 square feet of vacant shop space at the center. As a result of the vacancy created by the termination of the medical office tenant lease, the average occupancy level was lower at Mall Corners in fiscal 1995 than it had been for the past few years. The occupancy level at Mall Corners averaged 93% during fiscal 1995, as compared to an average level of 99% maintained for fiscal 1994. During fiscal 1995, one of the property's major tenants, which currently occupies 16,530 square feet of space under a lease that was scheduled to expire in early calendar year 1996, agreed to extend its lease for 10 years and expand its space to 25,000 square feet. Accommodating the expansion plans of this mini-anchor tenant will require the relocation of several small tenants within the center and the construction of an additional 10,000 square feet of space. Construction is underway to accommodate the relocation of three of the four tenants that will be displaced to accommodate the new anchor store, and the fourth tenant is moving out of the shopping center. The mortgage loan secured by the Mall Corners shopping center was scheduled to mature in December 1995. Subsequent to year-end, on December 29, 1995, the venture obtained a new first mortgage loan with a principal balance of $20,000,000 and repaid the maturing obligation, which had an outstanding balance of approximately $17,246,000 at the time of closing and bore interest at 11.5%. Excess loan proceeds of approximately $2.2 million were used to pay transaction costs and to establish certain required escrow deposits, including an amount of $1.7 million designated to pay for certain planned improvements and the aforementioned expansion of the shopping center which are expected to be completed in 1996. In addition, excess proceeds of approximately $550,000 were available to be paid to the Partnership, in accordance with the terms of the joint venture agreement, to be applied toward certain operating loans and cumulative preference amounts owed. The new first mortgage loan has a 10-year term, bears interest at a rate of approximately 7.4% per annum and requires monthly principal and interest payments based on a 20-year amortization schedule. Despite the increase in the loan principal balance, the annual debt service payments of the joint venture will decrease slightly as a result of this refinancing due to the significant reduction in the interest rate.
As previously reported, management's discussions with the borrower concerning the operations of the 150 Broadway property during fiscal 1994 resulted in an offer to purchase the Partnership's second mortgage loan position. The borrower was willing to put additional funds at risk, in part to defer a substantial income tax liability which would result from a foreclosure. Given the likelihood that large capital advances would be required by the Partnership over the next several years to keep the first mortgage loan current and avoid foreclosure, management concluded during fiscal 1994 that it would not be prudent to fund any further advances related to this investment. During the quarter ended December 31, 1994, the Partnership had agreed to assign its second mortgage interest to an affiliate of the borrower in return for a payment of $400,000. Subsequently, the borrower was unable to perform under the terms of this agreement and the Partnership agreed to reduce the required cash compensation to $300,000. During the quarter ended March 31, 1995, the Partnership received $200,000 of the agreed upon sale proceeds. The remaining $100,000 was funded into escrow on May 31, 1995 upon the final execution of the sale and assignment agreement. The $100,000 is to be released from escrow subsequent to the resolution of certain matters between the borrower and the first mortgage holder. The $200,000 received to date is non-refundable in the event that the sale is not consummated. The final approval of this sale and assignment transaction by the first mortgage holder and the release of the escrowed cash would terminate the Partnership's interest in, and any obligations related to, the 150 Broadway Office Building. As discussed in the 1994 Annual Report, the expectation at the time that the 150 Broadway bankruptcy plan was negotiated and approved was that the borrower would be able to lease the first two or three floors in the building to one or more prominent retailers at rental rates sufficient to stabilize the property's cash flow position at or near the breakeven level after debt service. Leases at this level would also have increased the property's current market value and increased the likelihood that the Partnership would benefit from the eventual improvement in the office leasing segment. Unfortunately, the borrower was not successful in executing this strategy. After marketing the retail space for over 2 years, during fiscal 1995 the borrower signed leases for the first three floors of the building. However, the rental terms were significantly below the original expectations, and the property is still projected to incur significant deficits for the next several years. The estimated market value of the building, which was 83% leased at September 30, 1995, is substantially below the balance of the $26 million first mortgage loan which was senior to the Partnership's claims.
At September 30, 1995, the Partnership had available cash and cash equivalents of approximately $2,515,000. Such cash and cash equivalents will be utilized for Partnership requirements such as the payment of operating expenses, the funding of future operating deficits or capital improvements at the joint ventures, if necessary, as required by the respective joint venture agreements, and for distributions to the partners. The source of future liquidity and distributions to the partners is expected to be from cash generated from the operations of the Partnership's income-producing investment properties and proceeds from the sale or refinancing of the remaining investment properties. Such sources are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis. As discussed further above, the Partnership no longer has any obligation to fund deficits in connection with the investment in the 150 Broadway Office Building. In light of this fact, and with the Partnership's other operating property investments performing well and producing excess cash flow distributions which are more than sufficient to cover the Partnership's ongoing operating expenses, the Managing General Partner reinstated a program of regular quarterly distributions to Partners during fiscal 1994. The first of such distribution payments was made in August 1994 for the quarter ended June 30, 1994. Payments to the Limited Partners are being made based on an annual return of 2% on original invested capital.
For the year ended September 30, 1995 the Partnership reported net income of $262,000 as compared to a net loss of $780,000 in fiscal 1994. This change in the Partnership's net operating results was mainly the result of certain transactions involving the Partnership's interest in the 150 Broadway Office Building. In December 1993, the Partnership funded a $200,000 escrow reserve account required under the terms of the 150 Broadway bankruptcy settlement agreement, as discussed further above. The Partnership's accounting policy for its investment in 150 Broadway resulted in any advances being recorded as an expense in the period paid. In addition, during fiscal 1994 the Partnership recognized an $800,000 provision for possible investment loss related to the 150 Broadway investment to fully reserve the carrying value of the Partnership's remaining investment. In fiscal 1995, during the quarter ended December 31, 1994, the Partnership recorded income of $200,000 to reflect the cash proceeds received related to the sale of the Partnership's interest in 150 Broadway. Additional income of $100,000 would be recorded upon satisfaction of the escrow requirements referred to above and the release of the escrowed cash to the Partnership. The favorable changes in the Partnership's net operating results related to the 150 Broadway investment were partially offset by a decrease in the Partnership's share of ventures' income of $200,000 in the current fiscal year. This unfavorable change in the Partnership's share of ventures' operations was mainly a result of a decrease in rental income of $330,000 at the Mall Corners shopping center, due to the decrease in occupancy discussed further above. Revenues also declined slightly at the Hurstborne Apartments during fiscal 1995 mainly due to a decrease in corporate apartment rental activity. An increase in combined depreciation and amortization expense of $88,000 also contributed to the decline in the Partnership's share of ventures' income during fiscal 1995. Deprecation charges have increased at the Mall Corners and Hurstborne joint ventures as a result of certain capitalized costs incurred over the past two years. A decrease in property operating expenses at the Regent's Walk Apartments and Hurstborne Apartments, totalling $281,000, partially offset the decrease in rental revenues and increase in depreciation expense during fiscal 1995. The decline in property operating expenses is primarily attributable to lower repairs and maintenance expenses for fiscal 1995 at both of the apartment properties. Repairs and maintenance expenses in fiscal 1994 reflected the costs of an exterior painting project at Regent's Walk and common area upgrading and landscape repair projects at the Hurstbourne Apartments.
For the year ended September 30, 1994, the Partnership reported a net loss of $780,000 as compared to net loss of $1,831,000 in fiscal 1993. This decrease in net loss was the result of the recognition of a provision for possible investment loss related to the 150 Broadway property of $2,000,000 in fiscal 1993. In fiscal 1994, the Partnership recognized an $800,000 provision for possible investment loss and an additional $200,000 charge against earnings related to the 150 Broadway investment. The provision for possible investment loss in fiscal 1994 was recorded to fully reserve the carrying value of the Partnership's remaining investment in the 150 Broadway property based on the circumstances discussed further above. The $200,000 charge to earnings in fiscal 1994 represents the funds contributed by the Partnership in December 1993 to establish the required escrow reserve account referred to above. In addition, an increase in interest income earned on cash reserves of $59,000 and a decline in Partnership general and administrative expenses of $83,000 contributed to the decrease in net loss in fiscal 1994.
The favorable changes in net loss were partially offset by a decrease in the Partnership's share of ventures' income of $59,000 in fiscal 1994. The decrease in the Partnership's share of ventures' income was mainly a result of an increase in repairs and maintenance expenses at the two apartment complexes. At the Regent's Walk Apartments, expenses were higher in fiscal 1994 due to an exterior painting project, and at the Hurstbourne Apartments, remodeling of the common areas of the property and increased landscaping expenses resulting from a harsh winter contributed to the increased expenses. These unfavorable changes were partially offset by an increase in rental income of $363,000 from the three joint ventures, due to a combination of higher occupancy and increased rental rates at the properties.
The Partnership had a net loss of $1,831,000 for the year ended September 30, 1993, as compared to net income of $9,696,000 for fiscal 1992. This change in net operating results can be primarily attributed to the foreclosure of the Northbridge Office Centre during fiscal 1992. The net income in fiscal 1992 resulted from an extraordinary gain from settlement of debt obligation of $29,842,000 recorded in connection with the Northbridge foreclosure. The extraordinary gain was partially offset by a loss on transfer of assets at foreclosure of $17,248,000. The transfer of the Northbridge Office Center's title to the lender through foreclosure proceedings was accounted for as a troubled debt restructuring in accordance with Statement of Financial Accounting Standards No. 15. "Accounting by Debtors and Creditors for Troubled Debt Restructurings". The extraordinary gain arose due to the fact that the balance of the mortgage loan and related accrued interest exceeded the estimated fair value of the property ($20,000,000) and certain other assets transferred to the lender at the date of the foreclosure. The loss on transfer of assets resulted from the fact that the net carrying value of the property exceeded its estimated fair value at the time of foreclosure.
The change in net operating results caused by the net foreclosure gain described above was partially offset by a decrease in the Partnership's operating loss and improvement in the Partnership's share of unconsolidated ventures' operations in fiscal 1993. Operating loss decreased by $82,000, despite the recording of a $2 million provision for possible uncollectible amounts, primarily due to the foreclosure of the Northbridge Office Centre, which had been generating substantial operating losses. The provision for possible uncollectible amounts in 1993 was recorded to reflect a change in the basis of accounting for the investment in 150 Broadway as a result of the final outcome of the borrower's bankruptcy proceedings. In addition, interest and other income decreased by $335,000 in fiscal 1993, mainly due to the defaults under the terms of the 150 Broadway second mortgage note receivable. Interest income on the second mortgage note was recognized subsequent to the borrower's bankruptcy filing as adequate protection payments were received by the Partnership per the direction of the bankruptcy court. Such payments were suspended in the third quarter of fiscal 1992 per the order of the bankruptcy court.
The Partnership's share of the operating results of the unconsolidated joint ventures improved by $585,000 in fiscal 1993. Increased rental income from all three operating properties contributed to this favorable change. Also contributing to the favorable change was lower interest expense on the mortgage loan secured by the Hurstbourne Apartments due to an interest rate modification which was effective in October 1992. In addition, depreciation expense decreased at the Mall Corners Shopping Center due to certain tenant improvements having become fully depreciated, and amortization expense decreased at the Hurstbourne Apartments as a result of certain deferred costs having been fully amortized. These positive changes were partially offset by a decrease in interest and other income primarily due to the recognition by Regent's Walk of excess insurance proceeds related to damages incurred from a hail storm in fiscal 1992.
The Partnership completed its eleventh full year of operations in 1995 and the effects of inflation and changes in prices on the Partnership's operating results to date have not been significant.
Inflation in future periods may result in an increase in revenues, as well as operating expenses, at the Partnership's operating investment properties. Some of the existing leases with tenants at the Partnership's retail shopping center contain rental escalation and/or expense reimbursement clauses based on increases in tenant sales or property operating expenses. 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 Sixth 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 1985, L.P., a Virginia limited partnership, certain limited partners of which are also officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operation, 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 4/25/84 * J. Richard Sipes Director 48 6/9/94 Walter V. Arnold Senior Vice President and Chief 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 4/25/84 * 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 and 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 received no 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 under Item 13.
The Partnership paid cash distributions to the Unitholders on a quarterly basis at a rate of 2% per annum on original invested capital in fiscal 1990. Regular quarterly distributions were suspended in fiscal 1991 and reinstated at the prior annual rate of 2% effective for the third quarter of fiscal 1994. However, 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, Sixth Income Properties Fund, Inc., is owned by PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is a Virginia limited partnership, certain limited partners of which are also 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) The directors and officers of the Managing General Partner do not directly own any Units of limited partnership interest of the Partnership. No director or officer of the Managing General Partner, nor any limited 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 Sixth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate General Partner"), a Virginia limited partnership, certain limited partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). 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.
In connection with the acquisition of properties, the Adviser received acquisition fees in an amount equal to 5% of the gross proceeds from the sale of the Partnership Units. In connection with the sale of each property, the Adviser may receive a disposition fee, payable upon liquidation of the Partnership, in an amount equal to the lesser of 1% of the aggregate sales price of the property or 50% of the standard brokerage commissions, subordinated to the payment of certain amounts to the Limited Partners.
All taxable income or tax loss (other than from a Capital Transaction) of the Partnership will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Taxable income or loss 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 or tax loss from a sale or refinancing will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. 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.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the General Partners and 3.99% to the Adviser, as an asset management fee. All sale or refinancing proceeds shall be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement.
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 will be paid a basic management fee (3% of adjusted cash flow, as defined in the Partnership Agreement) and an incentive management fee (2% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contributions), in addition to the asset management fee described above, for services rendered. In conjunction with the reinstatement of distribution payments effective for the third quarter of fiscal 1994, the Adviser earned total basic and asset management fees of $88,000 for the year ended September 30, 1995. No incentive management fees were earned during fiscal 1995.
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 $120,000 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 $9,000 (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 SIX
By: Sixth 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 4, 1996
By: /s/ J. Richard Sipes Date: January 4, 1996
ANNUAL REPORT ON FORM 10-K
PAINE WEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
Exhibit No. Description of Document Report or Other
(3) and (4) Prospectus of the Registrant Filed with the dated September 17, 1984, as Commission pursuant supplemented, with particular to Rule 424(c) and reference to the Restated incorporated herein Certificate and Agreement of by reference. Limited Partnership.
(10) Material contracts previously Filed with the filed as exhibits to registration Commission pursuant statements and amendments thereto to Section 13 or of the registrant together with 15(d) of the all such contracts filed as Securities Exchange exhibits of previously filed Act of 1934 and Forms 8-K and Forms 10-K are incorporated herein hereby incorporated herein by by reference. reference.
(13) Annual Report to Limited Partners No Annual Report 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 SIX LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Paine Webber Income Properties Six Limited Partnership:
Report of independent auditors F-2
Balance sheets as of September 30, 1995 and 1994 F-3
Statements of operations for the years ended September 30, 1995, 1994 and 1993 F-4
Statements of changes in partners' capital (deficit) for the years ended September 30, 1995, 1994 and 1993 F-5
Statements of cash flows for the years ended September 30, 1995, 1994 and 1993 F-6
Notes to financial statements F-7
Combined Joint Ventures of Paine Webber Income Properties Six 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' capital 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-29
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 Six Limited Partnership:
We have audited the accompanying balance sheets of PaineWebber Income Properties Six Limited Partnership as of September 30, 1995 and 1994, and the related statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended September 30, 1995. 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 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 Paine Webber Income Properties Six Limited Partnership at September 30, 1995 and 1994, and the 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.
/s/ ERNST & YOUNG LLP
PAINE WEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
September 30, 1995 and 1994 (In thousands, except per Unit data)
Investments in joint ventures, at equity $ 6,585 $ 7,469 Cash and cash equivalents 2,515 2,567
Accounts payable - affiliates $ 15 $ 9 Accrued expenses and other liabilities 30 21
Cumulative net loss (843) (846) Cumulative cash distributions (500) (487)
Limited Partners ($1,000 per unit; 60,000 Units issued): Capital contributions, net of offering costs 53,959 53,959 Cumulative net loss (30,260) (30,519) Cumulative cash distributions (13,302) (12,102) Total partners' capital 9,055 10,006
PAINE WEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
For the years ended September 30, 1995, 1994 and 1993 (In thousands, except per Unit data)
Interest income $ 161 $ 106 $ 47 Income from sale of second mortgage interest 200 - -
investment loss - 800 2,000 Cost of holding investment in 150 Broadway Office Building - 200 - Management fees 88 32 - General and administrative 333 376 459 Operating loss (60) (1,302) (2,412)
ventures' income 322 522 581
Net income (loss) $ 262 $ (780) $(1,831)
Net income (loss) $ 4.33 $(12.86) $ (30.20)
Cash distributions $ 20.00 $ 5.00$ -
The above per Limited Partnership Unit information is based upon the 60,000 Limited Partnership Units outstanding during each year.
PAINE WEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended September 30, 1995, 1994 and 1993
Balance at September 30, 1992 $(1,302) $14,222 $12,920
Net loss (19) (1,812) (1,831)
Balance at September 30, 1993 (1,321) 12,410 11,089
Cash distributions (3) (300) (303)
Net loss (8) (772) (780)
Balance at September 30, 1994 (1,332) 11,338 10,006
Cash distributions (13) (1,200) (1,213)
Net income 3 259 262
Balance at September 30, 1995 $(1,342) $10,397 $ 9,055
PAINE WEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
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) $ 262 $ (780) $ (1,831) Adjustments to reconcile net income (loss) to net cash used for operating activities: Partnership's share of ventures' income (322) (522) (581) Income from sale of second mortgage Provision for possible investment loss - 800 2,000 Changes in assets and liabilities: Other assets - 2 - Accounts payable - affiliates 6 (30) 9 Accrued expenses and other liabilities 9 (11) (61) Total adjustments (507) 239 1,367 Net cash used for operating activities (245) (541) (464)
Cash flows from investing activities: Distributions from joint ventures 1,406 1,948 1,820 Cash contributions to joint ventures (200) (28) - Additional investment in 150 Broadway Office Building - - (800) Proceeds from sale of investment in 150 Broadway Office Building 200 - - Net cash provided by investing
Cash flows from financing activities: Distributions to partners (1,213) (303) - Net cash used in financing activities (1,213) (303) -
Net increase (decrease) in cash and cash equivalents (52) 1,076 556
Cash and cash equivalents, beginning of year 2,567 1,491 935
Cash and cash equivalents, end of year $ 2,515 $ 2,567 $ 1,491
PAINE WEBBER INCOME PROPERTIES SIX
Paine Webber Income Properties Six Limited Partnership (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in April 1984 for the purpose of investing in a diversified portfolio of income-producing properties. The Partnership authorized the issuance of units (the "Units") of partnership interests (at $1,000 per Unit) of which 60,000 were subscribed and issued between September 17, 1984 and September 16, 1985.
2. Summary of Significant Accounting Policies
The accompanying financial statements include the Partnership's investments in certain joint venture partnerships which own operating properties. 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 venture is carried at cost adjusted for the Partnership's share of the venture's earnings or losses and distributions. See Note 4 for a description of these joint venture partnerships.
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.
Certain prior year balances have been reclassified to conform to the current year presentation.
For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less.
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 Sixth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate General Partner"), a Virginia limited partnership, certain limited partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). 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.
In connection with the acquisition of properties, the Adviser received acquisition fees in an amount equal to 5% of the gross proceeds from the sale of the Partnership Units. In connection with the sale of each property, the Adviser may receive a disposition fee, payable upon liquidation of the Partnership, in an amount equal to the lesser of 1% of the aggregate sales price of the property or 50% of the standard brokerage commissions, subordinated to the payment of certain amounts to the Limited Partners.
All taxable income or tax loss (other than from a Capital Transaction) of the Partnership will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Taxable income or loss 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 or tax loss from a sale or refinancing will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. 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.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the General Partners and 3.99% to the Adviser, as an asset management fee. All sale or refinancing proceeds shall be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement.
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 will be paid a basic management fee (3% of adjusted cash flow, as defined in the Partnership Agreement) and an incentive management fee (2% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contributions), in addition to the asset management fee described above, for services rendered. In conjunction with the reinstatement of distribution payments effective for the third quarter of fiscal 1994, the Adviser earned total basic and asset management fees of $88,000 and $32,000 for the years ended September 30, 1995 and 1994, respectively. No basic or asset management fees were earned in fiscal 1993. No incentive management fees have been earned to date. Accounts payable - affiliates at both September 30, 1995 and 1994 includes $9,000 of management fees payable to the Adviser.
Included in general and administrative expenses for the years ended September 30, 1995, 1994 and 1993 is $120,000, $121,000 and $137,000, 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 fees of $9,000, $5,000 and $2,000 (included in general and administrative expenses) for managing the Partnership's cash assets during fiscal 1995, 1994 and 1993, respectively. Included in accounts payable - affiliates at September 30, 1995 is $6,000 of cash management fees owed to Mitchell Hutchins.
4. Investments in Joint Ventures
The Partnership has investments in three joint ventures at September 30, 1995 and 1994. The joint ventures are accounted for on the equity method in the Partnership's financial statements.
Condensed combined financial statements of these joint ventures follow:
September 30, 1995 and 1994
Current assets $ 1,423 $ 1,160 Operating investment properties, net 43,852 44,809
Current liabilities $ 2,830 $10,809 Long-term debt and long-term debt subject to refinancing 34,228 25,724
Partnership's share of combined capital 5,621 6,596 Co-venturers' share of combined capital 3,472 3,471
Partnership's share of capital, as shown above $ 5,621 $ 6,596 liabilities and long-term debt 921 830 Excess basis due to investment in ventures (1) 43 43 Investments in unconsolidated joint ventures, at equity $ 6,585 $ 7,469
(1) At September 30, 1995 and 1994, the Partnership's investment exceeds its share of the joint venture capital accounts and liabilities by $43,000. This amount relates to certain expenses associated with acquiring the investments.
Condensed Combined Summary of Operations For the years ended September 30, 1995, 1994 and 1993
expense recoveries $ 9,122 $ 9,482 $ 9,088 Interest income 26 26 28
Property operating expenses 3,156 3,404 2,986 Depreciation and amortization 2,208 2,120 2,072 Interest expense 3,462 3,462 3,477 Net income $ 322 $ 522 $ 581
combined income $ 322 $ 522 $ 581 combined income - - - $ 322 $ 522 $ 581
Investments in joint ventures, at equity represents the Partnership's net investment in the joint venture partnerships. 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.
Investments in joint ventures, at equity on the balance sheet is comprised of the following joint venture investments (in thousands):
Regent's Walk Associates $ 1,583 $1,859 Gwinnett Mall Corners Associates 1,257 1,679
The Partnership received cash distributions from the joint ventures as set forth below (in thousands):
Regent's Walk Associates $ 276 $ 496 $ 328 Kentucky-Hurstbourne Associates 660 507 628 Gwinnett Mall Corners Associates 470 945 864 $ 1,406 $ 1,948 $ 1,820
Descriptions of the properties owned by the joint ventures and the terms of the joint venture agreements are summarized as follows:
On May 15, 1985 the Partnership acquired an interest in Regent's Walk Associates, a Kansas general partnership that owns and operates Regent's Walk Apartments, a 255-unit apartment complex in Overland Park, Johnson County, Kansas. The Partnership is a general partner in the joint venture. The Partnership's co-venture partner is an affiliate of J. A. Peterson Enterprises, Inc.
The initial aggregate cash investment by the Partnership for its interest was approximately $6,768,000 (including an acquisition fee of $390,000 paid to the Adviser). The apartments were encumbered by a nonrecourse first mortgage loan with a balance of $8,390,000 as of September 30, 1994. During the year ended September 30, 1995, the Company refinanced the $8,390,000, 9.0% first mortgage note that was scheduled to mature on May 1, 1995. The new long-term debt consists of a first mortgage note with a principal amount of $9,000,000 secured by the operating investment property. The note is payable monthly, including interest at 7.32%, with the unpaid principal balance of $8,500,163 due October 1, 2000. In connection with the refinancing of the mortgage loan, $500,000 of the loan proceeds were deposited in an escrow account to provide funds for the remodeling of kitchens and bathrooms in the apartment units. It is anticipated that these improvements will be completed over the next few years as new leases for the apartments are signed.
The joint venture agreement provides that the Partnership will receive from cash flow a cumulative preferred return, payable quarterly, of $164,000. Commencing June 1, 1988, after the Partnership has received its cumulative preferred return, the co-venturer is entitled to a preference return of $7,000 for each fiscal quarter which is cumulative only for amounts due in any one fiscal year. Any remaining cash flow is to be used to pay interest on any notes from the joint venture to the partners and then is to be distributed to the partners, with the Partnership receiving 90% of the first $200,000, 80% of the next $200,000 and 70% of any remainder. During the years ended September 30, 1995 and 1994, the Partnership's preferred return aggregated $656,000 in each year, while net cash available for distribution amounted to $320,000 and $469,000, respectively, leaving an unpaid cumulative preferred return of $2,720,000 at September 30, 1995 ($2,384,000 at September 30, 1994). The cumulative unpaid preference return is payable only in the event that sufficient future cash flow or sale or refinancing proceeds are available.
Taxable income or tax loss is to be allocated to the partners based on their proportionate share of cash distributions. Allocations of the venture's operations between the Partnership and the co-venturer for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
If additional cash is needed by the joint venture for any reason including payment of the Partnership's preference return, prior to June 1, 1992, the co-venturer was required to make loans to the joint venture up to a total of $250,000. After the joint venture has borrowed $250,000 from the co-venturer, if the joint venture requires additional funds for purposes other than distributions, then it will be provided 90% by the Partnership and 10% by the co-venturer.
Sale and/or refinancing proceeds will be distributed as follows, after making a provision for liabilities and obligations: (1) repayment to the co-venturer of up to $250,000 of operating loans plus accrued interest thereon, (2) payment of accrued interest and repayment of principal of operating notes (pro-rata), (3) to the Partnership payment of any preferred return arrearage, (4) to the Partnership an amount equal to the Partnership's gross investment plus $560,000, (5) to the co-venturer the amount of $500,000, (6) to payment of a brokers fee to the partners if a sale is made to a third party, (7) to the payment of up to $100,000 subordinated management fees, (8) the next $8,000,000 to the Partnership and the co-venturer in the proportions of 90% and 10%, respectively, (9) the next $4,000,000 to the Partnership and the co-venturer in the proportions of 80% and 20%, respectively, and (10) any remaining balance 70% to the Partnership and 30% to the co-venturer.
The joint venture has entered into a property management contract with an affiliate of the co-venturer, cancellable at the option of the Partnership upon the occurrence of certain events. The management fee was 4% of the gross rents collected from the property until June 1, 1990 when the fee increased to 5% of the gross rents. Subsequent to June 1, 1988, that portion of the fees representing 1% of gross rents shall be payable only to the extent of cash flow remaining after the Partnership has received its preferred return. Any payments not made pursuant to the above are payable only out of sale or refinancing proceeds the amount of which will not exceed $100,000 as specified in the agreement. Total subordinated management fees as of September 30, 1995 exceed this $100,000 limitation.
On July 25, 1985 the Partnership acquired an interest in Kentucky-Hurstbourne Associates, a newly formed Delaware general partnership, that owns and operates Hurstbourne Apartments, a 409-unit apartment complex located in Louisville, Kentucky. The Partnership is a general partner in the joint venture. The Partnership's co-venture partner is an affiliate of the Paragon Group.
The initial aggregate cash investment by the Partnership for its interest was approximately $8,716,000 (including an acquisition fee of $500,000 paid to the Adviser). The apartments are encumbered by a nonrecourse first mortgage loan with a balance of $8,457,000 as of September 30, 1995 This mortgage loan is scheduled to mature in September 1999.
The joint venture agreement as amended on May 21, 1986 provides that cash flow shall first be distributed to the Partnership in the amount of $67,000 per month (the Partnership's preference return). The preference return was cumulative on a year to year basis through July 31, 1989, and is noncumulative thereafter. The next $40,000 will be distributed to the co-venturer on a noncumulative annual basis, payable quarterly. Any cash flow not previously distributed at the end of each fiscal year will be applied in the following order: first, to the payment of all unpaid accrued interest on all outstanding operating notes; the next $225,000 of annual cash flow will be distributed 90% to the Partnership and 10% to the co-venturer; the next $260,000 of annual cash flow will be distributed 80% to the Partnership and 20% to the co-venturer, and any remaining balance will be distributed 70% to the Partnership and 30% to the co-venturer.
At September 30, 1995 and 1994, the cumulative preference return payable to the Partnership for years prior to July 31, 1989 was approximately $1,354,000. Under the terms of the joint venture agreement, unpaid preference returns will only be paid upon refinancing, sale, exchange or other disposition of the property. During the years ended September 30, 1995 and 1994, the Partnership was entitled to 100% of the net cash available for distribution, which amounted to $507,000 and $575,000, respectively.
Taxable income or tax loss of the joint venture will be allocated to the Partnership and co-venturer in proportion to the distribution of net cash flow subject to the following: first, the co-venturer shall not be allocated less than 10% of the net income or net loss; second, the co-venturer shall not be allocated net profits in excess of net cash flow distributed to it during the fiscal year. 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 venture's income and losses for the years ended September 30, 1995, 1994 and 1993 being allocated in a manner different from that provided in the venture agreement such that none of the losses were allocated 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 allocation 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 the outstanding first mortgage loan. Any remaining proceeds will be distributed in the following order: repayment of unpaid operating loans and accrued interest thereon to the Partnership and the co-venturer; the amount of any undistributed preference payments to the Partnership (for the period through July 31, 1989); $10,056,000 to the Partnership; $684,000 to the co-venturer; the amount of any unpaid subordinated management fees to the property manager; $9,000,000 distributed 90% to the Partnership and 10% to the co-venturer; $4,500,000 distributed 80% to the Partnership and 20% to the co-venturer with any remaining balance distributed 70% to the Partnership and 30% to the co-venturer.
If additional cash is required by the joint venture, it may be provided by the Partnership and the co-venturer as loans to the joint venture. Such loans would be provided 90% by the Partnership and 10% by the co-venturer. Through September 30, 1995, no such loans are outstanding.
The joint venture has entered into a property management contract with an affiliate of the co-venturer, cancellable at the option of the Partnership upon the occurrence of certain events. The management fee is 5% of gross receipts collected from the property. Two percent of such fees were subordinated to the Partnership's and co-venturer's returns during the first three years of the joint venture's operations. Under the terms of the joint venture agreement, unpaid subordinated management fees total $118,000 and will only be paid upon refinancing, sale, exchange or other disposition of the property.
c. Gwinnett Mall Corners Associates
On August 28, 1985 the Partnership acquired an interest in Gwinnett Mall Corners Associates, a Georgia general partnership that owns and operates Mall Corners Shopping Center, a 286,000 gross leasable square foot shopping center, located in Gwinnett County, Georgia. The Partnership is a general partner in the joint venture. The Partnership's co-venture partner is a partnership comprised of several individual investors.
The initial aggregate cash investment by the Partnership for its interest was approximately $10,707,000 (including an acquisition fee of $579,000 paid to the Adviser). The shopping center was encumbered by a construction mortgage loan with a balance of $22,669,000 at the time of closing. The construction mortgage loan was refinanced on November 4, 1985 with permanent financing of $17,700,000, with the remainder paid out of escrows established at the time of closing. The balance of the 11.5% nonrecourse permanent mortgage loan, which was scheduled to mature in December 1995, was $17,266,000 as of September 30, 1995. Subsequent to year-end, on December 29, 1995, the venture obtained a new first mortgage loan with a principal balance of $20,000,000 and repaid the maturing obligation. Excess loan proceeds of approximately $2.2 million were used to pay transaction costs and to establish certain required escrow deposits, including an amount of $1.7 million designated to pay for certain planned improvements and an expansion of the shopping center which are expected to be completed in 1996. In addition, excess proceeds of approximately $550,000 were available to be paid to the Partnership, in accordance with the terms of the joint venture agreement, to be applied toward the operating loan and cumulative preference amounts discussed further below. The new loan has a 10-year term, bears interest at a rate of approximately 7.4% per annum and requires monthly principal and interest payments based on a 20-year amortization schedule. Despite the increase in the loan principal balance, the annual debt service payments of the joint venture will decrease slightly as a result of this refinancing due to the significant reduction in the interest rate.
The joint venture agreement provides that the Partnership will receive from cash flow, as defined, an annual cumulative preferred return, payable monthly, of $1,047,000. In the event cash flow, as defined, was insufficient to pay the Partnership's preference return described above through November 1, 1990, the co-venturer was required to fund to the joint venture a monthly amount equal to the difference between $68,000 (the guaranteed preferred return) and cash flow, as defined. During 1990 the venture partners reached an agreement as to the cumulative deficiencies to be funded by the co-venturer, which totalled $665,000. Cumulative total preference distributions in arrears at September 30, 1995 amounted to $1,997,000 which includes minimum guaranteed distributions in arrears of $308,000.
The co-venturer is entitled to receive quarterly non-cumulative, subordinated returns of $38,000. Due to insufficient cash flow, the co-venturer received no distributions for any of the three years in the period ended September 30, 1995. Any remaining cash flow, as defined, after payments of the co-venturer's preference return, shall be distributed first to the Initial Property Manager (an affiliate of the co-venturer) in an amount equal to the then unpaid subordinated management fees from prior fiscal years, then next to pay accrued interest on any loans made by the Partnership and the co-venturer to the joint venture. The next $500,000 is to be distributed 80% to the Partnership and 20% to the co-venturer. The next $500,000 of cash flow in any year in excess of such returns will be distributed 70% to the Partnership and 30% to the co-venturer and the remaining balance is to be distributed 60% to the Partnership and 40% to the co-venturer.
Taxable income or tax loss will be allocated to the Partnership and the co-venturer in any year in the same proportions as the amount of cash distributed to each of them and if no net cash flow has been distributed, 100% to the Partnership. Allocations of the venture's operations between the Partnership and the co-venturer for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with operations of the Joint Venture, it will be provided 70% by the Partnership and 30% by the co-venturer (operating loans). The rate of interest on such loans shall equal the lesser of the rate announced by the First National Bank of Boston as its prime or the maximum rate of interest permitted by applicable law. In the event a partner shall default in its obligation to make an operating loan, the other partner may make all or part of the loan required to be made by the defaulting partner (default loan). Each default loan shall provide for the accrual of interest at the rate equal to the lesser of twice the operating loan rate or the maximum rate of interest permitted by applicable law. Through September 30, 1995, the Partnership and the co-venturer have made operating loans totalling $63,000 and $1,000, respectively. In addition the Partnership has made default loans aggregating $26,000 through September 30, 1995.
Distribution of sale and/or refinancing proceeds are to be as follows, after making a provision for liabilities and obligations and to the extent not previously returned to each partner: (1) payment of accrued interest and operating notes payable to partners; (2) to the Partnership the aggregate amount of the Partnership's Preference Return that shall not have been distributed, (3) to the Partnership an amount equal to the Partnership's gross investment, (4) the next $2,000,000 to the co-venturer, (5) to the Initial Property Manager for any unpaid subordinated management fee that shall have accrued, (6) the next $4,000,000 allocated to the Partnership and to the co-venturer in the proportions 80% and 20%, respectively, (7) the next $3,000,000 allocated to the Partnership and the co-venturer in the proportions 70% and 30%, respectively, and (8) any remaining balance shall be allocated to the Partnership and the co-venturer 70% and 30%, respectively, until the Partnership receives an amount equal to all net losses allocated to the Partnership for years through calendar 1989 in which the maximum Federal income tax rate for individuals was less than 50% times a percentage equal to 50% minus the weighted average maximum Federal income tax rate for individuals in effect during such years plus a simple rate of return added to each year's amount equal to 8% per annum. Thereafter, any remaining balance shall be distributed to the Partnership and the co-venturer 60% and 40%, respectively.
The joint venture entered into a property management contract with an affiliate of the co-venturer, cancellable at the Partnership's option upon the occurrence of certain events. The management fee is equal to 3% of the gross receipts, as defined, of which 1.5% was subordinated to the payment of the Partnership's minimum guaranteed distributions through November 1990.
5. Investment in 150 Broadway Office Building
The Partnership sold its 49% interest in the Bailey N.Y. Associates joint venture on September 22, 1989. The sales price for the Partnership's interest was $18,000,000 which was received in the form of $4,000,000 in cash and a $14,000,000 second mortgage note receivable. The Partnership also received a $1,000,000 promissory note in satisfaction of preferred returns accrued but not paid during the term of the joint venture partnership. The notes, which bore interest at 7% per annum, were originally payable in quarterly installments of principal and interest of $280,000, beginning in October of 1989, for the $14,000,000 note and in quarterly installments of interest only, beginning in April of 1991, for the $1 million note. The notes were due to mature in October of 1995.
Due to a deterioration in the commercial real estate market in New York City which adversely affected property operations, the borrower failed to make certain payments due under the terms of the Partnership's second mortgage note and the $1 million promissory note received as part of the 1989 sale agreement, as well as payments due on first and third mortgages with unaffiliated third parties. On July 22, 1991, in a defensive reaction to the commencement of foreclosure proceedings by the first mortgagee, the borrower filed for protection under Chapter 11 of the U. S. Bankruptcy Code. During fiscal 1993, the Partnership agreed to a settlement agreement involving both the first mortgage lender and the owner. Under the terms of the plan, which was approved by the bankruptcy court and declared effective on June 15, 1993, the Partnership received a new second mortgage loan in the principal amount of $6 million, with base interest at 4.75% per annum, in satisfaction of its prior second mortgage and promissory note in the combined face amount of approximately $15 million. The terms of the plan required the Partnership to fund, by way of a separate note, an initial amount of $800,000 to pay past due real estate taxes and to establish an escrow reserve of $200,000 prior to December 31, 1993 for future cash flow shortfalls of the property. This escrow reserve was funded in the first quarter of fiscal 1994. Under the terms of the agreement, if the first mortgagee made withdrawals from the escrow to cover any monthly debt service shortfalls, the Partnership was required to replenish the escrow on a quarterly basis or it would have forfeited its second mortgage position.
Subsequent to the final execution of the settlement plan, due to the uncertainty which existed with regard to the future collection of amounts owed under the terms of the Partnership's restructured $6 million second mortgage loan, management determined that it would be appropriate to account for the investment in the 150 Broadway Office Building on the cost method. Accordingly, the Partnership recorded a provision for possible uncollectible amounts of $2,000,000 in fiscal 1993 to write off the remaining carrying value of the original notes receivable received from the sale of the Partnership's joint venture interest. The cost basis of the Partnership's investment in the 150 Broadway Office Building was established at $800,000 as of September 30, 1993, which represented the amount of the additional investment required to affect the bankruptcy court settlement plan in fiscal 1993. Under the cost method, any amounts received as interest on the note or advances were recorded as income when received. Any advances required to maintain the Partnership's investment interest in the 150 Broadway Office Building were recorded as an expense in the period paid.
The value of the 150 Broadway Office Building was estimated to be well below the balance of the $26 million first mortgage loan which was senior to the Partnership's claims. Given the likelihood that large capital advances would be required to keep the first mortgage loan current and avoid foreclosure, management concluded during fiscal 1994 that it would not be prudent to fund any further advances related to this investment. In light of these circumstances and the resulting uncertainty that the Partnership would realize any amounts from its investment interest in 150 Broadway, the Partnership recorded provisions for possible investment loss totalling $800,000 during fiscal 1994 ($400,000 in the third quarter and $400,000 in the fourth quarter) to fully reserve the remaining carrying value of the investment as of September 30, 1994. Management's discussions with the borrower concerning the operations of the 150 Broadway property during fiscal 1994 resulted in an offer to purchase the Partnership's second mortgage loan position. During the quarter ended December 31, 1994, the Partnership agreed to assign its second mortgage interest to an affiliate of the borrower in return for a payment of $400,000. Subsequently, the borrower was unable to perform under the terms of this agreement and the Partnership agreed to reduce the required cash compensation to $300,000. During the quarter ended March 31, 1995, the Partnership received $200,000 of the agreed upon sale proceeds. The remaining $100,000 was funded into escrow on May 31, 1995 upon the final execution of the sale and assignment agreement. The $100,000 is to be released from escrow subsequent to the resolution of certain matters between the borrower and the first mortgage holder. The $200,000 received to date is non-refundable in the event that the sale is not consummated. The Partnership recorded income of $200,000 in fiscal 1995 to reflect the non-refundable cash proceeds received to date. Additional income of $100,000 would be recorded upon the satisfaction of the escrow requirements and the release of the escrowed cash to the Partnership.
On November 15, 1995, the Partnership distributed $300,000 to the Limited Partners, $3,000 to the General Partners and $13,000 to the Adviser as an asset management fee for the quarter ended September 30, 1995.
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 Six Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined Joint Ventures of Paine Webber Income Properties Six Limited Partnership as of September 30, 1995 and 1994, and the related combined statements of operations and changes in venturers' capital 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Joint Ventures of Paine Webber Income Properties Six 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.
as to which the date
PAINE WEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
September 30, 1995 and 1994
Cash and cash equivalents $ 480 $ 613 Accounts receivable - affiliates 21 15 Accounts receivable from tenants and others 74 83 Cash reserve for capital expenditures 512 134 Cash reserve for insurance and taxes 297 274 Total current assets 1,423 1,160
Cash reserve for tenant security deposits 40 20
Mall Corners III 665 665
Operating investment property, at cost: Buildings, improvements and equipment 53,269 52,315 Less accumulated depreciation (19,262) (17,292) Net operating investment property 43,852 44,809
Deferred expenses, net of accumulated amortization of $3,119 in 1995 and $2,881 in 1994 440 223
Distributions payable to venturers $ 499 $ 609 Notes payable to venturers 488 488 Advance from venturer 200 - Current portion of long-term debt 495 8,591 Accounts payable and accrued expenses 138 113 Accounts payable - affiliate 26 28 Accrued real estate taxes 171 164 Total current liabilities 2,830 10,809
Long-term debt and long-term debt subject to refinancing 34,228 25,724
Tenant security deposits 269 277
PAINEWEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL For the years ended September 30, 1995, 1994 and 1993
reimbursements $ 9,122 $ 9,482 $ 9,088 Interest income 26 26 28
Depreciation and amortization 2,208 2,120 2,072 Property taxes 653 620 590 Management fees 333 345 331 Maintenance and repairs 650 958 686 General and administrative 270 245 194
Net income 322 522 581
Distributions to venturers (1,296) (1,989) (1,688)
Venturers' capital, beginning of year 10,067 11,534 12,641
Venturers' capital, end of year $ 9,093 $10,067 $11,534
PAINE WEBBER INCOME PROPERTIES SIX LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS For the years ended September 30, 1995, 1994 and 1993
Cash flows from operating activities: Net income $ 322 $ 522 $ 581 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,208 2,119 2,072 Changes in assets and liabilities: Prepaid expenses 2 56 (35) Accounts receivable - affiliates (6) (15) - and others 9 71 25 Cash reserve for capital expenditures 122 (92) (8) Cash reserve for insurance and taxes (23) (44) (56) Cash reserve for tenant security deposits (20) (12) 16 Accounts payable and accrued expenses 25 14 (85) Accounts payable - affiliates (2) (9) 8 Accrued interest (12) 46 (25) Accrued real estate taxes 7 (158) 53 Other liabilities 9 38 3 Tenant security deposits (8) 5 4 Total adjustments 2,311 2,019 1,972 Net cash provided by operating
Cash flows from investing activities: Payment of lease commissions (67) (55) (63) Proceeds from insurance settlement - 379 390 Funding of renovation escrow account (500) - - Net cash used in investing
Cash flows from financing activities: Distributions to venturers (1,406) (1,948) (1,621) Long-term debt incurred 9,000 - - Debt acquisition costs (372) - - Advances from venturers 200 - - Principal payments on long-term debt (8,592) (182) (159) Net cash used in financing
Net increase (decrease) in cash and cash equivalents (133) (11) 228
beginning of year 613 624 396
Cash and cash equivalents, end of year $ 480 $ 613 $ 624
Cash paid during the year for interest $ 3,515 $ 3,421 $ 3,474
PAINE WEBBER INCOME PROPERTIES SIX Notes to Combined Financial Statements
1. Summary of significant accounting policies
The accompanying financial statements of the Combined Joint Ventures of Paine Webber Income Six Limited Partnership (PWIP6) include the accounts of PWIP6's three unconsolidated joint venture investees as of September 30, 1995. Gwinnett Mall Corners Associates, a Georgia general partnership, was organized on August 28, 1985, by PWIP6 and Mall Corners III, Ltd., a Georgia limited partnership (MC III), to acquire and operate a 286,000 square foot shopping center located in Gwinnett County, Georgia. Regent's Walk Associates was organized on April 25, 1985 in accordance with a joint venture agreement between PWIP6 and Peterson Interests of Kansas, Inc. (PIK). The joint venture was organized to purchase and operate a 255-unit apartment complex known as Regent's Walk Apartments in Overland Park, Kansas. The apartment complex was purchased on May 15, 1985. Kentucky-Hurstbourne Associates was organized on July 25, 1985 in accordance with a joint venture agreement between PWIP6 and Hurstbourne Apartments Company, Ltd. (Limited Partnership). The joint venture was organized to purchase and operate a 409-unit apartment complex known as Hurstbourne, Kentucky. 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 PWIP6, which owns a majority financial interest in each joint venture.
The records of two of the combined joint ventures, Gwinnett Mall Corners Associates and Kentucky-Hurstbourne Associates, are maintained on an income tax basis of accounting and adjusted to generally accepted accounting principles and reflect the necessary adjustments, principally to depreciation and amortization. The records of Regent's Walk Associates are maintained in accordance with generally accepted accounting principles.
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. All of the operating properties owned by the Combined Joint Ventures were 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 Combined Joint Ventures' financial statements.
Depreciation expense is computed on the straight-line basis over the estimated useful life of the buildings, equipment and tenant improvements, generally 5 to 30 years. Payments made to PWIP6 under a master lease agreement to guarantee a preference return were recorded as reductions of the basis of the Mall Corners operating investment property. Professional fees, including acquisition fees paid to a related party (Note 2), and other costs have been capitalized and are included in the cost of the operating investment properties.
The Combined Joint Ventures lease space at the operating investment properties under short-term and long-term operating leases. Rental revenues are recognized on an accrual basis as earned pursuant to the terms of the leases.
The Combined Joint Ventures are not subject to U.S. federal or state income taxes. The partners report their proportionate share of the joint venture's taxable income or tax loss in their respective tax returns; therefore, no provision for income taxes is included in the accompanying financial statements.
Lease commissions are being amortized over the shorter of ten years or the remaining term of the related lease on a straight-line basis. Permanent loan fees and related debt acquisition costs are being amortized on the straight-line method over the term of the related mortgage loans. Organization costs represent legal fees associated with the formation of the joint venture and were amortized over five years on a straight-line basis.
For purposes of reporting cash flows, the Combined Joint Ventures consider all highly liquid investments with original maturities of 90 days of less to be cash equivalents.
2. Partnership agreements and related party transactions
The Mall Corners joint venture agreement provides that PWIP6 will receive from cash flow, as defined, a annual cumulative preferred return, payable monthly, of $1,047,000. In the event cash flow, as defined, was insufficient to pay the PWIP6 preference return described above through November 1, 1990, MC III was required to fund the joint venture a monthly amount equal to the difference between $68,000 (the guaranteed preferred return) and cash flow, as defined. PWIP6 and MC III were in disagreement as to the amount of deficiencies to be funded by MC III through September 30, 1989. During 1990, the partners reached an agreement as to the cumulative deficiencies to be funded by MC III. This agreement resulted in a decrease to the receivable from MC III and a decrease in MC III's capital of $245,000. The joint venture made distributions to PWIP6 of $470,000 in 1995, $945,000 in 1994 and $864,000 in 1993 towards settlement of the cumulative preferred return. Cumulative preferred distributions in arrears at September 30, 1995 and 1994 amounted to approximately $1,997,000 and $1,420,000 including minimum guaranteed distributions in arrears of $308,000 at both dates (see Note 5).
The receivable from MC III totaled $665,000 at September 30, 1995 and 1994. The receivable is guaranteed by the partners of MC III, however, the venture is subject to credit loss to the extent the guarantors are unable to fulfill their obligation. The venture does not anticipate nonperformance by MC III due to their interest in the venture and the underlying value of the venture's assets.
MC III is entitled to receive quarterly non-cumulative, subordinated returns of $38,000 each quarterly period, subject to available cash flow. Due to insufficient cash flow, MC III received no distributions for any of the three years in the period ended September 30, 1995. Any remaining cash flow, as defined, after payment of MC III's preferred return, is to be distributed to the Initial Property Manager (an affiliate of MC III) in an amount equal to the then unpaid subordinated management fees from prior fiscal years, then next to pay accrued interest on any loans made by PWIP6 and MC III to the joint venture. The next $500,000, if any, is to be distributed 80% to PWIP6 and 20% to MC III, the second $500,000, if any, is to be distributed 70% to PWIP6 and 30% to MC III and the remaining balance, if any, is to be distributed 60% to PWIP6 and 40% to MC III.
Taxable income or tax loss is allocated to PWIP6 and MC III based on the proportionate percentage of net cash flow distributed; if no net cash flow has been distributed, 100% to PWIP6. Allocations of the joint venture's operations between PWIP6 and MC III for financial reporting purposes have been made in conformity with the allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with operations of the joint venture, it is to be provided 70% by PWIP6 and 30% by MC III in the form of operating loans. The rate of interest shall equal the lesser of the rate announced by the First National Bank of Boston as its prime rate or the maximum rate of interest permitted by applicable law. In the event a partner shall default in its obligation to make an operating loan, the other partner, may make all or part of the loan required to be made by the defaulting partner (default loan). Each default loan shall provide for the accrual of interest at the rate equal to the lesser of twice the operating loan rate or the maximum rate of interest permitted by applicable law. PWIP6 made a temporary advance of $200,000 to the venture during fiscal 1995 to fund a good faith deposit required in connection with the refinancing transaction described in Note 5. Such funds will be returned to PWIP6 subsequent to the closing of the refinancing transaction. There were no operating/default loans required in fiscal 1995 or 1994. Operating/default loans of $89,000 were required in fiscal years prior to 1990. Total interest incurred and expensed for these loans amounted to $12,000 in each of the last three fiscal years. The total accrued interest payable on the loans at September 1995 and 1994 was $88,000 and $76,000, respectively.
Distribution of sale and/or refinancing proceeds are to be as follows, after making a provision for liabilities and obligations and to the extent not previously returned to each partner: (1) payment of accrued interest and operating notes payable to partners (2) to PWIP6 of the aggregate amount of the PWIP6 Preference Return that shall not have been distributed, (3) to PWIP6 of an amount equal to PWIP6's gross investment, (4) the next $2,000,000 to MC III, (5) to the Initial Property Manager, as defined below, for any unpaid subordinated management fees that shall have accrued, (6) the next $4,000,000 allocated to PWIP6 and MC III in the proportions 80% and 20%, respectively, (7) the next $3,000,000 allocated to PWIP6 and MC III in the proportions of 70% and 30%, respectively, and (8) any remaining balance shall be allocated to PWIP6 and MC III 70% and 30%, respectively, until PWIP6 receives an amount equal to all net losses allocated to PWIP6 for the years through calendar 1989 in which the maximum Federal income tax rate for individuals was less than 50% times a percentage equal to 50% minus the weighted average maximum federal income tax rate for individuals in effect during such years plus a simple rate of return added to each year's amount equal to 8% per annum. Thereafter, any remaining balance shall be distributed to PWIP6 and MC III in the ratios of 60% and 40%, respectively.
The joint venture has entered into a property management contract with an affiliate of MC III (the Initial Property Manager), cancellable at PWIP6's option upon the occurrence of certain events. The management fee is equal to 3% of gross rents, as defined, of which 1.5% was subordinated to the receipt by PWIP6 of its guaranteed preferred return through November 1990. Management fees incurred in 1995, 1994 and 1993 were $94,000, $106,000 and $102,000, respectively. The property manager has provided maintenance and leasing services to the joint venture totalling $105,000, $76,000 and $69,000 in 1995, 1994 and 1993, respectively.
PaineWebber Properties Incorporated, the adviser to PWIP6 and an affiliate of Paine Webber Incorporated, received an acquisition fee of $580,000 in connection with PWIP6's original investment in the joint venture and the acquisition of the property.
Included in buildings and deferred expenses are $1,047,000 and $115,000, respectively of costs paid to the Initial Property Manager prior to the formation of the joint venture. These costs have been recorded as part of the basis of the assets contributed to the joint venture by MC III as its capital contribution. Pursuant to the joint venture agreement, MC III was required to fund initial tenant improvements and lease commissions through capital contributions.
In accordance with the joint venture agreement, certain amounts of cash have been appropriated and are restricted as to use. Pursuant to the joint venture agreement, an initial amount of $15,000 plus 1% of gross rental revenue thereafter, are to be allocated to the reserve for capital expenditures. The reserve was underfunded by approximately $86,000 and $87,000 at September 30, 1995 and 1994, respectively (see Note 5). No amounts are required to be allocated at any time the reserve balance exceeds $250,000. The reserve for real estate taxes consists of cash appropriated for the payment of future insurance and real estate taxes and was underfunded by approximately $53,000 and $83,000 at September 30, 1995 and 1994, respectively (see Note 5).
The Regent's Walk joint venture agreement provides that PWIP6 will receive from cash flow a cumulative preferred return, payable quarterly, of $164,000. Commencing June 1, 1988, after PWIP6 has received its cumulative preferred return, PIK is entitled to a preference return of $7,000 for each fiscal quarter which is cumulative only for amounts due in any one fiscal year. Any remaining cash flow is to be used to pay interest on any notes from the venturers and then is to be distributed to the partners, with PWIP6 receiving 90% of the first $200,000, 80% of the next $200,000 and 70% of any remainder.
During the years ended September 30, 1995 and 1994, PWIP6's preferred return amounted to $656,000, while net cash available for distribution amounted to $320,000 and $469,000, leaving an unpaid cumulative preferred return of $2,720,000 at September 30, 1995. Such amount is payable only in the event that sufficient future cash flow or sale or refinancing proceeds are available. Accordingly, the unpaid preferred return has not been accrued in the accompanying financial statements.
Income or loss is to be allocated to the partners based on their proportionate share of cash distributions.
Under the terms of the venture agreement, PIK was required to make loans to the joint venture up to a total of $250,000 for additional cash needed by the joint venture for any reason including payment of the PWIP6 preference return, prior to June 1, 1992. After the joint venture has borrowed $250,000 from PIK, if the joint venture requires additional funds for purposes other than distributions, then it will be provided 90% by PWIP6 and 10% by PIK.
Distribution of sale and/or refinancing proceeds will be distributed as follows, after making a provision for liabilities and obligations: (1) repayment to PIK of up to $250,000 of operating loans plus accrued interest thereon, (2) payment of accrued interest and repayment of principal of operating notes (pro-rata), (3) payment to PWIP6 of any preferred return arrearage, (4) to PWIP6 an amount equal to PWIP6's gross investment plus $560,000, (5) to PIK the amount of $500,000, (6) to payment of a brokers fee to the partners if a sale is made to a third party, (7) to the payment of up to $100,000 subordinated management fees, (8) the next $8,000,000 to PWIP6 and PIK in the proportions of 90% and 10%, respectively, (9) the next $4,000,000 to PWIP6 and PIK in the proportions of 80% and 20%, respectively, and (10) any remaining balance 70% to PWIP6 and 30% to PIK.
The venture agreement provides for a capital reserve account to be used solely for specified enhancement programs, capital expenditures, or at the discretion of PWIP6 up to $150,000 of capital or operating expenses of the joint venture. Such account was established in the initial amount of $845,000 and was funded from partner capital contributions. An additional $124,000 was added by capital contributions from PWIP6 during the year ended September 30, 1986; $49,000 was added by partners' loans in 1987, and $100,000 was added by partners' loans in 1988. Beginning in January 1991, for each month of operations an amount equal to 3% of the total amount of estimated operating expenses in the budget as approved by the partners, is to be added to the reserve. During the period October 1, 1991 through September 30, 1995, capital expenditures exceeded required deposits to the reserve and therefore no additions to the reserve have been made during this most recent three-year period. At September 30, 1995 and 1994, the balance in the reserve account was $11,000 and was invested in a savings account.
The joint venture entered into a property management contract with an affiliate ("property manager") of PIK. The management fee was 4% of gross rents, as defined until June 1, 1990 when the fee increased to 5% of gross rents. Subsequent to June 1, 1988, that portion of the fees representing 1% of gross rents shall be payable only to the extent of cash flow remaining after PWIP6 has received its preferred return. Any payments not made pursuant to the above are payable only out of sale or refinancing proceeds as specified in the agreement. As of September 30, 1995, deferred management fees exceed the $100,000 limitation referred to above.
At September 30, 1995 and 1994, $8,000 was due to the property manager for management fees. For the years ended September 30, 1995, 1994 and 1993 property management fees totalled $97,000, $98,000 and $93,000, respectively. During 1995, 1994 and 1993, management fees of $24,000 were subordinated as described above.
The Hurstbourne joint venture agreement as amended on May 21, 1986 provides that cash flow shall first be distributed to PWIP6 in the amount of $67,000 per month (PWIP6 preference return). The preference return is cumulative on a year to year basis through July 31, 1989 and is cumulative on a month-to-month basis, not annually, thereafter. The next $40,000 each year will be distributed to the Limited Partnership on a noncumulative annual basis, payable quarterly (Limited Partnership preference return).
At the end of each fiscal year, any cash flow not previously distributed will be applied in the following order: first, to the payment of all unpaid accrued interest on all outstanding operating notes; the next $225,000 of annual cash flow will be distributed 90% to PWIP6 and 10% to the Limited Partnership; the next $260,000 of annual cash flow will be distributed 80% to PWIP6 and 20% to the Limited Partnership, and any remaining balance will be distributed 70% to PWIP6 and 30% to the Limited Partnership.
After the end of each month, during a year in which PWIP6 has not received their cumulative preference return, the Limited Partnership shall distribute to the PWIP6 the lesser of (a) the excess, if any, of the cumulative PWIP6 preference return over the aggregate amount of net cash flow previously distributed to PWIP6 during the year or (b) any net cash flow distributed to the Limited Partnership during the year.
The cumulative preference return of PWIP6 in arrears at September 30, 1995 for unpaid preference returns through July 31, 1989 is approximately $1,354,000. Under the terms of the venture agreement, any unpaid returns will only be paid upon refinancing, sale, exchange or other disposition of the property. Unpaid preference returns are, therefore, not reflected in the financial position of the joint venture.
The taxable income or tax losses of the joint venture will be allocated to PWIP6 and the Limited Partnership in proportion to the distribution of net cash flow, provided that the Limited Partnership shall not be allocated less than ten percent of the taxable net income or tax losses, and the Limited Partnership shall not be allocated net profits in excess of net cash flow distributed to it during the fiscal year.
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 notes. Any remaining proceeds will be distributed in the following order: repayment of unpaid principal and accrued interest on all outstanding operating notes to PWIP6 and the Limited Partnership; the amount of any undistributed preference payments to PWIP6 (for the period through July 31, 1989); $10,056,000 to PWIP6; $684,000 to the Limited Partnership; the amount of any unpaid subordinated management fees to the property manager; $9,000,000 distributed 90% to PWIP6 and 10% to the Limited Partnership; $4,500,000 distributed 80% to PWIP6 and 20% to the Limited Partnership; with any remaining balance distributed 70% to PWIP6 and 30% to the Limited Partnership.
If additional cash is required in connection with the joint venture, it may be provided by PWIP6 and the Limited Partnership as loans (evidenced by operating notes) to the venture. Such loans would be provided 90% by PWIP6 and 10% by the Limited Partnership.
The venture has a property management contract with an affiliate (property manager) of the Limited Partnership. The management fee to the property manager is 5% of gross rents. Through July 30, 1988, 40% of the manager's fee was subordinated to receipt by PWIP6 and the Limited Partnership of their preference returns. At September 30, 1995 and 1994, cumulative subordinated management fees were approximately $118,000. Under terms of the venture agreement and as stated in Note 3, unpaid subordinated management fees will only be paid upon refinancing, sale, exchange or other disposition of the property.
An amount receivable from the property manager of $21,000 at September 30, 1995 and $15,000 at September 30, 1994 represent the balances in an intercompany account maintained between the property manager and the joint venture and are included in accounts payable -affiliates on the accompanying balance sheets. For the years ended September 30, 1995, 1994 and 1993 property management fees totaled $142,000, $141,000 and $136,000, respectively.
PaineWebber Properties Incorporated, the advisor to PWIP6 and an affiliate of PaineWebber Incorporated, was paid an acquisition fee of $500,000 in connection with PWIP6's investment in the joint venture.
The Gwinnett Mall Corners joint venture derives its income from noncancellable operating leases which expire on various dates through the year 2004. The operating property was approximately 93% leased as of September 30, 1995. The approximate future minimum lease payments to be received under noncancellable operating leases in effect as of September 30, 1995 are as follows (in thousands):
4. Notes payable to venturers
Notes payable to the venturers of Gwinnett Mall Corners Associates represent operating/default loans received from PWIP6 and MC III for operating purposes and consist of the following at September 30, 1995 and 1994 (in thousands):
Due to PWIP6 $ 88 $ 62 $ 26 Due to MC III 1 1 - $ 89 $ 63 $ 26
Regarding Regent's Walk Associates, during the years ended September 30, 1988 and 1987, PIK loaned the venture $25,000 and $225,000, respectively, under the terms of the venture agreement. Also, during those same years, the venture partners advanced $100,000 and $49,000, respectively, for additional renovation costs with PWIP6 providing 90% and PIK providing 10%.
Notes payable to venturers generally bear interest at the rate of prime plus 1% (9.75% at September 30, 1995). Interest incurred and expensed on notes payable to venturers for the years ended September 30, 1995, 1994 and 1993 totaled $39,000, $42,000 and $40,000, respectively.
Long-term debt consists of the following amounts (in thousands):
nonrecourse mortgage note secured by a Deed to Secure Debt and Security Agreement on the joint venture's property; bore interest at 11.5% per annum payable in monthly installments of interest only totalling $170 through December 31, 1991. Thereafter, the note was payable in monthly installments of $175 including principal and interest at 11.5% through December 1, 1995. At that time, the entire unpaid principal balance was due. See discussion of subsequent refinancing
nonrecourse promissory note secured by property; bore interest at 12.625% through September 30, 1992. In 1992, the Partnership exercised an option to extend the maturity date of the loan to September 30, 1999 with a 7.695% interest rate. Principal and interest payments of $62 are due monthly, with a balloon payment of $8,022 due on the new maturity date. 8,457 8,547
first mortgage note secured by the venture's operating investment property. In 1992, the note's maturity date was extended for a period of three years. On September 1, 1995 the Company refinanced the $8,390 9.0% first mortgage note that was scheduled to mature on May 1, 1995. The new first mortgage loan bears interest at an annual rate of 7.32% and requires principal and interest payments of $62 on a monthly basis through maturity on October 1, 2000, at which time a balloon payment of $8,500 will be due (see Less current portion 495 8,591
The loan secured by the shopping center owned by Gwinnett Mall Corners Associates was scheduled to mature in December 1995. Subsequent to year-end, on December 29, 1995, the venture obtained a new first mortgage loan with a principal balance of $20,000,000 and repaid the maturing obligation, which had an outstanding balance of approximately $17,246,000 at the time of closing. Excess loan proceeds of approximately $2.2 million were used to pay transaction costs and to establish certain required escrow deposits, including an amount of $1.7 million designated to pay for certain planned improvements and an expansion of the shopping center which are expected to be completed in 1996. In addition, excess proceeds of approximately $550,000 were available to be paid to PWIP6, in accordance with the terms of the joint venture agreement, to be applied toward the operating loans and cumulative preference amounts discussed in Note 2. The new loan has a 10-year term, bears interest at a rate of approximately 7.4% per annum and requires monthly principal and interest payments based on a 20-year amortization schedule. Despite the increase in the loan principal balance, the annual debt service payments of the joint venture will decrease slightly as a result of this refinancing due to the significant reduction in the interest rate.
Subsequent to the refinancing transaction described above for the Mall Corners long-term mortgage indebtedness, scheduled maturities of long-term debt for the next five years and thereafter are as follows (in thousands): | 10-K405 | 10-K | 1996-01-16T00:00:00 | 1996-01-16T11:38:47 |
0000912057-96-000503 | 0000912057-96-000503_0005.txt | We consent to the incorporation by reference in the Current Report on Form 8-K pertaining to ProNet Inc.'s acquisitions of Paging and Cellular of Texas, Apple Communications, Inc., Sun Paging Communications, SigNet Paging of Raleigh, Inc., and Cobbwells, Inc. d/b/a Page One, with respect to the financial statements of companies acquired as follows:
WITH RESPECT TO YEAR ENDED REPORT DATE
Apple Communications, Inc. December 31, 1994 August 4, 1995 SigNet of Raleigh, Inc. December 31, 1994 August 9, 1995 Cobbwells, Inc. d/b/a Page One December 31, 1994 August 24, 1995
all such statements are included in ProNet Inc.'s Current Report on Form 8-K dated September 14, 1995.
We also consent to the incorporation by reference in the Registration Statements (Form S-8, Nos. 33-18977 and 33-00000) pertaining to the 1987 Stock Option Plan of ProNet Inc. and the ProNet Inc. 1995 Long-Term Incentive Plan, respectively, and (Form S-3, No. 33-61279) pertaining to the registration of 2,000,000 shares of its common stock, of our reports as dated above, with respect to the financial statements of the companies acquired, included and incorporated by reference in the Current Report on Form 8-K for the year ended December 31, 1994.
/s/ ERNST & YOUNG LLP | 8-K | EX-23.1 | 1996-01-16T00:00:00 | 1996-01-16T13:01:34 |
0000806176-96-000010 | 0000806176-96-000010_0000.txt | PREMIER STATE MUNICIPAL BOND FUND, MINNESOTA SERIES Dear Shareholder: We are pleased to provide you with this report on the Premier State Municipal Bond Fund, Minnesota Series. For its semi-annual reporting period ended October 31, 1995, your Series' Class A and Class B shares produced total returns of 5.39% and 5.18%, respectively.* Tax-free income dividends of approximately $.414 per share for Class A shares and $.375 per share for Class B shares were paid.** This amounts to an annualized tax-free distribution rate per share of 5.14% for Class A shares and 4.85% for Class B shares.*** Class C shares, from their introduction on August 15, 1995 through October 31, provided a total return of 3.36%,* and paid tax-free income dividends of approximately $.150 per share** amounting to an annualized tax-free distribution rate per share of 4.60%.*** 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 stimulatory effect of easing monetary policy and are watchful for any signs of rekindling inflation. Our primary task _ to maximize current income exempt from Federal and Minnesota State 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. Since last writing to you in May 1995, we have chosen to focus on those issues bearing higher degrees of credit quality and broader measures of liquidity within the context of the Minnesota community as well as that of the market in general. During periods when prospects of an acceleration in economic activity and a rise in the rate of inflation were perceived by the bond market, our trading activity sought to emphasize those issues offering generous levels of tax-free income and limited characteristics of volatility. At these times, portfolio liquidity was further enhanced by maintaining higher than normal cash reserve positions in the Series. As economic statistics began to reveal a moderate rate of growth and a benign inflationary environment, we sought to increase the Series' duration and maximize the potential for principal appreciation. During these times, particular emphasis was placed on securing those issues bearing strong characteristics of protection from redemption prior to maturity. The high level of volatility exhibited by the market in recent years underscores the ned 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-Minnesota 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) 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. (b) Secured by letters of credit. (c) 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. (d) Inverse floater security - the interest rate is subject to change periodically. (e) Fitch currently provides creditworthiness information for a limited number of investments. (f) 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. (g) At October 31, 1995, the Series had $43,743,632 (26.0% of net assets) invested in securities whose payment of principal and interest is dependent upon revenues generated from housing projects.
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, MINNESOTA 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, MINNESOTA 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, MINNESOTA 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 Minnesota 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.
PREMIER STATE MUNICIPAL BOND FUND, MINNESOTA SERIES NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
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. (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, 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. The Fund has an unused capital loss carryover of approximately $1,306,000 available for Federal income tax purposes to be applied against future net securities profits, if any, realized subsequent to April 30, 1995. The carryover does not include net realized securities losses from November 1, 1994 through April 30, 1995 which are treated, for Federal income tax purposes, as arising in fiscal 1996. If not applied, the carryover expires in fiscal 2003. 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. There was no expense reimbursement for the six months ended October 31, 1995. (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, $59,895 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, $182,336, $29,947 and $1 were charged to Class A, Class B and Class C shares, respectively, by the Distributor pursuant to the Shareholder Services Plan.
Premier State Municipal Bond Fund, Minnesota Series NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
(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. NOTE 3--SECURITIES TRANSACTIONS: The aggregate amount of purchases and sales of investment securities amounted to $59,255,629 and $64,165,504, 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 $9,492,370, consisting of $9,984,911 gross unrealized appreciation and $492,541 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, MINNESOTA SERIES REVIEW REPORT OF ERNST & YOUNG LLP, INDEPENDENT ACCOUNTANTS
SHAREHOLDERS AND BOARD OF TRUSTEES PREMIER STATE MUNICIPAL BOND FUND, MINNESOTA SERIES We have reviewed the accompanying statement of assets and liabilities, including the statement of investments, of Premier State Municipal Bond Fund, Minnesota 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 | 1996-01-16T15:10:06 |
0000091155-96-000023 | 0000091155-96-000023_0001.txt | SMITH BARNEY PRECIOUS METALS AND MINERALS FUND INC.
Smith Barney Precious Metals and Minerals Fund Inc., a Maryland corporation having its principal offices in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Articles of Incorporation of the Corporation, as amended, are further amended by changing the Article containing the name of the Corporation to read:
The name of the Corporation (hereinafter called Barney Natural Resources Fund Inc.
SECOND: The Corporation is registered as an open-end investment company under the Investment Company Act of 1940.
THIRD: The foregoing amendment to the Charter of Incorporation of the Corporation was approved by a majority of the entire Board of Directors of the Corporation and the amendment of the Charter of Incorporation is limited to a change expressly permitted by Section 2-605 of Title 2 of Subtitle 6 of the Maryland General Corporation Law to be made without action by the stockholders.
IN WITNESS WHEREOF, the Corporation has caused this instrument to be signed in its name and on its behalf by its Chairman, Heath B. McLendon, and witnessed by its Assistant Secretary, Caren Cunningham, as of the 18th day of December, 1995.
The undersigned acknowledges these Articles of Amendment to be the corporate act of the Corporation and states that, to the best of his or her knowledge, information and belief, the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects and that this statement is made under all penalties of perjury.
WITNESS: Smith Barney Precious Metals Minerals Fund Inc.
/s/Caren Cunningham By:/s/Heath B. McLendon Caren Cunningham Heath B. McLendon Assistant Secretary Chairman of the | 485BPOS | EX-1 | 1996-01-16T00:00:00 | 1996-01-16T17:25:16 |
0000045809-96-000053 | 0000045809-96-000053_0000.txt | S E C U R I T I E S A N D E X C H A N G E C O M M I S
F O R M S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF OF SECURITIES OF UNIT INVESTMENT TRUSTS
A. Exact Name of Trust:
NEW YORK INSURED SERIES 14 B. Name of Depositor:
It is proposed that this filing will become effective August 18, pursuant to paragraph (b) of Rule 485.
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction as to the Prospectus in Form S-6)
In the opinion of counsel, under existing law interest income to the Trust and, with certain exceptions, to Unit holders is exempt from all Federal income tax. In addition, in the opinion of counsel, the interest income of the California Trust is exempt, to the extent indicated, from State and local taxes when held by residents of the state where the issuers of bonds in such Trust are located but the interest income of the National Trust may be subject to State and local taxes. Capital gains, if any, are subject to tax. Investors should read and retain this Prospectus for future reference. THE INITIAL PUBLIC OFFERING OF UNITS IN THE TRUSTS HAS BEEN COMPLETED. THE UNITS OFFERED HEREBY ARE ISSUED AND OUTSTANDING UNITS WHICH HAVE BEEN ACQUIRED BY THE SPONSOR EITHER BY PURCHASE FROM THE TRUSTEE OF UNITS TENDERED FOR REDEMPTION OR IN THE SECONDARY MARKET. SEE PART B, "RIGHTS OF UNIT HOLDERS--REDEMPTION OF UNITS--PURCHASE BY THE SPONSOR OF UNITS TENDERED FOR REDEMPTION" AND "MARKET FOR UNITS". THE PRICE AT WHICH THE UNITS OFFERED HEREBY WERE ACQUIRED WAS NOT LESS THAN THE REDEMPTION PRICE DETERMINED AS PROVIDED HEREIN. SEE PART B, "RIGHTS OF UNIT HOLDERS-- REDEMPTION PRICE PER UNIT". THE TAX EXEMPT SECURITIES TRUST consists of two underlying separate unit investment trusts (the "Trusts") designated as National Insured Trust 21 (the "National Insured Trust") and New York Insured Trust 14 (referred to hereinafter as either the "New York Insured Trust" or the "State Trust"). Each Trust was formed for the purpose of obtaining for its Unit holders tax-exempt interest income and conservation of capital through investment in a fixed portfolio of municipal bonds rated at the time of deposit in the category A or better by Standard & Poor's Corporation or Moody's Investors Service, with certain ratings being provisional or conditional. The State Trust is comprised of a fixed portfolio of interest-bearing obligations issued primarily by or on behalf of the state for which such State Trust is named and counties, municipalities, authorities or political subdivisions thereof. The National Insured Trust is comprised of a fixed portfolio of interest- bearing obligations issued on behalf of the states, counties, territories, possessions and municipalities of the United States and authorities or political subdivisions thereof. Hospital facilities bonds constitute 53.6% of the aggregate offering price of the New York Insured Trust on the Date of Deposit. The interest on all bonds in each Trust is, in the opinion of recognized bond counsel to the issuers of the obligations, (i) exempt under existing law (except in certain instances depending upon the Unit holders) from all Federal income tax, (ii) subject to the alternative minimum tax under the Tax Reform Act of 1986 as respects the required inclusion in the alternative minimum tax base of 75% of adjusted current earnings of corporate Unit holders and (iii) exempt from state income taxes to the extent indicated in the state for which a State Trust is named (see Part B--"Tax Exempt Securities Trust- Taxes"). THE OBJECTIVES of the Trusts are tax-exempt income and conservation of capital through an investment in a diversified portfolio consisting primarily of municipal bonds. There is, of course, no guarantee that the Trusts' objectives will be achieved since the payment of interest and preservation of principal are dependent upon the continued ability of the issuers of the bonds to meet such obligations. INSURANCE, guaranteeing the scheduled payment of all principal and interest throughout the life of certain of the Bonds in the National Insured Trust and the New York Insured Trust has been obtained at either the cost of the issuer at the time of issuance, at the cost of a holder prior to the purchase of the Bonds by the Trust, or at the cost of the SPONSOR at the Date of Deposit. Insurance guaranteeing the scheduled payments of principal and interest on the remainder of the Bonds in the portfolio of the National Insured Trust and the New York Insured Trust ("Portfolio Insurance") has been obtained by the Trust from AMBAC Indemnity Corporation ("AMBAC Indemnity") and applies only while such Bonds are retained in the Trust. Pursuant to an irrevocable commitment obtained from AMBAC Indemnity, in the event of the sale of a Bond covered by Portfolio Insurance, the Trustee has the right to obtain permanent insurance ("Permanent Insurance") for such a Bond upon payment of a single predetermined premium from the proceeds of the sale of such Bond. The monthly cost of the Portfolio Insurance on the Bonds while held in the National Insured Trust and the New York Insured Trust is accounted for as an expense for each of the Trusts. Any amount paid for Permanent Insurance on a Bond sold by the National Insured Trust or the New York Insured Trust will be accounted for as an offset to the amount received on the sale. All insurance relates only to the Bonds in the Trusts and not to the Units offered hereby or to the market value thereof. As a result of the insurance, the Units of the National Insured Trust and the New York Insured Trust have received a rating of AAA by Standard & Poor's Corporation as of the Date of Deposit. (See Part B--"Insurance".) There can be no assurance that Units of the Trusts will retain this AAA rating. No representation is made as to the insurers' abilities to meet their commitments. THE PUBLIC OFFERING PRICE of the Units of each Trust is equal to the aggregate bid price of the underlying securities in each Trust's portfolio divided by the number of Units outstanding in such Trust, plus a sales charge. This charge will be equal to 5% of the Public Offering Price (5.263% of the aggregate bid price of the securities per Unit). A proportional share of accrued and undistributed interest on the Securities at the date of delivery of the Units to the purchaser is also added to the Public Offering Price. THE SPONSOR, although not obligated to do so, intends to maintain a market for the Units of the Trusts at prices based upon the aggregate bid price of the underlying securities, as more fully described in Part B, "Market for Units". If such a market is not maintained, a Unit holder may be able to dispose of his Units only through redemption at prices that are also based upon the aggregate bid price of the underlying bonds. Neither any offering side evaluation nor any bid side evaluation of any of the Bonds in the National Insured Trust or the New York Insured Trust covered by the Portfolio Insurance includes any value for such insurance obtained by the Trusts or the commitments of AMBAC Indemnity to issue Permanent Insurance in the event of their sale unless the Security is in default or is deemed to be in significant risk of default. However, the market value of the underlying bonds insured to maturity includes the value attributable to the insurance on the bonds. (See Part B--"Insurance".) MONTHLY DISTRIBUTIONS of principal and interest received by each Trust will be made on or shortly after the fifteenth day of each month to holders of record on the first day of that month. For further information regarding the distributions by each Trust, see the "Summary of Essential Information".
THE SECURITIES AND EXCHANGE COMMISSION OR 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.
Prospectus Part A dated August 18, 1995 Note: Part A of this Prospectus may not be distributed unless accompanied by Part B.
TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED NEW YORK INSURED TRUST 14
Record Dates: The 1st day of each month Distribution Dates: The 15th day of each month Evaluation Time: Close of trading on the New York Stock Exchange (currently 4:00 P.M. New York Time) Trust Agreement: May 29, 1990 Mandatory Termination Date:January 1, 2040 Trustee's Annual Fee: $1.05 per $1,000 principal amount of bonds for the National Trust and $1.26 per $1,000 principal amount of bonds for the New York Trust ($12,827 per year on the basis of bonds in the principal amount of $11,710,000) plus expenses. Evaluator's Fee: $.30 per bond per evaluation
As of May 26, 1995, 20 (94%) of the Bonds in the National Trust were rated by Standard & Poor's Corporation (89% being rated AAA and 5% being rated A) and 2 (6%) were rated Aaa by Moody's Investors Service; 9 (100%) of the Bonds in the New York Trust were rated AAA by Standard & Poor's. Ratings assigned by rating services are subject to change from time to time.
Additional Considerations - Investment in any Trust should be made with an understanding that the value of the underlying Portfolio may decline with increases in interest rates. Approximately 10% and 7% of the Bonds in the National Trust and New York Trust, respectively, consist of general obligation bonds. Approximately 19% and 62% of the Bonds in the National Trust and New York Trust, respectively, consist of hospital revenue bonds (including obligations of health care facilities). Approximately 9% and 20% of the Bonds in the National Trust and New York Trust, respectively, consist of obligations of municipal housing authorities. Approximately 4% and 20% of the Bonds in the National Trust and New York Trust, respectively, consist of bonds which are subject to the Mortgage Subsidy Bond Tax Act of 1980. Approximately 24% of the Bonds in the National Trust consist of bonds in the power facilities category. (See Part B "Tax Exempt Securities Trust-Portfolio" for a brief summary of additional considerations relating to certain of
+ The percentages referred to in this summary are each computed on the basis of the aggregate bid price of the Bonds as of May 26, 1995.
TAX EXEMPT SECURITIES TRUST, NATIONAL INSURED TRUST NEW YORK INSURED TRUST 14
(1)The original cost to the investors represents the aggregate initial public offering price as of the date of deposit (May 29, 1990), exclusive of accrued interest, computed on the basis of the aggregate offering price of the securities. The initial underwriting commission (sales charge) was 4.70% of the aggregate public offering price (4.932% of the aggregate offering price of the securities). (2)Interest income represents interest earned on the Trust's portfolio and has been recorded on the accrual basis. (3)686 Units and 169 Units in the National Trust and New York Trust, respectively, were redeemed by the Trustee during the three years ended April 30, 1995 (78 Units in the National being redeemed in 1995. 228 Units and 69 Units in the National Trust and New York Trust, respectively, being redeemed in 1994. 380 Units and 100 Units in the National Trust and New York Trust, respectively, being redeemed in 1993). (4)Interest received by the Trust is distributed to Unit holders on the fifteenth day of each month, after deducting applicable expenses. (5)The gain from the sale or redemption of securities is computed on the basis of the average cost of the issue sold or redeemed. (6)The Trustee has custody of and responsibility for all accounting and financial books, records, financial statements and related data of each Trust and is responsible for establishing and maintaining a system of internal control directly related to, and designed to provide reasonable assurance as to the integrity and reliability of, financial reporting of each Trust. The Trustee is also responsible for all estimates of expenses and accruals reflected in each Trust's financial statements. The Evaluator determines the price for each underlying Bond included in each Trust's Portfolio of Securities on the basis set forth in Part B, "Public Offering - Offering Price". Under the Securities Act of 1933, as amended (the "Act"), the Sponsor is deemed to be issuer of each Trust's Units. As such, the Sponsor has the responsibility of issuer under the Act with respect to financial statements of each Trust included in the Registration Statement.
To the Unit Holders, Sponsor and Trustee of Tax Exempt Securities Trust, National Insured Trust 21 and New York Insured Trust 14:
We have audited the accompanying balance sheets of Tax Exempt Securities Trust, National Insured Trust 21 and New York Insured Trust 14, including the portfolios of securities, as of April 30, 1995, and the related statements of operations and changes in net assets for each of the years in the three- year period ended April 30, 1995. These financial statements are the responsibility of the Trustee (see Note 6). 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. Our procedures included confirmation of securities owned as of April 30, 1995 by correspondence 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 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 Tax Exempt Securities Trust, National Insured Trust 21 and New York Insured Trust 14, as of April 30, 1995, and the results of their operations and changes in their net assets for each of the years in the three-year period ended April 30, 1995, in conformity with generally accepted accounting principles.
NOTES TO PORTFOLIO OF SECURITIES:
(1)All Ratings are by Standard & Poor's Corporation, except those identified by an asterisk (*) which are by Moody's Investors Service. The meaning of the applicable rating symbols is set forth in Part B, "Ratings". (2)There is shown under this heading the year in which each issue of bonds initially or currently is redeemable and the redemption price for that year; unless otherwise indicated, each issue continues to be redeemable at declining prices thereafter, but not below par. "S.F." indicates a sinking fund has been or will be established with respect to an issue of bonds. The prices at which bonds may be redeemed or called prior to maturity may or may not include a premium and, in certain cases, may be less than the cost of the bonds to the Trust. Certain bonds in the portfolios, including bonds not listed as being subject to redemption provisions, may be redeemed in whole or in part other than by operation of the stated redemption or sinking fund provisions under certain unusual or extraordinary circumstances specified in the instruments setting forth the terms and provisions of such bonds. For example, see discussion of obligations of municipal housing authorities under "Tax Exempt Securities Trust-Portfolio" in Part B. (3)The market value of securities as of April 30, 1995 was determined by the Evaluator on the basis of bid prices for the securities at such date. (4)Insurance to maturity has been obtained previously from the listed insurance company for these bonds. The AAA ratings on these bonds are based in part on the credit worthiness and claims-paying ability of the insurance company insuring such bonds to maturity. No premium is payable therefore by the Trust.
All other bonds in the portfolio are insured by the Portfolio Insurance Policy obtained by the Trust. (See Part B, "Insurance on the Bonds in the
(p)It is anticipated that these bonds will be redeemed prior to their scheduled maturity, pursuant to a pre-refunding, as reflected under the column "Redemption Provisions".
Note that Part B of the Prospectus may not be distributed unless accompanied by Part A.
TAX EXEMPT SECURITIES TRUST--INSURED SERIES
For over 20 years, Tax Exempt Securities Trust has specialized in quality municipal bond investments designed to meet a variety of investment objectives and tax situations. Tax Exempt Securities Trust is a convenient and cost effective alternative to individual bond purchases. Each Trust is one of a series of similar but separate unit investment trusts created under the laws of the State of New York by a Trust Indenture and Agreement and related Reference Trust Agreement, dated the Date of Deposit (collectively, the "Trust Agreement"), among Smith Barney Inc. (the "Sponsor"), United States Trust Company of New York, as Trustee, and J.J. Kenny Co., Inc., as Evaluator. Each trust containing Bonds of a State for which such Trust is named (a "State Trust") and each National Trust and Selected Term Trust is referred to herein as the "Trust" or "Trusts," unless the context requires otherwise. On the Date of Deposit the Sponsor deposited with the Trustee interest-bearing obligations (the "Bonds"), including contracts and funds (represented by a certified check or checks and/or an irrevocable letter or letters of credit, issued by a major commercial bank) for the purchase of certain such obligations (such Bonds being referred to herein as the "Securities"). The Trustee thereafter delivered to the Sponsor registered certificates of beneficial interest (the "Certificates") representing the units (the "Units") comprising the entire ownership of each Trust. The initial public offering of Units in each Trust has been completed. The Units offered hereby are issued and outstanding Units which have been acquired by the Sponsor either by purchase from the Trustee of Units tendered for redemption or in the secondary market. See "Rights of Unit Holders--Redemption of Units--Purchase by the Sponsor of Units Tendered for Redemption" and "Public Offering-- Market for Units".
A tax-exempt unit investment trust provides many of the same benefits as individual bond purchases, while the unit holder avoids the complexity of analyzing selecting and monitoring a multi- bond portfolio. The objectives of a Trust in the Insured Series are tax- exempt income and conservation of capital through an investment in a diversified portfolio of insured municipal bonds. There is, of course, no guarantee that a Trust's objectives will be achieved since the payment of interest and the preservation of principal are dependent upon the continued ability of the issuers of the bonds or the creditworthiness of the insurers to meet such obligations. The insurance does not protect Unit holders from the risk that the value of the Units may decline before the ratings of the Bonds subsequent to the Date of Deposit, set forth in Part A - "Portfolio of Securities" may have declined due to, among other factors (including a decline in the creditworthiness of an insurer in the case of an insured trust which may also result in a decline in the AAA ratings of the Units of an insured trust), a decline in the creditworthiness of the issuer of said Bonds.
The following factors, among others, were considered in selecting Bonds for each Trust: (1) all the Bonds of the National Trust and the Selected Term Trust are obligations of the states, counties, territories, or municipalities of the United States and authorities or political subdivisions thereof, so that the interest on them will, in the opinion of recognized bond counsel to the issuing governmental authorities, be exempt from Federal income tax under existing law to the extent described in "Taxes", (2) all the Bonds deposited in a State Trust are obligations of the State for which such Trust is named or of the counties, territories or municipalities of such State, and authorities or political subdivisions thereof, or of the Territory of Guam or the Commonwealth of Puerto Rico, so that the interest on them will, in the opinion of recognized bond counsel to the issuing governmental authorities, be exempt from Federal income tax under existing law to the extent described in "Taxes" and from state income taxes in the state for which such State Trust is named to the extent described in Part C - "Tax Exempt Securities Trust - Taxes," (3) the Bonds are diversified as to purpose of issue and location of issuer, except in the case of a State Trust where the Bonds are diversified only as to purpose of issue, (4) the Bonds were chosen in part on the basis of their respective maturity dates and offer a degree of call protection, (5) in the opinion of the Sponsor, the Bonds are fairly valued relative to other bonds of comparable quality and maturity, and (6) whether insurance guaranteeing the timely payment, when due, of all principal and interest on the Bonds was available.
The Bonds in the Portfolio of a Trust were chosen in part on the basis of their respective maturity dates. The Selected Term Trust will contain Bonds which will have a dollar-weighted average portfolio maturity of more than three years but not more than ten years from the Date of Deposit. The National Trust or a State Trust not specified as to term will have a dollar-weighted average portfolio maturity of more than ten years from the Date of Deposit. For the actual maturity dates of each of the Bonds contained in each Trust, see Part A, "Portfolio or Securities". A sale or other disposition of a Bond by the Trust prior to the maturity of such Bond may be at a price which results in a loss to the Trust. The inability of an issuer to pay the principal amount due upon the maturity of a Bond would result in a loss to the Trust.
Additional Considerations Regarding the Trusts
Most of the Bonds in the Portfolio of a State Trust are subject to redemption prior to their stated maturity date pursuant to sinking fund or call provisions. (See Part A-"Portfolio Summary as of Date of Deposit" for information relating to the particular State Trust described therein.) In general, a call or redemption provision is more likely to be exercised when the offering price valuation of a bond is higher than its call or redemption price, as it might be in periods of declining interest rates, than when such price valuation is less than the bond's call or redemption price. To the extent that a Bond was deposited in a State Trust at a price higher than the price at which it is redeemable, redemption will result in a loss of capital when compared with the original public offering price of the Units. Conversely, to the extent that a Bond was acquired at a price lower than the redemption price, redemption will result in an increase in capital when compared with the original public offering price of the Units. Monthly distributions will generally be reduced by the amount of the income which would otherwise have been paid with respect to redeemed bonds. The Estimated Current Return and Estimated Long-Term Return of the Units may be affected by such redemptions. Each Portfolio of Securities in Part A contains a listing of the sinking fund and call provisions, if any, with respect to each of the Bonds in a State Trust. Because certain of the Bonds may from time to time under certain circumstances be sold or redeemed or will mature in accordance with their terms and the proceeds from such events will be distributed to Unit holders and will not be reinvested, no assurance can be given that a State Trust will retain for any length of time its present size and composition. Neither the Sponsor nor the Trustee shall be liable in any way for any default, failure or defect in any Bond.
The Portfolio of the State Trust may consist of some Bonds whose current market values were below face value on the Date of Deposit. A primary reason for the market value of such Bonds being less than face value at maturity is that the interest coupons of such Bonds are at lower rates than the current market interest rate for comparably rated Bonds, even though at the time of the issuance of such Bonds the interest coupons thereon represented then prevailing interest rates on comparably rated Bonds then newly issued. Bonds selling at market discounts tend to increase in market value as they approach maturity when the principal amount is payable. A market discount tax-exempt Bond held to maturity will have a larger portion of its total return in the form of taxable ordinary income and less in the form of tax-exempt income than a comparable Bond bearing interest at current market rates. Under the provisions of the Internal Revenue Code in effect on the date of this Prospectus any ordinary income attributable to market discount will be taxable but will not be realized until maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit", the State Trust may contain or be concentrated in one or more of the classifications of Bonds referred to below. A State Trust is considered to be "concentrated" in a particular category when the Bonds in that category constitute 25% or more of the aggregate value of the Portfolio. (See Part A-"Portfolio Summary as of Date of Deposit" for information relating to the particular State Trust described therein.) An investment in Units of the State Trust should be made with an understanding of the risks that these investments may entail, certain of which are described below.
General Obligation Bonds. Certain of the Bonds in the Portfolio may be general obligations of a governmental entity that are secured by the taxing power of the 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 an entity's credit will depend on many factors, including an erosion of the tax base due to population declines, natural disasters, declines in the state's industrial base or 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.
As a result of the recent recession's adverse impact upon both their revenues and expenditures, as well as other factors, many state and local governments are confronting deficits and potential deficits which are the most severe in recent years. Many issuers are facing highly difficult choices about significant tax increases and/or spending reductions in order to restore budgetary balance. Failure to implement these actions on a timely basis could force the issuers to depend upon market access to finance deficits or cash flow needs.
In addition, certain of the Bonds in the State Trust may be obligations of issuers (including California issuers) who rely in whole or in part on ad valorem real property taxes as a source of revenue. Certain proposals, in the form of state legislative proposals or voter initiatives, to limit ad valorem 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 ad valorem real property taxes, has had a significant impact on the taxing powers of local governments and on the financial conditions of school districts and local governments in California. It is not possible at this time to predict the final impact of such measures, or of similar future legislative or constitutional measures, on school districts and local governments or on their abilities to make future payments on their outstanding debt obligations.
Industrial Development Revenue Bonds ("IDRs"). IDRs, including pollution control revenue bonds, are tax-exempt securities issued by states, municipalities, public authorities or similar entities ("issuers") to finance the cost of acquiring, constructing or improving various projects, including pollution control facilities and certain industrial development facilities. These projects are usually operated by corporate entities. IDRs are not general obligations of governmental entities backed by their taxing power. Issuers are only obligated to pay amounts due on the IDRs to the extent that funds are available from the unexpended proceeds of the IDRs or receipts or revenues of the issuer under arrangements between the issuer and the corporate operator of a project. These arrangements may be in the form of a lease, installment sale agreement, conditional sale agreement or loan agreement, but in each case the payments to the issuer are designed to be sufficient to meet the payments of amounts due on the IDRs.
IDRs are generally issued under bond resolutions, agreements or trust indentures pursuant to which the revenues and receipts payable under the issuer's arrangements with the corporate operator of a particular project have been assigned and pledged to the holders of the IDRs or a trustee for the benefit of the holders of the IDRs. In certain cases, a mortgage on the underlying project has been assigned to the holders of the IDRs or a trustee as additional security for the IDRs. In addition, IDRs are frequently directly guaranteed by the corporate operator of the project or by another affiliated company. Regardless of the structure, payment of IDRs is solely dependent upon the creditworthiness of the corporate operator of the project or corporate guarantor. Corporate operators or guarantors that are industrial companies may be affected by many factors which may have an adverse impact on the credit quality of the particular company or industry. These include cyclicality of revenues and earnings, regulatory and environmental restrictions, litigation resulting from accidents or environmentally-caused illnesses, extensive competition (including that of low-cost foreign companies), unfunded pension fund liabilities or off-balance sheet items, and financial deterioration resulting from leveraged buy-outs or takeovers. However, certain of the IDRs in the Portfolio may be additionally insured or secured by letters of credit issued by banks or otherwise guaranteed or secured to cover amounts due on the IDRs in the event of default in payment by an issuer.
Hospital and Health Care Facility Bonds. The ability of hospitals and other health care facilities to meet their obligations with respect to revenue bonds issued on their behalf is dependent on various factors, including the level of payments received from private third-party payors and government programs and the cost of providing health care services.
A significant portion of the revenues of hospitals and other health care facilities is derived from private third-party payors and government programs, including the Medicare and Medicaid programs. Both private third-party payors and government programs have undertaken cost containment measures designed to limit payments made to health care facilities. Furthermore, government programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially decrease the rate of program payments for health care facilities. There can be no assurance that payments under governmental programs will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients participating in such programs. In addition, there can be no assurance that a particular hospital or other health care facility will continue to meet the requirements for participation in such programs.
The costs of providing health care services are subject to increase as a result of, among other factors, changes in medical technology and increased labor costs. In addition, health care facility construction and operation is subject to federal, state and local regulation relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, rate-setting, and compliance with building codes and environmental laws. Facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. These regulatory requirements are subject to change and, to comply, it may be necessary for a hospital or other health care facility to incur substantial capital expenditures or increased operating expenses to effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims and legal actions by patients and others in the ordinary course of business. Although these claims are generally covered by insurance, there can be no assurance that a claim will not exceed the insurance coverage of a health care facility or that insurance coverage will be available to a facility. In addition, a substantial increase in the cost of insurance could adversely affect the results of operations of a hospital or other health care facility. The Clinton Administration may impose regulations which could limit price increases for hospitals or the level of reimbursements for third-party payors or other measures to reduce health care costs and make health care available to more individuals, which would reduce profits for hospitals. Some states, such as New Jersey, have significantly changed their reimbursement systems. If a hospital cannot adjust to the new system by reducing expenses or raising rates, financial difficulties may arise. Also, Blue Cross has denied reimbursement for some hospitals for services other than emergency room services. The lost volume would reduce revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at any time upon the sale by the issuer of the hospital facilities to a non-affiliated entity, if the hospital becomes subject to ad valorem taxation, or in various other circumstances. For example, certain hospitals may have the right to call bonds at par if the hospital may be legally required because of the bonds to perform procedures against specified religious principles or to disclose information that is considered confidential or privileged. Certain FHA-insured bonds may provide that all or a portion of these bonds, otherwise callable at a premium, can be called at par in certain circumstances. If a hospital defaults upon a bond obligation, the realization of Medicare and Medicaid receivables may be uncertain and, if the bond obligation is secured by the hospital facilities, legal restrictions on the ability to foreclose upon the facilities and the limited alternative uses to which a hospital can be put may severely reduce its collateral value.
The Internal Revenue Service is currently 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 be revoked. At this time, it is uncertain whether any of the hospital and health care facility bonds held by the State Trust will be affected by such audit proceedings.
Single Family and Multi-Family Housing Bonds. Multi-family housing revenue bonds and single family mortgage revenue bonds are state and local housing issues that have been issued to provide financing for various housing projects. Multi-family housing revenue bonds are payable primarily from the revenues derived from mortgage loans to housing projects for low to moderate income families. Single-family mortgage revenue bonds are issued for the purpose of acquiring from originating financial institutions notes secured by mortgages on residences.
Housing obligations are not general obligations of the issuer although certain obligations may be supported to some degree by Federal, state or local housing subsidy programs. Budgetary constraints experienced by these programs as well as the failure by a state or local housing issuer to satisfy the qualifications required for coverage under these programs or any legal or administrative determinations that the coverage of these programs is not available to a housing issuer, probably will result in a decrease or elimination of subsidies available for payment of amounts due on the issuer's obligations. The ability of housing issuers to make debt service payments on their obligations will also be affected by various economic and non-economic developments including, among other things, the achievement and maintenance of sufficient occupancy levels and adequate rental income in multi-family projects, the rate of default on mortgage loans underlying single family issues and the ability of mortgage insurers to pay claims, employment and income conditions prevailing in local markets, increases in construction costs, taxes, utility costs and other operating expenses, the managerial ability of project managers, changes in laws and governmental regulations and economic trends generally in the localities in which the projects are situated. Occupancy of multi-family housing projects may also be adversely affected by high rent levels and income limitations imposed under Federal, state or local programs.
All single family mortgage revenue bonds and certain multi-family housing revenue bonds are prepayable over the life of the underlying mortgage or mortgage pool, and therefore the average life of housing obligations cannot be determined. However, the average life of these obligations will ordinarily be less than their stated maturities. Single-family issues are subject to mandatory redemption in whole or in part from prepayments on underlying mortgage loans; mortgage loans are frequently partially or completely prepaid prior to their final stated maturities as a result of events such as declining interest rates, sale of the mortgaged premises, default, condemnation or casualty loss. Multi-family issues are characterized by mandatory redemption at par upon the occurrence of monetary defaults or breaches of covenants by the project operator. Additionally, housing obligations are generally subject to mandatory partial redemption at par to the extent that proceeds from the sale of the obligations are not allocated within a stated period (which may be within a year of the date of issue). To the extent that these obligations were valued at a premium when a Holder purchased Units, any prepayment at par would result in a loss of capital to the Holder and, in any event, reduce the amount of income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on qualification under Section 143 of the Internal Revenue Code of 1986, as amended (the "Code"), in the case of single family mortgage revenue bonds or Section 142(a)(7) of the Code or other provisions of Federal law in the case of certain multi-family housing revenue bonds (including Section 8 assisted bonds). These sections of the Code or other provisions of Federal law contain certain ongoing requirements, including requirements relating to the cost and location of the residences financed with the proceeds of the single family mortgage revenue bonds and the income levels of tenants of the rental projects financed with the proceeds of the multi-family housing revenue bonds. While the issuers of the bonds and other parties, including the originators and servicers of the single-family mortgages and the owners of the rental projects financed with the multi-family housing revenue bonds, generally covenant to meet these ongoing requirements and generally agree to institute procedures designed to ensure that these requirements are met, there can be no assurance that these ongoing requirements will be consistently met. The failure to meet these requirements could cause the interest on the bonds to become taxable, possibly retroactively to the date of issuance, thereby reducing the value of the bonds, subjecting the Holders to unanticipated tax liabilities and possibly requiring the Trustee to sell the bonds at reduced values. Furthermore, any failure to meet these ongoing requirements might not constitute an event of default under the applicable mortgage or permit the holder to accelerate payment of the bond or require the issuer to redeem the bond. In any event, where the mortgage is insured by the Federal Housing Administration, its consent may be required before insurance proceeds would become payable to redeem the mortgage bonds.
Power Facility Bonds. The ability of utilities to meet their obligations with respect to revenue bonds issued on their behalf is dependent on various factors, including the rates they may charge their customers, the demand for a utility's services and the cost of providing those services. Utilities, in particular investor-owned utilities, are subject to extensive regulations relating to the rates which they may charge customers. Utilities can experience regulatory, political and consumer resistance to rate increases. Utilities engaged in long-term capital projects are especially sensitive to regulatory lags in granting rate increases. Any difficulty in obtaining timely and adequate rate increases could adversely affect a utility's results of operations.
The demand for a utility's services is influenced by, amoung other factors, competition, weather conditions and economic conditions. Electric utilities, for example, have experienced increased competition as a result of the availability of other energy sources, the effects of conservation on the use of electricity, self-generation by industrial customers and the generation of electricity by co-generators and other independent power producers. Also, increased competition will result if federal regulators determine that utilities must open their transmission lines to competitors. Utilities which distribute natural gas also are subject to competition from alternative fuels, including fuel oil, propane and coal.
The utility industry is an increasing cost business making the cost of generating electricity more expensive and heightening its sensitivity to regulation. A utility's costs are influenced by the utility's cost of capital, the availability and cost of fuel and other factors. In addition, natural gas pipeline and distribution companies have incurred increased costs as a result of long-term natural gas purchase contracts containing "take or pay" provisions which require that they pay for natural gas even if natural gas is not taken by them. There can be no assurance that a utility will be able to pass on these increased costs to customers through increased rates. Utilities incur substantial capital expenditures for plant and equipment. In the future they will also incur increasing capital and operating expenses to comply with environmental legislation such as the Clean Air Act of 1990, and other energy, licensing and other laws and regulations relating to, among other things, air emissions, the quality of drinking water, waste water discharge, solid and hazardous substance handling and disposal, and siting and licensing of facilities. Environmental legislation and regulations are changing rapidly and are the subject of current public policy debate and legislative proposals. It is increasingly likely that some or many utilities will be subject to more stringent environmental standards in the future that could result in significant capital expenditures. Future legislation and regulation could include, among other things, regulation of so-called electromagnetic fields associated with electric transmission and distribution lines as well as emissions of carbon dioxide and other so-called greenhouse gases associated with the burning of fossil fuels. Compliance with these requirements may limit a utility's operations or require substantial investments in new equipment and, as a result, may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various external factors including (a) the effects of inflation upon the costs of operation and construction, (b) substantially increased capital outlays and longer construction periods for larger and more complex new generating units, (c) uncertainties in predicting future load requirements, (d) increased financing requirements coupled with limited availability of capital, (e) exposure to cancellation and penalty charges on new generating units under construction, (f) problems of cost and availability of fuel, (g) compliance with rapidly changing and complex environmental, safety and licensing requirements, (h) litigation and proposed legislation designed to delay or prevent construction of generating and other facilities, (i) the uncertain effects of conservation on the use of electric energy, (j) uncertainties associated with the development of a national energy policy, (k) regulatory, political and consumer resistance to rate increases and (l) increased competition as a result of the availability of other energy sources. These factors may delay the construction and increase the cost of new facilities, limit the use of, or necessitate costly modifications to, existing facilities, impair the access of electric utilities to credit markets, or substantially increase the cost of credit for electric generating facilities. The Sponsor cannot predict at this time the ultimate effect of such factors on the ability of any issuers to meet their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law in October, 1992, makes it mandatory for a utility to permit non-utility generators of electricity access to its transmission system for wholesale customers, thereby increasing competition for electric utilities. NEPA also mandated demand-side management policies to be considered by utilities. NEPA prohibits the Federal Energy Regulatory Commission from mandating electric utilities to engage in retail wheeling, which is competition among suppliers of electric generation to provide electricity to retail customers (particularly industrial retail customers) of a utility. However, under NEPA, a state can mandate retail wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S. Congress regarding environmental damage resulting from the use of fossil fuels. Congressional support for the increased regulation of air, water, and soil contaminants is building and there are a number of pending or recently enacted legislative proposals which may affect the electric utility industry. In particular, on November 15, 1990, legislation was signed into law that substantially revises the Clean Air Act (the "1990 Amendments"). The 1990 Amendments seek to improve the ambient air quality throughout the United States by the year 2000. A main feature of the 1990 Amendments is the reduction of sulphur dioxide and nitrogen oxide emissions caused by electric utility power plants, particularly those fueled by coal. Under the 1990 Amendments the U.S. Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide emissions by 1993. The sulphur dioxide reduction will be achieved in two phases. Phase I addresses specific generating units named in the 1990 Amendments. In Phase II the total U.S. emissions will be capped at 8.9 million tons by the year 2000. The 1990 Amendments contain provisions for allocating allowances to power plants based on historical or calculated levels. An allowance is defined as the authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic air emissions from electric generating units pending the results of several federal government studies to be conducted over the next three to four years with respect to anticipated hazards to public health, available corrective technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to risks inherent in the nuclear industry. These risks include exposure to new requirements resulting from extensive federal and state regulatory oversight, public controversy, decomissioning costs, and spent fuel and radioactive waste disposal issues. While nuclear power construction risks are no longer of paramount concern, the emerging issue is radioactive waste disposal. In addition, nuclear plants typically require substantial capital additions and modifications throughout their operating lives to meet safety, environmental, operational and regulatory requirements and to replace and upgrade various plant systems. The high degree of regulatory monitoring and controls imposed on nuclear plants could cause a plant to be out of service or on limited service for long periods. When a nuclear facility owned by an investor-owned utility or a state or local municipality is out of service or operating on a limited service basis, the utility operator or its owners may be liable for the recovery of replacement power costs. Risks of substantial liability also arise from the operation of nuclear facilities and from the use, handling, and possible radioactive emissions associated with nuclear fuel. Insurance may not cover all types or amounts of loss which may be experienced in connection with the ownership and operation of a nuclear plant and severe financial consequences could result from a significant accident or occurrence. The Nuclear Regulatory Commission has promulgated regulations mandating the establishment of funded reserves to assure financial capability for the eventual decommissioning of licensed nuclear facilities. These funds are to be accrued from revenues in amounts currently estimated to be sufficient to pay for decommissioning costs.
The ability of state and local joint action power agencies to make payments on bonds they have issued is dependent in large part on payments made to them pursuant to power supply or similar agreements. Courts in Washington, Oregon and Idaho have held that certain agreements between the Washington Public Power Supply System ("WPPSS") and the WPPSS participants are unenforceable because the participants did not have the authority to enter into the agreements. While these decisions are not specifically applicable to agreements entered into by public entities in other states, they may cause a reexamination of the legal structure and economic viability of certain projects financed by joint power agencies, which might exacerbate some of the problems referred to above and possibly lead to legal proceedings questioning the enforceability of agreements upon which payment of these bonds may depend.
Water and Sewer Revenue Bonds. Water and sewer bonds are generally payable from user fees. The ability of state and local water and sewer authorities to meet their obligations may be affected by failure of municipalities to utilize fully the facilities constructed by these authorities, economic or population decline and resulting decline in revenue from user charges, rising construction and maintenance costs and delays in construction of facilities, impact of environmental requirements, failure or inability to raise user charges in response to increased costs, the difficulty of obtaining or discovering new supplies of fresh water, the effect of conservation programs and the impact of "no growth" zoning ordinances. In some cases this ability may be affected by the continued availability of Federal and state financial assistance and of municipal bond insurance for future bond issues.
University and College Bonds. The ability of universities and colleges to meet their obligations is dependent upon various factors, including the size and diversity of their sources of revenues, enrollment, reputation, management expertise, the availability and restrictions on the use of endowments and other funds, the quality and maintenance costs of campus facilities, and, in the case of public institutions, the financial condition of the relevant state or other governmental entity and its policies with respect to education. The institution's ability to maintain enrollment levels will depend on such factors as tuition costs, demographic trends, geographic location, geographic diversity and quality of the student body, quality of the faculty and the diversity of program offerings.
Legislative or regulatory action in the future at the Federal, state or local level may directly or indirectly affect eligibility standards or reduce or eliminate the availability of funds for certain types of student loans or grant programs, including student aid, research grants and work-study programs, and may affect indirect assistance for education.
Lease Rental Bonds. Lease rental bonds are issued for the most part by governmental authorities that have no taxing power or other means of directly raising revenues. Rather, the authorities are financing vehicles created solely for the construction of buildings (administrative offices, convention centers and prisons, for example) or the purchase of equipment (police cars and computer systems, for example) that will be used by a state or local government (the "lessee"). Thus, the bonds are subject to the ability and willingness of the lessee government to meet its lease rental payments which include debt service on the bonds. Willingness to pay may be subject to changes in the views of citizens and government officials as to the essential nature of the finance project. Lease rental bonds are subject, in almost all cases, to the annual appropriation risk, i.e., the lessee government is not legally obligated to budget and appropriate for the rental payments beyond the current fiscal year. These bonds are also subject to the risk of abatement in many states-rental bonds cease in the event that damage, destruction or condemnation of the project prevents its use by the lessee. (In these cases, insurance provisions and reserve funds designed to alleviate this risk become important credit factors). In the event of default by the lessee government, there may be significant legal and/or practical difficulties involved in the reletting or sale of the project. Some of these issues, particularly those for equipment purchase, contain the so-called "substitution safeguard", which bars the lessee government, in the event it defaults on its rental payments, from the purchase or use of similar equipment for a certain period of time. This safeguard is designed to insure that the lessee government will appropriate the necessary funds even though it is not legally obligated to do so, but its legality remains untested in most, if not all, states.
Capital Improvement Facility Bonds. The Portfolio of a State Trust may contain Bonds which are in the capital improvement facilities category. Capital improvement bonds are bonds issued to provide funds to assist political subdivisions or agencies of a state through acquisition of the underlying debt of a state or local political subdivision or agency which bonds are secured by the proceeds of the sale of the bonds, proceeds from investments and the indebtedness of a local political subdivision or agency. The risks of an investment in such bonds include the risk of possible prepayment or failure of payment of proceeds on and default of the underlying debt.
Solid Waste Disposal Bonds. Bonds issued for solid waste disposal facilities are generally payable from tipping fees and from revenues that may be earned by the facility on the sale of electrical energy generated in the combustion of waste products. The ability of solid waste disposal facilities to meet their obligations depends upon the continued use of the facility, the successful and efficient operation of the facility and, in the case of waste-to-energy facilities, the continued ability of the facility to generate electricity on a commercial basis. All of these factors may be affected by a failure of municipalities to fully utilize the facilities, an insufficient supply of waste for disposal due to economic or population decline, rising construction and maintenance costs, any delays in construction of facilities, lower-cost alternative modes of waste processing and changes in environmental regulations. Because of the relatively short history of this type of financing, there may be technological risks involved in the satisfactory construction or operation of the projects exceeding those associated with most municipal enterprise projects. Increasing environmental regulation on the federal, state and local level has a significant impact on waste disposal facilities. While regulation requires more waste producers to use waste disposal facilities, it also imposes significant costs on the facilities. These costs include compliance with frequently changing and complex regulatory requirements, the cost of obtaining construction and operating permits, the cost of conforming to prescribed and changing equipment standards and required methods of operation and, for incinerators or waste-to-energy facilities, the cost of disposing of the waste residue that remains after the disposal process in an environmentally safe manner. In addition, waste disposal facilities frequently face substantial opposition by environmental groups and officials to their location and operation, to the possible adverse effects upon the public health and the environment that may be caused by wastes disposed of at the facilities and to alleged improper operating procedures. Waste disposal facilities benefit from laws which require waste to be disposed of in a certain manner but any relaxation of these laws could cause a decline in demand for the facilities' services. Finally, waste-to-energy facilities are concerned with many of the same issues facing utilities insofar as they derive revenues from the sale of energy to local power utilities (see Power Facility Bonds above).
Moral Obligation Bonds. The State Trust may also 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 municipality in question. Even though the state 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 legislature and accordingly does not constitute a legally enforceable obligation or debt of the state. The agencies or authorities generally have no taxing power.
Refunded Bonds. 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 to date, however, bonds which were thought to be escrowed to maturity have been called for redemption prior to maturity.
Airport, Port and Highway Revenue Bonds. Certain facility revenue bonds are payable from and secured by the revenues from the ownership and operation of particular facilities, such as airports (including airport terminals and maintenance facilities), bridges, marine terminals, turnpikes and port authorities. For example, the major portion of gross airport operating income is generally derived from fees received from signatory airlines pursuant to use agreements which consist of annual payments for airport use, occupancy of certain terminal space, facilities, service fees, concessions and leases. Airport operating income may therefore be affected by the ability of the airlines to meet their obligations under the use agreements. The air transport industry is experiencing significant variations in earnings and traffic, due to increased competition, excess capacity, increased aviation fuel costs, deregulation, traffic constraints, the recent recession and other factors. As a result, several airlines are experiencing severe financial difficulties. Several airlines including America West Airlines have sought protection from their creditors under Chapter 11 of the Bankruptcy Code. In addition, other airlines such as Midway Airlines, Inc., Eastern Airlines, Inc. and Pan American Corporation have been liquidated. However, within the past few months Northwest Airlines, Continental Airlines and Trans World Airlines have emerged from bankruptcy. The Sponsor cannot predict what effect these industry conditions may have on airport revenues which are dependent for payment on the financial condition of the airlines and their usage of the particular airport facility.
Similarly, payment on bonds related to other facilities is dependent on revenues from the projects, such as use fees from ports, tolls on turnpikes and bridges and rents from buildings. Therefore, payment may be adversely affected by reduction in revenues due to such factors and increased cost of maintenance or decreased use of a facility, lower cost of alternative modes of transportation or scarcity of fuel and reduction or loss of rents.
Special Tax Bonds. Special tax bonds are payable from and secured by the revenues derived by a municipality from a particular tax such as 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. Special tax bonds are not secured by the general tax revenues of the municipality, and they do not represent general obligations of the municipality. Therefore, payment on special tax bonds may be adversely affected by a reduction in revenues realized from the underlying special tax due to a general decline in the local economy or population or due to a decline in the consumption, use or cost of the goods and services that are subject to taxation. Also, should spending on the particular goods or services that are subject to the special tax decline, the municipality may be under no obligation to increase the rate of the special tax to ensure that sufficient revenues are raised from the shrinking taxable base.
Tax Allocation Bonds. Tax allocation bonds are typically secured by incremental tax revenues collected on property within the areas where redevelopment projects, financed by bond proceeds are located ("project areas"). Such payments are expected to be made from projected increases in tax revenues derived from higher assessed values of property resulting from development in the particular project area and not from an increase in tax rates. Special risk considerations include: reduction of, or a less than anticipated increase in, taxable values of property in the project area, caused either by economic factors beyond the Issuer's control (such as a relocation out of the project area by one or more major property owners) or by destruction of property due to natural or other disasters; successful appeals by property owners of assessed valuations; substantial delinquencies in the payment of property taxes; or imposition of any constitutional or legislative property tax rate decrease.
Transit Authority Bonds. Mass transit is generally not self-supporting from fare revenues. Therefore, additional financial resources must be made available to ensure operation of mass transit systems as well as the timely payment of debt service. Often such financial resources include Federal and state subsidies, lease rentals paid by funds of the state or local government or a pledge of a special tax such as a sales tax or a property tax. If fare revenues or the additional financial resources do not increase appropriately to pay for rising operating expenses, the ability of the issuer to adequately service the debt may be adversely affected.
Convention Facility Bonds. The Portfolio of a State Trust may contain Bonds of issuers in the convention facilities category. Bonds in the convention facilities category include special limited obligation securities issued to finance convention and sports facilities payable from rental payments and annual governmental appropriations. The governmental agency is not obligated to make payments in any year in which the monies have not been appropriated to make such payments. In addition, these facilities are limited use facilities that may not be used for purposes other than as convention centers or sports facilities.
Puerto Rico. The Portfolio may contain bonds of issuers which will be affected by general economic conditions in Puerto Rico. Puerto Rico's unemployment rate remains significantly higher than the U.S. unemployment rate. Furthermore, the economy is largely dependent for its development upon U.S. policies and programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of Commonwealth and Federal investment incentive programs. For example, Section 936 of the Internal Revenue Code (the "Code") provides for a credit against Federal income taxes for U.S. companies operating on the island if certain requirements are met. The Omnibus Budget Reconciliation Act of 1993 imposes limits on such credit, effective for tax years beginning after 1993. In addition, from time to time proposals are introduced in Congress which, if enacted into law, would eliminate some or all of the benefits of Section 936. Although no assessment can be made at this time of the precise effect of such limitation, it is expected that the limitation of Section 936 credits would have a negative impact on Puerto Rico's economy.
Aid for Puerto Rico's economy has traditionally depended heavily on Federal programs, and current Federal budgetary policies suggest that an expansion of aid to Puerto Rico is unlikely. An adverse effect on the Puerto Rican economy could result from other U.S. policies, including a reduction of tax benefits for distilled products, further reduction in transfer payment programs such as food stamps, curtailment of military spending and policies which could lead to a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican electorate chose to continue Puerto Rico's Commonwealth status. Previously proposed legislation, which was not enacted, would have preserved the federal tax exempt status of the outstanding debts of Puerto Rico and its public corporations regardless of the outcome of the referendum, to the extent that similar obligations issued by states are so treated and subject to the provisions of the Code currently in effect. There can be no assurance that any pending or future legislation finally enacted will include the same or similar protection against loss of tax exemption. The November 1993 plebiscite can be expected to have both direct and indirect consequences on such matters as the basic characteristics of future Puerto Rico debt obligations, the markets for these obligations, and the types, levels and quality of revenue sources pledged for the payment of existing and future debt obligations. Such possible consequences include, without limitation, legislative proposals seeking restoration of the status of Section 936 benefits otherwise subject to the limitations discussed above. However, no assessment can be made at this time of the economic and other effects of a change in federal laws affecting Puerto Rico as a result of the November 1993 plebiscite.
Litigation and Legislation. To the best knowledge of the Sponsor, there is no litigation pending as of the Initial Date in respect of any Bonds which might reasonably be expected to have a material adverse effect upon the State Trust. At any time after the Initial Date of Deposit, litigation may be initiated on a variety of grounds, or legislation may be enacted, with respect to Bonds in the Trust. Litigation, for example, challenging the issuance of pollution control revenue bonds under environmental protection statutes may affect the validity of 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 the Bond has been validly issued and that the interest thereon is exempt from Federal income tax. 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 Act, a political subdivision or public agency or instrumentality of any state, including municipalities, may proceed to restructure or otherwise alter the terms of its obligations, including those of the type comprising the State Trust's Portfolio. The Sponsor is unable to predict what effect, if any, this legislation might have on the State Trust.
From time to time Congress considers proposals to tax the interest on state and local obligations, such as the Bonds. The Supreme Court clarified in South Carolina v. Baker (decided 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 adversely affect an investment in Units. Holders are urged to consult their own tax advisers.
Tax Exemption. 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 Holder) but may be subject to state and local taxes. As discussed under Taxes below, 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.
Moreover, the Internal Revenue Service announced on June 14, 1993 that it will be expanding its examination program with respect to tax-exempt bonds. The expanded examination program will consist of, among other measures, increased enforcement against abusive transactions, broader audit coverage (including the expected issuance of audit guidelines) and expanded compliance achieved by means of expected revisions to the tax-exempt bond information return forms. At this time, it is uncertain whether the tax exempt status of any of the Bonds would be affected by such proceedings, or whether such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on the Bond should ultimately be determined to be taxable, the Bond would become due and payable by its issuer, and, in addition, may provide that any related letter of credit or other security could be called upon if the issuer failed to satisfy all or part of its obligation. In other cases, however, a Bond may not provide for the acceleration or redemption of the Bond or a call upon the related letter of credit or other security upon a determination of taxability. In those cases in which a Bond does not provide for acceleration or redemption or in which both the issuer and the bank or other entity issuing the letter of credit or other security are unable to meet their obligations to pay the amounts due on the Bond as a result of a determination of taxability, the Trustee would be obligated to sell the Bond and, since it would be sold as a taxable security, it is expected that it would have to be sold at a substantial discount from current market price. In addition, as mentioned above, under certain circumstances Holders could be required to pay income tax on interest received prior to the date on which the interest is determined to be taxable.
Potential purchasers of the Units of a State Trust should consider the fact that the Trust's Portfolio consists primarily of Bonds issued by the state for which such State Trust is named or its municipalities or authorities and realize the substantial risks associated with an investment in such Bonds. Moreover, each State Trust is subject to certain additional state risk factors. The Sponsor believes the discussions of risk factors summarized below describe some of the more significant aspects of the State Trusts. The sources of such information are the official statements of issuers as well as other publicly available documents. While the Sponsor has not independently verified this information, it has no reason to believe that such information is not correct in all material respects. Investments in a State Trust or State Trusts should be made with an understanding that the value of the underlying Portfolio may decline with increases in interest rates.
California's economy is the largest among the 50 states. The State's January 1, 1992 population of 31 million represented approximately 12.0% of the total United States population. Total employment was about 14 million, the majority of which was in the service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced the worst economic, fiscal and budget conditions since the 1930s. Construction, manufacturing (especially aerospace), and financial services, among others, have all been severely affected. Job losses have been the worst of any post-war recession and have continued through the end of 1993. Employment levels are expected to stabilize before net employment starts to increase and pre-recession job levels are not expected to be reached for several more years. Unemployment is expected to remain above 9% through 1994.
The recession has seriously affected State tax revenues, which basically mirror economic conditions. It has also caused increased expenditures for health and welfare programs. The State is also facing a structural imbalance in its budget with the largest programs supported by the General Fund--K-14 education (kindergarten through community college), health, welfare and corrections--growing at rates significantly higher than the growth rates for the principal revenue sources of the General Fund. As a result, the State entered a period of chronic budget imbalance, with expenditures exceeding revenues for four of the last five fiscal years. Revenues declined in 1990-91 over 1989-90, the first time since the 1930s. By June 30, 1993, the State's General Fund had an accumulated deficit, on a budget basis, of approximately $2.8 billion. (Special Funds account for revenues obtained from specific revenue sources, and which are legally restricted to expenditures for specific purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction Plan to repay this deficit over two years. The original budget for 1993-94 reflected revenues which exceeded expenditures by a approximately $2.8 billion. As a result of continuing recession, the excess of revenues over expenditures for the fiscal year is now expected to be only about $500 million. Thus, the accumulated budget deficit at June 30, 1994 is now estimated by the Department of Finance to be approximately $2 billion, and the deficit will not be retired by June 30, 1995 as planned. The accumulated budget deficits over the past several years, together with expenditures for school funding which have not been reflected in the budget, and the reduction of available internal borrowable funds, have combined to significantly depleted the State's cash resources to pay as ongoing expenses. In order to meet its cash needs, the State has had to rely for several years on a series of external borrowings, including borrowings past the end of a fiscal year.
The State's tax revenue clearly reflects sharp declines in employment, income and retail sales on a scale not seen in over 50 years. The May 1994 revision to the 1994-95 Governor's Budget (the "May Revision"), released May 20, 1994, assumes that the State will start recovery from recessionary conditions in 1994, with a modest upturn beginning in 1994 and continuing into 1995, a year later than predicted in the May 1993 Department of Finance economic projection. Pre-recession job levels are not expected to be reached until 1997.
However, there is growing evidence that California is showing signs of an economic turnaround, and the May Revision is revised upward from the Governor's January Budget forecast. Since the Governor's January Budget forecast, 1993 non-farm employment has been revised upward by 31,000 jobs. Employment in the early months of 1994 has shown encouraging signs of growth, several months sooner than was contemplated in the January Budget forecast. Between December 1993 and April 1994, payrolls are up by 50,000 jobs.
On January 17, 1994 the Northridge earthquake, measuring an estimated 6.8 on the Richter Scale, struck Los Angeles. Significant property damage to private and public facilities occurred in a four-county area including northern Los Angeles County, Ventura County, and parts of Orange and San Bernadino Counties, which were declared as State and federal disaster areas by January 18. Current estimates of total property damage (private and public) are in the range of $20 billion or more, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in the areas, including large manufacturing and commercial buildings and all modern high-rise offices, survived the earthquake with minimal or no damage, validating the cumulative effect of strict building codes and thorough preparation for such emergency by the State and local agencies.
Damage to State-owned facilities included transportation corridors and facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and 210. Most of the major highways (Interstates 5 and 10) have now been reopened. The campus at California State University Northridge (very near the epicenter) suffered an estimated $350 million damage, resulting in the temporary closure of the campus. lt reopened using borrowed facilities elsewhere and many temporary structures. There was also some damage to the University of California at Los Angeles and to the Van Nuys State Office Building (now open after a temporary closure). Overall, except for the temporary road and bridge closures, and CSU-Northridge, the earthquake did not and is not expected to significantly affect State government operations.
The State in conjunction with the federal government is committed to providing assistance to local governments, individuals and businesses suffering damage as a result of the earthquake, as well as to provide for the repair and replacement of State owned facilities. The federal government has provided substantial earthquake assistance. The President immediately allocated some available disaster funds, and Congress has approved additional funds for a total of $9.5 billion of federal funds for earthquake relief, including assistance to homeowners and small businesses, and costs for repair of damaged public facilities. lt is now estimated that the overall effect of the earthquake on the regional and State economy will not be serious. The earthquake may have dampened economic activity briefly during late January and February, but the rebuilding efforts are now adding a small measure of stimulus.
Sectors which are now contributing to California's recovery include construction and related manufacturing, wholesale and retail trade, transportation and several service industries such as amusements and recreation, business services and management consulting. Electronics is showing modest growth and the rate of decline in aerospace manufacturing is slowly diminishing. These trends are expected to continue, and by next year, most of the restructuring in the finance and utilities industries should be nearly completed. As a result of these factors, average 1994 non-farm employment is now forecast to maintain 1993 levels compared to a projected 0.6% decline in the Governor's January Budget forecast. 1995 employment is expected to be up 1.6% compared to 0.7% in the January Budget forecast.
The Northridge earthquake resulted in a downward revision of this year's personal income growth from 4% in the Governor's January Budget forecast to 3.6%. However, this decline is more than explained by the $5.5 billion charge against rental and proprietor's income---equal to 0.8% of total income reflecting uninsured damage from the quake. Next year, without the quake's effects, income is projected to grow 6.1% compared to 5% projected in the January Budget forecast. Without the quake's effects, income was little changed in the May Revision compared to the January Budget forecast.
The housing forecast remains essentially unchanged from the January Budget forecast. Although existing sales have strengthened and subdivision surveys indicated increased new home sales, building permits are up only slightly from recession lows. Gains are expected in the months ahead, but higher mortgage interest rates will dampen the upturn. Essentially, the Northridge earthquake adds a few thousand housing units to the forecast, but this effect is offset by higher interest rates.
Interest rates represent one of several downside risks to the forecast. The rise in interest rates has occurred more rapidly than contemplated in the Governor's January Budget forecast. In addition to affecting housing, higher rates may also dampen consumer spending, given the high percentage of California homeowners with adjustable-rate mortgages. The May Revision forecast includes a further rise in the Federal Funds rate to nearly 5% by the beginning of 1995. Should rates rise more steeply, housing and consumer spending would be adversely affected.
The unemployment upturn is still tenuous. The Employment Development Department revised down February's employment gain and March was revised to a small decline. Unemployment rates in California have been volatile since January, ranging from 10.1% to a low of 8.6%, with July's figure at 9%. The small sample size coupled with changes made to the survey instrument in January contributed to this volatility.
The Governor's Budget, introduced on January 8, 1993, proposed General Fund expenditures of $37.3 billion, with projected revenues of $39.9 billion. To balance the budget in the face of declining revenues, the Governor proposed a series of revenue shifts from local government, reliance on increased federal aid, and reductions in State spending.
The May Revision of the Governor's budget, released on May 20,1993, projected the State would have an accumulated deficit of about $2.75 billion by June 30,1993, essentially unchanged from the prior year. The Governor proposed to eliminate this deficit over an 18-month period. Unlike previous years, the Govenor's Budget and May Revision did not calculate a "gap" to be closed, but rather set forth revenue and expenditure forecasts and proposals designed to produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993, along with implementing legislation. The Governor vetoed about $71 million in spending. With enactment of the Budget Act, the State carried out its regular cash flow borrowing program for the fiscal year with the issuance of $ billion of revenue anticipation notes maturing June 28, 1994.
The 1993-94 Budget Act was predicated on revenue and transfer estimates of $40.6 billion, $400 million below 1992-93 (and the second consecutive year of actual decline). The principal reasons for declining revenue were the continued weak economy and the expiration (or repeal) of three fiscal steps taken in 1991 a half cent temporary sales tax, a deferral -of operating loss carryforwards, and repeal by initiative of a sales tax on candy and snack foods.
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9 billion, an increase of 2.9% over 1992-93. The 1993-94 Budget Act included General Fund expenditures of $38.5 billion (a 6.3% reduction from projected 1992-93 expenditures of $41.1 billion), in order to keep a balanced budget within the available revenues. The Budget also included Special Fund expenditures of $12.1 billion, a 4.2% increase. The Budget Act reflected the following major adjustments:
1. Changes in local government financing to shift about $2.6 billion in property taxes from cities, counties, special districts and redevelopment agencies to school and community college districts. The property tax losses for cities and counties were offset in part by additional sales tax revenues and relief from some state mandated programs. Litigation by local governments challenging this shift has so far been unsuccessful. In November 1993 the voters approved the permanent extension of the 0.5% sales tax for local public safety purposes.
2. The Budget projected K-12 Proposition 98 funding on a cash basis at the same per-pupil level as 1992-93 by-providing schools a $609 million loan payable from future years' Proposition 98 funds.
3. The Budget assumed receipt of $692 million in aid to the State from the federal government to offset health and welfare costs associated with foreign immigrants living in the State. About $411 million of this amount was one-time funding. Congress ultimately appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs.
5. A 2-year suspension of the renters' tax credit ($390 million expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of payment to the Public Employees Retirement Fund ($339 million) and a change in accounting for debt service from accrual to cash basis, saving $107 million.
Administration reports during the course of the 1993-94 fiscal year have indicated that, although economic recovery appears to have started in the second half of the fiscal year, recessionary conditions continued longer than had been anticipated when the 1993-94 Budget Act was adopted. Overall, revenues for the 1993-94 fiscal year were about $800 million lower than original projections, and expenditures were about $780 million higher, primarily because of higher health and welfare caseloads, lower property taxes, which require greater State support for K-14 education to make up the shortfall, and lower than anticipated federal government payments for immigration-related costs. The most recent reports, however, in May and June 1994, indicated that revenues in the second half of the 1993-94 fiscal year have been very close to the projections made in the Governor's Budget of January 10, 1994, which is consistent with a slow turnaround in the economy.
During the 1993-94 fiscal year, the State implemented the Deficit Reduction Plan, which was a part of the 1993-94 Budget Act, by issuing $1.2 billion of revenue anticipation warrants in February 1994, maturing December 21, 1994. This borrowing reduced the cash deficit at the end of the 1993-94 fiscal year. Nevertheless, because of the $1.5 billion variance from the original Budget Act assumption, the General Fund ended the fiscal year at June 30, 1994 carrying forward an accumulated deficit of approximately $2 billion. Because of the revenue shortfall and the State's reduced internal borrowing cash resources, in addition to the $1-2 billion of revenue anticipation warrants issued as part of the Deficit Reduction Plan, the State issued an additional $2 billion of revenue anticipation warrants, maturing July 26,1994. which were needed to fund the State's obligations and expenses through the end of the 1993-94 fiscal year.
The 1994-95 fiscal year represents the fourth consecutive year the Governor and Legislature were faced with a very difficult budget environment to produce a balanced budget. Many program cuts and budgetary adjustments have already been made in the last three years. The Governor's May Revision to his Budget proposal recognized that the accumulated deficit could not be repaid in one year, and proposed a two-year solution. The May Revision sets forth revenue and expenditure forecasts and revenue and expenditure proposals which result in operating surpluses for the budget for both 1994-95 and 1995-96, and lead to the elimination of the accumulated deficit, estimated at about $2 billion at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects revenues and transfers of $41.9 billion, about $2.1 billion higher than revenues in 1993-94. This reflects the Administration's forecast of an improved economy. Also included in this figure is the projected receipt of about $360 million from the Federal Government to reimburse the State for the cost of incarcerating undocumented immigrants. The State will not know how much the Federal Government will actually provide until the Federal fiscal year 1995 Budget is completed, which is expected to be by October 1994. The Legislature took no action on a proposal in the Governor s January Budget to undertake expansion of the transfer of certain programs to counties, which would also have transferred to counties 0.5% of the State current sales tax. The Budget Act projects Special Fund revenues of $12.1 billion, a decrease of 2.4% from 1993-94 estimated levels.
The 1994-95 Budget Act projects General Fund expenditures of $40.9 billion, an increase of $1.6 billion over 1993-94. The Budget Act also projects Special Fund expenditures of $13.7 billion, a 5.4% increase over 1993-94 estimated expenditures. The principal features of the Budget Act were the following:
1. Receipt of additional federal aid in 1994-95 of about $400 million for costs of refugee assistance and medical care for undocumented aliens, thereby offsetting a similar General Fund cost. The State will not know how much of these funds it will receive until the Federal fiscal year 1994 Budget is passed.
2. Reductions of approximately $l.l billion in health and welfare programs.
3. A General Fund increase of approximately $38 million in support for the University of California and $65 million for the California State University. It is anticipated that student fees for the U.C. and the C.S.U will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by $526 million from the 1993-94 levels, representing an increase for enrollment growth and inflation. Consistent with previous budget agreements, Proposition 98 funding provides approximately $4,217 per student for K-12 schools, equal to the level in the past three years.
5. Legislation enacted with the Budget Act clarifies laws passed in 1992 and 1993 requiring counties and other local agencies to transfer funds to local school districts, thereby reducing State aid. Some counties had implemented programs providing less moneys to schools if there were redevelopment agencies projects. The legislation bans this method of transfers.
6. The Budget Act provides funding for anticipated growth in the State's prison inmate population, including provisions for implementing recent legislation (the so-called "Three Strikes" law) which requires mandatory life sentences for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund transfers ($255 million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation enacted for the 1993-94 Budget, the renters' tax credit was suspended for 1993 and 1994. A ballot proposition to permanently restore the renters' credit after this year failed at the June 1994 election. The Legislature enacted a further one-year suspension of the renters' tax credit, saving about $390 million in the 1995-96 fiscal year. The 1994-95 Budget assumes that the State will use a cash flow borrowing program in 1994-95 which combines one-year notes and warrants. Issuance of the warrants allows the State to defer repayment of approximately $1 billion of its accumulated budget deficit into the 1995-96 fiscal year.
THE FOREGOING DISCUSSION OF THE 1993-94 AND 1994-1995 FISCAL YEAR BUDGETS IS BASED IN LARGE PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT DOCUMENT, THE STATE INDICATED THAT ITS DISCUSSION OF THE 1994-95 FISCAL YEAR BUDGET WAS BASED ON ESTIMATES AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
The State is subject to an annual appropriations limit imposed by Article XIII B of the State Constitution (the "Appropriations Limit"), and is prohibited from spending "appropriations subject to limitation" in excess of the Appropriations Limit. Article XIIIB, originally adopted in 1979, was modified substantially by Propositions 98 and 111 in 1988 and 1990, respectively. "Appropriations subject to limitation" are authorizations to spend "proceeds of taxes", which consist of tax revenues and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed the reasonable cost of providing the regulation, product or service. The Appropriations Limit is based on the limit for the prior year, adjusted annually for certain changes, and is tested over consecutive two-year periods. Any excess of the aggregate proceeds of taxes received over such two-year period above the combined Appropriation Limits for those two years is divided equally between transfers to K-14 districts and refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of certain bonds, court or federally mandated costs, and, pursuant to Proposition 111, qualified capital outlay projects and appropriations or revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. Some recent initiatives were structured to create new tax revenues dedicated to specific uses and expressly exempted from the Article XIIIB limits. The Appropriations Limit may also be exceeded in cases of emergency arising from civil disturbance or natural disaster declared by the Governor and approved by two-thirds of the Legislature. If not so declared and approved, the Appropriations Limit for the next three years must be reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also establishes a minimum level of state funding for school and community college districts and requires that excess revenues up to a certain limit be transferred to schools and community college districts instead of returned to the taxpayers. Determination of the minimum level of funding is based on several tests set forth in Proposition 98. During fiscal year 1991-92 revenues were smaller than expected, thus reducing the payment owed to schools in 1991-92 under alternate "test" provisions. In response to the changing revenue situation, and to fully fund the Proposition 98 guarantee in the 1991-92 and 1992-93 fiscal years without exceeding it, the Legislature enacted legislation to reduce 1991-92 appropriations. The amount budgeted to schools but which exceeded the reduced appropriation was treated as a non-Proposition 98 short-term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion of the amount budgeted to K-14 schools was designated to "repay" the prior year loan, thereby reducing cash outlays in 1992-93 by that amount. To maintain per-average daily attendance ("ADA") funding, the 1992-93 Budget included loans of $732 million to K-12 schools and $241 million to community colleges, to be repaid from future Proposition 98 entitlements. The 1993-94 Budget also provided new loans of $609 million to K-12 schools and $178 million to community colleges to maintain ADA funding. These loans have been combined with the 1992-93 fiscal year loans into one loan of $1.760 billion, to be repaid from future years' Proposition 98 entitlements, and conditioned upon maintaining current funding levels per pupil at K-12 schools. A Sacramento County Superior Court in California Teachers' Association, et al. v. Gould, et al., has ruled that the 1992-93 loans to K-12 schools and community colleges violate Proposition 98. The impact of the court's ruling on the State budget and funding for schools is unclear and will remain unclear until the Court's written ruling, which is currently being prepared, is issued.
The 1994-95 Budget Act has appropriated $14.4 billion of Proposition 98 funds for K-14 schools, exceeding the minimum Proposition 98 guaranty by $8 million to maintain K-12 funds per pupil at $4,217. Based upon State revenues, growth rates and inflation factors, the 1994-95 Budget Act appropriations an additional $286 million within Proposition 908 for the 1993-94 fiscal year to reflect a need in appropriations for school district and county officers of education, as well as an anticipated deficiency in special education funding.
Because of the complexities of Article XIIIB, the ambiguities and possible inconsistencies in its terms, the applicability of its exceptions and exemptions and the impossibility of predicting future appropriations, the Sponsor cannot predict the impact of this or related legislation on the Bonds in the California Trust Portfolio. Other Constitutional amendments affecting state and local taxes and appropriations have been proposed from time to time. If any such initiatives are adopted, the State could be pressured to provide additional financial assistance to local governments or appropriate revenues as mandated by such initiatives. Propositions such as Proposition 98 and others that may be adopted in the future, may place increasing pressure on the State's budget over future years, potentially reducing resources available for other State programs, especially to the extent the Article XIIIB spending limit would restrain the State's ability to fund such other programs by raising taxes.
As of July 1, 1994, the State had over $18.34 billion aggregate amount of its general obligation bonds outstanding. General obligation bond authorizations in the aggregate amount of approximately $5.16 billion remained unissued as of July 1, 1994. The State also builds and acquires capital facilities through the use of lease purchase borrowing. As of June 30, 1994, the State had approximately $5.09 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities had approximately $21.87 billion aggregate principal amount of revenue bonds and notes outstanding as of March 31, 1993. Revenue bonds represent both obligations payable from State revenue-producing enterprises and projects, which are not payable from the General Fund, and conduit obligations payable only from revenues paid by private users of facilities financed by such revenue bonds. Such enterprises and projects include transportation projects, various public works and exposition projects, education facilities (including the California State University and University of California systems), housing health facilities and pollution control facilities.
The State is a party to numerous legal proceedings, many of which normally occur in governmental operations. In addition, the State is involved in certain other legal proceedings that, if decided against the State, might require the State to make significant future expenditures or impair future revenue sources. Examples of such cases include challenges to the State's method of taxation of certain businesses, challenges to certain vehicle license fees, and challenges to the State's use of Public Employee Retirement System funds to offset future State and local pension contributions. Other cases which could significantly impact revenue or expenditures involve reimbursement to school districts for voluntary school desegregation and state mandated costs, challenges to Medi-Cal eligibility, recovery for flood damages, and liability for toxic waste cleanup. Because of the prospective nature of these proceedings, it is not presently possible to predict the outcome of such litigation or estimate the potential impact on the ability of the State to pay debt service on its obligations.
On June 20, 1994, the United States Supreme Court, in two companion cases, upheld the validity of California's prior method of taxing multinational corporations under a "unitary" method of accounting for their worldwide earnings, thus avoiding tax refunds of approximately $1.55 billion by the State, and enabling the State to collect $620 million in previous assessments. Barclays Bank PLC v. Franchise Tax Board concerning foreign corporations, and Colgate- Palmmolive v. Franchise Tax Board concerned domestic corporations.
On July 15, 1994, Standard Poor's Corporation ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"),and Fitch Investors Service, Inc. ("Fitch") all downgraded their ratings of California's general obligation bonds. These bonds are usually sold in 20- to 30-year increments and used to finance the construction of schools, prisons, water systems and other projects. The ratings were reduced by Standard & Poor's from "A+" to "A", by Moody's from "Aa" to "A1", and by Fitch from "AA" to "A". Since 1991, when it had a "AAA" rating, the State's rating has been downgraded three times by all three ratings agencies. All three agencies cite the 1994-95 Budget Act's dependence on a "questionable" federal bailout to pay for the cost of illegal immigrants, the Propositions 98 guaranty of a minimum portion of State revenues for kindergarten through community college, and the persistent deficit requiring more borrowing as reasons for the reduced rating. Another concern was the State's reliance on a standby mechanism which could trigger across-the-board reductions in all State programs, and which could disrupt State operations, particularly in fiscal year 1995-96. However, a Standard & Poor's spokesman stated that, although the lowered ratings means California is aa riskier borrower, Standard & Poor's anticipates that the State will pay off its debts and not default. There can be no assurance that such ratings will continue for any given period of time or that they will not in the future be further revised.
As a result of Orange County's Chapter 9 bankruptcy filing on December 6, 1994, Moody's has suspended the County's bond ratings, and Standard & Poor's has cut its rating of all Orange County debt from "AA-" to "CCC", a level below investment grade and an indication of high risk and uncertainty. Fitch does not rate Orange County bonds. It is anticipated that as Orange County's credit and bond ratings fall, it will have difficulty in getting loans or selling its bonds to raise money. Additionally, the County's bankruptcy filing could affect about 180 municipalities, school districts and other municipal entities which entrusted billions of dollars to Orange County to invest. Standard & Poor's has informed such entities that they have been placed on negative credit watch, the usual step prior to a downgrade of credit rating.
The Sponsor believes the information summarized above describes some of the more significant aspects relating to the California Trust. The sources of such information are Preliminary Official Statements and Official Statements relating to the State's general obligation bonds and the State's revenue anticipation notes, or obligations of other issuers located in the State of California, or other publicly available documents. Although the Sponsor has not independently verified this information, it has no reason to believe that such information is not correct in all material respects.
Risk Factors.The Commonwealth of Massachusetts and certain of its cities and towns have at certain times in the recent past undergone serious financial difficulties which have adversely affected and, to some degree, continue to adversely affect their credit standing. These financial difficulties could adversely affect the market values and marketability of, or result in default in payment on, outstanding bonds issued by the Commonwealth or its public authorities or municipalities, including the Bonds deposited in the Trust. The following description highlights some of the more significant financial problems of the Commonwealth and the steps taken to strengthen its financial condition.
The effect of the factors discussed below upon the ability of Massachusetts issuers to pay interest and principal on their obligations remains unclear and in any event may depend on whether the obligation is a general or revenue obligation bond (revenue obligation bonds being payable from specific sources and therefore generally less affected by such factors) and on what type of security is provided for the bond. In order to constrain future debt service costs, the Executive Office for Administration and Finance established in November, 1988 an annual fiscal year limit on capital spending of $925 million, effective fiscal 1990. In January, 1990, legislation was enacted to impose a limit on debt service in Commonwealth budgets beginning in fiscal 1991. The law provides that no more than 10% of the total appropriations in any fiscal year may be expended for payment of interest and principal on general obligation debt of the Commonwealth (excluding the Fiscal Recovery Bonds discussed below). It should also be noted that Chapter 62F of the Massachusetts General Laws establishes a state tax revenue growth limit and does not exclude principal and interest due on Massachusetts debt obligations from the scope of the limit. It is possible that other measures affecting the taxing or spending authority of Massachusetts or its political subdivisions may be approved or enacted in the future.
The Commonwealth has waived its sovereign immunity and consented to be sued under contractual obligations including bonds and notes issued by it. However, the property of the Commonwealth is not subject to attachment or levy to pay a judgment, and the satisfaction of any judgment generally requires legislative appropriation. Enforcement of a claim for payment of principal of or interest on bonds and notes of the Commonwealth may also be subject to provisions of federal or Commonwealth statutes, if any, hereafter enacted extending the time for payment or imposing other constraints upon enforcement, insofar as the same may be constitutionally applied. The United States Bankruptcy Code is not applicable to states.
Cities and Towns. During recent years limitations were placed on the taxing authority of certain Massachusetts governmental entities that may impair the ability of the issuers of some of the Bonds in the Massachusetts Trust to maintain debt service on their obligations. Proposition 2.5, passed by the voters in 1980, led to large reductions in property taxes, the major source of income for cities and towns. As a result, between fiscal 1981 and fiscal 1989, the aggregate property tax levy declined in real terms by 15.6%.
Since Proposition 2.5 did not provide for any new state or local taxes to replace the lost revenues, in lieu of substantial cuts in local services, the Commonwealth began to increase local aid expenditures. In 1981 constant dollars, total direct local aid expenditures increased by 58.5% between fiscal years 1981 and 1989, or 5.9% per year. During the same period, the total of all other local revenue sources declined by 5.87% or 0.75% per year. Despite the substantial increases in local aid from fiscal 1981 to fiscal 1989, local spending increased at an average rate of 1% per year in real terms. Direct local aid for fiscal 1987, 1988, and 1989 was $2.601 billion, $2.769 billion, and $2.961 billion, respectively. Direct local aid declined in the three subsequent years to $2.937 billion in fiscal 1990, $2.608 billion in 1991 and $2.328 billion in 1992 and increased to $2.547 billion in 1993. It is estimated that fiscal 1994 expenditures for direct local aid will be $2.737 billion, which is an increase of approximately 7.5% above the fiscal 1993 level. The additional amount of indirect local aid provided over and above the direct local aid is estimated to have been $1.313 billion in fiscal 1991, $1.265 billion in fiscal 1992 and $1.717 billion in fiscal 1993 and is estimated to be approximately $1.717 billion in fiscal 1994.
Many communities have responded to the limitations imposed by Proposition 2.5 through statutorily permitted overrides and exclusions. Override activity peaked in fiscal 1991, when 182 communities attempted votes on one of the three types of referenda questions (override of levy limit, exclusion of debt service, or exclusion of capital expenditures) and 100 passed at least one question, adding $58.5 million of their levy limits. In fiscal 1992, 67 of 143 communities had successful votes totalling $31.0 million. In fiscal 1993, 83 communities attempted a vote; two-thirds of them (56) passed questions aggregating $16.4 million.
A statewide voter initiative petition which would effectively mandate that, commencing with fiscal 1992, no less than 40% of receipts from personal income taxes, sales and use taxes, corporate excise taxes and lottery fund proceeds be distributed to certain cities and towns in local aid was approved in the general election held November 6, 1990. Pursuant to this petition, the local aid distribution to each city or town was to equal no less than 100% of the total local aid received for fiscal 1989. Distributions in excess of fiscal 1989 levels were to be based on new formulas that would replace the current local aide distribution formulas. If implemented in accordance with its terms (including appropriation of the necessary funds), the petition as approved would shift several hundred million dollars to direct local aid. However, local aid payments explicitly remain subject to annual appropriation, and fiscal 1992 and fiscal 1993 appropriations for local aid did not meet, and fiscal 1994 appropriations for local aid do not meet, the levels set forth in the initiative law.
Pension Liabilities. The Commonwealth had funded its two pension systems on essentially a pay-as-you-go basis. The funding schedule is based on actuarial valuations of the two pension systems as of January 1. 1990, at which time the unfunded accrued liability for such systems operated by the Commonwealth (and including provision for Boston teachers) totalled $8.865 billion. The unfunded liability for the Commonwealth related to cost of living increases for local retirement systems was estimated to be an additional $2.004 billion as of January 1, 1990. An actuarial valuation as of January 1, 1992 shows that, as of such date, the total unfunded actuarial liability for such systems, including cost-of-living allowances, was approximately $8.485 billion representing a reduction of approximately $2.383 billion from January 1, 1990.
The amount in the Commonwealth's pension reserve, established to address the unfunded liabilities of the two state systems, has increased significantly in recent years due to substantial appropriations and changes in law relating to investment of retirement system assets. Total appropriations and transfers to the reserve in fiscal years 1985, 1986, 1987 and 1988 amounted to approximately $680 million. Comprehensive pension legislation approved in January 1988 committed the Commonwealth, beginning in fiscal 1989, to normal cost funding of its pension obligations and to a 40-year amortization schedule for its unfunded pension liabilities. Total pension costs increased from $659.7 million in fiscal 1989 to $868.2 million in fiscal 1993. Pension funding is estimated to be $951.0 million in fiscal year 1994. As of June 30, 1993, the Commonwealth's pension reserves had grown to approximately $3.877 billion.
State Budget and Revenues. The Commonwealth's Constitution requires, in effect, that its budget be balanced each year. The Commonwealth's fiscal year ends June 30. The General Fund is the Commonwealth's primary operating fund; it also functions as a residuary fund to receive otherwise unallocated revenues and to provide monies for transfers to other funds as required. The condition of the General Fund is generally regarded as the principal indication of whether the Commonwealth's operating revenues and expenses are in balance; the other principal operating funds (the Local Aid Fund and the Highway Fund) are customarily funded to at least a zero balance.
Limitations on Commonwealth tax revenues have been established by enacted legislation and by public approval of an initiative petition which has become law. The two measures are inconsistent in several respects, including the methods of calculating the limits and the exclusions from the limits. The initiative petition does not exclude debt service on the Commonwealth's notes and bonds from the limits. State tax revenues in fiscal 1988 through fiscal 1993 were lower than the limits. The Executive Office for Administration and Finance currently estimates that state tax revenues will not reach the limit imposed by either the initiative petition or the legislative enactment in fiscal 1994.
Budgeted expenditures for fiscal 1989 totalled approximately $12.643 billion. Budgeted revenues totalled approximately $11.970 billion, approximately $672.5 million less than total expenditures. Under the budgetary basis of accounting, after taking account of certain fund balances, fiscal 1989 ended with a deficit of $319.3 million. Under the GAAP basis of accounting, excluding fiduciary accounts and enterprise funds, the Commonwealth ended fiscal 1989 with a deficit of $946.2 million. This deficit reflected an operating gain in the capital projects funds due to the additional borrowing to reduce prior year deficits. If the capital project funds are excluded, the Comptroller calculated a GAAP deficit of $1.002 billion in fiscal 1989.
Fiscal 1989 tax revenues were adversely affected by the economic slowdown that began in mid-1988. In June, 1988, the fiscal 1989 tax revenue estimate was for 10.9% growth over fiscal 1988. Fiscal 1989 ended with actual tax revenue growth of 6.5%.
The fiscal 1989 budgetary deficit caused a cash deficit in the Commonwealth operating accounts on June 30, 1989 in the amount of approximately $450 million. The State Treasurer was forced to defer until early July certain fiscal 1989 expenditures including the payment of approximately $305 million in local aid due June 30, and with legislative authorization, issued temporary notes in July in the amount of $1.1 billion to pay fiscal 1989 and fiscal 1990 costs.
Fiscal year 1990 resulted in total expenditures of approximately $13.260 billion. Budgeted revenues and other services for fiscal 1990 were approximately $12.008 billion. Tax revenues for fiscal 1990 were approximately $8.517 billion, a decrease of approximately $314 million or 3.6% from fiscal 1989. The Commonwealth suffered an operating loss of approximately $1.25 billion and ended fiscal 1990 with a budgetary deficit of $1.104 billion. The Commonwealth had a cash surplus of $99.2 million on June 30, 1990 as a result of deferring until fiscal 1991 the payment of approximately $1.26 billion of local aid due June 30, 1990.
On July 28, 1990, the legislature enacted Chapter 151 which provides, among other matters, for the Commonwealth Fiscal Recovery Loan Act of 1990 and grants authorization for the Commonwealth to issue bonds in an aggregate amount up to $1.42 billion for purposes of funding the Commonwealth's fiscal 1990 deficit and certain prior year Medicaid reimbursement payments. Chapter 151 also provides for the establishment of the Commonwealth Fiscal Recovery Fund, deposits for which are derived from a portion of the Commonwealth's personal income tax receipts, are dedicated for this purpose and are to be deposited in trust and pledged to pay the debt service on these bonds. Under Chapter 151, the Commonwealth issued $1.363 billion of Dedicated Income Tax Bonds to cover the anticipated fiscal 1990 deficit.
Total expenditures for fiscal 1991 are estimated to have been $13.659 billion. Total revenues for fiscal 1991 are estimated to have been $13.634 billion, resulting in an estimated $21.2 million operating loss. Application of the adjusted fiscal 1990 fund balances of $258.3 million resulted in a final fiscal 1991 budgetary surplus of $237.1 million. State finance law required that approximately $59.2 million of the fiscal year surplus be placed in the Stabilization Fund described above. Amounts credited to the Stabilization Fund are not generally available to defray current year expenses without subsequent specific legislative authorization.
After payment in full of the local aid distribution of $1.018 billion due on June 28, 1991, retirement of all of the Commonwealth's outstanding commercial paper and repayment of certain other short-term borrowing, as of the period of fiscal 1991, the Commonwealth had a cash balance of $182.3 million. The fiscal 1991 year-end cash position compared favorably to the Commonwealth's cash position at the end of the prior fiscal year, June 30, 1990, when the Commonwealth's cash shortfall would have exceeded $1.1 billion had payment of local aid not been postponed.
Upon taking office in January 1991, the new Governor undertook a comprehensive review of the Commonwealth's budget. Based on projected spending of $14.105 billion, it was then estimated that $850 million in budget balancing measures would be needed prior to the close of fiscal 1991. At that time, estimated tax revenues were revised to $8.845 billion, $903 million less than was estimated at the time the fiscal 1991 budget was adopted. The Governor proposed a series of legislative and administrative actions, designed to eliminate the projected deficit. The legislature adopted a number of the Governor's recommendations and the Governor took certain other administrative actions, not requiring legislative approval, including $65 million in savings from the adoption of a state employee furlough program. It is estimated that spending reductions achieved through savings incentives and withholding of allotments totalled $484.3 million in the aggregate for fiscal 1991.
In addition to recommending spending reductions to close the projected budget deficit, the administration, in May 1991, filed an amendment to its Medicaid state plan that enabled it to claim 50% Federal reimbursement on uncompensated care payments provided to certain hospitals in the Commonwealth.
In fiscal 1992, Medicaid accounted for more than half of the Commonwealth's appropriations for health care. It is the largest item in the Commonwealth's budget. It has also been one of the fastest growing budget items. During fiscal years 1989, 1990 and 1991, Medicaid expenditures were $1.83 billion, $2.12 billion and $2.77 billion, respectively. A substantial amount of expenditures in recent years was provided through supplemental appropriations, repeating the experience that Medicaid expenditures have exceeded initial appropriation amounts. These annual amounts, however, do not take account of the practice of retroactive settlement of many provider payments after audit review and certification by the Rate Setting Commission. In fiscal 1990, payments of approximately $488 million were made to hospitals and nursing homes for rate settlements dating back as far as 1980, through the Medical Assistance Liability Fund established to fund certain Medicaid liabilities incurred, but not certified for payment, in prior years. This amount is not factored into the annual totals for Medicaid expenditures listed above. Including retroactive provider settlements, Medicaid expenditures for fiscal 1992 were $2.818 billion and for fiscal 1993 were $3.151 billion. The Executive Office for Administration and Finance estimates that fiscal 1994 Medicaid expenditures will be approximately $3.252 billion, an increase of 3.9% over fiscal 1993 expenditures. For fiscal 1994, no supplemental Medicaid appropriations are currently expected to be necessary. The Governor had proposed a managed care program to be implemented commencing in January, 1992 in order to address the considerable annual cost increases in the Medicaid program. Medicaid is presently 50% funded by federal reimbursements.
In fiscal 1992, total revenues and other sources of the budgeted operating funds totalled $13.728 billion, an increase over fiscal 1991 revenues of .7%. (Actual fiscal 1992 tax revenues exceeded original estimates and totalled $9.484 billion, an increase over fiscal 1991 collections of 5.4%). Fiscal 1992 expenditures and other uses of budgeted operating funds totalled approximately $13.420 billion, a decrease from fiscal 1991 expenditures by 1.7%. Fiscal year 1992 revenues and expenditures resulted in an operating gain of $312.3 million. Through the use of the prior year ending fund balances of $312.3 million, fiscal 1992 budgetary fund balances totalled $549.4 million. Total fiscal 1992 spending authority continued into fiscal 1993 is $231.0 million.
After payment in full of the quarterly local aid distribution of $514 million due on June 30, 1992, retirement of the Commonwealth's outstanding commercial paper (except for approximately $50 million of bond anticipation notes) and certain other short-term borrowings, as of June 30, 1992, the Commonwealth showed a year-end cash position of approximately $731 million for fiscal year 1992. The ending balance compares favorably with the cash balance of $182.3 million at the end of fiscal 1991. As of June 1993, the Commonwealth showed a year-end cash position of $622.2 million for fiscal year 1993. As of January 19, 1994, the Commonwealth estimates a 1994 year-end cash position of approximately $725.4 million.
The budgeted operating funds of the Commonwealth ended fiscal 1993 with a surplus of revenues and other sources over expenditures and other uses of $13.1 million and aggregate ending fund balances in the budgeted operating funds of the Commonwealth of approximately $562.5 million. Budgeted revenues and other sources for fiscal 1993 totalled approximately $14.710 billion, including tax revenues of $9.930 billion. Total revenues and other sources increased by approximately 6.9% from fiscal 1992 to fiscal 1993, while tax revenues increased by 4.7% for the same period. In July 1992, tax revenues had been estimated to be approximately $9.685 billion for fiscal 1993. This amount was subsequently revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other used in fiscal 1993 totalled approximately $14.696 billion, which is $1.280 billion or approximately 9.6% higher than fiscal 1992 expenditures and other uses. Fiscal 1993 budgeted expenditures were $23 million lower than the initial July 1992 estimates of fiscal 1993 budget expenditures.
On July 19, 1993, the Governor signed into law the budget for fiscal 1994, totalling $15.463 billion. This represented a $694 million increase over the then estimated budgeted expenditures of $14.976 billion for fiscal 1993. On January 14, 1994, the Governor signed into law supplemental appropriations totalling approximately $157.9 million. Including an additional $8.1 million in fiscal 1994 supplemental appropriation recommendations that the Governor plans to file, and an approximate $100 million contingency reserve in fiscal 1994 for possible additional spending, fiscal 1994 budgeted expenditures are currently estimated to be approximately $15.716 billion. Budgeted revenues and other sources to be collected in fiscal 1994 are estimated to be approximately $15.535 billion, which includes tax revenues of approximately $10.694 billion (as compared to $9.930 billion in fiscal 1993). This budget includes $175 million as part of an education reform bill passed by the legislature. The fiscal 1994 budget is based on numerous spending and revenue estimates, the achievement of which cannot be assured. As of January 10, 1994, the Legislature had overridden $21.0 million of the Governor's vetoes relating to the fiscal 1994 budget. Commonwealth expenditures and other uses in fiscal 1994 are currently estimated to be approximately $15.500 billion, which is $788 million or approximately 5.36% higher than those of fiscal 1993. Based on currently estimated revenues and expenditures, the Executive Office for Administration and Finance projects a fiscal 1994 ending balance of approximately $382.0 million, of which approximately $315.5 million will be in the Stabilization Fund.
On July 19, 1993, a 60-day hiring freeze on all executive branch agencies was instituted to help ensure that agency expenditures remain within their fiscal 1994 budget authorizations. On August 16, 1993, the Commonwealth announced that approximately 1,280 state employees would be laid off in the near future, in addition to approximately 350 employees already laid off in fiscal 1994.
On January 21, 1994, the Governor presented his Budget Submission for fiscal year 1995 providing for expenditures of $16.14 billion, a $424 million, or 2.7%, increase over current fiscal year 1994 projections. These proposed expenditures for fiscal year 1995 include direct local aid of $2.997 billion. This budget is based on total anticipated revenues of $16.144 billion, which represents a $609 million, or 3.9%, increase over fiscal year 1994 estimates. The Governor's budget recommendation is based on a tax revenue estimate of $11.226 billion, an increase of approximately 5.0%, as compared to currently estimated fiscal 1994 tax revenues of $10.694 billion.
The liabilities of the Commonwealth with respect to outstanding bonds and notes payable as of January 1, 1994 totalled $12.555 billion. These liabilities consisted of $8.430 billion of general obligation debt, $1.036 billion of dedicated income tax debt (the Fiscal Recovery Bonds), $104 million of special obligation debt, $2.742 billion of supported debt, and $243 million of guaranteed debt.
Capital spending by the Commonwealth was approximately $595 million in fiscal 1987, $632 million in fiscal 1988 and $971 million in fiscal 1989. In November 1988, the Executive Office for Administration and Finance established an administrative limit on state financed capital spending in the Capital Projects Funds of $925.0 million per fiscal year. Capital expenditures decreased to $936 million, $847 million, $694.1 million and $575.9 million in fiscal 1990, 1991, 1992 and 1993, respectively. Capital expenditures are projected to increase to $886.0 million in fiscal 1994. The growth in capital spending accounts for a significant rise in debt service during the period. Payments for the debt service on Commonwealth general obligation bonds and notes have risen at an average annual rate of 20.4% from $649.8 million in fiscal 1989 to $942.3 million in fiscal 1991. Debt Service payments in fiscal 1992 were $898.3 million, representing a 4.7% decrease from fiscal 1991. This decrease resulted from a $261 million one-time reduction achieved through the issuance of refunding bonds in September and October of 1991. Debt service expenditures were $1.139 billion for fiscal 1993 and are projected to be $1.220 billion for fiscal 1994. These amounts represent debt service payments on direct Commonwealth debt and do not include debt service on notes issued to finance the fiscal 1989 deficit and certain Medicaid- related liabilities, which were paid in full from non-budgeted funds. Also excluded are debt service contract assistance to certain state agencies and the municipal school building assistance program projected to total of $359.7 million in the aggregate in fiscal 1994. In addition to debt service on bonds issued for capital purposes, the Commonwealth is obligated to pay the principal of and interest on the Fiscal Recovery Bonds described above. The estimated debt service on such bonds currently outstanding (a portion of which were issued as variable rate bonds) ranges from approximately $279 million (interest only) in fiscal 1994 through fiscal 1997 and approximately $130 million in fiscal 1998, at which time the entire amount of the Fiscal Recovery Bonds will be retired.
In January 1990 legislation was enacted to impose a limit on debt service in Commonwealth budgets beginning in fiscal 1991. The law provides that no more than 10% of the total appropriations in any fiscal year may be expended for payment of interest and principal on general obligation debt (excluding the Fiscal Recovery Bonds) of the Commonwealth. This law may be amended or appealed by the legislature or may be superseded in the General Appropriation Act for any year. From fiscal year 1987 through fiscal year 1994 estimated this percentage has been substantially below the limited established by this law.
Legislation enacted in December 1989 imposes a limit on the amount of outstanding direct bonds of the Commonwealth. The limit for fiscal 1994 is $7.872 billion. The law provides that the limit for each subsequent fiscal year shall be 105% of the previous fiscal year's limit. The Fiscal Recovery Bonds will not be included in computing the amount of bonds subject to this limit.
In August 1991, the Governor announced a five-year capital spending plan. The plan, which represents the Commonwealth's first centralized multi-year capital plan, sets forth, by agency, specific projects to receive capital spending allocations over the next five fiscal years and annual capital spending limits. Capital spending by the Commonwealth, which exceeded $900 million annually in fiscal 1989, 1990 and 1991, declined to $694.1 million in fiscal 1992 and $575.9 in fiscal 1993. For fiscal 1994 through 1998, the plan forecasts annual capital spending for the Commonwealth of between $813 million and $886 million per year, exclusive of spending by the Massachusetts Bay Transit Authority. Total expenditures are forecast at $4.25 billion, an amount less than the total amount of agency capital spending requests for the same period. Planned spending is also significantly below legislatively authorized spending levels.
Unemployment. From 1980 to 1989, the Massachusetts unemployment rate was significantly lower than the national average. The Massachusetts unemployment rate averaged 9.0%, 8.5% and 6.9% in calendar 1991, 1992 and 1993, respectively. The Massachusetts unemployment rate in December, 1993 was 6.3% as compared to 6.6% for November, 1993 and 8.6% for December of 1992, although the rate has been volatile throughout this period. The Massachusetts unemployment rate in January and February, 1994 was 7.2% and 6.4%, respectively; these rates are not comparable to prior rates due to a new rate computation which became effective in 1994.
The balance in the Massachusetts Unemployment Compensation Trust Fund had been exhausted as of September 1991 due to the continued high levels of unemployment. As of December 31, 1992, the Massachusetts Unemployment Compensation Trust Fund balance was in deficit by $377 million. As of November 30, 1993, the Fund was in deficit by $163 million. The deficit is now expected to be approximately $120 million by the end of calendar 1993. Benefit payments in excess of contributions are being financed by use of repayable advances from the federal unemployment loan account. Legislation enacted in May 1992 increased employer contributions in order to reduce advances from the federal loan account. The additional increases in contributions provided by the new legislation should result in a positive balance in the Unemployment Compensation Trust Fund by the end of December 1994 and rebuild reserves in the system to over $1 billion by the end of 1996.
Litigation. The Attorney General of the Commonwealth is not aware of any cases involving the Commonwealth which in his opinion would affect materially its financial condition. However, certain cases exist containing substantial claims, among which are the following:
The United States has brought an action on behalf of the U.S. Environmental Protection Agency alleging violations of the Clean Water Act and seeking to enforce the clean-up of Boston Harbor. The Massachusetts Water Resources Authority (the "MWRA") has assumed primary responsibility for developing and implementing a court approved plan and time table for the construction of the treatment facilities necessary to achieve compliance with the federal requirements. The MWRA currently projects that total cost of construction of the waste water facilities required under the court's order as approximately $3.5 billion in current dollars. Under the Clean Water Act, the Commonwealth may be liable for any costs of complying with any judgment in this case to the extent that the MWRA or a municipality is prevented by state law from raising revenues necessary to comply with such a judgment.
In a recent suit filed against the Department of Public Welfare, plaintiffs allege that the Department has unlawfully denied personal care attendant services to severely disabled Medicaid recipients. The Court has denied plaintiffs' motion for a preliminary injunction and has not yet acted on plaintiffs' motion for reconsideration of that decision. If plaintiffs prevail on their claims, the suit could cost the Commonwealth as much as $200 million.
In a suit filed against the Commissioner of Revenue, plaintiffs challenge the inclusion of income from tax exempt obligations in the measure of the bank excise tax. The Appellate Tax Board issued a finding of fact and report in favor of the Commissioner of Revenue on September 30, 1993. An appeal has been filed. Approximately $400 million is at issue.
There are also several tax matters in litigation which may result in an aggregate liability in excess of $195 million.
Ratings. Beginning on May 17, 1989, Standard & Poor's downgraded its ratings on Massachusetts general obligation bonds and certain agency issues from AA+ to AA. The ratings were downgraded three additional times to a low of BBB on December 31, 1989. On July 14, 1989, Standard & Poor's also downgraded its rating on temporary general obligation notes and various agency notes from SP-1 + to SP-1 and on general obligation short-term notes and on short-term agency debt from SP-1 to SP-2. Bonds rated BBB may have speculative characteristics. The rating remained at BBB until September 9, 1992 when Standard & Poor's raised its rating to A. At this same time, such bonds were removed from CreditWatch. On October 14, 1993, Standard & Poor's raised its rating from A to A+.
On June 21, 1989, Moody's Investors Service downgraded its rating on Massachusetts general obligation bonds Aa to A. The ratings were further reduced on two occasions to a low on March 19, 1990 of Baa where it remained until September 10, 1992 when Moody's increased its rating to A.
Fitch Investors Service, Inc. lowered its rating on the Commonwealth's bonds from AA to A on September 29, 1989. As of December 5, 1991, its qualification of the bonds changed from Uncertain Trends to Stabilizing Credit Trend. On October 13, 1993, Fitch Investors raised its rating from A to A+.
Ratings may be changed at any time and no assurance can be given that they will be not be revised or withdrawn by the rating agencies, if in their respective judgments, circumstances should warrant such action. Any downward revision or withdrawal of a rating could have an adverse effect on market prices of the bonds.
The Sponsor is unable to predict what effect, if any, such factors may have on the Bonds in the Massachusetts Trust. Nevertheless, investors should be aware that if there should be a financial crisis relating to Massachusetts, its public bodies or municipalities (including the city of Boston), the market value and marketability of all outstanding bonds issued by the Commonwealth and its public authorities or municipalities, including the Bonds in the Massachusetts Trust, could be adversely affected.
The State's current fiscal year commenced on April 1, 1994, and ends in March 31, 1995, and is referred to herein as the State's 1994-95 fiscal year. The State's budget for the 1994-95 fiscal year was enacted by the Legislature on June 7, 1994, more than two months after the start of the fiscal year. Prior to adoption of the budget, the Legislature enacted appropriations for disbursements considered to be necessary for State operations and other purposes, including all necessary appropriations for debt service. The State Financial Plan for the 1994-95 fiscal year was formulated on June 16, 1994 and is based on the State's budget as enacted by the Legislature and signed into law by the Governor.
The economic and financial condition of the State may be affected by various financial, social, economic and political factors. Those factors can be very complex, may vary from fiscal year to fiscal year, and are frequently the result of actions taken not only by the State and its agencies and instrumentalities, but also by entities, such as the Federal government, that are not under the control of the State.
The State Financial Plan is based upon forecasts of national and State economic activity. Economic forecasts have frequently failed to predict accurately the timing and magnitude of changes in the national and the State economies. Many uncertainties exist in forecasts of both the national and State economies, including consumer attitudes toward spending, Federal financial and monetary policies, the availability of credit, and the condition of the world economy, which could have an adverse effect on the State. There can be no assurance that the State economy will not experience results in the current fiscal year that are worse than predicted, with corresponding material and adverse effects on the State's projections of receipts and disbursements.
The State Division of the Budget ("DOB") believes that its projections of receipts and disbursements relating to the current State Financial Plan, and the assumptions on which they are based, are reasonable. Actual results, however, could differ materially and adversely from the projections set forth below, and those projections may be changed materially and adversely from time to time.
As noted above, the financial condition of the State is affected by several factors, including the strength of the State and regional economy and actions of the Federal government, as well as State actions affecting the level of receipts and disbursements. Owing to these and other factors, the State may, in future years, face substantial potential budget gaps resulting from a significant disparity between tax revenues projected from a lower recurring receipts base and the future costs of maintaining State programs at current levels. Any such recurring imbalance would be exacerbated if the State were to use a significant amount of nonrecurring resources to balance the budget in a particular fiscal year. To address a potential imbalance for a given fiscal year, the State would be required to take actions to increase receipts and/or reduce disbursements as it enacts the budget for that year, and under the State Constitution the Governor is required to propose a balanced budget each year. To correct recurring budgetary imbalances, the State would need to take significant actions to align recurring receipts and disbursements in future fiscal years. There can be no assurance, however, that the State's actions will be sufficient to preserve budgetary balance in a given fiscal year or to align recurring receipts and disbursements in future fiscal years.
The 1994-95 State Financial Plan contains actions that provide nonrecurring resources or savings, as well as actions that impose nonrecurring losses of receipts or costs. It is believed that the net positive effect of nonrecurring actions represents considerably less than one-half of one percent of the State's General Fund, an amount significantly lower than the amount included in the State Financial Plans in recent years; it is believed that those actions do not materially affect the financial condition of the State. In addition to those nonrecurring actions, the 1994-95 State Financial Plan reflects the use of $1.026 billion in the positive cash margin carried over from the prior fiscal year, resources that are not expected to be available in the State's 1995- 96 fiscal year.
The General Fund is the general operating fund of the State and is used to account for all financial transactions, except those required to be accounted for in another fund. It is the State's largest fund and receives almost all State taxes and other resources not dedicated to particular purposes. In the State's 1994-95 fiscal year, the General Fund is expected to account for approximately 52 percent of total governmental-fund receipts and 51 percent of total governmental- fund disbursements. General Fund moneys are also transferred to other funds, primarily to support certain capital projects and debt service payments in other fund types.
New York State's financial operations have improved during recent fiscal years. During the period 1989-90 through 1991- 92, the State incurred General Fund operating deficits that were closed with receipts from the issuance of tax and revenue anticipation notes ("TRANs"). First, the national recession, and then the lingering economic slowdown in the New York and regional economy, resulted in repeated shortfalls in receipts and three budget deficits. For its 1992-93 and 1993-94 fiscal years, the State recorded balanced budgets on a cash basis, with substantial fund balances in each year as described below.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in the tax refund reserve account, $265 million in its Contingency Reserve Fund ("CRF") and $134 million in its Tax Stabilization Reserve Fund. These fund balances were primarily the result of an improving national economy, State employment growth, tax collections that exceeded earlier projections and disbursements that were below expectations. Deposits to the personal income tax refund reserve have the effect of reducing reported personal income tax receipts in the fiscal year when made and withdrawals from such reserve increase receipts in the fiscal year when made. The balance in the tax refund service account will be used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026 billion was available for budgetary planning purposes in the 1994-95 fiscal year. The remaining $114 million will be redeposited in the tax refund reserve account at the end of the State's 1994-95 fiscal year to continue the process of restructuring the State's cash flow as part of the Local Government Assistance Corporation ("LGAC") program. The balance in the CRF will be used to meet the cost of litigation facing the State. The Tax Stabilization Reserve Fund may be used only in the event of an unanticipated General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund service account, General Fund receipts in 1993-94 exceeded those originally projected when the State Financial Plan for that year was formulated on April 16, 1993 by $1.002 billion. Greater-than-expected receipts in the personal income tax, the bank tax, the corporation franchise tax and the estate tax accounted for most of this variance, and more than offset weaker-than-projected collections from the sales and use tax and miscellaneous receipts. Collections from individual taxes were affected by various factors including changes in Federal business laws, sustained profitability of banks, strong performance of securities firms, and higher-than-expected consumption of tobacco products following price cuts.
Disbursements and transfers from the General Fund were $303 million below the level projected in April 1993, an amount that would have been $423 million had the State not accelerated the payment of Medicaid billings, which in the April 1993 State Financial Plan were planned to be deferred into the 1994-95 fiscal year. Compared to the estimates included in the State Financial Plan formulated in April 1993, lower disbursements resulted from lower spending for Medicaid, capital projects, and debt service (due to refundings) and $114 million used to restructure the State's cash flow as part of the LGAC program. Disbursements were higher-than- expected for general support for public schools, the State share of income maintenance, overtime for prison guards, and highway snow and ice removal.
In certain prior fiscal years, the State has failed to enact a budget prior to the beginning of the State's fiscal year. A delay in the adoption of the State's budget beyond the statutory April 1 deadline and the resultant delay in the State's Spring borrowing has in certain prior years delayed the projected receipt by the City of State aid, and there can be no assurance that State budgets in the future fiscal years will be adopted by the April 1 statutory deadline.
The State has noted that its forecasts of tax receipts have been subject to variance in recent fiscal years. As a result of these uncertainties and other factors, actual results could differ materially and adversely from the State's current projections and the State's projections could be materially and adversely changed from time to time. There can be no assurance that the State will not face substantial potential budget gaps in future years resulting from a significant disparity between tax revenues projected from a lower recurring receipts base and the spending required to maintain State programs at current levels. To address any potential budgetary imbalance, the State may need to take significant actions to align recurring receipts and disbursements in future fiscal years.
Ratings on general obligation bonds of the State of New York were lowered by Standard & Poor's Corporation and Moody's Investors Service during 1990 from AA- to A and Aa to A, respectively. On January 6, 1992, Moody's Investors Service lowered its rating on certain appropriations-backed debt of New York State to Baa1 from A. The agency cited the failure of Governor Mario M. Cuomo and New York State lawmakers to close New York's current year budget gap. Moody's Investors Services also placed the general obligation, State guaranteed and New York local Municipal Assistance Corporation Bonds under review for possible downgrade in coming months. In addition, on January 13, 1992, Standard & Poor's Corporation lowered its rating on general obligation debt and guaranteed debt to A- from A. Standard & Poor's Corporation also downgraded its rating on variously rated debt, State moral obligations, contractual obligations, lease purchase obligations and other State guarantees. Additional reductions in ratings could result in a loss to Unit holders.
As of March 31, 1994, the State had approximately $5.370 billion in general obligation bonds, excluding refunding bonds and $294 million in bond anticipation notes outstanding. On May 24, 1993, the State issued $850 million in tax and revenue anticipation notes, all of which matured on December 31, 1993. Principal and interest due on general obligation bonds and interest due on bond anticipation notes and on tax and revenue anticipation notes were $782.5 million for the 1993-94 fiscal year, and are estimated to be $786.3 million for the 1994-95 fiscal year. These figures do not include interest on refunding bonds issued in July 1992, to the extent that such interest is to be paid from escrowed funds.
The fiscal stability of the State is related to the fiscal stability of its authorities, which generally have responsibility for financing, constructing, and operating revenue-producing benefit facilities. Certain authorities of the State, including the State Housing Finance Agency ("HFA"), the Urban Development Corporation ("UDC") and the Metropolitan Transportation Authority ("MTA") have faced and continue to experience substantial financial difficulties which could adversely affect the ability of such authorities to make payments of interest on, and principal amounts of, their respective bonds. Should any of its authorities default on their respective obligations, the State's access to public credit markets could be impaired. The difficulties have in certain instances caused the State (under its so-called "moral obligation") to appropriate funds on behalf of the authorities. Moreover, it is expected that the problems faced by these authorities will continue and will require increasing amounts of State assistance in future years. Failure of the State to appropriate necessary amounts or to take other action to permit those authorities having financial difficulties to meet their obligations (including HFA, UDC and MTA) could result in a default by one or more of the authorities. Such default, if it were to occur, would be likely to have a significant adverse effect on investor confidence in, and therefore the market price of, obligations of the defaulting authority. In addition, any default in payment of any general obligation of any authority whose bonds contain a moral obligation provision could constitute a failure of certain conditions that must be satisfied in connection with Federal guarantees of City and MAC obligations and could thus jeopardize the City's long- term financing plans.
The fiscal stability of the State is related to the fiscal stability of its authorities, which generally have responsibility for financing, constructing and operating revenue-producing public benefit facilities. The authorities are not subject to the constitutional restrictions on the incurrence of debt which apply to the State itself and may issue bonds and notes within the amounts of, and as otherwise restricted by, their legislative authorization. As of September 30, 1992, there were 18 authorities that had outstanding debt of $100 million or more. The aggregate outstanding debt, including bonds, of these 18 authorities was 63.5 billion as of September 30, 1993. As of March 31, 1994, aggregate public authority debt outstanding as State supported debt was $21.1 billion as State-related debt was $29.4 billion.
The authorities are generally supported by revenues generated by the projects financed or operated, such as fares, user fees on bridges, highway tolls and rentals for dormitory rooms and housing. In recent years, however, the State has provided financial assistance through appropriations, in some cases of a recurring nature, to certain of the 18 authorities for operating and other expenses and, in fulfillment of its commitments on moral obligation indebtedness or otherwise for debt service. This assistance is expected to continue to be required in future years.
The MTA oversees the operation of New York City's subway and bus lines by its affiliates, the New York City Transit Authority and the Manhattan and Bronx Surface Transit operating (collectively, the "Transit Authority" or the "TA"). Through MTA's subsidiaries, the Long Island Railroad Company, the Metro-North Commuter Railroad Company and the Metropolitan Suburban Bus Authority, the MTA operates certain commuter rail and bus lines in the New York metropolitan area. In addition, the Staten Island Rapid Transit Operating Authority, an MTA subsidiary, operates a rapid transit line on Staten Island. Through its affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll bridges and tunnels. Because fare revenues are not sufficient to finance the mass transit portion of these operations, the MTA has depended and will continue to depend for operating support upon a system of Federal, State, local government and TBTA support, including loans, grants and operating subsidies. Over the past several years, the State has enacted several taxes, including a surcharge on the profits of banks, insurance corporations and general business corporations doing business in the 12-county region served by the MTA (the"Metropolitan Transportation Region") and a special one-quarter of 1% regional sales and use tax, that provide additional revenues for mass transit purposes including assistance to the MTA, the surcharge, which expires in November 1995, yielded $507 million in calendar year 1992, of which the MTA was entitled to receive approximately 90 percent, or approximately $456 million. For the 1994-95 State fiscal year, total State assistance to the MTA is estimated at approximately $1.3 billion.
In 1993, State legislation authorized the refunding of a five-year $9.56 billion MTA capital plan for the five-year period, 1992 through 1996 (the "1992-96 Capital Program"). The MTA has received approval of the 1992-96 Capital Program based on this legislation from the 1992-96 Capital Program Review Board, as State law requires. This is the third five-year plan since the Legislature authorized procedures for the adoption, approval and amendment of a five-year plan in 1981 for a capital program designed to upgrade the performance of the MTA's transportation systems and to supplement, replace and rehabilitate facilities and equipment. The MTA, the TBTA and the TA are collectively authorized to issue an aggregate of $3.1 billion of bonds (net of certain statutory exclusions) to finance a portion of the 1992-96 Capital Program. The 1992-96 Capital Program is expected to be financed in significant part through the dedication of State petroleum business taxes.
There can be no assurance that all the necessary governmental actions for the Capital Program will be taken, that funding sources currently identified will not be decreased or eliminated, or that the 1992-96 Capital Program, or parts thereof, will not be delayed or reduced. Furthermore, the power of the MTA to issue certain bonds expected to be supported by the appropriation of State petroleum business taxes is currently the subject of a court challenge. If the Capital Program is delayed or reduced, ridership and fare revenues may decline, which could, among other things, impair the MTA's ability to meet its operating expenses without additional State assistance.
The State's experience has been that if an Authority suffers serious financial difficulties, both the ability of the State and the Authorities to obtain financing in the public credit markets and the market price of the State's outstanding bonds and notes may be adversely affected. The Housing Finance Agency ("HFA") and the Urban Development Corporation ("UDC") have in the past required substantial amounts of assistance from the State to meet debt service costs or to pay operating expenses. Further assistance, possibly in increasing amounts, may be required for these, or other, Authorities in the future. In addition, certain statutory arrangements provide for State local assistance payments otherwise payable to localities whose local assistance payments otherwise payable to localities to be made under certain circumstances to certain Authorities. The State has no obligation to provide additional assistance to localities whose local assistance payments have been paid to Authorities under these arrangements. However, in the event that such local assistance payments are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities
The City, with a population of approximately 7.3 million, is an international center of business and culture. Its non- manufacturing economy is broadly based, with the banking and securities, life insurance, communications, publishing, fashion design, retailing and construction industries accounting for a significant portion of the City's total employment earnings. Additionally, the City is the nation's leading tourist destination. The City's manufacturing activity is conducted primarily in apparel and publishing.
The national economic recession which began in July 1990 has adversely impacted the City harder than almost any other political jurisdiction in the nation. As a result, the City, with approximately 3 percent of national employment, has lost approximately 20 percent of all U.S. jobs during the recent economic downturn and, consequently, has suffered erosion of its local tax base. In total, the City private sector employment has plummeted by approximately 360,000 jobs since 1987. But, after nearly five years of decline, the City appears to be on the verge of a broad-based recovery which will lift many sectors of the local economy. Most of the nascent local recovery can be attributed to the continued improvement in the U.S. economy, but a great deal of the strength expected in the City economy will be due to local factors, such as the heavy concentration of the securities and banking industries in the City. The current forecast calls for modest employment growth of about 20,000 a year (0.6 percent) on average through 1998 with some slowing but still positive growth in employment in 1995-96 as U.S. growth slows (local job gains slow from 25,000 to around 10,000 per year).
During the most recent economic downturn, the City has faced recurring extraordinary budget gaps that have been addressed by undertaking one-time, one-shot budgetary initiatives to close then projected gaps in order to achieve a balanced budget as required by the laws of the State. For example, in order to achieve a balanced budget for the 1992 fiscal year, the City increased taxes and reduced services during the 1991 fiscal year to close a then projected gap of $3.3 billion in the 1992 fiscal year which resulted from, among other things, lower than expected tax revenue of approximately $1.4 billion, reduced State aid for the City of approximately $564 million and greater than projected increases in legally mandated expenditures of approximately $400 million, including public assistance and Medicare expenditures. The gap-closing measures for fiscal year 1992 included receipt of $605 million from tax increases, approximately $1.5 billion of proposed service reductions and proposed productivity savings of $545 million.
Notwithstanding its recurring projected budget gaps, for fiscal years 1981 through 1993 the City achieved balanced operating results (the City's General Fund revenues and transfers reduced by expenditures and transfers), as reported in accordance with Generally Accepted Accounting Principles ("GAAP"), and the City's 1994 fiscal year results are projected to be balanced in accordance with GAAP.
The City's ability to maintain balanced budgets in the future is subject to numerous contingencies; therefore, even though the City has managed to close substantial budget gaps in recent years in order to maintain balanced operating results, there can be no assurance that the City will continue to maintain a balanced budget as required by State law without additional tax or other revenue increases or reduction in City services, which could adversely affect the City's economic base.
Pursuant to the laws of the State, the City prepares an annual four-year financial plan, which is reviewed and revised on a quarterly basis and which includes the City's capital, revenue and expense projections. The City is required to submit its financial plans to review bodies, including the New York State Financial Control Board ("Control Board"). If the City were to experience certain adverse financial circumstances, including the occurrence or the substantial likelihood and imminence of the occurrence of an annual operating deficit of more than $100 million or the loss of access to the public credit markets to satisfy the City's capital and seasonal financing requirements, the Control Board would be required by State law to exercise powers, among others, of prior approval of City financial plans, proposed borrowings and certain contracts.
1995-1998 Financial Plan. On July 8, 1994, the City submitted to the Control Board the Financial Plan for the 1995-1998 fiscal years (the "1995-1998 Financial Plan or "Financial Plan"), which relates to the City, the Board of Education ("BOE") and the City Universiuty of New York ("CUNY"). The Financial Plan is based on the City's expense and capital budgets for the City's 1995 fiscal year, which were adopted on June 23, 1994.
The 1995-1998 Financial Plan projects revenues and expenditures for the 1995 fiscal year balanced in accordance with GAAP. The projections for the 1995 fiscal year reflect proposed actions to close a previously projected gap of approximately $2.3 billion for the 1995 fiscal year, which include City actions aggregating $1.9 billion, a $288 million increase in State actions over the 1994 and 1995 fiscal years, and a $200 million increase in Federal assistance. The City actions include proposed agency actions aggregating $1.1 billion, including productivity savings; tax and fee enforcement initiatives; service reductions; and savings from the restucturing of City services. City actions also include savings of $45 million resulting from proposed tort reform, the projected transfer to the 1995 fiscal year of $171 million of the projected 1994 fiscal year surplus, savings of $200 million for employee health care costs, $51 million in reduced pension costs, savings of $225 million from refinancing City bonds and $65 million from the proposed sale of certain City assets. The proposed savings for employee health care ocsts are subject to collective bargaining negotiation with the City's unions; the proposed savings from tort reform will require the approval of the State Legislature; and the $200 million increase in Federal assistance is subject to approval by Congress and the President.
The Financial Plan also set forth projections for the 1996 through 1998 fiscal years and outlines a proposed gap-closing program to close projected gaps of $1.5 billion, $2.0 billion and a $2.4 billion for the 1996 through 1998 fiscal years, respectively, after successful implementation of the $2.3 billion gap-closing program for the 1995 fiscal year.
The projections for the 1996 through 1998 fiscal years assume the extension by the State Legislature of the 14% personal income tax surcharge beyond calendar year 1995 and extension of the 12.5% personal income tax surcharge beyond calendar year 1996, resulting in combined revenues of $159 million, $633 million and $920 million in the 1996, 1997 and 1998 fiscal years, respectively. However, as part of the tax reduction program refected in the Financial Plan, the City is proposing the elimination of the 12.5% personal income tax surcharge when it expires at a cost of $184 million in fiscal year 1997 and$455 million in fiscal year 1998. The proposed gap-closing actions include City actions aggregating $1.2 billion, $1.5 billion and $1.7 billion in the 1996 through 1998 fiscal years, respectively; $275 million, $375 million and $525 million in proposed additional State actions in the 1996 through 1998 fiscal years, repectively, primarily from the proposed State assumption of certain Medicaid costs; and$100 million and $200 million in proposed additional Federal assistance in the 1997 and 1998 fiscal years, respectively. The proposed additional City actions, a substantial number of which are unspecified, include additional spending reductions, the reduction of City personnel through attrition, government efficiency initiatives, procurement initiatives, labor productivity initiatives, and the proposed privatization of City sewage treatment plants. Certain of these initiatives may be subject to negotiation with the City's municipal unions. Various actions proposed in the Financial Plan for the 1996-1998 fiscal years, including the proposed state actions, are subject to approval by Congress and the President. The State Legislature has in previous legislative sessions failed to approve certain of the City's proposals for the State assumption of certain Medicaid costs and mandate relief, thereby increasing the uncertainty as to the receipt of the State assistance included in the Financial Plan. In addition, the Financial Plan assumes the continuation of the current assumption with respect to wages for City employees and the assumed 9% earnings on pension fund assets for the 1994 fiscal year are expected to be substantially below the 9% assumed rate, which will increase the City's future pension contributions. In addition, a review of the pension fund earnings assumptions is currently being conducted which could firther increase the City's future pension contributions. In addition, a review of the pension fund earnings assumptions is currently being conducted which could further increse the City's future pension contributions by a substantial amount.
The City expects that tax revenue for the 1994 fiscal year will be approximaately $65 million less than forecast in the 1994 Modification, primarily due to shortfalls in the personal income tax and sales tax,and that expenditures will be approximately $25 million greater than forecast. Accordingly, the $171 million of the projected surplus for the 1994 fiscal year, which is currently projected in the 1994 Modification and the Financial Plan to be transferred to the 1995 fiscal year will decrease to 81 million. As a result, the City will reduce expenditures for the 1995 fiscal year to offset this decrease, which is expected to be reflected in the first quarter modification to the Financial Plan. In addition, the Financial Plan assumes that a special session of the State Legislature, which may take place in the near future, will enact, and the Governor will sign, State legislation relating to the proposed tort reform, which would save the City $45 million in payments for tort liability in fiscal year 1995, and certain anticipated improvements in fine and fee collections forecast to earn $25 million in City revenue in fiscal year 1995, and that the State Legislature will not enact proposed legislation mandataing additional pension benefits for City retirees costing the City approximately $200 million annually. To address these and other possible contingencies, on July 11, 1994, the Mayor stated that he will reserve $100 million from authorized spending by City agencies in fiscal year 1995 in addition to the existing general reserrves of $150 million. In addition, the City has identified a $360 million contingency program for the 1995 fiscal year, primarily consisting of layoffs and service reductions.
Actions to Close the Gaps. The 1995-1998 Financial Plan reflects a program of proposed actions by the City, State and Federal governments to close the gaps between projected revenues and expenditures of $1.5 billion, $2.0 billion and $2.4 billion for the 1996, 1997 and 1998 fiscal years, respectively.
City gap-closing actions total $1.2 billion in the 1996 fiscal year, $1.5 billion in the 1997 fiscal year and $1.7 billion in the 1998 fiscal year. These actions, a substantial number of which are unspecified, include additional spending reductions, aggregate $501 million, $598 million and $532 million in the 1996 through 1998 fiscal years, respectively; government efficiency initiatives aggregating $50 million, $100 million and $150 million in the 1996 through 1998 fiscal years, respectively; labor productivity initiatives, aggregating $250 million in each of the 1996 through 1998 fiscal years; and a proposed privatiztion of City seewage treatment plants which would result in revenues of $200 million in each of the 1996 through 1998 fiscal years. Certain of these initiatives may besubject to negotiation with the City's municipal unions.
State actions proposed in the gap-closing program total $275 million, $375 million and $525 million in each of the 1996, 1997 and 1998 fiscal years, respectively. These actions include savings primarily from the proposed State assumption of certain Medicaid costs.
The Federal actions proposed in the gap-closing program are $100 million and $200 million in increased Federal assistance in fiscal years 1997 and 1998, respectively.
Various actions proposed in the Financial Plan, including the proposed increse in State aid, are subject to approval by the Governor and the State Legislature, and the proposed increase in Federal aid is subject to approval by Congress and the President. State and Federal actions are uncertain and no assurance can be given that such actions will in fact be taken or that the savings that the City projects will ersult from these actions will be realized. The State Legislature failed to approve a substantial portion of the proposed State assumption of Medicaid costs in the last session. The Financial Plan assumes that these proposals will be approved by the State Legislature during the 1995 fiscal year and that the Federal government will increase its share of funding for the Medicaid program. If these measures cannot be implemented, the City will be required to take other actions to decrease expenditures or increase revenues to maintain a balanced financial plan.
Although the City has maintained balanced budgets in each of its last thirteen years, and is projected to achieve balanced operating results for the 1993 fiscal year, there can be no assurance that the gap-closing actions proposed in the Financial Plan can be successfully implemented or that the City will maintain a balanced budget in future years without additional State aid, revenue increases or expenditure reductions. Additional tax increases and reductions in essential City services could adversely affect the City's economic base.
Assumptions. The 1995-1998 Financial Plan is based on numerous assumptions, including the continuing improvement in the City's and the region's economy and a modest employment recvery during calendar year 1994 and the concomitant receipt of economically sensitive tax revenues in the amounts projected. The 1995-1998 Financial Plan is subject to various other uncertainties and contingencies relating to, among other factors, the extent, if any, to which wage increses for City employees exceed the annual increases assumed for the 1995 through 1998 fiscal years; continuation of the 9% interest earnings assumptions for pension fund assets and current assumptions with respect to wages for City employees affecting the City's required pension fund contributions; the willingness and ability of the State, in the context, of the State's current financial condition, to provide the aid contemplated by the Financial Plan and to take various other actions to assist the City, including the proposed State takeover of certain Mdeicaid costs and State mandate relief; the ability of HHC, BOE and other such agencies to maintain balanced budgets; the willingness of the Federal government to provide Federal aid; approval of the proposed continuation of the personal income tax surcharge; adoption of the City's budgets by the City Council in substantially the forms submitted by the MAyor; the ability of the City to implement proposed reductions in City personnel and other cost reduction initiatives, which may require in certain cases the cooperation of the City's municipal unions, and teh success with which the City controls expenditures; savings for health care costs for City employees in the amounts projected in the Financial Plan; additional expenditures that may be incurred due to the requirements of certain legislation requiring minimum levels of funding for education; the impact on real estate tax revenues of the current weakness in the real estate market; the City's ability to market its securities successfully in the public credit markets; the level of funding required to comply with the Americans with Disabilities Act od 1990; and additional expenditures that may be incurred as a result of deterioration in the condition of the City's ifrastructure.
The projections and assumptions contained in the 1995- 1998 Financial Plan are subject to revision which may involve substantial change, and no assurance can be given that these estimates and projections, which include actions which the City expects will be taken but which are not within the City's control, will be realized.
Certain Reports. From time to time, the Control Board staff, the City Comptroller and others issue reports and make public statements regarding the City's financial condition, commenting on, among other matters, the City's financial plans, projected revenues and expenditures and actions by the City to eliminate projected operating deficits. Some of these reports and statements have warned that the City may have underestimated certain expenditures and overestimated certain revenues and have suggested that the City may not have adequately provided for future contingencies. Certain of these reports have analyzed the City's Future economic and social conditions and have questioned whether the City has the capacity to generate sufficient revenues in the future to meet the costs of its expenditure increases and to provide necessary services.
On March 1, 1994, the City Comptroller issued a report on the state of the City's economy. The report concluded that, while the City's long recession is over, moderate growth is the best the City can expect, with the local economy being held back by continuing weakness in important international economies.
On July 11, 1994, the City Comptroller issued a report on the City's adopted budget for the 1995 fiscal year. The City Comptroller stated that if none of the uncertain proposals are implemented, the total risk could be as much as $763 million to $1.02 billion. risks which were identified as substantial risks include a possible $208 million to $268 million increase in overtime costs; approval by the State Legislature of a tort reform program to limit damage claims against the City, which would result in savings of $45 million; the $65 million proceeds from a proposed asset sale; additional expenditures at Health and Hospitals Corporation totaling $60 million; and $60 million of increased pension contributions resulting from lower than assumed pension fund earnings. Additional possible risks include obtaining the agreement of municipal unions to the proposed reduction in City expenditures for health care costs by $200 million; uncertainties concerning the assumed improvement in the collection of taxes, fines and fees totaling $75 million; and uncertainty concerning the receipt of the $200 million of increased Federal aid projected for the 1995 fiscal year. The City Comptroller noted that there are a number of additional issues, including possible larger than projected expenditures for foster care and public assistance and the receipt of $100 million from assumed FICA refunds. The City Comptroller has also stated in a report issued on June 8, 1994 that certain of the reductions in personnel and services proposed in the City's financial plan submitted to the Control Board on May 10, 1994 (the "May Financial Plan") will have long-term and, in some cases, severe consequences for City residents.
In addition, on July 11, 1994, the private members of the Control Board, Robert R. Kiley, Heather L. Ruth and Stanley S. Shuman, issued a statement which concluded that the 1995 fiscal year is not reasonalbly balanced and that further budget cuts are unavoidable in the next six months. In addition, the private members stated that the Financial Plan does not set forth a path to structural balance. The private members stated that, in order ot achieve this goal, City managers must be given fiscal targets they can be expected to meet; solid new proposals must be developed that back up the savings the City has committed to achieve to balance future budgets; and the deferral of expenses to future years, through actions such as the sale of property tax receivables, stretching out pension contributions and delaying debt service payments through refundings, must stop. On July 11, 1994, the Control Board staff stated that the City faces risks of greater than $1 billion and $2 billion for the 1995 and 1996 fiscal years, respectively, and risks of approximately $3 billion for each of the 1997 and 1998 fiscal years.
Substantially all of the City's full-time employees are members of labor unions. The Financial Emergency Act requires that all collective bargaining agreements entered into by the City and the Covered Organizations be consistent with the City's current financial plan, except under certain circumstances, such as awards arrived at through impasse procedures.
On January 11, 1993, the City announced a settlement with a coalition of municipal unions, including Local 237 of the International Brotherhood of Teamsters ("Local 237"), District 37 of the American Federation of State, County and Municipal Employees ("District Council 37") and other unions covering approximately 44% of the City's workforce. The settlement, which has been ratified by the unions, includes a total net expenditure increase of 8.25% over a 39- month period, ending March 31, 1995 for most of these employees. On April 9, 1993 the City announced an agreement with the Uniformed Fire Officers Association (the"UFOA") which is consistent with the coalition agreement. The agreement has been ratified. The Financial Plan reflects the costs associated with these settlements and provides for similar increases for all other City-funded employees.
The Financial Plan provides no additional wage increases for City employees after their contracts expire in the 1995 and 1996 fiscal years. Each 1% wage increase for all employees commencing in the 1995 and 1996 fiscal years would cost the City an additional $130 million for the 1995 fiscal year and $140 million for the 1996 fiscal year and $150 million each year thereafter above the amounts provided for in the Financial Plan.
The terms of eventual wage settlements could be determined through the impasse procedure in the New York City Collective Bargaining Law, which can impose a binding settlement.
New York City Indebtedness. Outstanding indebtedness having an initial maturity greater than one year from the date of issuance of the City as of March 31, 1994 was $21,290,000 compared to $19,624,000 as of March 31, 1993.
A substantial portion of the capital improvement in the City are financed by indebtedness issued by the Municipal Assistance Corporation of the City of New York ("MAC"). MAC was organized in 1975 to provide financing assistance for the City and also to exercise certain review functions with respect to the City's finances. MAC bonds are payable out of certain State sales and compensating use taxes imposed within the City, State stock transfer taxes and per capita State aid to the City. Any balance from these sources after meeting MAC debt service and reserve fund requirements and paying MAC's operating expenses is remitted to the City or, in the case of stock transfer taxes, rebated to the taxpayers. The State is not, however, obligated to continue the imposition of such taxes or to continue appropriation of the revenues therefrom to MAC, nor is the State obligated to continue to appropriate the State per capita aid to the City which would be required to pay the debt service on certain MAC obligations. MAC has not taxing power and MAC bonds do not create an enforceable obligation of either the State or the City. As of March 31, 1994, MAC had outstanding an aggregate of approximately $4.071 billion of its bonds compared to $4.470 billion as of March 31, 1993.
On February 11, 1991, Moody's Investors Service lowered its rating on the City's general obligation bonds from A to Baa1. On July 2, 1993, Standard & Poor's reconfirmed its A- rating of City bonds, continued its negative rating outlook assessment and stated that maintenance of such ratings depended upon the City's making further progress towards reducing budget gaps in the outlying years. In January 1995, Standard & Poor's reconfirmed its negative outlook and placed it on CreditWatch because of the City's accounting methods.
The State is the subject of numerous legal proceedings relating to State finances, State programs and miscellaneous tort, real property and contract claims in which the State is a defendant and where monetary damages sought are substantial. These proceedings could adversely affect the financial condition of the State in the 1994-95 fiscal years or thereafter.
In addition to the proceedings noted below, the State is party to other claims and litigation which its legal counsel has advised are not probable of adverse court decisions. Although the amounts of potential losses, if any are not presently determinable, it is the State's opinion that its ultimate liability in htese cases is not expected to have a material adverse effect on the State's financial position in the 1994-95 fiscal year or thereafter.
Potential purchasers of Units of the Trust should consider the fact that the Trust's portfolio consists primarily of securities issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and authorities and should realize the substantial risks associated with an investment in such securities. Although the General Fund of the Commonwealth (the principal operating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991, tax increases and spending decreases helped return the General Fund balance to a surplus at June 30, 1992 of $87.5 million and at June 30, 1993 of $698.9. The deficit in the Commonwealth's unreserved/undesignated funds of prior years also was reversed to a surplus of $64.4 million as of June 30, 1993.
Pennsylvania's economy historically has been dependent upon heavy industry, but has diversified recently into various services, particularly into medical and health services, education and financial services. Agricultural industries continue to be an important part of the economy, including not only the production of diversified food and livestock products, but substantial economic activity in agribusiness and food-related industries. Service industries currently employ the greatest share of non-agricultural workers, followed by the categories of trade and manufacturing. Future economic difficulties in any of these industries could have an adverse impact on the finances of the Commonwealth or its municipalities, and could adversely affect the market value of the Bonds in the Pennsylvania Trust or the ability of the respective obligors to make payments of interest and principal due on such Bonds.
Certain litigation is pending against the Commonwealth that could adversely affect the ability of the Commonwealth to pay debt service on its obligations, including suits relating to the following matters: (i) the ACLU has filed suit in federal court demanding additional funding for child welfare services; the Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania and is seeking the dismissal of the federal suit, inter alia, because of that settlement. The district court has denied class certification to the ACLU, and the parties have stipulated to a judgment against the plaintiffs to allow plaintiffs to appeal teh denial of a class certification to the Third Circuit; (ii) in 1987, the Supreme Court of Pennsylvania held that the statutory scheme for county funding of the judicial system to be in conflict with the Constitution of the Commonwealth but stayed judgment pending enactment by the legislature of funding consistent with the opinion and the legislature has yet to consider legislation implementing the judgment; (iii) several banks have filed suit against the Commonwealth contesting the constitutionality of a law enacted in 1989 imposing a bank shares tax; in July 1994, the Commonwealth Court en banc upheld the constitutionality of the 1989 bank shares tax law but struck down a companion law to provide credits againsst the bank shares tax for new banks; cross appeals from that decision to the Pennsylvania Supreme Court have been filed; (iv) litigation has been filed in both state and federal court by an association of rural and small schools and several individual school districts and parents challenging the constitutionality of the Commonwealth's system for funding local school districts--the federal case has been stayed pending resolution of the state case and the state case is in the pre-trial state (no available estimate of potential liability); (v) the ACLU has brought a class action on behalf of inmates challenging the conditions of confinement in thirteen of the Commonwealth's correctional institutions; a proposed settlement agreement has been submitted to the court and members of the class, but the court has not yet set a date for hearing on the terms of the agreement (no available estimate of potential cost of complying with the injunction sought but capital and personnel costs might cost millions of dollars) and (vi) a consortium of public interest law firms has filed a class action suit alleging that the Commonwealth has not complied with a federal mandate to provide screening, diagnostic and treatment services for all Medicaid-eligible children under 21; the district court denied class certification and has scheduled the case for trial (potentially liability estimated at between $9 million and $55 million); and (vii) litigation has been filed in federal court by the Pennsylvania Medical Society seeking payment of the full co-pay and deductible in excess of the maximum fees set under the Commonwealth's medical assistance program for outpatient services provided to medical assistance patients who were also eligible for Medicare; the Commonwealth received a favorable decision in the federal district court, but the Pennsylvania Medical Society won a reversal in the federal circuit court (potential liability estimated at $50 million per year).
The Commonwealth's general obligation bonds have been rated AA- by Standard & Poor's and A1 by Moody's for more than the last five years.
The City of Philadelphia (the "City") has been experiencing severe financial difficulties which has impaired its access to public credit markets and a long-term solution to the City's financial crisis is still being sought. The City experienced a series of General Fund deficits for fiscal years 1988 through 1992.
The City has no legal authority to issue deficit reduction bonds on its own behalf, but state legislation has been enacted to create an Intergovernmental Cooperation Authority to provide fiscal oversight for Pennsylvania cities (primarily Philadelphia) suffering recurring financial difficulties. The Authority is broadly empowered to assist cities in avoiding defaults and eliminating deficits by encouraging the adoption of sound budgetary practices and issuing bonds. In order for the Authority to issue bonds on behalf of the City, the City and the Authority entered into an intergovernmental cooperative agreement providing the Authority with certain oversight powers with respect to the fiscal affairs of the City, and the Authority approved a five-year financial plan prepared by the City. On June 16, 1992, the Authority issued a $474,555,000 bond issue on behalf of the City. The Authority approved the latest update of the five-year financial plan on May 2, 1994. The City has reported a surplus of approximately $15 million for fiscal year ending June 30, 1994. In July 1993, the Authority issued $643,430,000 of bonds to refund certain general obligation bonds of the City and to fund additional capital projects. In September 1993, the Authority issued $178,675,000 of bonds to advance refund certain of the bonds of the City and to fund additional capital projects.
On the date of this Prospectus, each Unit in a Trust represented a fractional undivided interest in the principal and net income of the Trust as set forth in the "Summary of Essential Information" in Part A. If any Units are redeemed by the Trustee, the principal amount of the Bonds in the affected Trust will be reduced by an amount allocable to redeemed Units and the fractional undivided interest in the affected Trust represented by each unredeemed Unit will be increased. Units will remain outstanding until redeemed upon tender to the Trustee by any Unit holder, which may include the Sponsor, or until the termination of the Trust Agreement. (See "Amendment and Termination of the Trust Agreement-Termination".) References in this Prospectus to "Units" are to Units which represented the fractional undivided interest indicated in the "Summary of Essential Information" of Part A.
Estimated Current Return and Estimated Long-Term Return
Under accepted bond practice, tax-exempt bonds are customarily offered to investors on a "yield price" basis (as contrasted to a "dollar price" basis) at the lesser of the yield as computed to maturity of the bonds or to an earlier redemption date and which takes into account not only the interest payable on the bonds but also the amortization or accretion to a specified date of any premium over or discount from the par (maturity) value in the bond's purchase price. Since Units of the Trust are offered on a dollar price basis, the rate of return on an investment in Units of the Trust is stated in terms of "Estimated Current Return", computed by dividing the Net Annual Income per Unit by the Public Offering Price per Unit. Any change in either the Net Annual Income per Unit or the Public Offering Price per Unit will result in a change in the Estimated Current Return. The Net Annual Income per Unit of a Trust is determined by dividing the total annual interest income of such Trust, less estimated annual fees and expenses of the Trustee, the Sponsor and the Evaluator, by the number of Units of such Trust outstanding. The Net Annual Income per Unit of a Trust will change as the income or expenses of such Trust changes and as Bonds are redeemed, paid, sold or exchanged. For a statement of the Net Annual Income per Unit and the Estimated Current Return Based on Public Offering Price, see Part A, "Summary of Essential Information".
The Estimated Long-Term Return for a Trust is a measure of the return to the investor over the estimated life of a Trust. The Estimated Long-Term Return represents an average of the yields to maturity (or call) of the Bonds in a Trust's portfolio calculated in accordance with accepted bond practice and adjusted to reflect expenses and sales charges. In calculating Estimated Long-Term Return, the average yield for a Trust's portfolio is derived by weighing each Bond's yield by the market value of the Bond and by the amount of time remaining to the date to which the Bond is priced. Once the average portfolio yield is computed, this figure is then reduced to reflect estimated expenses and the effect of the maximum sales charge paid by investors. The Estimated Long-Term Return calculation does not take into account the difference in the timing of payments to Unitholders who choose the quarterly or semi-annual plan of distribution which will reduce the economic return compared to those who choose the monthly plan of distribution.
A Trust may experience expenses and portfolio charges different from those assumed in the calculation of Estimated Long- Term Return. There thus can be no assurance that the Estimated Current Returns or Estimated Long-Term Returns quoted for a Trust will be realized in the future. Since both Estimated Current Return and Estimated Long-Term Return quoted on a given business day are based on the market value of the underlying Bonds on that day, subsequent calculations of these performance measures will reflect the then-current market value of the underlying Bonds and may be higher or lower.
The following discussion addresses only the tax consequences of Units held as capital assets and does not address the tax consequences of Units held by dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsor, under existing law:
The Trust is not an association taxable as a corporation for Federal income tax purposes, and income received by the Trust will be treated as the income of the Unit holders ("Holders") in the manner set forth below.
Each Holder will be considered the owner of a pro rata portion of each Bond in the State Trust under the grantor trust rules of Sections 671-679 of the Internal Revenue Code of 1986, as amended (the "Code"). In order to determine the face amount of a Holder's pro rata portion of each Bond on the Date of Deposit, see "Aggregate Principal" under "Portfolio of Securities". The total cost to a Holder of his Units, including sales charges, is allocated to his pro rata portion of each Bond, in proportion to the fair market values thereof on the date the Holder purchases his Units, in order to determine his tax basis for his pro rata portion of each Bond. In order for a Holder who purchases his Units on the Date of Deposit to determine the fair market value of his pro rata portion of each Bond on such date, see "Cost of Securities to Trust" under "Portfolio of Securities".
Each Holder will be considered to have received the interest on his pro rata portion of each Bond when interest on the Bond is received by the State Trust. In the opinion of bond counsel (delivered on the date of issuance of each Bond), such interest will be excludable from gross income for regular Federal income tax purposes (except in certain limited circumstances referred to below). Amounts received by the State Trust pursuant to a bank letter of credit, guarantee or insurance policy with respect to payments of principal, premium or interest on a Bond in the State Trust will be treated for Federal income tax purposes in the same manner as if such amounts were paid by the issuer of the Bond.
The Trusts may contain Bonds which were originally issued at a discount ("original issue discount"). The following principles will apply to each Holder's pro rata portion of any Bond originally issued at a discount. In general, original issue discount is defined as the difference between the price at which a debt obligation was issued and its stated redemption price at maturity. Original issue discount on a tax-exempt obligation issued after September 3, 1982, is deemed to accrue as tax-exempt interest over the life of the obligation under a formula based on the compounding of interest. Original issue discount on a tax-exempt obligation issued before July 2, 1982 is deemed to accrue as tax-exempt interest ratably over the life of the obligation. Original issue discount on any tax-exempt obligation issued during the period beginning July 2, 1982 and ending September 3, 1982 is also deemed to accrue as tax-exempt interest over the life of the obligation, although it is not clear whether such accrual is ratable or is determined under a formula based on the compounding of interest. If a Holder's tax basis for his pro rata portion of a Bond issued with original issue discount is greater than its "adjusted issue price" but less than its stated redemption price at maturity (as may be adjusted for certain payments), the Holder will be considered to have purchased his pro rata portion of the Bond at an "acquisition premium." A Holder's adjusted tax basis for his pro rata portion of a Bond issued with original issue discount will include original issue discount accrued during the period such Holder held his Units. Such increases to the Holder's tax basis in his pro rata portion of the Bond resulting from the accrual of original issue discount, however, will be reduced by the amortization of any such acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond exceeds the redemption price at maturity thereof (subject to certain adjustments), the Holder will be considered to have purchased his pro rata portion of the Bond with "amortizable bond premium". The Holder is required to amortize such bond premium over the term of the Bond. Such amortization is only a reduction of basis for his pro rata portion of the Bond and does not result in any deduction against the Holder's income. Therefore, under some circumstances, a Holder 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.
A Holder will recognize taxable gain or loss when all or part of his pro rata portion of a Bond is disposed of by the State Trust for an amount greater or less than his adjusted tax basis. Any such taxable gain or loss will be capital gain or loss, except that any gain from the disposition of a Holder's pro rata portion of a Bond acquired by the Holder at a "market discount" (i.e., where the Holder's original tax basis for his pro rata portion of the Bond (plus any original issue discount which will accrue thereon until its maturity) is less than its stated redemption price at maturity) would be treated as ordinary income to the extent the gain does not exceed the accrued market discount. Capital gains are generally taxed at the same rate as ordinary income. However, the excess of net long-term capital gains over net short-term capital losses may be taxed at a lower rate than ordinary income for certain noncorporate taxpayers. A capital gain or loss is long-term if the asset is held for more than one year and short-term if held for one year or less. The deduction of capital losses is subject to limitations. A Holder will also be considered to have disposed of all or part of his pro rata portion of each Bond when he sells or redeems all or some of his Units.
Under Section 265 of the Code, a Holder (except a corporate Holder) is not entitled to a deduction for his pro rata share of fees and expenses of the State Trust because the fees and expenses are incurred in connection with the production of tax-exempt income. Further, if borrowed funds are used by a Holder to purchase or carry Units of the State Trust, interest on such 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. Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in Congress and state legislatures which, if enacted into law, could have an adverse impact on the tax-exempt status of the Bonds. It is impossible to predict whether any legislation in respect of the tax status of interest on such obligations may be proposed and eventually enacted at the Federal or state level.
The foregoing discussion relates only to Federal and certain aspects of New York State and City income taxes. Depending on their state of residence, Holders may be subject to state and local taxation and should consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will be a preference item for purposes of the alternative minimum tax ("AMT"). The Sponsor believes that interest (including any original issue discount) on the Bonds should not be subject to the AMT for individuals or corporations under this rule. A corporate Holder should be aware, however, that the accrual or receipt of tax-exempt interest not subject to the AMT may give rise to an alternative minimum tax liability (or increase an existing liability) because the interest income will be included in the corporation's "adjusted current earnings" for purposes of the adjustment to alternative minimum taxable income required by Section 56(g) of the Code and will be taken into account for purposes of the environmental tax on corporations under Section 59A of the Code, which is based on an alternative minimum taxable income.
In addition, interest on the Bonds must be taken into consideration in computing the portion, if any, of social security benefits that will be included in an individual's gross income and subject to Federal income tax. Holders are urged to consult their own tax advisers concerning an investment in Units.
At the time of issuance of each Bond, an opinion relating to the validity of the Bond and to the exemption of interest thereon from regular Federal income taxes was or will be rendered by bond counsel. Neither the Sponsor nor Davis Polk & Wardwell nor any of the special counsel for state tax matters have made or will make any review of the proceedings relating to the issuance of the Bonds or the basis for these opinions. The tax exemption is dependent upon the issuer's (and other users') compliance with certain ongoing requirements, and the opinion of bond counsel assumes that these requirements will be complied with. However, there can be no assurance that the issuer (and other users) will comply with these requirements, in which event the interest on the Bond could be determined to be taxable retroactively to the date of issuance.
In the case of certain of the Bonds, the opinions of bond counsel indicate that interest on such Bonds received by a "substantial user" of the facilities being financed with the proceeds of such Bonds, or persons related thereto, for periods while such Bonds are held by such a user or related person, will not be exempt from regular Federal income taxes, although interest on such Bonds received by others would be exempt from regular Federal income taxes. "Substantial user" is defined under U.S. Treasury Regulations to include only a person whose gross revenue derived with respect to the facilities financed by the issuance of bonds is more than 5% of the total revenue derived by all users of such facilities, or who occupies more than 5% of the usable area of such facilities or for whom such facilities or a part thereof were specifically constructed, reconstructed or acquired. "Related persons" are defined to include certain related natural persons, affiliated corporations, partners and partnerships. Similar rules may be applicable for state tax purposes.
After the end of each calendar year, the Trustee will furnish to each Holder an annual statement containing information relating to the interest received by the State Trust on the Bonds, the gross proceeds received by the Trust from the disposition of any Bond (resulting from redemption or payment at maturity of any Bond or the sale by the State Trust of any Bond), and the fees and expenses paid by the State Trust. The Trustee will also furnish annual information returns to each Holder and to the Internal Revenue Service. Holders are required to report to the Internal Revenue Service the amount of tax-exempt interest received during the year.
The description of Federal tax consequences applies separately for each State Trust. Below, arranged alphabetically by state, is a description of certain state and local tax consequences for residents of the state and locality for which such State Trust is named.
Messrs. Morgan, Lewis & Bockius acted as special California counsel to Insured Trust 9 and all prior Insured Trusts. Messrs. Adams, Duque and Hazeltine, special California counsel to Insured Trust 21 and New York 14. At the time of the Closing for each Insured Trust, the respective counsel to the Trusts rendered an opinion under the existing law substantially to the effect that:
The Insured California Trust is not an association taxable as a corporation under the income tax laws of the State of California;
The income, deductions and credits against tax of the Insured California Trust will be treated as the income, deductions and credits against tax of the holders of Units in the Insured California Trust under the income tax laws of the State of California;
Interest on the bonds held by the Insured California Trust, and any interest income received by the Insured California Trust from its investments in units of previously formed California trusts included within a Multistate Series of Tax Exempt Securities Trust (the "Previously Formed Trusts"), to the extent that such interest is exempt from taxation under California law will not lose its character as tax- exempt income merely because that income is passed through to the holders of Units; however, a corporation subject to the California franchise tax is required to include that interest income in its gross income for purposes of determining its franchise tax liability;
Each holder of a Unit in the Insured California Trust will have a taxable event when the Insured California Trust disposes of a bond (whether by sale, exchange, redemption, or payment at maturity) or when the Unit holder redeems or sells his Units. The total tax cost of each Unit to a holder of a Unit in the Insured California Trust is allocated among each of the bond issues held in the Insured California Trust (in accordance with the proportion of the Insured California Trust comprised by each bond issue) in order to determine the holder's per Unit tax cost for each bond issue, and the tax cost reduction requirements relating to amortization of bond premium will apply separately to the per Unit tax cost of each bond issue. Therefore, under some circumstances, a holder of a Unit may realize a taxable gain when the Insured California Trust which issued such Unit disposes of a bond or the holder's Units are sold or redeemed for an amount equal to or less than his original cost of the bond or Unit. Similarly, each Unit holder will have a taxable event (i) when a Previously Formed Trust disposes of a bond, and (ii) when the Insured California Trust disposes of any of its ownership interests in a Previously Formed
Each holder of a Unit in the Insured California Trust is deemed to be the owner of a pro rata portion of the Insured California Trust under the personal property tax laws of the State of California; and
The pro rata ownership of the bonds held by the Insured California Trust, as well as the interest income therefrom, are exempt from California personal property taxes.
At the time of the closing for each Massachusetts Trust, Messrs. Palmer & Dodge, special Massachusetts counsel on Massachusetts tax matters, rendered an opinion under then existing Massachusetts law substantially to the effect that:
Tax-exempt interest for federal income tax purposes (including insurance payments to the extent they are treated as tax- exempt interest for federal income tax purposes) received by or through the Massachusetts Trust, or by or through a Previous Trust in which the Massachusetts Trusts owns an interest, on obligations issued by Massachusetts its counties, municipalities, authorities, political subdivisions, or instrumentalities, by the government of Puerto Rico or by its authority or by the government of Guam or by its authority, will not result in a Massachusetts income tax liability for the Massachusetts Trust or for Unitholders who are subject to Massachusetts income taxation under Massachusetts General Laws, Chapter 62.
Capital gain and capital loss realized by the Massachusetts Trust and included in the Federal gross income of Unitholders who are subject to Massachusetts income taxation under General Laws, Chapter 62 will be included as capital gains and losses in the Unit holder's Massachusetts gross income, except where capital gain is specifically exempted from income taxation under the Massachusetts statute authorizing issuance of the obligations held by the Massachusetts Trust or held by the Previous Trusts in which the Massachusetts Trust owns an interest, and will not result in a Massachusetts income tax liability for the Massachusetts Trust.
Gains and losses realized upon sale or redemption of Units by Unitholders who are subject to Massachusetts income taxation under Massachusetts General Law, Chapter 62 will be includible in their Massachusetts gross income.
At the time of the closing for each Pennsylvania Trust, Messrs. Drinker Biddle & Reath, special Pennsylvania counsel on Pennsylvania tax matters, rendered an opinion under then existing Pennsylvania law substantially to the effect that:
Units evidencing fractional undivided interests in the Pennsylvania Trust are not subject to any of the personal property taxes presently in effect in Pennsylvania to the extent that the Trust is comprised of bonds issued by the Commonwealth of Pennsylvania, any public authority, commission, board or other agency created by the Commonwealth of Pennsylvania, any political subdivision of the Commonwealth of Pennsylvania or any public authority created by any such political subdivision ("Pennsylvania Bonds"). The taxes referred to include the County Personal Property Tax imposed on residents of Pennsylvania by the Act of June 17, 1913, P.L. 507, as amended, and the additional personal property taxes imposed on Pittsburgh residents by the School District of Pittsburgh under the Act of June 20, 1947, P.L. 733, as amended, and by the City of Pittsburgh under Ordinance No. 599 of December 28, 1967. The portion, if any, representing Pennsylvania Bonds held by Units in a Prior Trust are also not subject to such taxes. The portion, if any, of such Units representing bonds or other obligations issued by the Government of Guam or by its authority and bonds issued by the Government of Puerto Rico or by its authority and bonds issued by the Government of the Virgin Islands or by a municipality thereof (collectively, "Possession Bonds") is not expressly exempt from taxation under the foregoing Acts, but because such bonds are expressly relieved from state taxation by United States statutes, the Commonwealth of Pennsylvania and its political subdivisions are precluded from imposing any direct tax on Possession Bonds, and, therefore, such bonds are not subject to Personal Property Tax.
Pennsylvania Trust Units may be subject to tax in the estate of a resident decedent under the Pennsylvania inheritance and estate tax.
Income received by a Unit holder attributable to interest realized by the Pennsylvania Trust from Pennsylvania Bonds, Possession Bonds and Prior Trust Units or attributable to insurance proceeds on account of such interest, is not taxable to individuals, estates or trusts under the Personal Income Tax imposed by Article III of the Tax Reform Code of 1971. Neither is such income taxable to corporations under the Corporate Net Income Tax imposed by Article IV of the Tax Reform Code of 1971 (in the case of insurance proceeds to the extent that they are exempt for Federal Income Tax purposes); nor to individuals under the Pennsylvania School District Net Income Tax ("School District Tax") imposed on Philadelphia resident individuals under authority of the Act of August 9, 1963, P.L. 640.
Income received by a Unit Holder attributable to gain on the sale or other disposition by the Pennsylvania Trust of Pennsylvania Bonds, Possession Bonds and Prior Trust Units is not taxable to individuals, estates or trusts under the Personal Income Tax. Such gain is also not taxable under the Corporate Net Income Tax or under the School District Tax, except that gain on the sale or other disposition of Possession Bonds and that portion of Prior Trust Units attributable to such bonds held for six months or less may be taxable under the School District Tax.
To the extent that gain on the disposition of a Unit represents gain realized on Pennsylvania or Possession Bonds held by the Pennsylvania Trust or held by Prior Trust Units, such gain may be subject to the Personal Income Tax and Corporate Net Income Tax. Such gain may also be subject to the School District Tax, except the gain realized with respect to a Unit held for more than six months is not subject to the School District Tax.
No opinion is expressed regarding the extent, if any, to which Units, or interest and gain thereon, is subject to, or included in the measure of, the special taxes imposed by the Commonwealth of Pennsylvania on banks and other financial institutions or any privilege, excise, franchise or other tax imposed on business entities not discussed herein (including the Corporate Capital Stock/Foreign Franchise Tax). Insurance on the Bonds in the Portfolio of a Trust
Insurance guaranteeing the scheduled payment to maturity of all principal and interest ("Insurance to Maturity") has been obtained for some or all of the Bonds in each Trust at the cost of the issuer of the Bond, a previous holder or the Sponsor as of the first business day after the Date of Deposit. Insurance to Maturity was obtained from the Municipal Bond Insurance Association ("MBIA"), as of the Date of Deposit, for all the Bonds in the Portfolios of Insured Series 1-4, Insurance to Maturity was obtained for all the Bonds in the Portfolios of Insured Series 5-9 from one or more of the following insurers; MBIA, AMBAC Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation ("MBIAC"), Capital Guaranty Insurance Company ("CGIC"), Financial Guaranty Insurance Company ("Financial Guaranty"), Asset Guaranty Reinsurance Company ("Asset Guaranty"), Capital Markets Insurance Company ("CAPMAC"), Connie Lee Insurance Company ("Connie Lee") or FInancial Security Assurance Inc. ("FSA"). (collectively, the "Insurance Companies".) For Insured Series 5 and subsequent Insured Series, the description of the Bonds under "Portfolio of Securities" in Part A indicates which Insurance Company has issued Insurance to Maturity with respect to each Bond.
The insurance policies are non-cancellable and will continue in force so long as Bonds are outstanding and the insurers remain in business. The respective insurance policies guarantee the scheduled payment of principal and interest on but do not guarantee the market value of the Bonds covered by each policy or the value of the Units. In the event the issuer of an insured Bond defaults in payment of interest or principal the insurance company insuring the Bond will be required to pay to the trustee any interest or principal payments due. Payment under each of the insurance policies is to be made in respect of principal of and interest on Bonds covered thereby which becomes due for payment but is unpaid. Each such policy provides for payment of the defaulted principal or interest due to a trustee or paying agent. In turn, such trustee or paying agent will make payment to the bondholder (in this case, the Trustee) upon presentation of satisfactory evidence of such bondholder's rights to receive such payment.
As a result of the insurance on the Bonds of each Trust, the Units thereof received a rating of AAA by Standard & Poor's Corporation as of the Date of Deposit for each such Trust. There can be no assurance that Units of a Trust will retain this AAA rating. Insurance is not a substitute for the basic credit of an issuer, but supplements the issuer's existing credit and provides additional security therefor. No representation is made as to the Insurance Companies' abilities to meet their commitments.
A description of each of the insurers follows:
AMBAC is a Wisconsin-domiciled stock insurance company, regulated by the Insurance Department of the State of Wisconsin, and licensed to do business in various states, with admitted assets of approximately $1,450,000,000 and policyholders' surplus of approximately $782,000,000 as of December 31, 1994. AMBAC is a wholly-owned subsidiary of AMBAC Inc., a financial holding company which is publicly owned following a complete divestiture by Citibank during the first quarter of 1992.
CGIC, a monoline bond insurer headquartered in San Francisco, California, was established in November 1986 to assume the financial guaranty business of United States Fidelity and Guaranty Company ("USF&G'). It is a wholly-owned subsidiary of Capital Guaranty Corporation ("CGC") whose stock is owned by: Constellation Investments, Inc., an affiliate of Baltimore Gas & Electric, Fleet/Norstar Financial Group, Inc., Safeco Corporation, Sibag Finance Corporation, an affiliate of Siemens AG, and USF&G, the 8th largest property/casualty company in the U.S. as measured by net premiums written, and CGC management. As of December 31, 1994, CGIC had total admitted assets of approximately $304,000,000 and total statutory policyholders' surplus of approximately $168,000,000 .
Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation (the "Corporation"), a Delaware holding company. Financial Guaranty, domiciled in the State of New York and located at 175 Water Street, New York, New York, 10038, commenced its business of providing insurance and financial guaranties for a variety of investment instruments in January, 1984. The Corporation is a wholly-owned subsidiary of General Electric Capital Corporation. The Corporation and General Electric Capital Corporation are not obligated to pay the debts of Financial Guaranty or the claims against Financial Guaranty. Neither the National Insured Trust nor the Units nor the portfolio is insured directly or indirectly by the Corporation.
Financial Guaranty, in addition to providing insurance for the payment of interest and principal of municipal bonds and notes held in unit investment trust portfolios, provides insurance for all or a portion of new issues of municipal bonds and notes and for municipal bonds and notes held by mutual funds. Financial Guaranty expects to provide other forms of financial guaranties in the future. It is also authorized to write fire, property damage liability, workman's compensation and employers' liability and fidelity and surety insurance. As of December 31, 1994, its total admitted assets were approximately $2,131,000,000 and its policyholders' surplus was approximately $894,000,000. Although the Sponsor has not undertaken an independent investigation of Financial Guaranty, the Sponsor is not aware that the information herein is inaccurate or incomplete. Standard & Poor's Corporation and Moody's Investors Service have rated the claims- paying ability of Financial Guaranty "AAA" and "Aaa", respectively.
Financial Guaranty is currently licensed to provide insurance in all 50 states and the District of Columbia, files reports with state insurance regulatory agencies and is subject to audit and review by such authorities. Financial Guaranty is also subject to regulation by the State of New York Insurance Department. Such regulation, however, is no guarantee that Financial Guaranty will be able to perform on its contracts of insurance in the event a claim should be made thereunder.
The information relating to Financial Guaranty contained above has been furnished by Financial Guaranty. The financial information contained herein with respect to Financial Guaranty is unaudited but appears in reports filed with state insurance regulatory authorities and is subject to audit and review by such authorities. No representation is made herein as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the dates thereof.
The insurance companies comprising MBIA and their respective percentage liabilities are as follows: The Aetna Casualty and Surety Company, thirty-three percent (33%); The Fund American Companies, Inc., thirty percent (30%); The Travelers Indemnity Company, fifteen percent (15%); Cigna Property and Casualty Company, twelve percent (12%); and The Continental Insurance Company, ten percent (10%). Each insurance company comprising MBIA is licensed to do business in various states. Such state regulation, however, is no guarantee that any of the insurance companies comprising MBIA will be able to perform on its contract of insurance in the event a claim should be made thereunder. All policies are individual obligations of the participating insurance companies and their obligations thereunder cannot be increased beyond their percentage commitment; therefore, each company will not be obligated to pay any unpaid obligation of any other member of MBIA. However, each insurance company is a multiline insurer involved in several lines of insurance other than municipal bond insurance, and the assets of each insurance company also secure all of its other insurance policy and surety bond obligations. The MBIA companies listed above or their parent organizations have been in the insurance business from seventy to well over a hundred years. Standard & Poor's Corporation rates all new issues insured by MBIA, "AAA" and Moody's Investors Service rates all bond issues insured by MBIA, "Aaa".
MBIAC is the principal operating subsidiary of MBIA, Inc. The principal shareholders of MBIA, Inc. are The Aetna Casualty and Surety Company, The Fund American Companies, Inc., subsidiaries of CIGNA Corporation and Credit Local de France, CAECL S.A., and they own approximately 35% of the outstanding common stock of MBIA Inc. Neither MBIA, Inc. nor its shareholders are obligated to pay the debts of or claims against MBIAC. MBIAC, is a limited liability corporation rather than a several liability association. MBIAC is domiciled in the State of New York and licensed to do business in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico. As of December 31, 1994, MBIAC had admitted assets of approximately $3.4 billion and policyholders' surplus of approximately $1,100,000,000. Standard & Poor's Corporation rates all new issues insured by MBIAC and Moody's Investors Service rates all bond issues insured by MBIAC, "AAA" and "Aaa", respectively.
Asset Guaranty is a New York State insurance company licensed to write financial guarantee, credit, residual value and surety insurance. Asset Guaranty commenced operations in mid-1988 by providing reinsurance to several major monoline insurers. Asset Guaranty also issued limited amounts of primary financial guaranty insurance, but not in direct competition with the primary mono-line companies for which it acts as a reinsurer. The parent holding company of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with Enhance Financial Services (EFS) in June, 1990 to form Enhance Financial Services Group Inc. (EFSG). The two main, 100%-owned subsidiaries of EFSG, Asset Guaranty and Enhance Reinsurance Company (ERC), share common management and physical resources. After an initial public offering completed in February 1992 and the sale by Merrill Lynch & Co. of its stake, EFSG is 49.8%-owned by the public, 29.9% by US West Financial Services, 14.1% by Manufacturers Life Insurance Co. and 6.2% by senior management. Both ERC and Asset Guaranty are rated "AAA" for claims paying ability by Duff & Phelps. ERC is rated triple-A for claims-paying ability by both S&P and Moody's. Asset Guaranty received a "AA" claims-paying-ability rating from S&P during August 1993, but remains unrated by Moody's. As of December 31, 1994 Asset Guaranty had admitted assets of approximately $159,000,000 and policyholders' surplus of approximately $140,000,000.
CAPMAC commenced operations in December 1987, as the second mono-line financial guaranty insurance company (after FSA) organized solely to insure non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank (New York State) to a group of 12 investors led by the following: Dillon Read's Saratoga Partners Il; L.P. (Saratoga), an acquisition fund; Caprock Management, Inc., representing Rockefeller family interests; Citigrowth Fund, a Citicorp venture capital group; and CAPMAC senior management and staff. These groups control approximately 70% of the stock of CHI. CAPMAC had traditionally specialized in guaranteeing consumer loan and trade receivable asset-backed securities. Under the new ownership group CAPMAC intends to become involved in the municipal bond insurance business, as well as their traditional non-municipal business. As of December 31, 1994 CAPMAC's admitted assets were approximately $199,000,000 and its policyholders' surplus was approximately $140,000,000.
Connie Lee is a wholly owned subsidiary of College Construction Loan Insurance Association ("CCLIA"), a government-sponsored enterprise established by Congress to provide American academic institutions with greater access to low-cost capital through enhancement. Connie Lee, the operating insurance company, was incorporated in 1987 and began business as a reinsurer of tax-exempt bonds of colleges, universities, and teaching hospitals with a concentration on the hospital sector. During the fourth quarter of 1991 Connie Lee began underwriting primary bond insurance which will focus largely on the college and university sector. CCLIA's founding shareholders are the U.S. Department of Education, which owns 36% of CCLIA, and the Student Loan Marketing Association ("Sallie Mae"), which owns 14%. The other principal owners are: Pennsylvania Public School Employees' Retirement System, Metropolitan Life Insurance Company, Kemper Financial Services, Johnson family funds and trusts, Northwestern University, Rockefeller & Co., Inc. administered trusts and funds, and Stanford University. Connie Lee is domiciled in the state of Wisconsin and has licenses to do business in 47 states and the District of Columbia. As of December 31, 1994, its total admitted assets were approximately $194,000,000 and policyholders' surplus was approximately $106,000,000.
FSA is a monoline property and casualty insurance company incorporated in New York in 1984. It is a wholly-owned subsidiary of Financial Security Assurance Holdings Ltd., a New York Stock Exchange listed company which is in turn approximately 60.5% owned by U.S. West Capital Corportion (U.S. West) 7.6% by Fund American Enterprises Holdings Inc. and 7.4% by the Tokio Marine and Fire Insurance Co. Ltd. FSA is licensed directly or indirectly through its subsidiaries to engage in the special guaranty insurance business in all 50 states, the District of Columbia, Puerto Rico and the United Kingdom. U.S. West is a subsidiary of U.S. West, Inc., which operates businesses involved in communications, data solutions, marketing services and capital assets, including the provision of telephone services in 14 states in the western and midwestern United States.
Pursuant to an intercompany agreement, liabilities on financial guaranty insurance written by FSA or either of its subsidiaries proportional to their respective capital surplus and reserves, subject to applicalbe statutory risk limitations. In addition, FSA reinsures a portion of its liabilities under certain of its financial guaranty insurance policies with other reinsureres under various quota-share treaties and on a transaction-by-transaction basis. Such reinsurance is utilized by FSA as a risk management device and to comply with certain statutory and rating agency requirements; it does not alter or limit FSA's obligations under any financial guaranty insurance policy. As of December 31, 1994 total admitted assets of FSA and its wholly-owned subsidiaries was $804,000,000 and total policyholder' surplus was $344,000,000.
Insurance companies are subject to regulation and supervision in the jurisdictions in which they do business under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation, supervision and administration relate, among other things, to: the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding reserves for unearned premiums, losses and other matters. Regulatory agencies require that premium rates not be excessive, inadequate or unfairly discriminatory. Insurance regulation in many states also includes "assigned risk" plans, reinsurance facilities, and joint underwriting associations, under which all insurers writing particular lines of insurance within the jurisdiction must accept, for one or more of those lines, risks unable to secure coverage in voluntary markets. A significant portion of the assets of insurance companies is 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 can significantly impact the insurance business. Current and proposed Federal measures which may significantly affect the insurance business include pension regulation (ERISA), controls on medical care costs, minimum standards for no-fault automobile insurance, national health insurance, personal privacy protection, tax law changes affecting life insurance companies or the relative desirability of various personal investment vehicles and repeal of the current antitrust exemption for the insurance business. (If this exemption is eliminated, it will substantially affect the way premium rates are set by all property-liability insurers.) In addition, the Federal government operates in some cases as a co-insurer with the private sector insurance companies.
Insurance companies are also affected by a variety of state and Federal regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include judicial redefinitions of risk exposure in areas such as products liability and state and Federal extension and protection of employee benefits, including pension, workers' compensation, and disability benefits. These developments may result in short-term adverse effects on the profitability of various lines of insurance. Longer-term adverse effects can often be minimized through prompt repricing of coverages and revision of policy terms. In some instances, these developments may create new opportunities for business growth. All insurance companies write policies-and set premiums based on actuarial assumptions about mortality, injury, the occurrence of accidents and other insured events. These assumptions, while well supported by past experience, necessarily do not take account of future events. The occurrence in the future of unforeseen circumstances could affect the financial condition of one or more insurance companies. The insurance business is highly competitive and with the deregulation of financial service businesses, it should become more competitive. In addition, insurance companies may expand into non-traditional lines of business which may involve different types of risks.
The financial information relating to AMBAC, CGIC, MBIA, MBIAC, Asset Guaranty, CAPMAC, Connie Lee and FSA has been obtained from publicly available sources. No representation is made herein as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the dates thereof, but the Sponsor is not aware that the information herein is inaccurate or incomplete.
The cost of the insurance (the "Insurance Premiums") for Insurance to Maturity has been paid by the issuers at the time of issuance, by a previous holder of a Bond or by the Sponsor on the first business day after the Date of Deposit. The Insurance Premiums paid by the Sponsor were paid from the acquisition profit of the Sponsor (see "Public Offering--Sponsor's and Underwriters' Profits"), and, if such profit was not sufficient to cover the cost of said Insurance Premiums, from the sales charge imposed on the purchasers of Units or from other general funds of the Sponsor.
At no cost to the Trusts, the Sponsor has borne all the expenses of creating and establishing the Trusts, including the cost of the initial preparation and execution of the Trust Agreements, initial preparation and printing of the certificates for Units, the fees of the Evaluator, legal expenses, advertising and selling expenses and other out-of-pocket expenses. The cost of maintaining the secondary market, such as printing, legal and accounting, will be borne by the Sponsor except as otherwise provided in the Trust Agreements.
Trustee's, Sponsor's and Evaluator's Fees -- The Trustee will receive for its ordinary recurring services to the Trusts an annual fee in the amount set forth in Part A -- "Summary of Essential Information". For a discussion of the services performed by the Trustee pursuant to its obligation under the Trust Agreements, see "Rights of Unit Holders". The Trustee will receive the benefit of any reasonable cash balances in the Interest and Principal Accounts.
The Portfolio supervision fee (the "Supervision Fee"), which is earned for Portfolio supervisory services is based upon the greatest face amount of Bonds in the Trust at any time during the calendar year with respect to which the fee is being computed. The Supervision Fee has been incurred by Portfolios which have come into existence after August 14, 1991, beginning with Series 345 initially, and each series, in existence, thereafter.
The Supervision Fee, which is not to exceed the amount set forth in Part A--"Summary of Essential Information," may exceed the actual costs of providing Portfolio supervisory services for such Trust, but at no time will the total amount the Sponsor receives for Portfolio supervisory services rendered to all series of Tax Exempt Securities Trust in any calendar year exceed the aggregate cost to them of supplying such services in such year. In addition, the Sponsor may also be reimbursed for bookkeeping and other administrative services provided to the Trust in amounts not exceeding their costs of providing these services.
The Evaluator determines the aggregate bid price of the underlying securities in the Trusts on a daily basis at a fee in the amount set forth under Part A, "Summary of Essential Information", for each evaluation of the Bonds in a Trust. For a discussion of the services performed by the Evaluator pursuant to its obligations under the Trust Agreements, see "Evaluator--Responsibility" and "Public Offering--Offering Price".
Any of such fees may be increased without approval of the Unit holders by amounts not exceeding proportionate increases in consumer prices for services as measured by the United States Department of Labor's Consumer Price Index entitled "All Services Less Rent" or, if such Index in no longer published, in a similar Index to be determined by the Trustee and the Sponsor. In addition, at the time of any such increase, the Trustee shall also be entitled to charge thereafter an additional fee at a rate or amount to be determined by the Trustee and the Sponsor based upon the face amount of Deposited Units in a Trust, for the Trustee's services in maintaining such Deposited Units. The approval of Unit holders shall not be required for charging of such additional fee.
Other Charges -- The following additional charges are or may be incurred by a Trust: all expenses (including counsel fees and expenses of counsel and auditors) of the Trustee incurred in connection with its activities under the Trust Agreements, including reports and communications to Unit holders; the expenses and costs of any action undertaken by the Trustee to protect the Trusts and the rights and interests of the Unit holders; fees of the Trustee for any extraordinary services performed under the Trust Agreements, indemnification of a Trustee for any loss or liability accruing to it without gross negligence, bad faith or willful misconduct on its part, arising out of or in connection with its acceptance or administration of a Trust; in the case of certain Trusts, to the extent lawful, expenses (including legal, accounting and printing expenses) of maintaining registration or qualification of the Units and/or the Trust under Federal or state securities laws subsequent to initial registration so long as the Sponsor are maintaining a market for the Units; and all taxes and other governmental charges imposed upon the Securities or any part of the Trusts (no such taxes or charges are being levied or made or, to the knowledge of the Sponsor, contemplated). The above expenses, including the Trustee's fee, when paid by or owing to the Trustee, are secured by a lien on the Trust. In addition, the Trustee is empowered to sell Bonds in order to make funds available to pay all expenses.
The Public Offering Price of the Units of the Trusts is determined by adding to the Evaluator's determination of the aggregate bid price of the Bonds per Unit a sales charge equal to the percentage of the Public Offering Price indicated for the Trust in Part A, "Summary of Essential Information". The aggregate bid price of the underlying Bonds may be expected to be less than the aggregate offering price of the Bonds. (See "Method of Evaluation".) A proportionate share of accrued and undistributed interest on the Bonds in a Trust at the date of delivery of the Units of such Trust to the purchaser is also added to the Public Offering Price.
Pursuant to employee benefit plans, Units of the Trusts are available to employees of the Sponsor, at a Public Offering Price equal to the Evaluator's determination of the aggregate bid price of Bonds of a Trust per Unit plus a sales charge of 1.25% of the Public Offering Price and after the Initial Public Offering period, at a Public Offering Price equal to the Evaluator's determination of the aggregate bid price of the Bonds of a Trust per Unit plus a sales charge of 1.25% of the Public Offering Price. Sales through such plans to employees of the Sponsor result in less selling effort and selling expenses than sales to the general public.
The aggregate bid price of the Bonds (which is used to calculate the price at which the Sponsor repurchase and sell Units in the secondary market and the Redemption Price at which Units may be redeemed) will be determined by the Evaluator (1) on the basis of the current bid prices for the Bonds, (2) if bid prices are not available for any bonds, on the basis of current bid prices of comparable securities, (3) by appraisal, or (4) by any combination of the above. Such determinations will be made each business day as of the Evaluation Time set forth in the "Summary of Essential Information" in Part A, effective for all sales made subsequent to the last preceding determination. The term "business day" as used herein shall exclude Saturdays, Sundays and any other day on which the New York Stock Exchange is closed. The difference between the bid and offering prices of the Bonds may be expected to average approximately 1.5% of principal amount. In the case of actively traded securities, the difference may be as little as 0.5 of 1%, and in the case of inactively traded securities such difference will usually not exceed 3%. The price at which Units may be repurchased by the Sponsor in the secondary market could be less than the price paid by the Unit holder. For information relating to the calculation of the Redemption Price per Unit, which is also based upon the aggregate bid price of the underlying Bonds and which may be expected to be less than the Public Offering Price per Unit, see "Rights of Unit Holders--Redemption of Units".
In determining the bid prices of Bonds covered by Insurance of Maturity, the evaluator took into account the insurance issued in respect of those Bonds and the AAA rating assigned to certain of those Bonds as a result of the insurance. In making its evaluation, the Evaluator first determined the quality of the insurance issued by the Insurance Companies and then compared the Bonds to other securities which had comparable insurance and which were of comparable quality. In addition, the Evaluator, in accordance with its practice, obtained from dealers and brokers two sets of bid prices for the Bonds: one based on actual bid prices for such Bonds (without insurance) and the other based on said dealer's or broker's estimation of such bid prices as if such Bonds were insured.
Units acquired in the secondary market (see "Public Offering--Market for Units") may be offered by this Prospectus at the Public Offering Price determined in the manner provided above (see "Public Offering--Offering Price"). The Sponsor will allow a discount on Units sold to members of the National Association of Securities Dealers, Inc. Such discount is subject to change from time to time.
Sales will be made only with respect to whole Units, and the Sponsor reserves the right to reject, in whole or in part, any order for the purchase of Units. A purchaser does not become a Unit holder (Certificate holder) or become entitled to exercise the rights of a Unit holder (including the right to redeem his Units) until he has paid for his Units. Generally, such payment must be made within five business days after an order for the purchase of Units has been placed. The price paid by a Unit holder is the Public Offering Price in effect at the time his order is received, plus accrued interest (see "Public Offering-Method of Evaluation"). This price may be different from the Public Offering price in effect on any other day, including the day on which the Unit holder made payment for the Units.
Although not obligated to do so, the Sponsor presently intends to maintain a market for the Units of the respective Trusts and to continuously offer to purchase such Units at prices based upon the aggregate bid price of the underlying Bonds which may be less than the price paid by the Unit holder. For information relating to the method and frequency of the Evaluator's determination of the aggregate bid price of the underlying Bonds. (See "Public Offering-Method of Evaluation".) The costs of maintaining the secondary market, such as printing, legal and accounting, will be borne by the Sponsor except as otherwise provided in the Trust Agreements. The Sponsor may cease to maintain such a market at any time and from time to time, without notice if the supply of Units of any of the respective Trusts exceeds demand, or for any other reason. In this event the Sponsor may nonetheless purchase Units, as a service to Unit holders, at prices based on the current Redemption Price of those Units. In the event that a market is not maintained for the Units of any of the Trusts, a Unit holder of such a Trust desiring to dispose of his Units may be able to do so only by tendering such Units to the Trustee for redemption at the Redemption Price, which is also based upon the aggregate bid price of the underlying Bonds. (See "Rights of Unit Holders--Redemption of
Unit holders may elect to exchange any or all of their Units in this series of a Trust for units of one or more of any series of Tax Exempt Securities Trust (the "Exchange Trust") available for sale in the state in which the Unit holder resides at a Public Offering Price for the units of the Exchange Trust to be acquired based on a fixed sales charge of $25 per unit. The Sponsor reserves the right to modify, suspend or terminate this plan at any time without further notice to Unit holders. Therefore, there is no assurance that a market for units will in fact exist on any given date on which a Unit holder wishes to sell his Units of this series and thus there is no assurance that the Exchange Option will be available to a Unit holder. Exchanges will be effected in whole units only. Any excess proceeds from Unit holders' Units being surrendered will be returned and Unit holders will not be permitted to advance any new money in order to complete an exchange.
An exchange of Units pursuant to the Exchange Option for units of an Exchange Trust will generally constitute a "taxable event" under the Code i.e. a Unit holder will recognize gain or loss at the time of exchange. However, an exchange of Units of this Trust for units of any other similar series of the Tax Exempt Securities Trust which are grantor trusts for U.S. Federal income tax purposes will not constitute a taxable event to the extent that the underlying securities in each trust do not differ materially either in kind or in extent. Unit holders are urged to consult their own tax advisors as to the tax consequences to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange Option at the bid prices of the underlying securities in the particular portfolio involved per unit plus a fixed charge of $25 per unit. As an example, assume that a Unit holder, who has three units of a trust with a current price of $1,020 per unit based on the bid prices of the underlying securities, desires to exchange his units for units of a series of an Exchange Trust with a current price of $880 per unit based on the bid prices of the underlying securities. In this example, the proceeds from the Unit holder's units will aggregate $3,060. Since only whole units of an Exchange Trust may be purchased under the Exchange Option, the Unit holder would be able to acquire three units in the Exchange Trust for a total cost of $2,715 ($2,640 for the units and $75 for the sales charge). The remaining $345 would be returned to the Unit holder in cash.
Distributions of interest and principal, if any, are made to Unit holders monthly. The Unit holder will have the option of either receiving his monthly income check from the Trustee or participating in one of the reinvestment programs offered by certain of the Sponsor provided such Unit holder meets the minimum qualifications of the reinvestment program and such program lawfully qualifies for sale in the jurisdiction in which the Unit holder resides. Upon enrollment in a reinvestment program, the Trustee will direct monthly interest distributions and principal distributions, if any, to the reinvestment program selected by the Unit holder. Since each Sponsor has arranged for different reinvestment alternatives, Unit holders should contact the Sponsor for more complete information, including charges and expenses. The appropriate prospectus will be sent to the Unit holder. The unit holder should read the prospectus for a reinvestment program carefully before deciding to participate. Participation in the reinvestment program will apply to all Units of a Trust owned by the Unit holder and may be terminated at any time by the Unit holder, or the program may be modified or terminated by the Trustee or the program's Sponsor.
For their services, the Sponsor receives a gross commission equal to a percentage of the Public Offering Price of the Units. In maintaining a market for the Units of the respective Trusts (see "Public Offering--Market for Units"), the Sponsor also realizes profits or sustain losses in the amount of any difference between the price at which they buy such Units and the price at which they resell or redeem such Units (see "Public Offering--Offering Price").
Ownership of Units of the respective Trusts is evidenced by registered certificates executed by the Trustee and the Sponsor. Certificates are transferable by presentation and surrender to the Trustee of the certificate properly endorsed or accompanied by a written instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any multiple thereof. A Unit holder may be required to pay $2.00 per certificate reissued or transferred, and to pay any governmental charge that may be imposed in connection with each such transfer or interchange. For new certificates issued to replace destroyed, stolen or lost certificates, the Unit holder must furnish indemnity satisfactory to the Trustee and must pay such expenses as the Trustee may incur. Mutilated certificates must be surrendered to the Trustee for replacement.
Distribution of Interest and Principal
Interest and principal received by each Trust will be distributed on each monthly Distribution Date on a pro rata basis to Unit holders in such Trust of record as of the preceding Record Date. All distributions will be net of applicable expenses and funds required for the redemption of Units and, if applicable, reimbursements to the Trustee for interest payments advanced to Unit holders on previous Monthly Distribution Dates. (See Part A, "Summary of Essential Information" and "Tax Exempt Securities Trust--Expenses and Charges" and "Rights of Unit Holders--Redemption of Units" in this
The Trustee will credit to the Interest Account of each respective Trust all interest received by such Trust, including that part of the proceeds of any disposition of Bonds of such Trust which represents accrued interest and including all moneys paid pursuant to any insurance contract representing interest on any Bond in the Trusts. Other receipts will be credited to the Principal Account of the affected Trust. The pro rata share of the Interest Account and the pro rata share of cash in the Principal Account represented by each Unit of a Trust will be computed by the Trustee each month as of the Record Date. (See Part A, "Summary of Essential Information".) Proceeds received from the disposition of any of the Bonds subsequent to a Record Date and prior to the next succeeding Distribution Date will be held in the Principal Account and will not be distributed until the following Distribution Date. The distribution to the Unit holders as of each Record Date will be made on the following Distribution Date or shortly thereafter and shall consist of an amount substantially equal to one-twelfth of such holder's pro rata share of the estimated annual income to the Interest Account after deducting estimated expenses (the "Monthly Interest Distribution") plus such holder's pro rata share of the cash balance in the Principal Account computed as of the close of business on the preceding Record Date. Persons who purchase Units between a Record Date and a Distribution Date will receive their first distribution on the second Distribution Date following their purchase of Units. No distribution need be made from the Principal Account if the balance therein is less than an amount sufficient to distribute $1.00 per Unit. The Monthly Interest Distribution per Unit as of the date of this Prospectus is shown in the "Summary of Essential Information" in Part A for the particular Trust and will change as the income and expenses of the respective Trusts change and as Bonds are exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of each Trust is paid on a semi-annual basis. Because Bond interest is not received by the Trusts at a constant rate throughout the year, any Monthly Interest Distribution may be more or less than the amount credited to the Interest Account as of the Record Date. In order to eliminate fluctuations in Monthly Interest Distributions resulting from such variances, the Trustee is required by the Trust Agreement to advance such amounts as may be necessary to provide Monthly Interest Distributions of approximately equal amounts. The Trustee will be reimbursed, without interest, for any such advances from funds available from the Interest Account on the next ensuing Record Date or Record Dates, as the case may be. If all or a portion of the Bonds for which advances have been made subsequently fail to pay interest when due and if one or more of the insurers of such Bonds fails to meet its obligation under its policy of insurance, the Trustee may recoup advances made by it in anticipation of receipt of interest payments on such Bonds by reducing the amount distributed per Unit in one or more Monthly Interest Distributions. If units are redeemed subsequent to such advances by the Trustee, but prior to receipt by the Trustee of actual notice of the failure of the issuer to pay the interest due on the underlying Bond and the concurrent failure of the respective insurance company to meet its obligation under its insurance policy, each remaining Unit holder will be subject to a greater pro rata reduction in his Monthly Interest Distribution than would have occurred absent such redemptions. Funds which are available for future distributions, payments of expenses and redemptions are in accounts which are non- interest bearing to Unit holders and are available for use by United States Trust Company of New York, pursuant to normal banking procedures. The Trustee is entitled to the benefit of holding any reasonable cash balances in the Interest and Principal Accounts. The Trustee anticipates that the average cash balance in the Interest Account will be approximately 2% in excess of the amounts anticipated to be required for Monthly Distributions to Unit holders. In addition, because of the varying interest payment dates of the Bonds comprising each Trust Portfolio, accrued interest at any point in time will be greater than the amount of interest actually received by a particular Trust and distributed to Unit holders. Therefore, there will always remain an item of accrued interest that is added to the value of the Units. This excess accrued but undistributed interest amount is known as the accrued interest carryover. If a Unit holder sells all or redeems a portion of his Units, a portion of his sale proceeds will be allocable to his proportionate share of the accrued interest carryover. Similarly, if a Unit holder sells or redeems all or a portion of his Units, the Redemption Price per Unit which he is entitled to receive from the Trustee will include accrued interest carryover on the Bonds. (See "Rights of Unit Holders --Redemption of Units--Computation of
As of the first day of each month the Trustee will deduct from the Interest Account of each Trust and, to the extent funds are not sufficient therein, from the Principal Account of such Trust, amounts necessary to pay the expenses of such Trust. (See "Tax Exempt Securities Trust--Expenses and Charges".) The Trustee also may withdraw from said account such amounts, if any, as it deems necessary to establish a reserve for any governmental charges payable out of the Trust. Amounts so withdrawn shall not be considered a part of the Trust's assets until such time as the Trustee shall return all or any part of such amounts to the appropriate account. In addition, the Trustee may withdraw from the Interest Account and the Principal Account such amounts as may be necessary to cover redemption of Units by the Trustee. (See "Rights of Unit Holders--Redemption of Units".) The Trustee is also entitled to withdraw from the Interest Account, and, to the extent funds are not sufficient therein, from the Principal Account, on one or more Record Dates as may be appropriate, amounts sufficient to recoup advances which it has made in anticipation of the receipt by a Trust of interest in respect of Bonds which subsequently fail to pay interest when due.
The Trustee shall furnish Unit holders in connection with each distribution a statement of the amount of interest, if any, and the amount of other receipts, if any, which are being distributed, expressed in each case as a dollar amount per Unit. In the event that the issuer of any of the Bonds fails to make payment when due of any interest or principal and such failure results in a change in the amount that would otherwise be distributed as a monthly distribution, the Trustee will, with the first such distribution following such failure, set forth in an accompanying statement, the issuer and the Bonds, the amount of the reduction in the distribution per Unit resulting from such failure, the percentage of the aggregate principal amount of Bonds which such Bond represents and, to the extent then determined, information regarding any disposition or legal action with respect to such Bond. Within a reasonable time after the end of each calendar year, the Trustee will furnish to each person who at any time during the calendar year was a Unit holder of record, a statement (1) as to the Interest Account: interest received (including amounts representing interest received upon any disposition of Bonds), deductions for payment of applicable taxes and for fees and expenses of the Trust, redemption of Units and the balance remaining after such distributions and deductions, expressed both as a total dollar amount and as a dollar amount representing the pro rata share of each Unit outstanding on the last business day of such calendar year; (2) as to the Principal Account: the dates of disposition of any Bonds and the net proceeds received therefrom (excluding any portion representing interest), deductions for payments of applicable taxes and for fees and expenses of the Trust, redemptions of Units, and the balance remaining after such distributions and deductions, expressed both as a total dollar amount and as a dollar amount representing the pro rata share of each Unit outstanding on the last business day of such calendar year; (3) a list of Bonds held and the number of Units outstanding on the last business day of such calendar year; (4) the Redemption Price per Unit based upon the last computation thereof made during such calendar year; and (5) amounts actually distributed during such calendar year from the Interest Account and from the Principal Account, separately stated, expressed both as total dollar amounts and as dollar amounts representing the pro rata share of each Unit outstanding. The accounts of Trusts will be audited not less frequently than annually by independent auditors designated by the Sponsor, and the report of such auditors shall be furnished by the Trustee to Unit holders of such Trusts upon request.
The Trustee shall keep available for inspection by Unit holders at all reasonable times during the usual business hours, books of record and account of its transactions as Trustee including records of the names and addresses of Unit holders, certificates issued or held, a current list of Bonds in the Portfolio and a copy of the Trust Agreement.
Units may be tendered to the Trustee for redemption at its unit investment trust office at 770 Broadway, New York, New York 10003, upon payment of any relevant tax. At the present time there are no specific taxes related to the redemption of the Units. No redemption fee will be charged by the Sponsor or the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates for Units to be redeemed must be properly endorsed or accompanied by a written instrument of transfer. Unit holders must sign exactly as their name appears on the face of the certificate with the signature guaranteed by an officer of a national bank or trust company or by a member of either the New York, Midwest or Pacific Stock Exchange. In certain instances the Trustee may require additional documents such as, but not limited to, trust instruments, certificates of death, appointments as executor or administrator or certificates of corporate authority.
Within seven calendar days following such tender, the Unit holder will be entitled to receive in cash an amount for each Unit tendered equal to the Redemption Price per Unit computed as of the Evaluation Time set forth in the "Summary of Essential Information" of Part A on the date of tender. (See "Redemption of Units-- Computation of Redemption Price per Unit".) The "date of tender" is deemed to be the date on which Units are received by the Trustee, except as regards Units received after the close of trading on the New York Stock Exchange, the date of tender is the next day on which such Exchange is open for trading, and such Units will be deemed to have been tendered to the Trustee on such day for redemption at the Redemption Price computed on that day. For information relating to the purchase by the Sponsor of Units tendered to the Trustee for redemption at prices which may, in certain circumstances, be in excess of the Redemption Price, see "Redemption of Units--Purchase by the Sponsor of Units Tendered for Redemption."
Accrued interest paid on redemption shall be withdrawn from the Interest Account, or, if the balance therein is insufficient, from the Principal Account. All other amounts paid on redemption shall be withdrawn from the Principal Account. The Trustee is empowered to sell Bonds in order to make funds available for redemption. Such sales, if required, could result in a sale of Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and diversity of each Trust will be reduced.
The Trustee reserves the right to suspend the right of redemption and to postpone the date of payment of the Redemption Price per Unit for any period during which the New York Stock Exchange is closed, other than weekend and holiday closings, or trading on that Exchange is restricted or during which (as determined by the Securities and Exchange Commission) an emergency exists as a result of which disposal or evaluation of the underlying Bonds is not reasonably practicable, or for such other periods as the Securities and Exchange Commission has by order permitted.
Computation of Redemption Price per Unit - The Redemption Price per Unit of a Trust is determined by the Trustee on the basis of the bid prices of the Bonds in such Trust as of the Evaluation Time on the date any such determination is made. The Redemption Price per Unit of a Trust is each Unit's pro rata share, determined by the Trustee, of: (1) the aggregate value of the Bonds in such Trust on the bid side of the market (determined by the Evaluator as set forth under "Public Offering Prices--Method of Evaluation"), (2) cash on hand in such Trust, and accrued and unpaid interest on the Bonds as of the date of computation, less (a) amounts representing taxes or governmental charges payable out of such Trust, (b) the accrued expenses of such Trust, and (c) cash held for distribution to Unit holders of such Trust of record as of a date prior to the evaluation.
Purchase by the Sponsor of Units Tendered for Redemption--The Trust Agreement requires that the Trustee notify the Sponsor of any tender of Units for redemption. So long as the Sponsor is maintaining a bid in the secondary market, the Sponsor, prior to the close of business on the second succeeding business day, will purchase any Units tendered to the Trustee for redemption at the price so bid by making payment therefore to the Unit holder in an amount not less than the Redemption Price not later than the day on which the Units would otherwise have been redeemed by the Trustee. (See "Public Offering-- Market for Units".) Units held by the Sponsor may be tendered to the Trustee for redemption as any other Units, provided that the Sponsor shall not receive for Units purchased as set forth above a higher price than it paid, plus accrued interest.
The offering price of any Units resold by the Sponsor will be the Public Offering Price determined in the manner provided in this Prospectus. (See "Public Offering--Offering Price".) Any profit resulting from the resale of such Units will belong to the Sponsor which likewise will bear any loss resulting from a lower offering or redemption price subsequent to their acquisition of such Units. (See
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013 ("Smith Barney"), was incorporated in Delaware in 1960 and traces its history through predecessor partnerships to 1873. Smith Barney, an investment banking and securities broker-dealer firm, is a member of the New York Stock Exchange, Inc. and other major securities and commodities exchanges, the National Association of Securities Dealers, Inc. and the Securities Industry Association. Smith Barney is an indirect, wholly-owned subsidiary of Travelers Group Inc. (formerly, Primerica Corporation).
Smith Barney sponsors numerous open-end investment companies and closed-end investment companies. Smith Barney also sponsors all Series of Corporate Securities Trust, Government Securities Trust and Harris, Upham Tax-Exempt Fund and acts as co- sponsor of certain trusts of The Equity Income Fund, Concept Series. The Sponsor has acted previously as managing underwriter of other investment companies. In addition to participating as a member of various underwriting and selling groups or as agent of other investment companies, the Sponsor also executes orders for the purchase and sale of securities of investment companies and sell securities to such companies in its capacities as broker or dealer in securities.
The Sponsor is liable for the performance of its obligations arising from their responsibilities under the Trust Agreement, but will be under no liability to Unit holders for taking any action of refraining from any action in good faith or for errors in judgment or responsible in any way for depreciation or loss incurred by reason of the sale of any Bonds, except in cases of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties. (See "Tax Exempt Securities Trust--Portfolio" and "Sponsor --
Although the Trusts are not actively managed as mutual funds are, the portfolios are reviewed periodically on a regular cycle. The Sponsor is empowered to direct the Trustee to dispose of Bonds or deposited Units of other Trusts when certain events occur that adversely affect the value of the Bonds, if the Sponsor determine that any insurance that may be applicable to the Bonds cannot be relied upon to maintain the interests of the Trusts to at least as great an extent as such disposition, including default in payment of interest or principal, default in payment of interest or principal on other obligations of the same issuer, institution of legal proceedings, default under other documents adversely affecting debt service, decline in price or the occurrence of other market or credit factors, or decline in projected income pledged for debt service on revenue Bonds and advanced refunding that, in the opinion of the Sponsor, may be detrimental to the interests of the Unit Holders.
The Sponsor intends to provide portfolio services for each Trust in order to determine whether the Trustee should be directed to dispose of any such Bonds.
It is the responsibility of the Sponsor to instruct the Trustee to reject any offer made by an issuer of any of the Bonds to issue new obligations in exchange and substitution for any Bonds pursuant to a refunding or refinancing plan, except that the Sponsor may instruct the Trustee to accept such an offer or to take any other action with respect thereto as the Sponsor may deem proper if the issuer is in default with respect to such Bonds or in the judgment of the Sponsor the issuer will probably default in respect to such Bonds in the foreseeable future. Any obligations so received in exchange or substitution will be held by the Trustee subject to the terms and conditions of the Trust Agreement to the same extent as Bonds originally deposited thereunder. Within five days after the deposit of obligations in exchange or substitution for underlying Bonds, the Trustee is required to give notice thereof to each Unit holder, identifying the Bonds eliminated and the Bonds substituted therefor. Except as stated in this paragraph, the acquisition by the Trust of any securities other than the Bonds initially deposited in each respective Trust is prohibited.
If the Sponsor resigns or otherwise fails or becomes unable to perform its duties under the Trust Agreement, and no express provision is made for action by the Trustee in such event, the Trustee may appoint a successor sponsor or terminate the Trust Agreement and liquidate the affected Trusts.
The Trustee is the United States Trust Company of New York, with its principal place of business at 114 West 47th Street, New York, New York 10036. United States Trust Company of New York has, since its establishment in 1853, engaged primarily in the management of trust and agency accounts for individuals and corporations. The Trustee is a member of the New York Clearing House Association and is the subject to supervision and examination by the Superintendent of Banks of the State of New York, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. In connection with the storage and handling of certain Bonds deposited in the Trust, the Trustee may use the services of The Depository Trust Company. These services may include safekeeping of the Bonds and coupon- clipping, computer book-entry transfer and institutional delivery services. The Depository Trust Company is a limited purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System and a clearing agency registered under the Securities Exchange Act of 1934.
The Trustee shall not be liable or responsible in any way for depreciation or loss incurred by reason of the disposition of any moneys, securities or certificates or in respect of any evaluation or for any action taken in good faith reliance on prima facie properly executed documents except in cases of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations and duties. In addition, the Trustee shall not be personally liable for any taxes or other governmental charges imposed upon or in respect of a Trust which the Trustee may be required to pay under current or future law of the United States or any other taxing authority having jurisdiction. (See "Tax Exempt Securities Trust -- Portfolio".) For information relating to the responsibilities and indemnification of the Trustee under the Trust Agreement, reference is made to the material set forth under "Rights of Unit Holders", "Sponsor -- Resignation" and "Other Charges".
By executing an instrument in writing and filing the same with the Sponsor, the Trustee and any successor may resign. In such an event the Sponsor is obligated to appoint a successor trustee as soon as possible. If the Trustee becomes incapable of acting or becomes bankrupt or its affairs are taken over by public authorities, the Sponsor may remove the Trustee and appoint a successor as provided in the Trust Agreement. Such resignation or removal shall become effective upon the acceptance of appointment by the successor trustee. If no successor has accepted the appointment within thirty days after notice of resignation, the retiring trustee may apply to a court of competent jurisdiction for the appointment of a successor. The resignation or removal of a trustee becomes effective only when the successor trustee accepts its appointment as such or when a court of competent jurisdiction appoints a successor trustee.
The Evaluator is Kenny Information, Systems, Inc., a division of J.J. Kenny Co., Inc. with main offices located at 65 Broadway, New York, New York 10006.
The Trustee, Sponsor and Unit holders may rely on any evaluation furnished by the Evaluator and shall have no responsibility for the accuracy thereof. Determinations by the Evaluator under the Trust Agreement shall be made in good faith upon the basis of the best information available to it; provided, however, that the Evaluator shall be under no liability to the Trustee, the Sponsor, or Unit holders for errors in judgment. But this provision shall not protect the Evaluator in cases of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties.
The Trust Agreement requires the Evaluator to evaluate the Bonds of a Trust on the basis of their bid prices on the last business day of June and December in each year, on the day on which any Unit of such Trust is tendered for redemption and on any other day such evaluation is desired by the Trustee or is requested by the Sponsor. For information relating to the responsibility of the Evaluator to evaluate the Bonds on the basis of their bid prices see "Public Offering -- Offering Price".
The Evaluator may resign or may be removed by the joint action of the Sponsor and the Trustee, and in such event, the Sponsor and the Trustee are to use their best efforts to appoint a satisfactory successor. Such resignation or removal shall become effective upon the acceptance of appointment by a successor evaluator. If upon resignation of the Evaluator no successor has accepted appointment within thirty days after notice of resignation, the Evaluator may apply to a court of competent jurisdiction for the appointment of a successor.
AMENDMENT AND TERMINATION OF THE TRUST
The Sponsor and the Trustees have the power to amend the Trust Agreement without the consent of any of the Unit holders when such an amendment is (1) to cure any ambiguity or to correct or supplement any provision of the Trust Agreement which may be defective or inconsistent with any other provision contained therein, or (2) to make such other provisions as shall not adversely affect the interests of the Unit holders; provided, that the Trust Agreement is not amended to increase the number of Units issuable thereunder or to permit the deposit or acquisition of securities either in addition to or in substitution for any of the Bonds initially deposited in the respective Trusts, except for the substitution of certain refunding securities for such Bonds or to permit the Trustee to engage in business or in investment activities not specifically authorized in the Trust Agreement as originally adopted. In the event of any amendment, the Trustee is obligated to notify promptly all Unit holders of the substance of such amendment.
The Trust Agreement provides that if the principal amount of Bonds is less than 50% of the principal amount of the Bonds originally deposited in such Trust, the Trustee may in its discretion and will, when directed by the Sponsor, terminate such Trust. Each Trust may be terminated at any time by 100% of the Unit holders. See Part A for additional mandatory and optional termination provisions. However, in no event may any trust continue beyond the Mandatory Termination Date set forth in Part A of this Prospectus under "Summary of Essential Information". In the event of termination, written notice thereof will be sent by the Trustee to all Unit holders. Within a reasonable period after termination, the Trustee will sell any Bonds remaining in the affected Trust, and, after paying all expenses and charges incurred by such Trust, will distribute to each Unit holder, upon surrender for cancellation of his certificate for Units, his pro rata share of the balances remaining in the Interest Account and Principal Account of such Trust.
Certain legal matters in connection with the Units offered hereby have been passed upon by Messrs. Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, as special counsel for the Sponsor. Messrs. Carter, Ledyard & Milburn, 2 Wall Street, New York, New York 10005, act as counsel for the Trustee.
The Statements of Financial Condition and Portfolio of Securities of each Trust included in this Prospectus have been audited by KPMG Peat Marwick LLP, independent auditors, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing.
A Standard & Poor's corporate or municipal bond rating is a current assessment of the creditworthiness of an obligor with respect to a specific debt obligation. This assessment of creditworthiness may take into consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a security, inasmuch as it does not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished to Standard & Poor's by the issuer and obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform any audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
A summary of the meaning of the applicable rating symbols as published by Standard & Poor's follows:
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree.
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--Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to weakened capacity to pay interest and repay principal for bonds in this category than for bonds in higher-rated categories.
BB,B,CCC,CC,C--Debt rated BB,B,CCC,CC and C is regarded, on balance, as predominantly 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 C 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.
D--Debt rated D is in default, and payment of interest and/or repayment of principal is in arrears.
Plus (+) or Minus (-): To provide more detailed indications of credit quality, 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.
Provisional Ratings: The letter "p" following a rating indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by 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. Accordingly, the investor should exercise his own judgment with respect to such likelihood and risk.
Conditional rating(s), indicated by "Con" are given to bonds for which the continuance of the security rating is contingent upon Standard & Poor's receipt of an executed copy or closing documentation confirming investments and cash flows and/or the security rating is conditional upon the issuance of insurance by the respective insurance company.
A summary of the meaning of the applicable Moody's Investors Service's rating symbols and their meanings is as follows:
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 edge". Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of a high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. Aa bonds are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuations of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A--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 s 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 the 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.
Caa--Bonds which are 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 which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which 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.
Note: Those municipal bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1, respectively. In addition, Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Although Industrial Revenue Bonds and Environmental Control Revenue Bonds are tax-exempt issues, they are included in the corporate bond rating system.
Conditional ratings, indicated by "Con" are given to bonds for which the security depends upon the completion of some act or the fulfillment of some condition. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operating experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. A parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition.
Note: NR indicates, among other things, that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's Corporation and Moody's Investors Service do not rate a particular type of obligation as a matter of policy. Subsequent to the Date of Deposit the credit characteristics of the Issuers of Securities may have changed. Currently, certain of the Securities in the portfolio of a Trust may be unrated and have credit characteristics comparable to securities rated below the minimum requirements of such Trust for acquisition of a Security. See Part A- "Portfolio of Securities" herein to ascertain the ratings on the Securities, if any, on the date of the Portfolio of Securities.
A brief description of the applicable Fitch Investors Service, Inc. rating symbols and their meanings is as follows:
AAA--Bonds which are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds which 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.
A--Bonds which 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-Bonds which 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 these bonds will fall below investment grade is higher than for bonds with higher ratings.
Plus (+) 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', 'DDD', 'DD' or 'D' categories.
Conditional--A conditional rating is promised on the successful completion of a project of the occurrence of a specific event.
Duff & Phelps Credit Rating Co.
A brief description of the applicable Duff & Phelps Credit Rating Co. rating symbols and their meanings is as follows:
AAA-Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions.
A-Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles.
NR-Not rated (credit characteristics comparable to A or better on the Date of Deposit).
This Prospectus contains information concerning the Trust and the Sponsors, but does not contain all the information set forth in the registration statements and exhibits relating thereto, which the Trust has filed with the Securities and Exchange Commission, Washington, D.C. under the Securities Act of 1933 and the Investment Company Act of 1940, and to which reference is hereby made.
This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, securities in any state to any person to whom it is not lawful to make such offer in such state.
INFORMATION NOT REQUIRED IN PROSPECTUS
This Post-Effective Amendment to the Registration Statement on Form S-6 comprises the following papers and documents:
The facing Sheet on Form S-6.
The Prospectus consisting of pages A-1 - A- , and 1- , back cover.
Written consents of the following persons:
a division of Kenny Information Systems, Inc.
*4.6A - Consent of Kenny S&P Evaluation Services, a division of Kenny Information Systems, Inc. as Evaluator.
A Division of Kenny Information Systems, Inc. New York, New York, 1146-2511
1345 Avenue of the Americas
Insured Series 21& New York 14
We have examined the post-effective Amendment to the Registration Statement File No. 33-29107 for the above-captioned trust. We hereby acknowledge that Kenny S&P Evaluation Services, a division of Kenny Information Systems, Inc. is currently acting as the evaluator for the trust. We hereby consent to the use in the Amendment of the reference to Kenny S&P Evaluation Services, a division of Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings indicated in the above-referenced Amendment to the Registration Statement for the respective bonds comprising the trust portfolio are the ratings currently indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter with the Securities and Exchange Commission.
The consent of counsel to the use of their name in the Prospectus included in this Post- Effective Amendment to the Registration Statement ("Post- Effective Amendment") is contained in their opinion filed as Exhibit 3.1 to the Registration Statement.
We consent to the use of our report dated July 28, 1995 included herein and to the reference to our firm under the heading "AUDITORS" in the prospectus.
Pursuant to the requirements of the Securities Act of 1933, the registrant, Tax Exempt Securities Trust, Insured Series 14, certifies that it meets all the requirements for effectiveness of this Post-Effective Amendment pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment 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 3rd day of August, 1995. Signatures appear on pages II-3 and II-4.
A majority of the members of the Board of Directors of Smith Barney Incorporated have signed this Post-Effective Amendment pursuant to Powers of Attorney authorizing the person signing this Post-Effective Amendment to do so on behalf of such members.
These Powers of Attorney were filed with the Securities and Exchange Commission under the Securities Act of 1933 with the Registration Statement of Tax Exempt Securities Trust, Appreciation Series 7, Registration No. 2-78499 and with the Registration Statement of Tax Exempt Securities Trust, Series 110, Intermediate Term Series 15 and Short-Intermediate Term Series 13, Registration Nos. 2-97179, 2-95591 and 2-96184, respectively, with the Registration Statement of Tax Exempt Securities Trust, Series 284, Amendment No. 2, Registration No. 33-22777, with the Registration Statement of Tax Exempt Securities Trust, Series 295, Amendment No. 1, Registration No. 33-26376, and with the Registration Statement of Tax Exempt Securities Trust, Series 335, Amendment No. 1, Registration No. 33-37952.
By the following persons,* who constitute a majority of the directors of Smith Barney Inc. :
* Pursuant to Powers of Attorney previously filed. | 485BPOS | 485BPOS | 1996-01-16T00:00:00 | 1996-01-16T10:50:25 |
0000912057-96-000518 | 0000912057-96-000518_0000.txt | As filed with the Securities and Exchange Commission on January 16, 1996
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 24 /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: (800) 766-3863
c/o Robertson, Stephens & Company, L.P. (Name and Address of Agent for Service)
Approximate date of proposed public offering : As soon as practicable after this Amendment becomes effective.
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to paragraph (b); /x / On January 18, 1996 pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a)(1); / / On (date) pursuant to paragraph (a)(1); / / 75 days after filing pursuant to paragraph (a)(2); or / / On (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
The Registrant has registered an indefinite number of its shares of beneficial interest, pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Registrant filed a Rule 24f-2 Notice on May 31, 1995 for the fiscal year ended March 31, 1995.
The information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement.
(The Robertson Stephens Contrarian Fund) (The Robertson Stephens Developing Countries Fund) (The Robertson Stephens Emerging Growth Fund) (The Robertson Stephens Global Low-Priced Stock Fund) (THE ROBERTSON STEPHENS GLOBAL NATURAL RESOURCES FUND) (The Robertson Stephens Growth & Income Fund) (The Robertson Stephens Information Age Fund) (The Robertson Stephens Partners Fund) (The Robertson Stephens Value + Growth Fund)
San Francisco, CA 94104 PROSPECTUS
Robertson Stephens Investment Trust offers shares of nine mutual funds. The Funds make available the expertise of the investment professionals at Robertson Stephens Investment Management:
THE ROBERTSON STEPHENS CONTRARIAN FUND seeks maximum long-term growth by investing in growing companies worldwide that have been overlooked by other investors. The Contrarian Fund also seeks to take advantage of both rising and, to a lesser degree, declining markets. The Fund may borrow money in an attempt to increase its investment return.
THE ROBERTSON STEPHENS DEVELOPING COUNTRIES FUND seeks long-term capital appreciation by investing primarily in developing country equity securities. The Fund may borrow money in an attempt to increase its investment return.
THE ROBERTSON STEPHENS EMERGING GROWTH FUND seeks capital appreciation by investing primarily in common stocks of emerging growth companies with above-average growth prospects.
THE ROBERTSON STEPHENS GLOBAL LOW-PRICED STOCK FUND seeks long-term growth of capital by investing in low-priced stocks of companies around the world.
THE ROBERTSON STEPHENS GLOBAL NATURAL RESOURCES FUND seeks long-term capital appreciation by investing in securities of issuers located anywhere in the world in the natural resources industries.
THE ROBERTSON STEPHENS GROWTH & INCOME FUND seeks long-term total return by investing in equity securities and debt securities, focusing on small- and mid-cap companies that offer potential for capital appreciation, current income, or both.
THE ROBERTSON STEPHENS INFORMATION AGE FUND seeks long-term capital appreciation by aggressive investing primarily in companies within the information technology sector.
THE ROBERTSON STEPHENS PARTNERS FUND seeks long-term growth by investing primarily in equity securities of U.S. small-cap companies, using a value methodology combining Graham & Dodd balance sheet analysis with cash flow analysis.
THE ROBERTSON STEPHENS VALUE + GROWTH FUND seeks capital appreciation by investing primarily in mid-cap growth companies with favorable relationships between price/earnings ratios and growth rates, in sectors offering the potential for above-average returns.
This Prospectus explains concisely the information about the Trust that a prospective investor should know before investing in the Funds. Please read it carefully and keep it for future reference. Investors can find more detailed information about the Funds in the November 15, 1995 Statement of Additional Information, as amended from time to time. For a free copy of the Statement of Additional Information, please call 1-800-766-FUND. The Statement of Additional Information has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 following table summarizes an investor's maximum transaction costs from investing in each of the Funds and expenses incurred by each of the Funds based on its most recent fiscal year (except in the case of Funds which have only recently commenced operations, where the table shows the expenses those Funds expect to incur in their first fiscal year). The Example shows the cumulative expenses attributable to a hypothetical $1,000 investment in the Funds over specified periods.
* A $9.00 fee is charged for redemptions made by bank wire.
(as a percentage of average net assets)
(1) Reflecting applicable expense limitations.
An investment of $1,000 in the Fund would incur the following expenses, assuming 5% annual return and redemption at the end of each period:
This information is provided to help investors understand the operating expenses of the Funds. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE PERFORMANCE. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN. Management Fees and Total Fund Operating Expenses for the Contrarian Fund, and Other Expenses and Total Fund Operating Expenses for the Developing Countries Fund reflect expense limitations in effect for the most recent fiscal year. In addition, Rule 12b-1 Expenses for the Developing Countries Fund have been restated to reflect a reduction in such Expenses. In the absence of the expense limitations the Management Fees and Total Fund Operating Expenses for the year would have been 1.50% and 2.58%, respectively, for the Contrarian Fund, and the Other Expenses and the Total Fund Operating Expenses for the Developing Countries Fund would have been 1.96% and 3.46%, respectively. The Management Fees paid by the Funds are higher than those paid by most other mutual funds. Because of Rule 12b-1 fees paid by certain of the Funds, long-term shareholders of those Funds may pay more than the economic equivalent of the maximum front-end sales load permitted under applicable broker-dealer sales rules. The Trustees have proposed to shareholders of the Value + Growth Fund that they approve a Distribution Plan under which the Fund would pay fees to Robertson, Stephens & Company, L.P. at an annual rate of 0.25% of the Fund's average daily net assets. If the Plan is implemented, the Fund's Management Fees would be reduced by the amount of any payments to Robertson, Stephens & Company, L.P. under the Plan. See "The Funds' Distributor," below.
THE CONTRARIAN FUND, THE DEVELOPING COUNTRIES FUND, AND THE VALUE + GROWTH FUND
The financial highlights presented below, covering the life of each Fund, have been audited by Price Waterhouse LLP, independent accountants. The audited financial statements for these periods are contained in the Statement of Additional Information.
Per share data is determined by using the average number of shares outstanding throughout the period.
(1) If the Contrarian Fund had paid all of its expenses and there had been no reimbursement by Robertson, Stephens & Company Investment Management, L.P. ("RSIM, L.P."), the ratio of expenses to average net assets for the year ended March 31, 1995 would have been 2.58%, and the ratio of net investment income/(loss) to average net assets would have been (0.42)%.
(2) If the Developing Countries Fund had paid all of its expenses and there had been no reimbursement by RSIM, L.P., the ratio of expenses to average net assets for the period ended March 31, 1995 would have been 3.46% (annualized), and the ratio of net investment income to average net assets would have been 0.41% (annualized).
(3) If the Value + Growth Fund had paid all of its expenses and had received no reimbursement from RSIM, L.P., the ratio of expenses to average net assets for the period ended March 31, 1994 and March 31, 1993 would have been 2.35% and 2.71% (annualized), respectively, and the ratio of net investment income/(loss) to average net assets would have been (1.31)% and (0.12)% (annualized), respectively.
The financial highlights presented below, covering the life of the Fund, have been audited by Price Waterhouse LLP, independent accountants, for the years ended after December 31, 1990. The audited financial statements of the Fund for these periods are contained in the Statement of Additional Information.
Per share data is determined by using the average number of shares outstanding throughout the period.
(1) Data for 1987 is limited to the one month after the Emerging Growth Fund's shares were first offered to the public on November 30, 1987. The ratios and portfolio turnover rate are not annualized for this one month.
The Robertson Stephens Mutual Funds are designed to make available to mutual fund investors the expertise of the investment professionals at Robertson, Stephens & Company Investment Management, L.P. and Robertson Stephens Investment Management, Inc. (Robertson, Stephens & Company Investment Management, L.P. and Robertson Stephens Investment Management, Inc. are referred to collectively in this Prospectus as "Robertson Stephens Investment Management").
THE FUNDS' INVESTMENT STRATEGIES AND PORTFOLIO INVESTMENTS WILL DIFFER FROM THOSE OF MOST OTHER MUTUAL FUNDS. ROBERTSON STEPHENS INVESTMENT MANAGEMENT SEEKS AGGRESSIVELY TO IDENTIFY FAVORABLE SECURITIES, ECONOMIC AND MARKET SECTORS, AND INVESTMENT OPPORTUNITIES THAT OTHER INVESTORS AND INVESTMENT ADVISERS MAY NOT HAVE IDENTIFIED. WHEN ROBERTSON STEPHENS INVESTMENT MANAGEMENT IDENTIFIES SUCH AN INVESTMENT OPPORTUNITY, IT MAY DEVOTE MORE OF A FUND'S ASSETS TO PURSUING THAT OPPORTUNITY, OR AT DIFFERENT TIMES, THAN MANY OTHER MUTUAL FUNDS, AND MAY SELECT INVESTMENTS FOR THE FUND THAT WOULD BE INAPPROPRIATE FOR LESS AGGRESSIVE MUTUAL FUNDS. IN ADDITION, UNLIKE MOST OTHER MUTUAL FUNDS, MANY OF THE FUNDS MAY ENGAGE IN SHORT SALES OF SECURITIES WHICH INVOLVE SPECIAL RISKS.
None of the Funds, other than the Growth & Income Fund, invests for current income. Each of the Funds may hold a portion of its assets in cash or money market investments.
The investment objectives and policies of each Fund may, unless otherwise specifically stated, be changed by the Trustees of the Trust without shareholder approval. All percentage limitations on investments will apply at the time of investment and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of the investment. There can, of course, be no assurance that a Fund will achieve its investment objective.
For a description of certain risks associated with the Funds' investment practices, see "Other investment practices and risk considerations", below.
THE CONTRARIAN FUND'S INVESTMENT OBJECTIVE IS MAXIMUM LONG-TERM GROWTH. Normally, the Contrarian Fund seeks this growth by aggressive yet flexible investing world-wide in growing companies that are attractively priced. The Contrarian Fund focuses its investments primarily on equity securities of domestic, multinational, and foreign companies whose potential values generally have been overlooked by other investors. Such companies include attractively priced businesses that have not yet been discovered or become popular, previously unpopular companies having growth potential due to changed circumstances, companies that have declined in value and no longer command an investor following, and previously popular companies temporarily out of favor due to short-term factors.
In implementing its "contrarian" investment strategy, the Fund may take positions that are different from those taken by other mutual funds. For example, the Fund may sell the stocks of some issuers short, and may take positions in options and futures contracts in anticipation of a market decline. The Fund is a non-diversified mutual fund.
THE DEVELOPING COUNTRIES FUND'S INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL APPRECIATION. The Fund invests primarily in a non-diversified portfolio of publicly traded developing country equity securities. The Fund may also, to a lesser degree, invest in private placements of developing country equity securities.
Developing country equity securities are securities which are principally traded in the capital markets of a developing country; securities of companies that derive at least 50% of their total revenues from either goods produced or services performed in developing countries or from sales made in developing countries, regardless of where the securities of such companies are principally traded; securities of companies organized under the laws of, and with a principal office in, a developing country; securities of investment companies (such as country funds) that principally invest in developing country securities; and American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) with respect to the securities of such companies. Developing countries are countries that in the opinion of Robertson Stephens Investment Management are generally considered to be developing countries by the international financial community. The Fund will normally invest at least 65% of its assets in developing country equity securities. The Fund is a non-diversified mutual fund.
The Developing Countries Fund may invest up to 10% of its total assets in shares of other investment companies. Such other investment companies would likely pay expenses similar to those paid by the Fund, including, for example, advisory and administrative fees. Robertson Stephens Investment Management will waive its investment advisory fees on the Fund's assets invested in other open-end investment companies, to the extent of the advisory fees of those investment companies attributable to the Fund's investment.
In selecting investments for the Fund, Robertson Stephens Investment Management may consider a number of factors in evaluating potential investments, including political risks, classic macroeconomic variables, and equity market valuations. Robertson Stephens Investment Management may also focus on the quality of a company's management, the company's growth prospects, and the financial well being of the company. The Developing Countries Fund's investments generally will reflect a broad cross-section of countries, industries, and companies in order to minimize risk. In situations where the market for a particular security is determined by Robertson Stephens Investment Management to be sufficiently liquid, the Fund may engage in short sales. Prior to July 1995, the Developing Countries Fund was known as the "Robertson Stephens Emerging Markets Fund."
THE EMERGING GROWTH FUND'S INVESTMENT OBJECTIVE IS CAPITAL APPRECIATION. The Fund invests in an actively managed diversified portfolio of equity securities (principally common stocks) of emerging growth companies. Emerging growth companies are companies that, in the opinion of Robertson Stephens Investment Management, have the potential, based on superior products or services, operating characteristics, and financing capabilities, for more rapid growth than the overall economy.
The Emerging Growth Fund's investments generally are held in a portfolio of securities of companies in industry segments that are experiencing rapid growth such as segments of high technology, environmental and health care-related industries and in companies with proprietary manufacturing or service businesses. Robertson Stephens Investment Management may consider a number of factors in evaluating potential investments, including the quality of management, the state of development of the technology involved, the market for the company's products, and the financial condition of the company. Among the aspects of a company's financial condition which may be considered by Robertson Stephens Investment Management are the company's earnings growth prospects, the availability of cash flow and assets to finance research and product development, and the company's return on capital.
THE GLOBAL LOW-PRICED STOCK FUND
THE GLOBAL LOW-PRICED STOCK FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH.
Fund intends to invest in "low-priced" stocks (prices no greater than $10 per share) of companies worldwide that have future growth potential, but are overlooked or underappreciated by other investors.
Robertson Stephens Investment Management believes there are substantial opportunities to discover and invest in undervalued companies that have long-term growth prospects. Such companies include attractively priced businesses that have not yet been discovered by other investors, previously out-of-favor companies having growth potential due to changing circumstances, companies that have declined in value and no longer command an investor following, and companies temporarily out of favor due to short-term factors. In most cases there will be little coverage by Wall Street analysts of the companies in which the Fund invests. Institutional ownership will also usually be limited.
It has been the experience of Robertson Stephens Investment Management that attractive investment opportunities often exist in companies whose stock price is $10 or less per share. For many reasons, including limits on purchasing the stocks "on margin" (with borrowed money), many investors do not buy low-priced stocks. The result is less competition from other investors, and the potential that a company's value may not be reflected fully in its stock price.
In selecting securities for the Fund's portfolio, Robertson Stephens Investment Management uses a "bottom-up" analysis, looking at companies of all sizes, and in all industries and geographical markets. Robertson Stephens Investment Management uses fundamental analysis focusing on a company's financial condition, profitability prospects, and capital needs going forward.
Robertson Stephens Investment Management will likely invest in certain stocks before other investors recognize their value. The result could be a lack of stock price movement in the near term. Investors should therefore have a long-term investment horizon when investing in the Fund.
Although the Fund will seek to invest principally in common stocks, it may also invest any portion of its assets in preferred stocks, warrants, and debt securities if Robertson Stephens Investment Management believes they would help achieve the Fund's objective. The Fund will normally invest substantially all of its assets in low-priced stocks, and will normally invest in securities of issuers located in at least three countries, one of which may be the United States.
Smaller companies may present greater opportunities for investment return, but may also involve greater risks. They may have limited product lines, markets, or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume. As a result, the prices of these securities may fluctuate more than prices of securities of larger, more widely traded companies. See "Investments in smaller companies," below.
THE GLOBAL NATURAL RESOURCES FUND'S INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL APPRECIATION. The Fund will invest primarily in securities of issuers in the natural resources industries. The Fund is designed for investors who believe that investment in securities of such companies provides the opportunity for capital appreciation, while offering the potential over the long term to limit the adverse effects of inflation. The Fund may invest in securities of issuers located anywhere in the world if Robertson Stephens Investment Management believes they offer the potential for capital appreciation.
Although the Fund will seek to invest principally in common stocks, it may also invest in preferred stocks, securities convertible into common stocks or preferred stocks, and warrants to purchase common stocks or preferred stocks. The Fund will seek to invest in companies with strong potential for earnings growth, and whose earnings and tangible assets could benefit from accelerating inflation. Robertson Stephens Investment Management believes that companies in the natural resources industries with the flexibility to adjust prices or control operating costs offer attractive opportunities for capital growth when inflation is rising.
Companies in the NATURAL RESOURCES INDUSTRIES include companies that Robertson Stephens Investment Management considers to be principally engaged in the discovery, development, production, or distribution of natural resources, the development of technologies for the production or efficient use of natural resources, or the furnishing of related supplies or services. Natural resources include, for example, energy sources, precious metals, forest products, real estate, nonferrous metals, and other basic commodities.
Companies in the natural resources industries may include, for example:
- COMPANIES THAT PARTICIPATE IN THE DISCOVERY AND DEVELOPMENT OF NATURAL RESOURCES from new or conventional sources.
- COMPANIES THAT OWN OR PRODUCE NATURAL RESOURCES such as oil, natural gas, precious metals, and other commodities.
- COMPANIES THAT ENGAGE IN THE TRANSPORTATION, DISTRIBUTION, OR PROCESSING of natural resources.
- COMPANIES THAT CONTRIBUTE NEW TECHNOLOGIES FOR THE PRODUCTION OR EFFICIENT USE OF NATURAL RESOURCES, such as systems for energy conversion, conservation, and pollution control.
- COMPANIES THAT PROVIDE RELATED SERVICES such as mining, drilling, chemicals, and related parts and equipment.
A particular company will be considered to be principally engaged in the natural resources industries if at the time of investment Robertson Stephens Investment Management determines that at least 50% of the company's assets, gross income, or net profits are committed to, or derived from, those industries. A company will also be considered to be principally engaged in the natural resources industries if Robertson Stephens Investment Management considers that the company has the potential for capital appreciation primarily as a result of particular products, technology, patents, or other market advantages in those industries.
The Fund will normally invest at least 65% of its assets in securities of companies in the natural resources industries. The Fund may invest the remainder of its assets in securities of companies in any industry if Robertson Stephens Investment Management believes they would help achieve the Fund's objective of long-term capital appreciation. The portion of the Fund's assets invested in such securities will vary, depending on Robertson Stephens Investment Management's evaluation of economic conditions, inflationary expectations, and other factors affecting companies in the natural resources industries and other sectors. The Fund may also sell securities short if it expects their market price to decline. The Fund will normally invest in securities of issuers located in at least three countries, one of which may be the United States.
Because the Fund's investments are concentrated in the natural resources industries, the value of its shares will be especially affected by factors peculiar to those industries and may fluctuate more widely than the value of shares of a portfolio which invests in a broader range of industries. For example, changes in commodity prices may affect both the industries which produce, refine, and distribute them and industries which supply alternate sources of commodities. In addition, certain of these industries are generally subject to greater government regulation than many other industries; therefore, changes in regulatory policies may have a material effect on the business of companies in these industries.
THE GROWTH & INCOME FUND
THE GROWTH & INCOME FUND'S INVESTMENT OBJECTIVE IS LONG-TERM TOTAL RETURN. The Fund will pursue this objective primarily by investing in equity and debt securities, focusing on small-and mid-cap companies that offer the potential for capital appreciation, current income, or both.
The Fund will normally invest the majority of its assets in common and preferred stocks, convertible securities, bonds, and notes. Although the Fund will focus on companies with market capitalizations of up to $3 billion, the Fund intends to remain flexible and may invest in securities of larger companies. The Fund may also engage in short sales of securities it expects to decline in price. The Fund intends to pay dividends quarterly; the amount of any dividends will fluctuate.
Small- and mid-cap companies may present greater opportunities for investment return, but may also involve greater risks. They may have limited product lines, markets, or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume. As a result, the prices of these securities may fluctuate more than prices of securities of larger, widely traded companies. See "Investments in smaller companies," below.
THE INFORMATION AGE FUND'S INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL APPRECIATION. The Fund is designed for investors who believe that aggressive investment in common stocks of companies in the information technology industries provides significant opportunities for capital appreciation. While ordinary mutual funds may place some of their portfolios in securities of companies in the information technology sector, the Robertson Stephens Information Age Fund focuses its investments in that sector.
Although the Fund will seek to invest principally in common stocks, it may also invest any portion of its assets in preferred stocks and warrants if Robertson Stephens Investment Management believes they would help achieve the Fund's objective. The Fund may also engage in short sales of securities it expects to decline in price.
Companies in the INFORMATION TECHNOLOGY INDUSTRIES include companies that Robertson Stephens Investment Management considers to be principally engaged in the development, production, or distribution of products or services related to the processing, storage, transmission, or presentation of information or data. The following examples illustrate the wide range of products and services provided by these industries:
- COMPUTER HARDWARE AND SOFTWARE of any kind, including, for example, semiconductors, minicomputers, and peripheral equipment.
- TELECOMMUNICATIONS products and services.
- MULTIMEDIA products and services, including, for example, goods and services used in the broadcast and media industries.
- DATA PROCESSING products and services.
- FINANCIAL SERVICES COMPANIES that collect or disseminate market, economic, and financial information.
A particular company will be considered to be principally engaged in the information technology industries if at the time of investment Robertson Stephens Investment Management determines that at least 50% of the company's assets, gross income, or net profits are committed to, or derived from, those industries. A company will also be considered to be principally engaged in the information technology industries if Robertson Stephens Investment Management considers that the company has the potential for capital appreciation primarily result of particular products, technology, patents, or other market advantages in those industries. The Fund will normally invest at least 65% of its assets in securities of companies in the information technology industries.
Because the Fund's investments are concentrated in the information technology industries, the value of its shares will be especially affected by factors peculiar to those industries and may fluctuate more widely than the value of shares of a portfolio which invests in a broader range of industries. For example, many products and services are subject to risks of rapid obsolescence caused by technological advances. Competitive pressures may have a significant effect on the financial condition of companies in the information technology industries. For example, if information technology continues to advance at an accelerated rate, and the number of companies and product offerings continues to expand, these companies could become increasingly sensitive to short product cycles and aggressive pricing. In addition, many of the activities of companies in the information technology industries are highly capital intensive, and it is possible that a company which invests substantial amounts of capital in the development of new products or services will be unable to recover its investment or otherwise to meet its obligations.
THE PARTNERS FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH. The Fund will employ a value methodology to invest in equity securities primarily of companies with market capitalizations of up to $750 million. This traditional value methodology combines Graham & Dodd balance sheet analysis with cash flow analysis.
In selecting investments for the Fund, Robertson Stephens Investment Management will:
- Perform fundamental research focusing on
- Observe how management allocates
- Strive to understand the unit economics of the business of the company;
- Key on the cash flow rate of return on capital
- Discern the sources and uses of cash;
- Consider how management is
- Ask how the stock market is pricing the entire company.
At times, the Fund may invest all or most of its assets in securities of U.S. issuers. At other times, the Fund may invest any portion of its assets in foreign securities, if Robertson Stephens Investment Management believes they offer attractive investment values.
Small companies may present greater opportunities for investment return, but may also involve greater risks. They may have limited product lines, markets, or financial resources, or may depend on a limited management group. Their securities may trade less frequently and in limited volume. As a result, the prices of these securities may fluctuate more than prices of securities of larger, widely traded companies. See "Investments in smaller companies," below.
Although the Fund will seek to invest principally in common stocks, it may also invest in preferred stocks, warrants, and debt securities if Robertson Stephens Investment Management believes they would help achieve the Fund's objectives. The Fund may also hold a portion of its assets in cash or money market instruments. The Fund is a non-diversified mutual fund.
THE VALUE + GROWTH FUND
THE VALUE + GROWTH FUND'S INVESTMENT OBJECTIVE IS CAPITAL APPRECIATION. The Fund invests primarily in mid-cap growth companies with favorable relationships between price/earnings ratios and growth rates, in sectors offering the potential for above-average returns. Mid-cap companies are companies with market capitalizations ranging from $750 million to approximately $2 billion, although the Fund's investments may include securities of larger or smaller companies.
In selecting investments for the Fund, Robertson Stephens Investment Management's primary emphasis is typically on evaluating a company's management, growth prospects, business operations, revenues, earnings, cash flows, and balance sheet in relationship to its share price. Robertson Stephens Investment Management may select stocks which it believes are undervalued relative to the current stock price. Undervaluation of a stock can result from a variety of factors, such as a lack of investor recognition of (1) the value of a business franchise and continuing growth potential, (2) a new, improved or upgraded product, service or business operation, (3) a positive change in either the economic or business condition for a company, (4) expanding or changing markets that provide a company with either new earnings direction or acceleration, or (5) a catalyst, such as an impending or potential asset sale or change in management, that could draw increased investor attention to a company. Robertson Stephens Investment Management also may use similar factors to identify stocks which it believes to be overvalued, and may engage in short sales of such securities.
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The Funds may also engage in the following investment practices, each of which involves certain special risks. The Statement of Additional Information contains more detailed information about these practices (some of which may be considered "derivative" investments), including limitations designed to reduce these risks.
INVESTMENTS IN SMALLER COMPANIES. Each of the Funds may invest a substantial portion of its assets in securities issued by small companies. Such companies may offer greater opportunities for capital appreciation than larger companies, but investments in such companies may involve certain special risks. Such companies may have limited product lines, markets, or financial resources and may be dependent on a limited management group. While the markets in securities of such companies have grown rapidly in recent years, such securities may trade less frequently and in smaller volume than more widely held securities. The values of these securities may fluctuate more sharply than those of other securities, and a Fund may experience some difficulty in establishing or closing out positions in these securities at prevailing market prices. There may be less publicly available information about the issuers of these securities or less market interest in such securities than in the case of larger companies, and it may take a longer period of time for the prices of such securities to reflect the full value of their issuers' underlying earnings potential or assets.
Some securities of smaller issuers may be restricted as to resale or may otherwise be highly illiquid. The ability of a Fund to dispose of such securities may be greatly limited, and a Fund may have to continue to hold such securities during periods when Robertson Stephens Investment Management would otherwise have sold the security. It is possible that Robertson Stephens Investment Management or its affiliates or clients may hold securities issued by the same issuers, and may in some cases have acquired the securities at different times, on more favorable terms, or at more favorable prices, than a Fund.
SHORT SALES. (ALL FUNDS EXCEPT THE EMERGING GROWTH, GLOBAL LOW-PRICED STOCK, AND PARTNERS FUNDS.) When Robertson Stephens Investment Management anticipates that the price of a security will decline, it may sell the security short and borrow the same security from a broker or other institution to complete the sale. A Fund may make a profit or incur a loss depending upon whether the market price of the security decreases or increases between the date of the short sale and the date on which the Fund must replace the borrowed security.
All short sales must be fully collateralized, and no Fund will sell securities short if, immediately after and as a result of the sale, the value of all securities sold short by the Fund exceeds 25% of its total assets. Each of the Funds limits short sales of any one issuer's securities to 2% of the Fund's total assets and to 2% of any one class of the issuer's securities.
FOREIGN SECURITIES. The Funds may invest in securities principally traded in foreign markets. Since foreign securities are normally denominated and traded in foreign currencies, the value of a Fund's assets may be affected favorably or unfavorably by currency exchange rates and exchange control regulations. There may be less information publicly available about a foreign company than about a U.S. company, and foreign companies are not generally subject to accounting, auditing, and financial reporting standards and practices comparable to those in the United States. The securities of some foreign companies are less liquid and at times more volatile than securities of comparable U.S. companies. Foreign brokerage commissions and other fees are also generally higher than in the United States. Foreign settlement procedures and trade regulations may involve certain risks (such as delay in payment or delivery of securities or in the recovery of a Fund's assets held abroad) and expenses not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation of assets, imposition of currency exchange controls, confiscatory taxation, political or financial instability, and diplomatic developments that could affect the value of a Fund's investments in certain foreign countries. Legal remedies available to investors in certain foreign countries may be more limited than those available with respect to investments in the United States or in other foreign countries. In the case of securities issued by a foreign governmental entity, the issuer may in certain circumstances be unable or unwilling to meet its obligations on the securities in accordance with their terms, and a Fund may have limited recourse available to it in the event of default. The laws of some foreign countries may limit a Fund's ability to invest in securities of certain issuers located in those foreign countries. Special tax considerations apply to foreign securities. A Fund may buy or sell foreign currencies and options and futures contracts on foreign currencies for hedging purposes in connection with its foreign investments.
Certain Funds may at times invest a substantial portion of their assets in securities of issuers in developing countries. Investments in developing countries are subject to the same risks applicable to foreign investments generally, although those risks may be increased due to conditions in such countries. For example, the securities markets and legal systems in developing countries may only be in a developmental stage and may provide few, or none, of the advantages or protections of markets or legal systems available in more developed countries. Although many of the securities in which the Funds may invest are traded on securities exchanges, they may trade in limited volume, and the exchanges may not provide all of the conveniences or protections provided by securities exchanges in more developed markets. The Funds may also invest a substantial portion of their assets in securities traded in the over-the-counter markets in such countries and not on any exchange, which may affect the liquidity of the investment and expose the Funds to the credit risk of their counterparties in trading those investments.
DEBT SECURITIES. Each of the Funds may invest in debt securities from time to time, if Robertson Stephens Investment Management believes that they might help achieve the Fund's objective. The Growth & Income Fund and the Partners Fund may invest without limit in debt securities and other fixed-income securities. Each of the other Funds may invest in debt securities to the extent consistent with its investment policies, although Robertson Stephens Investment Management expects that under normal circumstances those Funds would not likely invest a substantial portion of their assets in debt securities.
The CONTRARIAN FUND and the GROWTH & INCOME FUND may invest in lower-quality, high-yielding debt securities. Lower-rated debt securities (commonly called "junk bonds") are considered to be of poor standing and predominantly speculative. Securities in the lowest rating categories may have extremely poor prospects of attaining any real investment standing and may be in default. The rating services' descriptions of securities in the lower rating categories, including their speculative characteristics, are set forth in the Statement of Additional Information.
Like those of other fixed-income securities, the values of lower-rated securities fluctuate in response to changes in interest rates. In addition, the lower ratings of such securities reflect a greater possibility that adverse changes in the financial condition of the issuer, or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. Changes by recognized rating services in their ratings of any fixed-income security and in the ability or perceived inability of an issuer to make payments of interest and principal may also affect the value of these investments. See the Statement of Additional Information.
EACH OF THE OTHER FUNDS will invest only in securities rated "investment grade" or considered by Robertson Stephens Investment Management to be of comparable quality. Investment grade securities are rated Baa or higher by Moody's Investors Service, Inc. or BBB or higher by Standard & Poor's Corporation. Securities rated Baa or BBB lack outstanding investment characteristics, have speculative characteristics, and are subject to greater credit and market risks than higher-rated securities. Descriptions of the securities ratings assigned by Moody's and Standard & Poor's are described in the Statement of Additional Information.
Any of the Funds may at times invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount from face value and pay interest only at maturity rather than at intervals during the life of the security. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. The values of zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation in response to changes in market interest rates than bonds which pay interest currently, and may involve greater credit risk than such bonds.
A Fund will not necessarily dispose of a security when its debt rating is reduced below its rating at the time of purchase, although Robertson Stephens Investment Management will monitor the investment to determine whether continued investment in the security will assist in meeting the Fund's investment objective.
BORROWING AND LEVERAGE. The CONTRARIAN FUND and DEVELOPING COUNTRIES FUND may borrow money to invest in additional portfolio securities. This practice, known as "leverage", increases a Fund's market exposure and its risk. When a Fund has borrowed money for leverage and its investments increase or decrease in value, the Fund's net asset value will normally increase or decrease more than if it had not borrowed money. The interest the Fund must pay on borrowed money will reduce the amount of any potential gains or increase any losses. The extent to which a Fund will borrow money, and the amount it may borrow, depend on market conditions and interest rates. Successful use of leverage depends on Robertson Stephens Investment Management's ability to predict market movements correctly. A Fund may at times borrow money by means of reverse repurchase agreements. Reverse repurchase agreements generally involve the sale by a Fund of securities held by it and an agreement to repurchase the securities at an agreed-upon price, date, and interest payment. Reverse repurchase agreements will increase a Fund's overall investment exposure and may result in losses.
OPTIONS AND FUTURES. A Fund may buy and sell call and put options to hedge against changes in net asset value or to attempt to realize a greater current return. In addition, through the purchase and sale of futures contracts and related options, a Fund may at times seek to hedge against fluctuations in net asset value and to attempt to increase its investment return. The Partners Fund does not currently expect to engage in transactions in futures contracts.
A Fund's ability to engage in options and futures strategies will depend on the availability of liquid markets in such instruments. It is impossible to predict the amount of trading interest that may exist in various types of options or futures contracts. Therefore, there is no assurance that a Fund will be able to utilize these instruments effectively for the purposes stated above. Although a Fund will only engage in options and futures transactions for limited purposes, those transactions involve certain risks which are described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and may require a Fund to segregate assets to cover its outstanding positions. For more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. A Fund may buy and sell index futures contracts ("index futures") and options on index futures and on indices for hedging purposes (or may purchase warrants whose value is based on the value from time to time of one or more foreign securities indices). An index future is a contract to buy or sell units of a particular bond or stock index at an agreed price on a specified future date. Depending on the change in value of the index between the time when the Fund enters into and terminates an index futures or option transaction, the Fund realizes a gain or loss. A Fund may also buy and sell index futures and options to increase its investment return.
LEAPS AND BOUNDS. The Value + Growth Fund may purchase long-term exchange-traded equity options called Long-Term Equity Anticipation Securities ("LEAPs") and Buy-Write Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the opportunity to participate in the underlying securities' appreciation in excess of a fixed dollar amount, and BOUNDs provide a holder the opportunity to retain dividends on the underlying securities while potentially participating in the underlying securities' capital appreciation up to a fixed dollar amount. The Value + Growth Fund will not purchase these options with respect to more than 25% of the value of its net assets and will limit the premiums paid for such options in accordance with the most restrictive applicable state securities laws.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. Options and futures transactions involve costs and may result in losses. Certain risks arise because of the possibility of imperfect correlations between movements in the prices of futures and options and movements in the prices of the underlying security or index or of the securities held by a Fund that are the subject of a hedge. The successful use by a Fund of the strategies described above further depends on the ability of Robertson Stephens Investment Management to forecast market movements correctly. Other risks arise from a Fund's potential inability to close out futures or options positions. Although a Fund will enter into options or futures transactions only if Robertson Stephens Investment Management believes that a liquid secondary market exists for such option or futures contract, there can be no assurance that a Fund will be able to effect closing transactions at any particular time or at an acceptable price. Certain provisions of the Internal Revenue Code may limit a Fund's ability to engage in options and futures transactions.
Each Fund expects that its options and futures transactions generally will recognized exchanges. A Fund may in certain instances purchase and sell options in the over-the-counter markets. A Fund's ability to terminate options in the over-the-counter markets may be more limited than for exchange-traded options, and such transactions also involve the risk that securities dealers participating in such transactions would be unable to meet their obligations to the Fund. A Fund will, however, engage in over-the-counter transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of Robertson Stephens Investment Management, the pricing mechanism and liquidity of the over-the-counter markets are satisfactory and the participants are responsible parties likely to meet their obligations.
A Fund will not purchase futures or options on futures or sell futures if, as a result, the sum of the initial margin deposits on the Fund's existing futures positions and premiums paid for outstanding options on futures contracts would exceed 5% of the Fund's assets. (For options that are "in-the-money" at the time of purchase, the amount by which the option is "in-the-money" is
NON-DIVERSIFICATION AND SECTOR CONCENTRATION. The Contrarian Fund, the Developing Countries Fund, and the Partners Fund are "non-diversified" investment companies under the Investment Company Act of 1940. This means that each of those Funds may invest its assets in a limited number of issuers. Under the Internal Revenue Code, a Fund generally may not invest more than 25% of its assets in obligations of any one issuer other than U.S. Government obligations and, with respect to 50% of its total assets, a Fund may not invest more than 5% of its total assets in the securities of any one issuer (except U.S. Government securities). Thus, a Fund may invest up to 25% of its total assets in the securities of each of any two issuers. This practice involves an increased risk of loss to a Fund if the market value of a security should decline or its issuer were otherwise not to meet its obligations.
At times a Fund may invest more than 25% of its assets in securities of issuers in one or more market sectors such as, for example, the technology sector. A market sector may be made up of companies in a number of related industries. A Fund would only concentrate its investments in a particular market sector if the Fund's investment adviser were to believe the investment return available from concentration in that sector justifies any additional risk associated with concentration in that sector. When a Fund concentrates its investments in a market sector, financial, economic, business, and other developments affecting issuers in that sector will have a greater effect on the Fund than if it had not concentrated its assets in that sector.
Currently, the Contrarian Fund has invested a significant portion of its assets in companies within a number of industries involving base metals, precious metals, and oil/energy. In addition, the Value + Growth Fund has invested a significant portion of its assets in companies within a number of industries in the technology and telecommunications sectors. Accordingly, the performance of these Funds may be subject to a greater risk of market fluctuation than that of a fund invested in a wider spectrum of market or industrial sectors.
SECURITIES LOANS AND REPURCHASE AGREEMENTS. Each of the Funds may lend portfolio securities to broker-dealers and may enter into repurchase agreements. These transactions must be fully collateralized at all times, but involve some risk to a Fund if the other party should default on its obligations and the Fund is delayed or prevented from recovering the collateral.
DEFENSIVE STRATEGIES. At times, Robertson Stephens Investment Management may judge that market conditions make pursuing a Fund's basic investment strategy inconsistent with the best interests of its shareholders. At such times, Robertson Stephens Investment Management may temporarily use alternative strategies, primarily designed to reduce fluctuations in the values of the Fund's assets. In implementing these
"defensive" strategies, a Fund may invest in U.S. Government securities, other high-quality debt instruments, and other securities Robertson Stephens Investment Management believes to be consistent with the Fund's best interests.
PORTFOLIO TURNOVER. The length of time a Fund has held a particular security is not generally a consideration in investment decisions. The investment policies of a Fund may lead to frequent changes in the Fund's investments, particularly in periods of volatile market movements. A change in the securities held by a Fund is known as "portfolio turnover." Portfolio turnover generally involves some expense to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. Such sales may result in realization of taxable capital gains. Annual portfolio turnover is expected to be less than 100% for the Partners Fund and the Global Natural Resources Fund and 200% for the Growth & Income, Global Low-Priced Stock, and Information Age Funds. The Portfolio turnover rates for the other Funds are set forth under "Financial Highlights."
The Trustees of the Trust are responsible for generally overseeing the conduct of the Trust's business. ROBERTSON, STEPHENS & COMPANY INVESTMENT MANAGEMENT, L.P., 555 California Street, San Francisco, CA 94104, is the investment adviser for each of the Funds other than the Emerging Growth Fund. Robertson, Stephens & Company Investment Management, L.P., a California limited partnership, was formed in 1993 and is registered as an investment adviser with the Securities and Exchange Commission. The general partner of Robertson, Stephens & Company Investment Management, L.P. is Robertson, Stephens & Company, Inc., and the principal limited partner is Robertson, Stephens & Company, L.P., the Funds' distributor and a major investment banking firm specializing in emerging growth companies that has developed substantial investment research, underwriting, and venture capital expertise. Since 1978, Robertson, Stephens & Company, L.P. has managed underwritten public offerings for over $15.23 billion of securities of emerging growth companies. Robertson, Stephens & Company Investment Management, L.P. and its affiliates have in excess of $2.7 billion under management in public and private investment funds. Robertson, Stephens & Company, L.P., its general partner, Robertson, Stephens & Company, Inc., and Sanford R. Robertson may be deemed to be control persons of Robertson, Stephens & Company Investment Management, L.P.
ROBERTSON STEPHENS INVESTMENT MANAGEMENT, INC., 555 California Street, San Francisco, CA 94104 is the investment adviser for the Emerging Growth Fund. Robertson Stephens Investment Management, Inc. commenced operations in March 1986 and is registered as an investment adviser with the Securities and Exchange Commission and is an indirect wholly-owned subsidiary of Robertson, Stephens & Company, L.P.
Subject to such policies as the Trustees may determine, Robertson Stephens Investment Management furnishes a continuing investment program for the Funds and makes investment decisions on their behalf pursuant to Investment Advisory Agreements with each Fund. Robertson Stephens Investment Management is also responsible for overall management of the Funds' business affairs, subject to the authority of the Board of Trustees, and provides office space and officers for the Trust. The Trust pays all expenses not assumed by Robertson Stephens Investment Management including, among other things, Trustees' fees, auditing, accounting, legal, custodial, investor servicing, and shareholder reporting expenses, and payments under the Funds' Distribution Plans.
Robertson Stephens Investment Management places all orders for purchases and sales of the Funds' securities. In selecting broker-dealers, Robertson Stephens Investment Management may consider research and brokerage services furnished to it and its affiliates. Robertson, Stephens & Company, L.P. may receive brokerage commissions from the Funds in accordance with procedures adopted by the Trustees under the Investment Company Act of 1940 which require periodic review of these transactions. Subject to seeking the most favorable price and execution available, Robertson Stephens Investment Management may consider sales of shares of the Funds as a factor in the selection of broker-dealers.
ADMINISTRATIVE SERVICES. Each of the Growth & Income, Global Low-Priced Stock, Global Natural Resources, and Information Age Funds has entered into an agreement with Robertson Stephens Investment Management pursuant to which Robertson Stephens Investment Management provides administrative services to the Fund. Each Fund pays Robertson Stephens Investment Management a fee for such services at the annual rate of 0.25% of the Fund's average daily net assets.
PAUL H. STEPHENS has served as the Contrarian Fund's portfolio manager since its inception in June 1993. He is a founder of Robertson, Stephens & Company, L.P. In addition to managing public investment portfolios for individuals since 1975, Mr. Stephens has acted as the firm's Chief Investment Officer since 1978.
ROBERT C. CZEPIEL, the principal executive officer of Robertson Stephens Investment Management, Inc. who, with the help of his staff, has been responsible for managing the Emerging Growth Fund's portfolio since that Fund's inception in November 1987, is an accomplished investment professional with over twenty years of experience as a securities analyst (primarily in emerging growth and high-technology companies). Additionally, he has over ten years' experience as a portfolio manager, including four years with CIGNA Investments where he managed five portfolios with net assets ranging from $25-80 million.
RONALD E. ELIJAH has managed the Value + Growth Fund's portfolio since that Fund's inception in April 1992. Mr. Elijah is also the portfolio manager for the Information Age Fund. From August 1985 to January 1990, Mr. Elijah was a securities analyst for Robertson, Stephens & Company, L.P. From January 1990 to January 1992, Mr. Elijah was an analyst and portfolio manager for Water Street Capital, which managed short selling investment funds.
MICHAEL HOFFMAN has been responsible for managing the Developing Countries Fund's portfolio since that Fund's inception in April 1994. From August 1990 to April 1994, Mr. Hoffman was a portfolio manager with CIGNA International Investment Advisors, where he managed four portfolios with net assets ranging from $25-100 million.
ANDREW P. PILARA, JR. has been responsible for managing the Partners Fund since the Fund's inception in July 1995 and is responsible for managing the Global Natural Resources Fund. Since August 1993 he has been a member of the Contrarian Fund management team. Mr. Pilara has been involved in the securities business for over 25 years, with experience in portfolio management, research, trading, and sales. Prior to joining Robertson, Stephens & Company Investment Management, L.P., he was president of Pilara Associates, an investment management firm he established in 1974.
M. HANNAH SULLIVAN is responsible for managing the Global Low-Priced Stock Fund. Since April 1992, she has been a member of the management team for the Contrarian Fund.
JOHN L. WALLACE has been responsible for managing the Growth & Income Fund since its inception in July 1995. Prior to joining Robertson, Stephens & Company Investment Management, L.P., Mr. Wallace was Vice President of Oppenheimer Management Corp., where he was portfolio manager of the Oppenheimer Main Street Income and Growth Fund.
Currently, your minimum initial investment is $5,000 ($1,000 for IRAs), and your subsequent investments must be at least $100 ($1 for IRAs). You may obtain an Application by calling the Funds at 1-800-766-FUND, or by writing to Robertson, Stephens & Company, L.P. at 555 California Street, San Francisco, CA 94104.
You may make your initial investment in Fund shares by mail or by wire transfer as described below.
BY MAIL: Send a completed Application, together with a check made payable to the Fund in which you intend to invest, to the Funds' Transfer Agent: State Street Bank and Trust Company c/o National Financial Data Services, P.O. Box 419717, Kansas City, MO 64141.
BY WIRE: (1) Telephone National Financial Data Services at 1-800-272-6944. Indicate the name(s) to be used on the account registration, the mailing address, your social security number, the amount being wired, the name of your wiring bank, and the name and telephone number of a contact person at the wiring bank. Please include the account number that you receive in your wire along with the account name.
(2) Then instruct your bank to wire the specified amount, along with your account name and number to:
State Street Bank and Trust Company Credit: [Name of Fund]. For further credit:
At the same time, you must mail a completed and signed Application to: State Street Bank and Trust Company c/o National Financial Data Services, P.O. Box 419717, Kansas City, MO 64141. Please include your account number on the Application.
You also may purchase and sell shares through certain securities brokers. Such brokers may charge you a transaction fee for this service; account options available to clients of securities brokers, including arrangements regarding the purchase and sale of Fund shares, may differ from those available to persons investing directly in the Funds. In their sole discretion, either Robertson Stephens Investment Management or Robertson, Stephens & Company, L.P., the Funds' distributor, may pay such brokers for shareholder, subaccounting, and other services, including handling such sales.
After your account is open, you may invest by mail, telephone, or wire at any time. Please include your name and account number on all checks and wires. Please use separate checks or wires for investments to separate accounts.
AUTOBUY: The Autobuy option allows shareholders to purchase shares by moving money directly from their checking account to a Robertson Stephens fund. If you have established the Autobuy option, you may purchase additional shares in an existing account by calling the Transfer Agent at 1-800-272-6944 and instructing the Transfer Agent as to the dollar amount you wish to invest. The automatically be processed through the Automatic Clearing House (ACH) system. There is no fee for this option. If you did not establish this option at the time you opened your account, send a letter of instruction along with a voided check to the Transfer Agent.
OTHER INFORMATION ABOUT PURCHASING SHARES
All purchases of the Funds' shares are subject to acceptance by a Fund and are not binding until accepted and shares are issued. Your signed and completed Application (for initial investments) or account statement stub (for subsequent investments) and full payment, in the form of either a wire transfer or a check, must be received and accepted by a Fund before any purchase becomes effective. Purchases of Fund shares are made at the net asset value next determined after the purchase is accepted. See "How Net Asset Value Is Determined." Please initiate any wire transfer early in the morning to ensure that the wire is received by a Fund before 4:00 p.m. New York time.
All purchases must be made in U.S. dollars, and checks should be drawn on banks located in the U.S. If your purchase of shares is canceled due to non-payment or because a check does not clear, you will be held responsible for any loss incurred by the Funds or the Transfer Agent. Each Fund can redeem shares to reimburse it or the Transfer Agent for any such loss.
Each Fund reserves the right to reject any purchase, in whole or in part, and to suspend the offering of its shares for any period of time and to change or waive the minimum investment amounts specified in this prospectus.
No share certificates will be issued, except that certificates for shares of the Emerging Growth Fund will be issued upon written request to the Transfer Agent.
Shares of one Fund may be exchanged for shares of another Fund. Exchanges of shares will be made at their relative net asset values. Shares may be exchanged only if the amount being exchanged satisfies the minimum investment required and the shareholder is a resident of a state where shares of the appropriate Fund are qualified for sale. However, you may not exchange your investment in shares of any Fund more than four times in any twelve-month period (including the initial exchange of your investment from that Fund during the period, and subsequent exchanges of that investment from other Funds during the same twelve-month period).
Investors should note that an exchange will result in a taxable event. Exchange privileges may be terminated, modified, or suspended by a Fund upon 60 days prior notice to shareholders.
Unless you have indicated that you do not wish to establish telephone exchange privileges (see the Account Application or call the Funds for details), you may make exchanges by telephone.
You may redeem your shares of a Fund by mailing a written request for redemption to the Transfer Agent that:
(1) states the number of shares or dollar
(2) identifies your account number; and
(3) is signed by you and all other owners of the account exactly as their names appear on the account.
If you request that the proceeds from your redemption be sent to you at an address other than your address of record, or to another party, you must include a signature guarantee for each such signature by an eligible signature guarantor, such as a member firm of a national securities exchange or a commercial bank or trust company located in the United States. If you are a resident of a foreign country, another type of certification may be required. Please contact the Transfer Agent for more details. Corporations, fiduciaries, and other types of shareholders may be required to supply additional documents which support their authority to effect a redemption.
Unless you have indicated you do not wish to establish telephone redemption privileges (see the Account Application or call the Funds for details), you may redeem shares by calling the Transfer Agent at 1-800-272-6944 by 4:00 p.m. New York time on any day the New York Stock Exchange is open for business.
If an account has more than one owner, the Transfer Agent may rely on the instructions of any one owner. Each Fund employs reasonable procedures in an effort to confirm the authenticity of telephone instructions, which may include requiring the caller to give a special authorization number assigned to your account. If these procedures are not followed, the Funds and the Transfer Agent may be responsible for any losses because of unauthorized or fraudulent instructions. By not declining telephone redemption privileges, you authorize the Transfer Agent to act upon any telephone instructions it believes to be genuine, (1) to redeem shares from your account and (2) to mail or wire the redemption proceeds. If you recently opened an account by wire, you cannot redeem shares by telephone until the Transfer Agent has received your completed Application.
Telephone redemption is not available for shares held in IRAs. Each Fund may change, modify, or terminate its telephone redemption services at any time upon 30 days notice.
If your financial institution receives Federal Reserve wires, you may instruct that your redemption proceeds be forwarded to you by a wire transfer. Please indicate your financial institution's complete wiring instructions. The Funds will forward proceeds from telephone redemptions only to the bank account or Robertson, Stephens & Company, L.P. brokerage account that you have authorized in writing. A $9.00 wire fee will be paid either by redeeming shares from your account or upon a full redemption, deducting the fee from the proceeds.
AUTOSELL: The Autosell option allows shareholders to redeem shares from their Robertson Stephens fund accounts and to have the proceeds sent directly to their checking account. If you have established the Autosell option, you may redeem shares by calling the Transfer Agent at 1-800-272-6944 and instructing it as to the dollar amount or number of shares you wish to redeem. The proceeds will automatically be sent to your bank through the Automatic Clearing House (ACH) system. There is no fee for this option. If you did not establish this option at the time you opened your account, send a letter of instruction along with a voided check to the Transfer Agent.
The redemption price per share is the net asset value per share next determined after the Transfer Agent receives the request for redemption in proper form, and each Fund will make payment for redeemed shares within seven days thereafter. Under unusual circumstances, a Fund may suspend repurchases, or postpone payment of redemption proceeds for more than seven days, as permitted by federal securities law. If you purchase shares of a Fund by check (including certified check) and redeem them shortly thereafter, the Fund will delay payment of the redemption proceeds for up to fifteen days after the Fund's receipt of the check.
You may experience delays in exercising telephone redemptions during periods of abnormal market activity. Accordingly, during periods of volatile economic and market conditions, you may wish to consider transmitting redemption orders to the Transfer Agent by an overnight courier service.
Shares of the Funds are distributed by Robertson, Stephens & Company, L.P. Under its Distribution Agreement with the Funds, Robertson, Stephens & Company, L.P. bears certain expenses related to the distribution of shares of the Funds, including commissions payable to persons engaging in the distribution of the shares, advertising expenses, and the costs of preparing and distributing sales literature incurred in connection with the offering of the shares.
To compensate Robertson, Stephens & Company, L.P. for the services it provides and for the expenses it bears under the Distribution Agreement, each Fund (other than the Value + Growth Fund) has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940 pursuant to which the Fund pays Robertson, Stephens & Company, L.P. compensation accrued daily and paid monthly at the annual rate of 0.75% of that Fund's average daily net assets, in the case of the Contrarian Fund, and 0.25% of the Fund's average daily net assets, in the case of each of the other Funds. Robertson, Stephens & Company, L.P. may pay brokers a commission expressed as a percentage of the purchase price of shares of the Funds.
Each Fund has agreed to indemnify Robertson, Stephens & Company, L.P. against certain liabilities, including liabilities under the Securities Act of 1933, as amended.
The Trustees of the Trust have proposed to shareholders of the Value + Growth Fund that they approve a Distribution Plan for that Fund, under which the Fund would pay Robertson, Stephens & Company, L.P. compensation, accrued daily and paid monthly, at the annual rate of 0.25% of the Fund's average daily net assets. It is expected that, if the Plan is approved, it will be implemented on January 1, 1996. See "Expense Summary," above.
Each Fund distributes substantially all of its net investment income and net capital gains to shareholders at least once per year (more often if necessary to avoid certain excise or income taxes on the Fund). The Growth & Income Fund pays distributions from net investment income quarterly. All distributions will be automatically reinvested in Fund shares unless the shareholder requests cash payment on at least 10 days prior written notice to the Transfer Agent.
Each Fund intends to qualify as a "regulated investment company" for federal income tax purposes and to meet all other requirements that are necessary for it to be relieved of federal taxes on income and gains it distributes to shareholders. A Fund will distribute substantially all of its net investment income and net capital gain income on a current basis.
All Fund distributions will be taxable to you as ordinary income, except that any distributions of net long-term capital gains will be taxed as such, regardless of how long you have held your shares. Distributions will be taxable as described above, whether received in cash or in shares through the reinvestment of distributions. Early in each year, the Trust will notify you of the amount and tax status of distributions paid to you by each of the Funds for the preceding year.
The foregoing is a summary of certain federal income tax consequences of investing in a Fund. You should consult your tax adviser to determine the precise effect of an investment in a Fund on your particular tax situation.
HOW NET ASSET VALUE IS DETERMINED
Each Fund calculates the net asset value of its shares by dividing the total value of its assets, less liabilities, by the number of its shares outstanding. Shares are valued as of the close of regular trading on the New York Stock Exchange each day the Exchange is open. Fund securities for which market quotations are readily available are stated at market value. Short-term investments that will mature in 60 days or less are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair values determined by Robertson Stephens Investment Management.
Yield and total return data may from time to time be included in advertisements about the Funds. A Fund's "yield" is calculated by dividing the Fund's annualized net investment income per share during a recent 30-day period by the maximum public offering price per share on the last day of that period. "Total return" for one- and five-year periods, and for the life of a Fund, through the most recent calendar quarter represents the average annual compounded rate of return (or, in the case of a period of one year or less, the actual rate of return) on an investment of $1,000 in the Fund. Total return may also be presented for other periods. Quotations of yield or total return for a period when an expense limitation was in effect will be greater than if the limitation had not been in effect. A Fund's performance may be compared to various indices. See the Statement of Additional Information. Information may be presented in advertisements about a Fund describing the background and professional experience of the Fund's investment advisor or any portfolio manager.
ALL DATA ARE BASED ON A FUND'S PAST INVESTMENT RESULTS AND DO NOT PREDICT FUTURE PERFORMANCE. Investment performance, which will vary, is based on many factors, including market conditions, the composition of the Fund's portfolio, and the Fund's investments expenses. Investment performance also often reflects the risks associated with a Fund's investment objective and policies. These factors should be considered when comparing a Fund's investment results to those of other mutual funds and other investment vehicles.
Each Fund is a series of the Trust, which was organized on May 11, 1987 under the laws of the Commonwealth of Massachusetts and is a business entity commonly known as a "Massachusetts business trust." The Trust may offer shares of beneficial interest in a number of separate series with no par value per share. When matters are submitted for shareholder vote, shareholders of each series will have one vote for each full share owned and proportionate, fractional votes for fractional shares held. Generally, shares of each series vote separately as a class on all matters except (1) matters affecting only the interests of one or more of the series, in which case only shares of the affected series would be entitled to vote, or (2) when the Investment Company Act requires that shares of all series be voted in the aggregate. Although the Trust is not required to hold annual shareholder meetings, shareholders have the right to call a meeting to elect or remove Trustees, or to take other actions as provided in the Agreement and Declaration of Trust.
State Street Bank and Trust Company, c/o National Financial Data Services, P.O. Box 419717, Kansas City, Missouri 64141, acts as each Fund's transfer agent and dividend paying agent. State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, also acts as the custodian of each Fund's portfolio.
THE ROBERTSON STEPHENS CONTRARIAN FUND THE ROBERTSON STEPHENS EMERGING GROWTH FUND THE ROBERTSON STEPHENS GLOBAL LOW-PRICED STOCK FUND THE ROBERTSON STEPHENS GLOBAL NATURAL THE ROBERTSON STEPHENS GROWTH & THE ROBERTSON STEPHENS INFORMATION AGE FUND THE ROBERTSON STEPHENS PARTNERS FUND THE ROBERTSON STEPHENS VALUE + GROWTH FUND
Robertson, Stephens & Company, L.P.
State Street Bank and Trust Company c/o National Financial Data Services
State Street Bank and Trust Company
No dealer, salesman, 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 offer contained in this Prospectus, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Fund. This Prospectus does not constitute an offering in any state or jurisdiction in which such offering may not lawfully be made.
PROSPECTUS SUPPLEMENT DATED JANUARY 18, 1996 to Prospectus dated November 15, 1995
Principally as a result of significant stock price appreciation, at the date of this Prospectus Supplement, approximately 26% of the Contrarian Fund's total assets were invested in common stock of Diamond Fields Resources, a Canadian corporation. As a result, a decline in the stock price of Diamond Fields Resources would have a significant adverse effect on the net asset value of the Fund.
ROBERTSON STEPHENS EMERGING GROWTH FUND
David Evans is responsible for managing the Emerging Growth Fund's portfolio. Mr. Evans has more than fifteen years of investment research and management experience, and has been a part of the management team at RSIM, Inc. since 1989. Mr. Evans has worked closely with Robert C. Czepiel, the former portfolio manager of the Fund, for many years, including at CIGNA Investments, where he was an analyst and portfolio manager before joining RSIM, Inc.
ROBERTSON STEPHENS VALUE + GROWTH FUND
The Value + Growth Fund has adopted a Distribution Plan, pursuant to which the Fund will make payments to Robertson, Stephens & Company LLC ("RS&Co."), its distributor, accrued daily and paid monthly, at the annual rate of 0.25% of the Fund's average daily net assets, commencing on January 1, 1996. The Distribution Plan is intended to compensate RS&Co. for the services it provides and for the expenses it bears in connection with the offering of the Fund's shares. Robertson, Stephens & Company Investment Management, L.P., the Fund's investment adviser, has agreed to reduce the management fees payable to it by an amount equal to the payments received by RS&Co. under the Distribution Plan. The following information replaces the data provided on page 2 of the Prospectus under the caption "Annual Fund Operating Expenses" with respect to the Value + Growth Fund:
Total Fund Operating Expenses 1.68%
The Financial Highlights on the following page supplement the table on page 3 of the prospectus.
THE CONTRARIAN FUND, THE DEVELOPING COUNTRIES FUND, THE EMERGING GROWTH FUND, THE GROWTH & INCOME FUND, THE PARTNERS FUND AND THE VALUE + GROWTH FUND
The financial highlights presented below, covering the periods ended September 30, 1995 for each Fund, have not been audited.
Per share data is determined by using the average number of shares outstanding throughout the period.
(1) IF THE CONTRARIAN FUND HAD PAID ALL OF ITS EXPENSES AND THERE HAD BEEN NO REIMBURSEMENT BY ROBERTSON, STEPHENS & COMPANY INVESTMENT MANAGEMENT, L.P. ("RSIM, L.P."), THE RATIO OF EXPENSES TO AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 WOULD HAVE BEEN 2.52%, AND THE RATIO OF NET INVESTMENT (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN (0.04)%.
(2) IF THE DEVELOPING COUNTRIES FUND HAD PAID ALL OF ITS EXPENSES AND THERE HAD BEEN NO REIMBURSEMENT BY RSIM, L.P., THE RATIO OF EXPENSES TO AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 WOULD HAVE BEEN 3.41%, AND THE RATIO OF NET INVESTMENT (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN (1.38)%.
(3) IF THE PARTNERS FUND HAD PAID ALL OF ITS EXPENSES AND THERE HAD BEEN NO REIMBURSEMENT BY RSIM, L.P., THE RATIO OF EXPENSES TO AVERAGE NET ASSETS FOR THE PERIOD ENDED SEPTEMBER 30, 1995 WOULD HAVE BEEN 5.71%, AND THE RATIO OF NET INVESTMENT (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN (1.17)%.
(The Robertson Stephens Contrarian Fund) (The Robertson Stephens Developing Countries Fund) (The Robertson Stephens Emerging Growth Fund) (The Robertson Stephens Global Low-Priced Stock Fund) (The Robertson Stephens Global Natural Resources Fund) (The Robertson Stephens Growth & Income Fund) (The Robertson Stephens Information Age Fund) (The Robertson Stephens Partners Fund) (The Robertson Stephens Value + Growth Fund)
AS REVISED JANUARY 18, 1996
Robertson Stephens Investment Trust (the "Trust") is an open-end series investment company. This Statement of Additional Information is not a prospectus and should be read in conjunction with the Prospectus of the Trust dated November 15, 1995. A copy of the Trust's Prospectus can be obtained upon request made to Robertson, Stephens & Company LLC, the Trust's distributor, 555 California Street, San Francisco, California 94104, telephone 1-800-766-FUND.
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . 2 THE FUNDS' INVESTMENT LIMITATIONS. . . . . . . . . . . . . . . . . . . . . . 15 MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 THE FUNDS' DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 HOW NET ASSET VALUE IS DETERMINED. . . . . . . . . . . . . . . . . . . . . . 31 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 HOW PERFORMANCE IS DETERMINED. . . . . . . . . . . . . . . . . . . . . . . . 33 ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The investment objectives and policies of the Funds are described in detail in the Prospectus. The following discussion provides supplemental information concerning certain investment techniques in which one or more of the Funds may engage, and certain of the risks they may entail. Certain of the investment techniques may not be available to all of the Funds.
All of the Funds, except for the Emerging Growth Fund, are managed by Robertson, Stephens & Company Investment Management, L.P. ("RSIM, L.P."). The Emerging Growth Fund is managed by Robertson Stephens Investment Management, Inc. ("RSIM, Inc."). RSIM, L.P. and RSIM, Inc. are sometimes referred to in this Statement collectively as "Robertson Stephens Investment Management".
Certain of the Funds may purchase lower-rated debt securities, sometimes referred to as "junk bonds" (those rated BB or lower by Standard & Poor's Corporation ("S&P") or Ba or lower by Moody's Investor Service, Inc. ("Moody's")). See APPENDIX A for a description of these ratings.
The lower ratings of certain securities held by a Fund reflect a greater possibility that adverse changes in the financial condition of the issuer, or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payment of interest and principal would likely make the values of securities held by the Fund more volatile and could limit the Fund's ability to sell its securities at prices approximating the values a Fund had placed on such securities. It is possible that legislation may be adopted in the future limiting the ability of certain financial institutions to purchase lower rated securities; such legislation may adversely affect the liquidity of such securities. In the absence of a liquid trading market for securities held by it, the Fund may be unable at times to establish the fair market value of such securities. The rating assigned to a security by Moody's or S&P does not reflect an assessment of the volatility of the security's market value or of the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated securities fluctuate in response to changes in interest rates. Thus, a decrease in interest rates generally will result in an increase in the value of a Fund's fixed-income securities. Conversely, during periods of rising interest rates, the value of a Fund's fixed-income securities generally will decline. In addition, the values of such securities are also affected by changes in general economic conditions and business conditions affecting the specific industries of their issuers. Changes by recognized rating services in their ratings of any fixed-income security and in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect cash income derived from such securities, but will affect the Fund's net asset value. A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase, although Robertson Stephens Investment Management will monitor the investment to determine whether continued investment in the security will assist in meeting the Fund's investment objective.
Issuers of lower-rated securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. In addition, such issuers may not have more traditional methods of financing available to them, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default in payment of interest or principal by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. Certain of the lower- rated securities in which the Funds may invest are issued to raise funds in connection with the acquisition of a company, in so-called "leveraged buy-out" transactions. The highly leveraged capital structure of such issuers may make them especially vulnerable to adverse changes in economic conditions.
Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, a Fund could find it more difficult to sell lower-rated securities when Robertson Stephens Investment Management believes it advisable to do so or may be able to sell such securities only at prices lower than if such securities were more widely held. In many cases, such securities may be purchased in private placements and, accordingly, will be subject to restrictions on resale as a matter of contract or under securities laws. Under such circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing a Fund's net asset value. In order to enforce its rights in the event of a default under such securities, a Fund may be required to take possession of and manage assets securing the issuer's obligations on such securities, which may increase the Fund's operating expenses and adversely affect the Fund's net asset value. A Fund may also be limited in its ability to enforce its rights and may incur greater costs in enforcing its rights in the event an issuer becomes the subject of bankruptcy proceedings.
Certain securities held by a Fund may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by a Fund during a time of declining interest rates, the Fund may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed.
The Funds may purchase and sell put and call options on their portfolio securities to enhance investment performance and to protect against changes in market prices.
COVERED CALL OPTIONS. A Fund may write covered call options on its securities to realize a greater current return through the receipt of premiums than it would realize on its securities alone. Such option transactions may also be used as a limited form of hedging against a decline in the price of securities owned by the Fund.
A call option gives the holder the right to purchase, and obligates the writer to sell, a security at the exercise price at any time before the expiration date. A call option is "covered" if the writer, at all times while obligated as a writer, either owns the underlying securities (or comparable securities satisfying the cover requirements of the securities exchanges), or has the right to acquire such securities through immediate conversion of securities.
In return for the premium received when it writes a covered call option, a Fund gives up some or all of the opportunity to profit from an increase in the market price of the securities covering the call option during the life of the option. The Fund retains the risk of loss should the price of such securities decline. If the option expires unexercised, the Fund realizes a gain equal to the premium, which may be offset by a decline in price of the underlying security. If the option is exercised, the Fund realizes a gain or loss equal to the difference between the Fund's cost for the underlying security and the proceeds of sale (exercise price minus commissions) plus the amount of the premium.
A Fund may terminate a call option that it has written before it expires by entering into a closing purchase transaction. A Fund may enter into closing purchase transactions in order to free itself to sell the underlying security or to write another call on the security, realize a profit on a previously written call option, or protect a security from being called in an unexpected market rise. Any profits from a closing purchase transaction may be offset by a decline in the value of the underlying security. Conversely, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from a closing purchase transaction is likely to be offset in whole or in part by unrealized appreciation of the underlying security owned by the Fund.
COVERED PUT OPTIONS. A Fund may write covered put options in order to enhance its current return. Such options transactions may also be used as a limited form of hedging against an increase in the price of securities that the Fund plans to purchase. A put option gives the holder the right to sell, and obligates the writer to buy, a security at the exercise price at any time before the expiration date. A put option is "covered" if the writer segregates cash and high-grade short-term debt obligations or other permissible collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from terminating such options in closing purchase transactions, a Fund also receives interest on the cash and debt securities maintained to cover the exercise price of the option. By writing a put option, the Fund assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value, resulting in a potential capital loss unless the security later appreciates in value.
A Fund may terminate a put option that it has written before it expires by a closing purchase transaction. Any loss from this transaction may be partially or entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. A Fund may also purchase put options to protect portfolio holdings against a decline in market value. This protection lasts for the life of the put option because the Fund, as a holder of the option, may sell the underlying security at the exercise price regardless of any decline in its market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs that the Fund must pay. These costs will reduce any profit the Fund might have realized had it sold the underlying security instead of buying the put option.
A Fund may purchase call options to hedge against an increase in the price of securities that the Fund wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Fund, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. These costs will reduce any profit the Fund might have realized had it bought the underlying security at the time it purchased the call option.
A Fund may also purchase put and call options to attempt to enhance its current return.
OPTIONS ON FOREIGN SECURITIES. Certain of the Funds may purchase and sell options on foreign securities if the Fund's Adviser believes that the investment characteristics of such options, including the risks of investing in such options, are consistent with the Fund's investment objectives. It is expected that risks related to such options will not differ materially from risks related to options on U.S. securities. However, position limits and other rules of foreign exchanges may differ from those in the U.S. In addition, options markets in some countries, many of which are relatively new, may be less liquid than comparable markets in the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve certain risks, including the risks that a Fund's Adviser will not forecast interest rate or market movements correctly, that a Fund may be unable at times to close out such positions, or that hedging transactions may not accomplish their purpose because of imperfect market correlations. The successful use of these strategies depends on the ability of a Fund's Adviser to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which provides a secondary market for an option of the same series. There is no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time. If no secondary market were to exist, it would be impossible to enter into a closing transaction to close out an option position. As a result, a Fund may be forced to continue to hold, or to purchase at a fixed price, a security on which it has sold an option at a time when its Adviser believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen events might cause The Options Clearing Corporation or an exchange to institute special trading procedures or restrictions that might restrict a
Fund's use of options. The exchanges have established limitations on the maximum number of calls and puts of each class that may be held or written by an investor or group of investors acting in concert. It is possible that the Trust and other clients of Robertson Stephens Investment Management may be considered such a group. These position limits may restrict the Funds' ability to purchase or sell options on particular securities.
Options which are not traded on national securities exchanges may be closed out only with the other party to the option transaction. For that reason, it may be more difficult to close out unlisted options than listed options. Furthermore, unlisted options are not subject to the protection afforded purchasers of listed options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as a "regulated investment company" under the Internal Revenue Code, may also restrict the Funds' use of options.
Certain of the Funds may purchase over-the-counter ("OTC") puts and calls with respect to specified securities ("special expiration price options") pursuant to which the Funds in effect may create a custom index relating to a particular industry or sector that Robertson Stephens Investment Management believes will increase or decrease in value generally as a group. In exchange for a premium, the counterparty, whose performance is guaranteed by a broker- dealer, agrees to purchase (or sell) a specified number of shares of a particular stock at a specified price and further agrees to cancel the option at a specified price that decreases straight line over the term of the option. Thus, the value of the special expiration price option is comprised of the market value of the applicable underlying security relative to the option exercise price and the value of the remaining premium. However, if the value of the underlying security increases (or decreases) by a prenegotiated amount, the special expiration price option is canceled and becomes worthless. A portion of the dividends during the term of the option are applied to reduce the exercise price if the options are exercised. Brokerage commissions and other transaction costs will reduce these Funds' profits if the special expiration price options are exercised. A Fund will not purchase special expiration price options with respect to more than 25% of the value of its net assets, and will limit premiums paid for such options in accordance with state securities laws.
The Value + Growth Fund may purchase certain long-term exchange-traded equity options called Long-Term Equity Anticipation Securities ("LEAPs") and Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a holder the opportunity to participate in the underlying securities' appreciation in excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to retain dividends on the underlying security while potentially participating in the underlying securities' capital appreciation up to a fixed dollar amount. The Value + Growth Fund will not purchase these options with respect to more than 25% of the value of its net assets, and will limit the premiums paid for purchasing such options in accordance with the most restrictive applicable state securities laws.
LEAPs are long-term call options that allow holders the opportunity to participate in the underlying securities' appreciation in excess of a specified strike price, without receiving payments equivalent to any cash dividends declared on the underlying securities. A LEAP holder will be entitled to receive a specified number of shares of the underlying stock upon payment of the exercise price, and therefore the LEAP will be exercisable at any time the price of the underlying stock is above the strike price. However, if at expiration the price of the underlying stock is at or below the strike price, the LEAP will expire worthless.
BOUNDs are long-term options which are expected to have the same economic characteristics as covered call options, with the added benefits that BOUNDs can be traded in a single transaction and are not subject to early exercise. Covered call writing is a strategy by which an investor sells a call option while simultaneously owning the number of shares of the stock underlying the call. BOUND holders are able to participate in a stock's price appreciation up to but not exceeding a specified strike price while receiving payments equivalent to any cash dividends declared on the underlying stock. At expiration, a BOUND holder will receive a specified number of shares of the underlying stock for each BOUND held if, on the last day of trading, the underlying stock closes at or below the strike price. However, if at expiration the underlying stock closes above the strike price, the BOUND holder will receive a payment equal to a multiple of the BOUND's strike price for each BOUND held. The terms of a BOUND are not adjusted because of cash distributions to the shareholders of the underlying security. BOUNDs are subject to the position limits for equity options imposed by the exchanges on which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that of the corresponding LEAPs. For example, if at expiration the underlying stock closes at or below the strike price, the LEAP will expire worthless, and the holder of a corresponding BOUND will receive a specified number of shares of stock from the writer of the BOUND. If, on the other hand, the LEAP is "in the money" at expiration, the holder of the LEAP is entitled to receive a specified number of shares of the underlying stock from the LEAP writer upon payment of the strike price, and the holder of a BOUND on such stock is entitled to the cash equivalent of a multiple of the strike price from the writer of the BOUND. An investor holding both a LEAP and a corresponding BOUND, where the underlying stock closes above the strike price at expiration, would be entitled to receive a multiple of the strike price from the writer of the BOUND and, upon exercise of the LEAP, would be obligated to pay the same amount to receive shares of the underlying stock. LEAPs are American-style options (exercisable at any time prior to expiration), whereas BOUNDs are European-style options (exercisable only on the expiration date).
INDEX FUTURES CONTRACTS AND OPTIONS. A Fund may buy and sell futures contracts and related options for hedging purposes or to attempt to increase investment return. The Funds currently expect that they will only purchase and sell stock index futures contracts and related options. A stock index futures contract is a contract to buy or sell units of a stock index at a specified future date at a price agreed upon when the contract is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100 Index") is composed of 100 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 100 Index assigns relative weightings to the common stocks included in the Index, and the Index fluctuates with changes in the market values of those common stocks. In the case of the S&P 100 Index, contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one contract would be worth $18,000 (100 units x $180). The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. For example, if a Fund enters into a futures contract to buy 100 units of the S&P 100 Index at a specified future date at a contract price of $180 and the S&P 100 Index is at $184 on that future date, the Fund will gain $400 (100 units x gain of $4). If the Fund enters into a futures contract to sell 100 units of the stock index at a specified future date at a contract price of $180 and the S&P 100 Index is at $182 on that future date, the Fund will lose $200 (100 units x loss of $2).
A Fund may purchase or sell futures contracts with respect to any securities indexes. Positions in index futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures.
In order to hedge its investments successfully using futures contracts and related options, a Fund must invest in futures contracts with respect to indexes or sub-indexes the movements of which will, in its judgment, have a significant correlation with movements in the prices of the Fund's securities.
Options on index futures contracts give the purchaser the right, in return for the premium paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the holder would assume the underlying futures position and would receive a variation margin payment of cash or securities approximating the increase in the value of the holder's option position. If an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash based on the difference between the exercise price of the option and the closing level of the index on which the futures contract is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing and selling call and put options on index futures contracts, each of the Funds which may purchase and sell index futures contracts may purchase and sell call and put options on the underlying indexes themselves to the extent that such options are traded on national securities exchanges. Index options are similar to options on individual securities in that the purchaser of an index option acquires the right to buy (in the case of a call) or sell (in the case of a put), and the writer undertakes the obligation to sell or buy (as the case may be), units of an index at a stated exercise price during the term of the option. Instead of giving the right to take or make actual delivery of securities, the holder of an index option has the right to receive a cash "exercise settlement amount". This amount is equal to the amount 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 the exercise, multiplied by a fixed "index multiplier".
A Fund may purchase or sell options on stock indices in order to close out its outstanding positions in options on stock indices which it has purchased. A Fund may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call or put options on an index involves less potential risk to a Fund because the maximum amount at risk is the premium paid for the options plus transactions costs. The writing of a put or call option on an index involves risks similar to those risks relating to the purchase or sale of index futures contracts.
MARGIN PAYMENTS. When a Fund purchases or sells a futures contract, it is required to deposit with its custodian an amount of cash, U.S. Treasury bills, or other permissible collateral equal to a small percentage of the amount of the futures contract. This amount is known as "initial margin". The nature of initial margin is different from that of margin in security transactions in that it does not involve borrowing money to finance transactions. Rather, initial margin is similar to a performance bond or good faith deposit that is returned to a Fund upon termination of the contract, assuming the Fund satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a process known as "marking to market". These payments are called "variation margin" and are made as the value of the underlying futures contract fluctuates. For example, when a Fund sells a futures contract and the price of the underlying index rises above the delivery price, the Fund's position declines in value. The Fund then pays the broker a variation margin payment equal to the difference between the delivery price of the futures contract and the value of the index underlying the futures contract. Conversely, if the price of the underlying index falls below the delivery price of the contract, the Fund's futures position increases in value. The broker then must make a variation margin payment equal to the difference between the delivery price of the futures contract and the value of the index underlying the futures contract.
When a Fund terminates a position in a futures contract, a final determination of variation margin is made, additional cash is paid by or to the Fund, and the Fund realizes a loss or a gain. Such closing transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Funds intend to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. If there is not a liquid secondary market at a particular time, it may not be possible to close a futures position at such time and, in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. However, in the event financial futures are used to hedge portfolio securities, such securities will not generally be sold until the financial futures can be terminated. In such circumstances, an increase in the price of the portfolio securities, if any, may partially or completely offset losses on the financial futures.
In addition to the risks that apply to all options transactions, there are several special risks relating to options on futures contracts. The ability to establish and close out positions in such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that such a market will develop. Although a Fund generally will purchase only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time. In the event no such market exists for particular options, it might not be possible to effect closing transactions in such options, with the result that a Fund would have to exercise the options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by a Fund of futures contracts and related options as a hedging device. One risk arises because of the imperfect correlation between movements in the prices of the futures contracts and options and movements in the underlying securities or index or movements in the prices of a Fund's securities which are the subject of a hedge. A Fund's Adviser will, however, attempt to reduce this risk by purchasing and selling, to the extent possible, futures contracts and related options on securities and indexes the movements of which will, in its judgment, correlate closely with movements in the prices of the underlying securities or index and the Fund's portfolio securities sought to be hedged.
Successful use of futures contracts and options by a Fund for hedging purposes is also subject to its Adviser's ability to predict correctly movements in the direction of the market. It is possible that, where a Fund has purchased puts on futures contracts to hedge its portfolio against a decline in the market, the securities or index on which the puts are purchased may increase in value and the value of securities held in the portfolio may decline. If this occurred, the Fund would lose money on the puts and also experience a decline in value in its portfolio securities. In addition, the prices of futures, for a number of reasons, may not correlate perfectly with movements in the underlying securities or index due to certain market distortions. First, all participants in the futures market are subject to margin deposit requirements. Such requirements may cause investors to close futures contracts through offsetting transactions which could distort the normal relationship between the underlying security or index and futures markets. Second, the margin requirements in the futures markets are less onerous than margin requirements in the securities markets in general, and as a result the futures markets may attract more speculators than the securities markets do. Increased participation by speculators in the futures markets may also cause temporary price distortions. Due to the possibility of price distortion, even a correct forecast of general market trends by a Fund's Adviser still may not result in a successful hedging transaction over a very short time period.
OTHER RISKS. Funds will incur brokerage fees in connection with their futures and options transactions. In addition, while futures contracts and options on futures will be purchased and sold to reduce certain risks, those transactions themselves entail certain other risks. Thus, while a Fund may benefit from the use of futures and related options, unanticipated changes in interest rates or stock price movements may result in a poorer overall performance for the Fund than if it had not entered into any futures contracts in the event of an imperfect correlation between the futures position and the portfolio position which is intended to be protected, the desired protection may not be obtained and the Fund may be exposed to risk of loss.
Certain of the Funds may purchase securities whose prices are indexed to the prices of other securities, securities indices, currencies, precious metals or other commodities, or other financial indicators. Indexed securities typically, but not always, are debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Gold-indexed securities, for example, typically provide for a maturity value that depends on the price of gold, resulting in a security whose price tends to rise and fall together with gold prices. Currency-indexed securities typically are short-term to intermediate-term debt securities whose maturity values or interest rates are determined by reference to the values of one or more specified foreign currencies, and may offer higher yields than U.S. dollar-denominated securities of equivalent issuers. Currency-indexed securities may be positively or negatively indexed; that is, their maturity value may increase when the specified currency value increases, resulting in a security whose price characteristics are similar to a put option on the underlying currency. Currency-indexed securities also may have prices that depend on the values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the performance of the security, currency, commodity or other instrument to which they are indexed, and also may be influenced by interest rate changes in the U.S. and abroad. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer's creditworthiness deteriorates. Recent issuers of indexed securities have included banks, corporations, and certain U.S. Government agencies.
A Fund may enter into repurchase agreements. A repurchase agreement is a contract under which the Fund acquires a security for a relatively short period (usually not more than one week) subject to the obligation 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). It is the Trust's present intention to enter into repurchase agreements only with member banks of the Federal Reserve System and securities dealers meeting certain criteria as to creditworthiness and financial condition established by the Trustees of the Trust and only with respect to obligations of the U.S. government or its agencies or instrumentalities or other high-quality, short-term debt obligations. Repurchase agreements may also be viewed as loans made by a Fund which are collateralized by the securities subject to repurchase. Robertson Stephens Investment Management will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. If the seller defaults, a Fund could realize a loss on the sale of the underlying security to the extent that the proceeds of sale including accrued interest are less than the resale price provided in the agreement including interest. In addition, if the seller should be involved in bankruptcy or insolvency proceedings, a Fund may incur delay and costs in selling the underlying security or may suffer a loss of principal and interest if the Fund is treated as an unsecured creditor and required to return the underlying collateral to the seller's estate.
Leveraging a Fund creates an opportunity for increased net income but, at the same time, creates special risk considerations. For example, leveraging may exaggerate changes in the net asset value of a Fund's shares and in the yield on a Fund's portfolio. Although the principal of such borrowings will be fixed, a Fund's assets may change in value during the time the borrowing is outstanding. Leveraging will create interest expenses for a Fund, which can exceed the income from the assets retained. To the extent the income derived from securities purchased with borrowed funds exceeds the interest these Funds will have to pay, each Fund's net income will be greater than if leveraging were not used. Conversely, if the income from the assets retained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of the Fund will be less than if leveraging were not used, and therefore the amount available for distribution to stockholders as dividends will be reduced.
In connection with its leveraging activities, a Fund may enter into reverse repurchase agreements, in which the Fund sells securities and agrees to repurchase them at a mutually agreed date and price. A reverse repurchase agreement may be viewed as a borrowing by the Fund, secured by the security which is the subject of the agreement. In addition to the general risks involved in leveraging, reverse repurchase agreements involve the risk that, in the event of the bankruptcy or insolvency of the Fund's counterparty, the Fund would be unable to recover the security which is the subject of the agreement, the amount of cash or other property transferred by the counterparty to the Fund under the agreement prior to such insolvency or bankruptcy is less than the value of the security subject to the agreement, or the Fund may be delayed or prevented, due to such insolvency or bankruptcy, from using such cash or property or may be required to return it to the counterparty or its trustee or receiver.
A Fund may lend its portfolio securities, provided: (1) the loan is secured continuously by collateral consisting of U.S. Government securities, cash, or cash equivalents adjusted daily to have market value at least equal to the current market value of the securities loaned; (2) the Fund may at any time call the loan and regain the securities loaned; (3) a Fund will receive any interest or dividends paid on the loaned securities; and (4) the aggregate market value of securities of any Fund loaned will not at any time exceed one- third (or such other limit as the Trustees may establish) of the total assets of the Fund. In addition, it is anticipated that a Fund may share with the borrower some of the income received on the collateral for the loan or that it will be paid a premium for the loan.
Before a Fund enters into a loan, its Adviser considers all relevant facts and circumstances, including the creditworthiness of the borrower. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, a Fund retains the right to call the loans at any time on reasonable notice, and it will do so in order that the securities may be voted by a Fund if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. A Fund will not lend portfolio securities to borrowers affiliated with the Fund.
Certain of the Funds may seek to hedge investments or realize additional gains through short sales. Short sales are transactions in which a Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing it at the market price at or prior to the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a Fund is required to repay the lender any dividends or interest that accrue during the period of the loan. To borrow the security, a Fund also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker (or by the Fund's custodian in a special custody account), to the extent necessary to meet margin requirements, until the short position is closed out. A Fund also will incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which a Fund replaces the borrowed security. A Fund will realize a gain if the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends, interest or expenses a Fund may be required to pay in connection with a short sale.
As noted in the Prospectus, the Funds may invest in foreign securities, securities denominated in or indexed to foreign currencies, and certificates of deposit issued by United States branches of foreign banks and foreign branches of United States banks.
Investments in foreign securities may involve considerations different from investments in domestic securities due to limited publicly available information, non-uniform accounting standards, lower trading volume and possible consequent illiquidity, greater volatility in price, the possible imposition of withholding or confiscatory taxes, the possible adoption of foreign governmental restrictions affecting the payment of principal and interest, expropriation of assets, nationalization, or other adverse political or economic developments. Foreign companies may not be subject to auditing and financial reporting standards and requirements comparable to those which apply to U.S. companies. Foreign brokerage commissions and other fees are generally higher than in the United States. It may be more difficult to obtain and enforce a judgment against a foreign issuer.
In addition, to the extent that a Fund's foreign investments are not United States dollar-denominated, the Fund may be affected favorably or unfavorably by changes in currency exchange rates or exchange control regulations and may incur costs in connection with conversion between currencies.
DEVELOPING COUNTRIES. The considerations noted above for foreign investments generally are intensified for investments in developing countries. These risks include (i) volatile social, political and economic conditions; (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) the existence of national policies which may restrict a 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 developing countries, of a capital market structure or market-oriented economy; (vii) economies based on only a few industries; and (viii) the possibility that recent favorable economic developments in certain developing countries may be slowed or reversed by unanticipated political or social events in such countries.
A Fund may engage in currency exchange transactions to protect against uncertainty in the level of future foreign currency exchange rates and to increase current return. A Fund may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, a Fund enters into foreign currency transactions with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities. A Fund will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging, a Fund will attempt to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold or on which the dividend or interest payment is declared, and the date on which such payments are made or received.
A Fund may purchase or sell a foreign currency on a spot (I.E., cash) basis at the prevailing spot rate in connection with transaction hedging. A Fund may also enter into contracts to purchase or sell foreign currencies at a future date ("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes, a Fund may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives a Fund the right to assume a short position in the futures contract until expiration of the option. A put option on currency gives a Fund the right to sell a currency at a specified exercise price until the expiration of the option. A call option on a futures contract gives a Fund the right to assume a long position in the futures contract until the expiration of the option. A call option on currency gives a Fund the right to purchase a currency at the exercise price until the expiration of the option. A Fund will engage in over-the-counter transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of its Adviser, the pricing mechanism and liquidity are satisfactory and the participants are responsible parties likely to meet their contractual obligations.
When it engages in position hedging, a Fund enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which securities held by the Fund are denominated or are quoted in their principle trading markets or an increase in the value of currency for securities which the Fund expects to purchase. In connection with position hedging, a Fund may purchase put or call options on foreign currency and foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. A Fund may also purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the values of those securities between the dates the currency exchange transactions are entered into and the dates they mature.
It is impossible to forecast with precision the market value of a Fund's portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for a Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security or securities being hedged is less than the amount of foreign currency a Fund is obligated to deliver and if a decision is made to sell the security or securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security or securities of a Fund if the market value of such security or securities exceeds the amount of foreign currency the Fund is obligated to deliver.
To offset some of the costs to a Fund of hedging against fluctuations in currency exchange rates, the Fund may write covered call options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which a Fund owns or intends to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in the value of such currency.
A Fund may also seek to increase its current return by purchasing and selling foreign currency on a spot basis, by purchasing and selling options on foreign currencies and on foreign currency futures contracts, and by purchasing and selling foreign currency forward contracts.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency exchange contract 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 as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. A foreign currency futures contract is a standardized contract for the future delivery of a specified amount of a foreign currency at a future date at a price set at the time of the contract. Foreign currency futures contracts traded in the United States are designed by and traded on exchanges regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign exchange contracts are traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a Fund may either accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader who is a party to the original forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts.
Positions in foreign currency futures contracts and related options may be closed out only on an exchange or board of trade which provides a secondary market in such contracts or options. Although a Fund will normally purchase or sell foreign currency futures contracts and related options only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or option or at any particular time. In such event, it may not be possible to close a futures or related option position and, in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin on its futures positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly to options on securities, and are traded primarily in the over-the-counter market, although options on foreign currencies have recently been listed on several exchanges. Such options will be purchased or written only when a Fund's Adviser believes that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence exchange rates and investments generally.
The value of a foreign currency option is dependent upon the value of the foreign currency and the U.S. dollar, and may have no relationship to the investment merits of a foreign security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the U.S. options markets.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the "spread") between prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should a Fund desire to resell that currency to the dealer.
The value of the Contrarian Fund's investments may be affected by changes in the price of gold and other precious metals. Gold has been subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and other governmental policies, such as currency devaluations or revaluations; economic and social conditions within a country; trade imbalances; or trade or currency restrictions between countries. Because much of the world's known gold reserves are located in South Africa, political and social conditions there may pose special risks to the Contrarian Fund's investments. For instance, social upheaval and related economic difficulties in South Africa could cause a decrease in the share values of South African issuers. Many institutions have rescinded policies that preclude investments in companies doing business in South Africa. In July 1991, the United States lifted the prohibition on new U.S. investment in South Africa, including the purchase of newly-issued securities of South African companies.
In addition to its investments in securities, the Contrarian Fund may invest a portion of its assets in precious metals, such as gold, silver, platinum, and palladium, and precious metal options and futures. The prices of precious metals are affected by broad economic and political conditions, but are less subject to local and company-specific factors than securities of individual companies. As a result, precious metals and precious metal options and futures may be more or less volatile in price than securities of companies engaged in precious metals-related businesses. The Contrarian Fund may purchase precious metals in any form, including bullion and coins, provided that RSIM, L.P. intends to purchase only those forms of precious metals that are readily marketable and that can be stored in accordance with custody regulations applicable to mutual funds. The Contrarian Fund may incur higher custody and transaction costs for precious metals than for securities. Also, precious metals investments do not pay income.
The Contrarian Fund is authorized to invest up to 5% of its total assets in precious metals. As a further limit on precious metals investment, under current federal income tax law, gains from selling precious metals (and certain other assets) may not exceed 10% of the Contrarian Fund's annual gross income. This tax requirement could cause the Contrarian Fund to hold or sell precious metals, securities, options or futures when it would not otherwise do so.
ZERO-COUPON DEBT SECURITIES AND PAY-IN-KIND SECURITIES
Zero-coupon securities in which a Fund may invest are debt obligations which are generally issued at a discount and payable in full at maturity, and which do not provide for current payments of interest prior to maturity. Zero- coupon securities usually trade at a deep discount from their face or par value and are subject to greater market value fluctuations from changing interest rates than debt obligations of comparable maturities which make current distributions of interest. As a result, the net asset value of shares of a Fund investing in zero-coupon securities may fluctuate over a greater range than shares of other mutual funds investing in securities making current distributions of interest and having similar maturities.
When debt obligations have been stripped of their unmatured interest coupons by the holder, the stripped coupons are sold separately. The principal or corpus is sold at a deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive any rights to periodic cash interest payments. Once stripped or separated, the corpus and coupons may be sold separately. Typically, the coupons are sold separately or grouped with other coupons with like maturity dates and sold in such bundled form. Purchasers of stripped obligations acquire, in effect, discount obligations that are economically identical to the zero-coupon securities issued directly by the obligor.
Zero-coupon securities allow an issuer to avoid the need to generate cash to meet current interest payments. Even though zero-coupon securities do not pay current interest in cash, a Fund is nonetheless required to accrue interest income on them and to distribute the amount of that interest at least annually to shareholders. Thus, a Fund could be required at times to liquidate other investments in order to satisfy its distribution requirement.
A Fund also may purchase pay-in-kind securities. Pay-in-kind securities pay all or a portion of their interest or dividends in the form of additional securities.
The Trust has adopted the following fundamental investment restrictions which (except to the extent they are designated as nonfundamental as to any Fund) may not be changed without the affirmative vote of a majority of the outstanding voting securities of the affected Fund.
THE CONTRARIAN FUND, THE DEVELOPING COUNTRIES FUND, THE EMERGING GROWTH FUND AND THE VALUE + GROWTH FUND.
1. purchase or sell commodities or commodity contracts, or interests in oil, gas, or other mineral leases, or other mineral exploration or development programs, although it may invest in companies that engage in such businesses to the extent otherwise permitted by a Fund's investment policies and restrictions and by applicable law, except as required in connection with otherwise permissible options, futures and commodity activities as described elsewhere in the Prospectus and this
2. purchase or sell real estate, although it may invest in securities secured by real estate or real estate interests, or issued by companies, including real estate investment trusts, that invest in real estate or real estate interests;
3. make short sales or purchases on margin, although it may obtain short- term credit necessary for the clearance of purchases and sales of its portfolio securities and except as required in connection with permissible options, futures, short selling and leverage activities as described elsewhere in the Prospectus and this Statement (the short sale restriction is nonfundamental for the Value + Growth Fund);
4. (a) for the Contrarian Fund and the Developing Countries Fund only: with respect to 50% of its total assets, invest in the securities of any one issuer (other than the U.S. Government and its agencies and instrumentalities), if immediately after and as a result of such
5% of the total assets of the Fund would be invested in such issuer (the remaining 50% of its total assets may be invested without restriction except to the extent other investment restrictions may be
(b) for the Emerging Growth Fund and Value + Growth Fund only: with respect to 75% of its total assets, invest in the securities of any one issuer (other than the U.S. Government and its agencies and instrumentalities), if immediately after and as a result of such investment more than 5% of the total assets of the Fund would be invested in such issuer (the remaining 25% of its total assets may be invested without restriction except to the extent other investment
5. mortgage, hypothecate, or pledge any of its assets as security for any of its obligations, except as required for otherwise permissible borrowings (including reverse repurchase agreements), short sales, financial options and other hedging activities;
6. make loans of the Fund's assets, including loans of securities (although it may, subject to the other restrictions or policies stated herein, purchase debt securities or enter into repurchase agreements with banks or other institutions to the extent a repurchase agreement is deemed to be a loan), except that the Contrarian Fund and Developing Countries Fund each may lend up to one-third of its total
7. borrow money, except from banks for temporary or emergency purposes or in connection with otherwise permissible leverage activities, and then only in an amount not in excess of (a) one-third of the value of the Contrarian Fund's or Developing Countries Fund's total assets, or (b) 5% of the Emerging Growth Fund's or Value + Growth Fund's total assets (in any case as determined at the lesser of acquisition cost or current market value and excluding collateralized reverse repurchase
8. underwrite securities of any other company, although it may invest in companies that engage in such businesses if it does so in accordance with policies established by the Trust's Board of Trustees (the Board's current policy permits a Fund to invest in companies that directly or through subsidiaries execute portfolio transactions for a Fund or have entered into selling agreements with the Distributor to sell Fund shares, to the extent permitted by applicable law), and except to the extent that the Fund may be considered an underwriter within the meaning of the Securities Act of 1933, as amended, in the
9. invest more than 25% of the value of the Fund's total assets in the securities of companies engaged in any one industry (except securities issued by the U.S. Government, its agencies and instrumentalities);
10. issue senior securities, as defined in the 1940 Act, except that this restriction shall not be deemed to prohibit the Fund from making any otherwise permissible borrowings, mortgages or pledges, or entering into permissible reverse repurchase agreements, and options and
11. purchase the securities of any company for the purpose of exercising management or control (nonfundamental restriction for the Contrarian Fund, the Developing Countries Fund and the Value + Growth Fund);
12. (a) purchase more than 10% of the outstanding voting securities of any one issuer (fundamental restriction for the Emerging Growth Fund and nonfundamental restriction for the Value + Growth Fund);
(b) own, directly or indirectly, more than 25% of the voting securities of any one issuer or affiliated person of the issuer (nonfundamental restriction of the Contrarian Fund and the Developing
13. (a) purchase the securities of any registered investment company, except as part of a merger or similar reorganization transaction
(b) purchase the securities of other investment companies, except as permitted by the 1940 Act or as part of a merger, consolidation, acquisition of assets or similar reorganization transaction (Value +
(c) purchase the securities of other investment companies, except as permitted by the 1940 Act (and then only in the open market where no commission except the ordinary broker's commission is paid) or as part of a merger, consolidation, acquisition of assets or similar reorganization transaction (nonfundamental for the Contrarian Fund);
(d) purchase the securities of other investment companies, except as permitted by the 1940 Act and except as otherwise provided in the Prospectus (nonfundamental for the Developing Countries Fund);
14. (a) invest more than 5% of the value of its total assets in securities of any issuer which has not had a record, together with its predecessors, of at least three years of continuous operations (fundamental restriction for the Emerging Growth Fund and nonfundamental restriction for the Value + Growth Fund); and
(b) invest more than 50% of its total assets in the securities of issuers which, together with any predecessors, have a record of less than three years of continuous operation or in restricted securities (nonfundamental restriction for the Contrarian Fund and the Developing
15. invest more than 10% of the value of its total assets in securities that are not readily marketable or that would require registration under the Securities Act of 1933, as amended, upon disposition (as a matter of operating policy, the Fund interprets this restriction as including venture capital investments such as venture capital partnerships whose securities are not registered under the Securities Act of 1933 and unregistered securities of companies which are not yet publicly held; furthermore, and as an additional matter of operating policy, the Board of Trustees has adopted a further restriction that no more than 5% of the Fund's total assets may be held in such restricted securities) (Emerging Growth Fund only).
Additional investment restrictions, which may be changed by the Board of Trustees without shareholder approval, provide that no Fund may:
1. except as required in connection with otherwise permissible options and futures activities, invest more than 5% of the value of the Fund's total assets in rights or warrants (other than those that have been acquired in units or attached to other securities), or invest more than 2% of its total assets in rights or warrants that are not listed on the New York or American Stock Exchanges;
2. participate on a joint basis in any trading account in securities, although the Adviser may aggregate orders for the sale or purchase of securities with other accounts it manages to reduce brokerage costs or
3. invest, in the aggregate, more than 15% (Contrarian Fund and Developing Countries Fund only) or 10% (Value + Growth Fund only) of its net assets in illiquid securities;
4. (a) purchase or write put, call, straddle or spread options except as described in the Prospectus or Statement of Additional Information (Contrarian Fund, Developing Countries Fund and Value + Growth Fund
(b) write, purchase, or sell puts, calls, straddles, spreads or combinations thereof (Emerging Growth Fund only);
5. purchase or retain in the Fund's portfolio any security if any officer, trustee or shareholder of the issuer is at the same time an officer, trustee or employee of the Trust or of its Adviser and such person owns beneficially more than 1/2 of 1% of the securities and all such persons owning more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of the issuer;
6. invest in real estate limited partnerships or invest more than 10% of the value of its total assets in real estate investment trusts (the Contrarian Fund and Value + Growth Fund only);
7. buy or sell physical commodities, except that the Contrarian Fund may invest not more than 5% of its net assets in gold, silver, platinum, palladium or other precious metals;
8. invest or engage in arbitrage transactions (Emerging Growth Fund and Value + Growth Fund only);
9. invest more than 40% of its total assets in the securities of companies operating exclusively in one foreign country;
10. purchase securities of other open-end investment companies (Value +
11. under normal market conditions, invest less than 65% of its total assets in:
(a) equity securities (Contrarian Fund only).
(b) emerging markets equity securities (Developing Countries Fund only).
(c) equity securities of emerging growth companies (Emerging Growth Fund only).
(d) companies listed on a nationally recognized securities exchange or traded on the National Association of Securities Dealers Automated Quotation System (Value + Growth Fund only).
As fundamental investment restrictions, which may not be changed with respect to a Fund without approval by the holders of a majority of the outstanding shares of that Fund, a Fund may not:
1. issue any class of securities which is senior to the Fund's shares of beneficial interest, except that each of the Funds may borrow money to the extent contemplated by Restriction 3 below;
2. purchase securities on margin (but a Fund may obtain such short-term credits as may be necessary for the clearance of transactions). (Margin payments or other arrangements in connection with transactions in short sales, futures contracts, options, and other financial instruments are not considered to constitute the purchase of securities on margin for this purpose.);
3. borrow more than one-third of the value of its total assets less all liabilities and indebtedness (other than such borrowings) not
4. act as underwriter of securities of other issuers except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities
5. (as to 75% of the Global Low-Priced Stock Fund's, the Global Natural Resources Fund's, the Growth & Income Fund's, and the Information Age Fund's total assets and 50% of the Partners Fund's total assets) purchase any security (other than obligations of the U.S. Government, its agencies or instrumentalities) if as a result: (i) more than 5% of the Fund's total assets (taken at current value) would then be invested in securities of a single issuer, or (ii) more than 25% of the Fund's total assets (taken at current value) would be invested in a single industry, except that the Information Age Fund may invest without limit in any one or more information technology industries and the Global Natural Resources Fund may invest without limit in any one or more natural resources industries, as described in the Trust's
6. invest in securities of any issuer if any officer or Trustee of the Trust or any officer or director of RSIM, L.P. or RSIM, Inc., as the case may be, owns more than 1/2 of 1% of the outstanding securities of such issuer, and such officers, Trustees and directors who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
7. make loans, except by purchase of debt obligations or other financial instruments in which the Fund may invest consistent with its investment policies, by entering into repurchase agreements, or through the lending of its portfolio securities.
In addition, it is contrary to the current policy of each of the Global Low-Priced Stock, Global Natural Resources, Growth & Income, Information Age, and Partners Funds, which policy may be changed without shareholder approval, to:
1. invest in warrants (other than warrants acquired by the Fund as a part of a unit or attached to securities at the time of purchase) if, as a result, such investment (valued at the lower of cost or market value) would exceed 5% of the value of the Fund's net assets, provided that not more than 2% of the Fund's net assets may be invested in warrants not listed on the New York or American Stock Exchanges;
2. purchase or sell commodities or commodity contracts, except that a Fund may purchase or sell financial futures contracts, options on financial futures contracts, and futures contracts, forward contracts, and options with respect to foreign currencies, and may enter into
3. purchase securities restricted as to resale if, as a result, (i) more than 10% of the Fund's total assets would be invested in such securities, or (ii) more than 5% of the Fund's total assets (excluding any securities eligible for resale under Rule 144A under the Securities Act of 1933) would be invested in such securities;
4. invest in (a) securities which at the time of such investment are not readily marketable, (b) securities restricted as to resale, and (c) repurchase agreements maturing in more than seven days, if, as a result, more than 15% of the Fund's net assets (taken at current value) would then be invested in the aggregate in securities described in (a), (b), and (c) above;
5. invest in securities of other registered investment companies, except by purchases in the open market involving only customary brokerage commissions and as a result of which not more than 5% of its total assets (taken at current value) would be invested in such securities, or except as part of
a merger, consolidation, or other acquisition;
6. invest in real estate limited partnerships;
7. purchase 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 companies (including predecessors) less than three years
8. purchase or sell real estate or interests in real estate, including real estate mortgage loans, although (i) it may purchase and sell securities which are secured by real estate and securities of companies, including limited partnership interests, that invest or deal in real estate and it may purchase interests in real estate investment trusts, and (ii) the Global Natural Resources Fund may invest in any issuers in the natural resources industries. (For purposes of this restriction, investments by a Fund in mortgage-backed securities and other securities representing interests in mortgage pools shall not constitute the purchase or sale of real estate or interests in real estate or real estate mortgage loans.);
9. make investments for the purpose of exercising control or management;
10. invest in interests in oil, gas or other mineral exploration or development programs or leases, although it may invest in the common stocks of companies that invest in or sponsor such programs, and the Global Natural Resources Fund may invest in any issuer in the natural
11. acquire more than 10% of the voting securities of any issuer;
12. invest more than 15%, in the aggregate, of its total assets in the securities of issuers which, together with any predecessors, have a record of less than three years continuous operation and securities restricted as to resale (including any securities eligible for resale under Rule 144A under the Securities Act of 1933);
13. purchase or sell puts, calls, straddles, spreads, or any combination thereof, if, as a result, the aggregate amount of premiums paid or received by a Fund in respect of any such transactions then outstanding would exceed 5% of its total assets.
In addition, the Global Low-Priced Stock, Global Natural Resources and Information Age Funds will only sell short securities that are traded on a national securities exchange in the U.S. (including the National Association of Securities Dealers' Automated Quotation National Market System) or in the country where the principal trading market in the securities is located. (This limitation does not apply to short sales against the box).
All percentage limitations on investments will apply at the time of investment and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of such investment. Except for the investment restrictions listed above as fundamental or to the extent designated as such in a Prospectus, the other investment policies described in this Statement or in the Prospectus are not fundamental and may be changed by approval of the Trustees. As a matter of policy, the Trustees would not materially change a Fund's investment objective without shareholder approval.
The Investment Company Act of 1940, as amended (the "1940 Act"), provides that a "vote of a majority of the outstanding voting securities" of the Fund means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of a Fund, or (2) 67% or more of the shares present at a meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy.
Set forth below is certain information about the Trust's trustees and executive officers:
*G. RANDY HECHT, PRESIDENT, CHIEF EXECUTIVE OFFICER AND TRUSTEE c/o Robertson, Stephens & Company LLC, 555 California Street, San Francisco, CA Mr. Hecht, 44, has served as the Chief Operating Officer of Robertson, Stephens & Company, Inc. since January 1993, as Chief Financial Officer of Robertson, Stephens & Company LLC (and its predecessors) from June 1984 to January 1993 and as the head of the firm's Investment Management Group since 1988. He is a limited partner of Robertson, Stephens & Company LLC, and a member of the Management and Executive Committees of Robertson, Stephens & Company, Inc.. As of October 18, 1988 Mr. Hecht assumed the responsibilities of President and Chief Executive Officer of the Trust. From May 1987 through May 1995, he served as Chief Financial Officer of the Trust. Mr. Hecht has been a Director of Robertson Stephens Investment Management, Inc. ("RSIM, Inc.") and of Robertson, Stephens & Company, Inc., the sole general partner of Robertson, Stephens & Company Investment Management, L.P. (RSIM, L.P.), one of the Trust's Advisers, from June 1989 to January 1993, and since January 1993, respectively. Mr. Hecht served as the Trust's Secretary from May 1987 through January 1989, as RSIM, L.P.'s Secretary from 1993 to the present, and as RSIM, Inc.'s Secretary from May 1987 through June 1989. He has been a Trustee of the Trust since June 1987.
c/o Robertson, Stephens & Company LLC, 555 California Street, San Francisco, CA Mr. Auerbach, 49, is the President and Chairman of the Board of Auerbach Associates, Inc., a management consulting firm which he founded in 1979. Mr. Auerbach is also the sole shareholder and director of a company that is a general partner of Tuttle & Company, which provides mortgage pipeline interest rate hedging services to a variety of institutional clients. Mr. Auerbach is the President of Tuttle & Auerbach Securities, Inc., an introducing broker trading futures on behalf of institutional hedging clients and individuals. He also is a Director of Roelof Mining, Inc. He was a professor of Business Administration at St. Mary's College, Moraga, California until June 1992. He is the co-founder, and served as the Chairman until March 1986, of Intraview Systems Corporation, a privately- held company whose assets were acquired by Worlds of Wonder, Inc. He has been a Trustee of the Trust since June 1987.
c/o Robertson, Stephens & Company LLC, 555 California Street, San Francisco, CA Mr. Cooney, 71, is retired. He had a consulting agreement with Lord Abbett & Co., a mutual fund adviser, from January 1987 until December 1989. From September 1985 through December 1986 he was an Executive Vice President and Senior Adviser of the Lord Abbett Developing Growth Fund, a mutual fund. Mr. Cooney was the portfolio manager of the Lord Abbett Developing Growth Fund from its inception (October 1973) through September 1985, at which time the Lord Abbett Developing Growth Fund had assets of approximately $250 million. He has been a Trustee of the Trust since April 1989.
*Denotes a Trustee who is an "interested person," as defined in the 1940 Act.
TERRY R. OTTON, CHIEF FINANCIAL OFFICER c/o Robertson, Stephens & Company LLC, 555 California Street, San Francisco, CA Mr. Otton, 41, has served as Treasurer, Chief Financial Officer, and Principal Accounting Officer of Robertson, Stephens & Company LLC (and its predecessors) since January 1993, and has been a Managing Director since January 1992. Prior to becoming Chief Financial Officer of Robertson, Stephens & Company LLC, he served as Controller from January 1988 to December 1992. Mr. Otton is a Certified Public Accountant, and prior to joining Robertson, Stephens & Company LLC in 1982, was employed by Arthur Anderson.
c/o Robertson, Stephens & Company LLC, 555 California Street, San Francisco, CA Mr. Peterson, 54, has served as Director of the IBM Retirement Funds since April 1988. He was a Manager of the IBM Retirement Funds from March 1981 until April 1988. Mr. Peterson is a Trustee of Emerging Markets Growth Fund, Inc., a closed-end investment company, and of New World Investment Fund, an open-end investment company. He has been a Trustee of the Trust since June 1987.
c/o Robertson, Stephens & Company LLC, 555 California Street, San Francisco, CA Mr. Rohal, 48, has served as Managing Director and Director of Research for Robertson, Stephens & Company LLC (and its predecessors) since April 1993. From November 1987 to April 1993 he was Managing Director and co-head of the technology research group for Alex. Brown & Sons, an investment banking firm. He has been a Trustee of the Trust since July 1993.
c/o Robertson, Stephens & Company LLC, 555 California Street, San Francisco, CA Mr. Goldbaum, 25, has worked in investment management operations at Robertson, Stephens & Company LLC (and its predecessors) since April 1994. Prior to joining Robertson, Stephens & Company LLC, Mr. Goldbaum was Accounting Manager at NCM Management Ltd., a real estate investment/management firm. Mr. Goldbaum has served as Secretary of the Trust since November 1995.
Pursuant to the terms of the Advisory Agreements with the Funds, Robertson Stephens Investment Management pays all compensation of officers of the Trust as well as the fees and expenses of all Trustees of the Trust who are affiliated persons of Robertson Stephens Investment Management. The Trust pays each unaffiliated Trustee an annual fee of $30,000 and reimburses their actual out- of-pocket expenses relating to attendance at meetings of the Board of Trustees.
CONTROL PERSONS AND SHARE OWNERSHIP
The Funds' shareholders of record who owned more than 5% of the respective Funds' shares on December 31, 1995 were as follows:
To the Funds' knowledge, there were no shareholders who owned beneficially 5% or more of a Fund's shares on December 31, 1995.
On December 31, 1995, the officers and trustees of the Trust, as a group, beneficially owned less than 1% of the outstanding shares of each Fund.
The Trust's Declaration of Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, except if it is determined in the manner specified in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust or that such indemnification would relieve any officer or Trustee of any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties. The Trust, at its expense, provides liability insurance for the benefit of its Trustees and officers.
Pursuant to Investment Advisory Agreements (the "Advisory Agreements"), Robertson Stephens Investment Management determines the composition of the Funds' portfolios, the nature and timing of the changes to the Funds' portfolios, and the manner of implementing such changes. Robertson Stephens Investment Management also (a) provides the Funds with investment advice, research, and related services for the investment of their assets, subject to such directions as it may receive from the Board of Trustees; (b) pays all of the Trust's executive officers' salaries and executive expenses (if any); (c) pays all expenses incurred in performing its investment advisory duties under the Advisory Agreements; and (d) furnishes the Funds with office space and (except in the case of the Global Low-Price Stock Fund, the Global Natural Resources Fund, the Growth & Income Fund, and the Information Age Fund) certain administrative services. The services of Robertson Stephens Investment Management to the Funds are not deemed to be exclusive, and Robertson Stephens Investment Management or any affiliate may provide similar services to other series of the Trust, other investment companies, and other clients, and may engage in other activities. The Funds may reimburse Robertson Stephens Investment Management (on a cost recovery basis only) for any services performed for a Fund by it outside its duties under the Advisory Agreement.
RSIM, L.P. is a California limited partnership whose sole general partner is Robertson, Stephens & Company, Inc. and whose sole limited partner is Robertson, Stephens & Company LLC ("RS&Co."). RSIM, Inc. is a wholly-owned subsidiary of RS&Co. Although the operations and management of RS&Co. are independent from those of Robertson Stephens Investment Management, it is expected that Robertson Stephens Investment Management will, in its discretion and consistent with applicable regulations, draw upon the resources of RS&Co.
Investment decisions for the Funds and for the other investment advisory clients of Robertson Stephens Investment Management and its affiliates are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved. Thus, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In some instances, one client may sell a particular security to another client. It also sometimes happens that two or more clients simultaneously purchase or sell the same security, in which event each day's transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which in Robertson Stephens Investment Management's opinion is equitable to each and in accordance with the amount being purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients. Robertson Stephens Investment Management employs professional staffs of portfolio managers who draw upon a variety of resources, including RS&Co., for research information for the Funds.
MANAGEMENT FEES. The Funds pay Robertson Stephens Investment Management management fees as compensation for the services provided by under the Advisory Agreements. The amount of these management fees is calculated daily and payable monthly at the following annual rates based on the average daily net assets of each Fund:
Global Low-Priced Stock Fund 1.00% Global Natural Resources Fund 1.00% Growth & Income Fund 1.00% Value + Growth Fund 1.00%
These management fees are higher than those paid by most other investment companies. Robertson Stephens Investment Management also may at its discretion from time to time pay for Fund expenses from its own assets, or reduce the management fee of a Fund in excess of that required.
For the fiscal period June 3, 1993 (commencement of operations) through March 31, 1994, management fees for the Contrarian Fund were $1,476,494. For the fiscal year ended March 31, 1995, management fees for the Contrarian Fund were $8,053,129. Reimbursement of such fees was $785,897. Management fees for the Developing Countries Fund for the fiscal year ended March 31, 1995 were $174,084, and expected reimbursement of management fees was $44,177. The management fees for the Emerging Growth Fund for the fiscal years ended March 31, 1993, March 31, 1994 and March 31, 1995 were $648,066, $1,804,284 and $1,736,763, respectively. For the fiscal period ended March 31, 1993, the management fees for the Value + Growth Fund were $101,957, and RSIM, L.P. waived all of its management fees in connection with its agreement to limit the Value + Growth Fund's annual operating expenses. For the fiscal years ended March 31, 1994 and March 31, 1995, the management fees for the Value + Growth Fund were $288,116 and $1,260,821, respectively, and for the year ended March 31, 1994, reimbursement of management fees by RSIM, L.P. was approximately $191,672. (Prior to January 1, 1996, the Value + Growth Fund paid management fees to RSIM, L.P. at an annual rate of 1.25% of the Fund's average daily net assets.)
The Advisory Agreements for the Global Low-Price Stock Fund, the Global Natural Resources Fund, the Growth & Income Fund, the Information Age Fund, the Partners Fund, and the Value + Growth Fund permit Robertson Stephens Investment Management to seek reimbursement of any reductions made to its management fee within the two-year period following such reduction, subject to the ability of the Fund in question to effect such reimbursement and remain in compliance with applicable expense limitations. At March 31, 1995, RSIM, L.P. had waived management fees in respect of the Value + Growth Fund in the amount of $172,210, which was still subject to reimbursement by the Fund.
ADMINISTRATIVE FEES. The Global Low-Priced Stock Fund, Global Natural Resources Fund, Growth & Income Fund, and Information Age Fund have entered into Administrative Services Agreements with RSIM, L.P., pursuant to which RSIM, L.P. continuously provides business management services to the Funds and generally manages all of the business and affairs of the Funds, subject to the general oversight of the Trustees. The Funds pay RSIM, L.P. a fee, calculated daily and payable monthly, at the annual rate of 0.25% of their respective average daily net assets.
The proceeds received by each Fund for each issue or sale of its shares, and all income, earnings, profits, and proceeds thereof, subject only to the rights of creditors, will be specifically allocated to such Fund, and constitute the underlying assets of that Fund. The underlying assets of each Fund will be segregated on the Trust's books of account, and will be charged with the liabilities in respect of such Fund and with a share of the general liabilities of the Trust. Expenses with respect to any two or more Funds may be allocated in proportion to the net asset values of the respective Funds except where allocations of direct expenses can otherwise be fairly made.
Each of the Advisory Agreements is subject to annual approval (in the case of the Global Low-Priced Stock Fund, the Global Natural Resources Fund, the Growth & Income Fund, the Information Age Fund and the Partners Fund, commencing in 1997) by (i) the vote of the Trustees vote or of a majority of the outstanding voting securities (as defined in the 1940 Act) of the affected Fund, and (ii) the vote of a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust, RSIM, L.P., or RSIM, Inc. Each is terminable by Robertson Stephens Investment Management or the Trust, without penalty, on 60 days written notice to the other and will terminate automatically in the event of its assignment.
Each of the Administrative Services Agreements is subject to annual approval (commencing in 1997) by (i) the Board of Trustees, and (ii) the vote of a majority of the Trustees who are not "interested persons" (as defined in the 1940 Act). The Administrative Services Agreements may be terminated without penalty, by the Trust or by the vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the affected Fund, on 30 days notice to RSIM, L.P.
Each Fund will pay all expenses related to its operation which are not borne by Robertson Stephens Investment Management or the distributor, including but not limited to taxes, interest, brokerage fees and commissions, compensation paid to RS&Co. under a Fund's 12b-1 Plan, fees paid to members of the Board of Trustees who are not officers, directors, stockholders or employees of Robertson Stephens Investment Management or RS&Co., SEC fees and related expenses, state Blue Sky qualification fees, charges of custodians, transfer agents, registrars or other agents, outside auditing, accounting, and legal services, charges for the printing of prospectuses and statements of additional information for regulatory purposes or for distribution to shareholders, certain shareholder report charges, and charges relating to corporate matters.
Total operating expenses of a Fund are subject to applicable limitations under rules and regulations of the states in which that Fund is authorized to sell its shares; therefore, operating expenses are effectively subject to the most restrictive of such expense limitations as the same may be amended from time to time. The most stringent state expense limitation applicable to the Funds currently requires that Robertson Stephens Investment Management reimburse certain expenses of a Fund, including the management fees paid to Robertson Stephens Investment Management under its Advisory Agreement (excluding Rule 12b- l fees, interest, taxes, brokerage fees and commissions, and certain extraordinary charges), in any fiscal year in which such expenses exceed, in the case of the Contrarian Fund, 2.5% of the Fund's average daily net assets and, in the case of each of the other Funds, 2.5% of a Fund's average daily net assets up to $30 million, 2.0% of average daily net assets between $30 million and $100 million, and 1.5% of such net assets over $100 million. The Funds do not include any dividend expense on short sales among a Fund's expenses for this purpose.
Transactions on U.S. stock exchanges, commodities markets, and futures markets and other agency transactions involve the payment by a Fund of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Trust usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Trust includes a disclosed, fixed commission or discount retained by the underwriter or dealer. It is anticipated that most purchases and sales of securities by funds investing primarily in certain fixed-income securities will be with the issuer or with underwriters of or dealers in those securities, acting as principal. Accordingly, those funds would not ordinarily pay significant brokerage commissions with respect to securities transactions.
It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive brokerage and research services (as defined in the Securities Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that execute portfolio transactions for the clients of such advisers and from third parties with which such broker-dealers have arrangements. Consistent with this practice, Robertson Stephens Investment Management receives brokerage and research services and other similar services from many broker-dealers with which Robertson Stephens Investment Management places a Fund's portfolio transactions and from third parties with which these broker-dealers have arrangements. These services include such matters as general economic and market reviews, industry and company reviews, evaluations of investments, recommendations as to the purchase and sale of investments, newspapers, magazines, pricing services, quotation services, news services and personal computers utilized by Robertson Stephens Investment Management's managers and analysts. Where the services referred to above are not used exclusively by Robertson Stephens Investment Management for research purposes, Robertson Stephens Investment Management, based upon its own allocations of expected use, bears that portion of the cost of these services which directly relates to its non-research use. Some of these services are of value to Robertson Stephens Investment Management and its affiliates in advising various of its clients (including the Funds), although not all of these services are necessarily useful and of value in managing the Funds. The management fee paid by a Fund is not reduced because the Fund's Adviser or its affiliates receive these services even though Robertson Stephens Investment Management might otherwise be required to purchase some of these services for cash.
Robertson Stephens Investment Management places all orders for the purchase and sale of portfolio investments for the Fund and buys and sells investments for the Fund through a substantial number of brokers and dealers. Robertson Stephens Investment Management seeks the best overall terms available for the Fund, except to the extent Robertson Stephens Investment Management may be permitted to pay higher brokerage commissions as described below. In doing so, Robertson Stephens Investment Management, having in mind the Fund's best interests, considers all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security or other investment, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker-dealer involved and the quality of service rendered by the broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the Advisory Agreements, Robertson Stephens Investment Management may cause the Fund to pay a broker-dealer which provides "brokerage and research services" (as defined in the 1934 Act) to Robertson Stephens Investment Management an amount of disclosed commission for effecting securities transactions on stock exchanges and other transactions for the Fund on an agency basis in excess of the commission which another broker-dealer would have charged for effecting that transaction. Robertson Stephens Investment Management's authority to cause a Fund to pay any such greater commissions is also subject to such policies as the Trustees may adopt from time to time. Neither RSIM, L.P. nor RSIM, Inc. currently intends to cause the Funds to make such payments. It is the position of the staff of the Securities and Exchange Commission that Section 28(e) does not apply to the payment of such greater commissions in "principal" transactions. Accordingly, RSIM, L.P. and RSIM, Inc. will use their best efforts to obtain the best overall terms available with respect to such transactions.
The following tables provide information regarding brokerage commissions paid by the Funds for the periods indicated.
Each of the Funds has adopted a Distribution Plan under Rule 12b-l of the 1940 Act (each a "Plan"). Pursuant to the Plans, each Fund may pay RS&Co. (also referred to as the "Distributor") distribution fees at an annual rate of 0.25% of their respective average daily net assets, except the Contrarian Fund, which may pay a distribution fee at annual rate of 0.75%, for services the Distributor renders and costs and expenses it incurs in connection with the continuous offering of these Funds' shares. These expenses may include, but are not limited to, the costs of preparing and mailing all required reports and notices to shareholders, prospectuses and proxy materials; all fees and expenses relating to the qualification of these Funds and/or their shares under the securities laws of any jurisdiction, and under the Securities Act of 1933 and the 1940 Act; all costs related to the mailing of confirmations of shares sold or redeemed, reports of share balances, and responding to telephone or mail inquiries of investors or prospective investors; and payments to dealers, financial institutions, advisers, or other firms. The Plans also permit the Distributor to receive compensation based on a prorated portion of its overhead expenses attributable to the distribution of these Funds' shares, which include leases, communications, salaries, training, supplies, photocopying, and any other category of the Distributor's expenses attributable to the distribution of these Funds' shares.
For the three-month period ended March 31, 1993, and the twelve-month periods ended March 31, 1994 and March 31, 1995, the Emerging Growth Fund incurred distribution fees of $162,016, $451,071 and $434,190, respectively. For the period June 3, 1993 through March 31, 1994 and the twelve-month period ended March 31, 1995, the Contrarian Fund incurred distribution fees of $738,247 and $4,026,498, respectively. For the period from May 2, 1994 through March 31, 1995, the Developing Countries Fund incurred distribution fees of $69,633. The Value + Growth Fund's Plan became effective on January 1, 1996.
HOW NET ASSET VALUE IS DETERMINED
A Fund determines net asset value per share once daily, as of 4:30 p.m. New York time on each day the New York Stock Exchange (the "Exchange") is open. The Exchange is closed Saturdays, Sundays, New Year's Day, Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving and Christmas.
Securities for which market quotations are readily available are valued at prices which, in the opinion of the Trustees or a Fund's Adviser, most nearly represent the market values of such securities. Currently, such prices are determined using the last reported sale price or, if no sales are reported (as in the case of some securities traded over-the-counter), the last reported bid price, except that certain U.S. Government securities are stated at the mean between the last reported bid and asked prices. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value. All other securities and assets are valued at their fair value following procedures approved by the Trustees. Liabilities are deducted from the total, and the resulting amount is divided by the number of shares of the class outstanding.
Reliable market quotations are not considered to be readily available for long-term corporate bonds and notes, certain preferred stocks, tax-exempt securities, or certain foreign securities. These investments are stated at fair value on the basis of valuations furnished by pricing services approved by the Trustees, which determine valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders.
If any securities held by a Fund are restricted as to resale, the Fund's Adviser determines their fair values. The fair value of such securities is generally determined as the amount which a Fund could reasonably expect to realize from an orderly disposition of such securities over a reasonable period of time. The valuation procedures applied in any specific instance are likely to vary from case to case. However, consideration is generally given to the financial position of the issuer and other fundamental analytical data relating to the investment and to the nature of the restrictions on disposition of the securities (including any registration expenses that might be borne by the Fund in connection with such disposition). In addition, specific factors are also generally considered, such as the cost of the investment, the market value of any unrestricted securities of the same class (both at the time of purchase and at the time of valuation), the size of the holding, the prices of any recent transactions or offers with respect to such securities and any available analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is substantially completed each day at various times prior to the close of the Exchange. The values of these securities used in determining the net asset value of a Fund's shares are computed as of such times. Also, because of the amount of time required to collect and process trading information as to large numbers of securities issues, the values of certain securities (such as convertible bonds, U.S. Government securities, and tax-exempt securities) are determined based on market quotations collected earlier in the day at the latest practicable time prior to the close of the Exchange. Occasionally, events affecting the value of such securities may occur between such times and the close of the Exchange which will not be reflected in the computation of a Fund's net asset value. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value following procedures approved by the Trustees.
Each Fund intends to qualify each year and elect to be taxed as a regulated investment company under Subchapter M of the United States Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability determined under Subchapter M, a Fund would not be subject to federal income tax on any of its net investment income or net realized capital gains that are distributed to shareholders. As long as each Fund maintains its status as a regulated investment company and distributes all of its income, it will not, under present law, be subject to any excise or income taxes in Massachusetts or to franchise or income taxes in California.
In order to qualify as a "regulated investment company," a Fund must, among other things, (a) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other dispositions of stock, securities, or foreign currencies, and other income (including gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies; (b) derive less than 30% of its gross income from the sale or other disposition of certain assets (including stock and securities) held less than three months; (c) diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets consists of cash, cash items, U.S. Government securities, and other securities limited generally with respect to any one issuer to not more than 5% of the total assets of the Fund and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any issuer (other than U.S. Government securities). In order to receive the favorable tax treatment accorded regulated investment companies and their shareholders, moreover, a Fund must in general distribute at least 90% of its interest, dividends, net short-term capital gain, and certain other income each year.
An excise tax at the rate of 4% will be imposed on the excess, if any, of each Fund's "required distribution" over its actual distributions in any calendar year. Generally, the "required distribution" is 98% of the Fund's ordinary income for the calendar year plus 98% of its capital gain net income recognized during the one-year period ending on October 31 (or December 31, if the Fund so elects) plus undistributed amounts from prior years. Each Fund intends to make distributions sufficient to avoid imposition of the excise tax. Distributions declared by a Fund during October, November or December to shareholders of record on a date in any such month and paid by the Fund during the following January will be treated for federal tax purposes as paid by the Fund and received by shareholders on December 31 of the year in which declared.
With respect to investment income and gains received by a Fund from sources outside the United States, such income and gains may be subject to foreign taxes which are withheld at the source. The effective rate of foreign taxes in which a Fund will be subject depends on the specific countries in which its assets will be invested and the extent of the assets invested in each such country and therefore cannot be determined in advance.
A Fund's ability to use options, futures, and forward contracts and other hedging techniques, and to engage in certain other transactions, may be limited by tax considerations, in particular, the requirement that less than 30% of the Fund's gross income be derived from the sale or disposition of assets held for less than three months. A Fund's transactions in foreign currency-denominated debt instruments and its hedging activities will likely produce a difference between its book income and its taxable income. This difference may cause a portion of the Fund's distributions of book income to constitute returns of capital for tax purposes or require the Fund to make distributions exceeding book income in order to permit the Fund to continue to qualify, and be taxed under Subchapter M of the Code, as a regulated investment company.
Under federal income tax law, a portion of the difference between the purchase price of zero-coupon securities in which a Fund has invested and their face value ("original issue discount") is considered to be income to the Fund each year, even though the Fund will not receive cash interest payments from these securities. This original issue discount (imputed income) will comprise a part of the net investment income of the Fund which must be distributed to shareholders in order to maintain the qualification of the Fund as a regulated investment company and to avoid federal income tax at the level of the Fund.
Each Fund is required to withhold 31% of all income dividends and capital gain distributions, and 31% of the gross proceeds of all redemptions of Fund shares, in the case of any shareholder who does not provide a correct taxpayer identification number, about whom a Fund is notified that the shareholder has under reported income in the past, or who fails to certify to a Fund that the shareholder is not subject to such withholding. Tax-exempt shareholders are not subject to these back-up withholding rules so long as they furnish the Fund with a proper certification.
The foregoing is a general and abbreviated summary of the applicable provisions of the Code and related regulations currently in effect. For the complete provisions, reference should be made to the pertinent Code sections and regulations. The Code and regulations are subject to change by legislative or administrative actions. Dividends and distributions also may be subject to state and federal taxes. Shareholders are urged to consult their tax advisers regarding specific questions as to federal, state or local taxes. The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S. investors should consult their tax advisers concerning the tax consequences of ownership of shares of the Fund, including the possibility that distributions may be subject to a 30% United States withholding tax (or a reduced rate of withholding provided by treaty). Statements as to the tax status of distributions will be mailed annually.
Average annual total return for one-, five-, and ten-year periods (or for such shorter periods as a Fund has been in operation) is determined by calculating the actual dollar amount of investment return on a $1,000 investment in the Fund at the beginning of the period, and then calculating the annual compounded rate of return which would produce that amount. Total return for a period of one year is equal to the actual return of the Fund during that period. Total return calculations assume reinvestment of all Fund distributions at net asset value on their respective reinvestment dates.
The Funds impose no sales load on initial purchases or on reinvested dividends. Accordingly, no sales charges are deducted for purposes of this calculation.
The calculation of total return assumes that all dividends, if any, and distributions paid by a Fund would be reinvested at the net asset value on the day of payment.
At times, a Fund's Adviser may reduce its compensation or assume expenses of the Fund in order to reduce the Fund's expenses. The per share amount of any such fee reduction or assumption of expenses during a Fund's past ten fiscal years (or for the life of the Fund, if shorter) is reflected in the Prospectus. Any such fee reduction or assumption of expenses would increase the Fund's total return during the period of the fee reduction or assumption of expenses.
Total return may be presented for other periods or without giving effect to any contingent deferred sales charge. Any quotation of total return or yield not reflecting the contingent deferred sales charge would be reduced if the sales charges were reflected.
All data are based on past performance and do not predict future results.
The total returns of each of the Funds for the periods indicated through September 30, 1995 are set forth below. No information is presented as to the Global Low-Priced Stock Fund, the Global Natural Resources Fund, or the Information Age Fund because none of those Funds had commenced operations as of September 30, 1995. Total returns for periods when an expense limitation was in effect are higher than they would be if no expense limitation had been in effect. Total return for periods of one year or less reflect the actual return of a Fund during the period; total return for periods longer than one year reflect the average annual total return of a Fund during the period.
Year ended September 30, 1995 20.22% From inception (6/30/93) through September 30, 1995 13.57%
Year ended September 30, 1995 (7.78)% From inception (5/2/94) through September 30, 1995 (5.63)%
Year ended September 30, 1995 19.91% Three years ended September 30, 1995 19.29% Five years ended September 30, 1995 20.57% From inception (11/30/87) through September 30, 1995 22.53%
From inception (7/12/95) September 30, 1995 7.60%
From inception (7/12/95) September 30, 1995 1.90%
Year ended September 30, 1995 76.97% Three years ended September 30, 1995 39.70% From inception (5/12/92) through September 30, 1995 34.87%
From time to time, a Fund may present non-standardized total return information, in addition to standardized performance information, which may include such results as the growth of a hypothetical $10,000 investment in a Fund, and cumulative total return. The results of a $10,000 investment in a Fund and cumulative total return measure the absolute change in net asset value resulting from all Fund operations including reinvestment of a distribution paid by a Fund for the period specified.
The aggregate total return is calculated in a similar manner to average annual total return, except that the results are not annualized. Each calculation assumes that all dividends and distributions are reinvested at net asset value on the reinvestment dates during the period.
A Fund may compare its performance with that of appropriate indices such as the Standard & Poor's Composite Index of 500 stocks ("S&P 500"), Standard & Poor's MidCap 400 Index ("S&P 400"), the NASDAQ Industrial Index, and the NASDAQ Composite Index, Russell 2000 Index or other unmanaged indices so that investors may compare the Fund's results with those of a group of unmanaged securities. The S&P 500, the S&P 400, the NASDAQ Industrial Index, the NASDAQ Composite Index and the Russell 2000 Index are unmanaged groups of common stocks traded principally on national securities exchanges and the over the counter market, respectively. A Fund also may, from time to time, compare its performance to other mutual funds with similar investment objectives and to the industry as a whole, as quoted by rating services and publications, such as Lipper Analytical Services, Inc., Morningstar Mutual Funds, Forbes, Money and Business Week.
In addition, one or more portfolio managers or other employees of Robertson Stephens Investment Management may be interviewed by print media, such as THE WALL STREET JOURNAL or BUSINESS WEEK, or electronic news media, and such interviews may be reprinted or excerpted for the purpose of advertising regarding the Fund.
From time to time a Fund may present a statistical measure of the volatility of a Fund's performance relative to the volatility of the performance of the S&P 500. A Fund calls this comparative measure its "beta." Beta is approximate, because it is statistical, and is not necessarily indicative of future fund performance volatility. Thus, if a Fund's portfolio volatility perfectly represents that of the S&P 500, a Fund's beta would be 1.0. If a Fund's beta is greater than 1.0, a Fund's portfolio would tend to represent a greater market risk than the S&P 500 because a Fund's portfolio would tend to be more sensitive to movements in the securities markets. For example, if a Fund's beta is 1.1, a Fund's performance would tend to vary approximately 10% more than would the performance of the S&P 500. If a Fund's beta is 0.9, a Fund's performance would tend to vary 10% less than the performance of the S&P 500. The correlation is not usually exact because, depending upon the diversification of a Fund's portfolio, a beta of less than 1.0 may indicate only that the portfolio is less sensitive to market movements, not that the Fund's portfolio has low overall risk.
The beta included with any presentation of the Fund's performance data will be calculated according to the following formula:
Where: n = number of months measured
R(FT) = rate of return on the Fund in month T
R(MT) = rate of return on the market index, I.E., the S&P 500, R(F) = arithmetic average monthly rate of return of the Fund R(M) = arithmetic average monthly rate of return on the market index, I.E., the S&P 500
The Value + Growth Fund's beta from the date upon which its prospectus became effective (May 12, 1992) through December 31, 1993 was 0.63. The Value + Growth Fund's beta for the twelve-month periods ended December 31, 1993 and March 31, 1994 were 0.63 and 0.68, respectively, and for the period from April 1, 1994 through March 31, 1995 was 1.34.
Robertson Stephens Investment Trust (the "Trust") is a diversified, open- end series investment company, which was organized on May 11, 1987 as a Massachusetts business trust.
State Street Bank and Trust Company, c/o National Financial Data Services, at P.O. Box 419717, Kansas City, MO 64141, serves as the Funds' Transfer Agent. State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, serves as the Funds' Custodian. As Transfer Agent, State Street Bank and Trust Company maintains records of shareholder accounts, processes purchases and redemptions of shares, acts as dividend and distribution disbursing agent and performs other related shareholder functions. As Custodian, it and subcustodians designated by the Board of Trustees hold the securities in the Funds' portfolio and other assets for safekeeping. The Transfer Agent and Custodian do not and will not participate in making investment decisions for the Funds.
Price Waterhouse LLP, 555 California Street, San Francisco, California 94104, are the Trust's independent accountants, providing audit services, tax return review and other tax consulting services and assistance and consultation in connection with the review of various Securities and Exchange Commission filings. The Financial Highlights included in the Prospectus of Robertson Stephens Investment Trust and the Fund's prospectuses and the financial statements incorporated by reference into the Trust's prospectuses and included in this Statement have been so included and incorporated in reliance upon the report of Price Waterhouse LLP, the independent accountants, given on the authority of said firm as experts in auditing and accounting.
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Agreement and Declaration of Trust disclaims shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees. The Agreement and Declaration of Trust provides for indemnification out of a Fund's property for all loss and expense of any shareholder held personally liable for the obligations of that Fund. Thus the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations.
The Prospectus and this Statement, together, do not contain all of the information set forth in the Registration Statement of Robertson Stephens Investment Trust, as amended, filed with the Securities and Exchange Commission. Certain information is omitted in accordance with rules and regulations of the Commission. The Registration Statement may be inspected at the Public Reference Room of the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies thereof may be obtained from the Commission at prescribed rates.
This Appendix describes ratings applied to corporate bonds by Standard & Poor's Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody"s') and Fitch Investor Services, Inc. ("Fitch").
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's to a debt obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay principal and differ from the highest rated issues only in small degree.
A: Bonds rated A have a strong capacity to pay interest and repay principal, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than in higher rated categories.
BB: Bonds rated BB have less near-term vulnerability to default than other speculative issues. However, they face 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: Bonds rated B have a greater vulnerability to default but currently have 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: Bonds rated CCC have a currently identifiable vulnerability to default, and are 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, they are not likely to have the capacity to pay interest and repay principal.
CC: Bonds rated CC are typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC bond rating.
C: The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- bond 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: Bonds rated D are in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating will also be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or minus to show relative standing within the major rating categories.
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 these 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 the desirable investment. Assurance of interest and principal payments or 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 issues 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 rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
AAA: Bonds and notes rated AAA are regarded as being of the highest quality, with the obligor having an extraordinary ability to pay interest and repay principal which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds and notes rated AA are regarded as high quality obligations. The obligor's ability to pay interest and repay principal, while very strong, is somewhat less than for AAA rated securities, and more subject to possible change over the term of the issue.
A: Bonds and notes rated A are regarded as being of good quality. The obligor's ability to pay interest and repay principal is strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds and notes with higher ratings.
BBB: Bonds and notes rated BBB are regarded as being 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 and notes with higher ratings.
BB: Bonds and notes rated BB are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements.
B: Bonds and notes rated B are considered highly speculative. While bonds and notes in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.
CCC: Bonds and notes rated CCC have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.
CC: Bonds and notes rated CC are minimally protected. Default in payment of interest and/or principal seems probable over time.
C: Bonds and notes rated C are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds and notes rated DDD, DD and D are in default on interest and/or principal payments. Such bonds and notes are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds and notes, and "D" represents the lowest potential for recovery.
Note: Fitch ratings (other than the AAA, DDD, DD or D categories) may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. These are refinements more closely reflecting strengths and weaknesses, and are not to be used as trend indicators.
Attached are financial statements of Robertson Stephens Investment Trust for the specified periods.
MARCH 31, 1995 ANNUAL REPORT
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS CONTRARIAN FUND
SCHEDULE OF NET ASSETS (CONTINUED)
(2) See 4f in Notes to Financial Statements. (3) See 4g in Notes to Financial Statements. (4) GDS - Global Depository Shares. (5) ADR - American Depository Receipt. (6) See 4e in Notes to Financial Statements.
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT
SCHEDULE OF SECURITIES SOLD SHORT
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS CONTRARIAN FUND
STATEMENT OF ASSETS AND LIABILITIES
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS CONTRARIAN FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Per share data for each period has been determined by using the average number of shares outstanding throughout each period.
*Ratios, except for total return and portfolio turnover rate, have been annualized.
If the Fund had paid all of its expenses and there had been no reimbursement by the Adviser, the ratio of expenses to average net assets for the year ended March 31, 1995 would have been 2.58%, and the ratio of net investment (loss) to average net assets would have been (0.42)%.
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT
The Robertson Stephens Contrarian Fund (the "Fund") is a series of the Robertson Stephens Investment Trust, a Massachusetts business trust organized on May 11, 1987 (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, open-end management investment company. The Fund became effective to offer shares to the public on June 30, 1993. Prior to the public offering, shares were offered in a private placement offering on June 3, 1993, at $10 per share, to sophisticated investors under Section 4(2) of the Securities Act of 1933. The Trust currently offers four series of shares - The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund and The Robertson Stephens Emerging Markets Fund. The assets for each series are segregated and accounted for separately.
1. SIGNIFICANT ACCOUNTING POLICIES: The following policies are in conformity with generally accepted accounting principles.
- Marketable equity securities including options and foreign securities are valued at the last sale price on the principal exchange or market on which they are traded, or, if there were no sales that day, at the mean between the closing bid and asked prices. Foreign securities prices are generally denominated in foreign currencies. The currencies are translated into U.S. dollars by using the exchange rates quoted at the close of The London Stock Exchange prior to when the Fund's net asset values are next determined. At March 31, 1995, 98.5% of the Fund's long positions and 100% of its short positions were valued in this manner.
- Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use all available resources including quotations from market makers and fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which would have a significant impact on the value of a security. At March 31, 1995, 1.5% of the Fund's long positions were valued using these guidelines and procedures.
- Principally as a result of significant stock price appreciation, on May 24, 1995 approximately 24% of the Contrarian Fund's net assets were invested in common stock of Diamond Fields Resources, a Canadian corporation. As a result, a decline in the stock price of Diamond Fields Resources would have a significant adverse effect on the net asset value of the Fund.
b. REPURCHASE AGREEMENTS: Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 102% of the repurchase price under the agreement. However, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Advisor to have satisfactory creditworthiness. At March 31, 1995, the collateral held by the Fund against the outstanding repurchase agreement was 102% of the repurchase agreement price.
c. FEDERAL INCOME TAXES: The Fund has made no provision for federal income taxes for the year ended March 31, 1995, as it does not expect to incur any federal income tax for the year. The Fund expects in the future to comply with requirements of the Internal Revenue Code for qualifying as a regulated investment company so as not to be subject to federal income tax, although it chose not to take steps to comply with those requirements for the year ended March 31, 1995.
d. SECURITIES TRANSACTIONS: Securities transactions are accounted for on the date the securities are purchased, sold, or sold short (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
e. FOREIGN CURRENCY TRANSLATION: The accounting records of the Fund are maintained in U.S. dollars. Investment securities and all other assets and liabilities of the Fund denominated in a foreign currency are translated into U.S. dollars at the exchange rate each day. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate in effect on the dates of the respective transactions.
The Fund does not isolate the portion of the fluctuations on investment resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized gain or loss and unrealized appreciation or depreciation from investments.
f. INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
g. CAPITAL ACCOUNTS: The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial
THE ROBERTSON STEPHENS CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
a. TRANSACTIONS: The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the year ended March 31, 1995 and from June 3, 1993 (commencement of operations) to March 31, 1994 were as follows:
a. ADVISORY FEES AND EXPENSE LIMITATION: Under the terms of an advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Fund pays Robertson Stephens Investment Management, L.P. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co."), the Fund's Distributor, is the sole Limited Partner, an investment advisory fee calculated at an annual rate of 1.50% of the average daily net assets of the Fund. For the year ended March 31, 1995, the Fund incurred investment advisory fees of $8,053,129. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees but excluding distribution fees and dividend expense for short sales, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale. The current limits for the Fund are 2.5% of the Fund's average daily net assets up to $30 million, 2.0% between $30 million to $100 million and 1.5% above $100 million. For the year ended March 31, 1995, the expected reimbursement of advisory fees was $785,897.
b. AFFILIATED PERSONS: Certain officers and Trustees of the Fund are also limited partners and/or employees of RS & Co. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM's General Partner, RS & Co., Inc., and a Limited Partner and Chief Operating Officer of the Fund's Distributor, RS & Co. Paul H. Stephens, Portfolio Manager of the Fund and Chief Investment Officer of RSIM, is also a founding Partner and the Chief Investment Officer of RS & Co. John P . Rohal, a Trustee of the Fund, is a Limited Partner and Director of Research for RS & Co. All affiliated persons and access persons of the Fund, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
c. COMPENSATION OF TRUSTEES AND OFFICERS: Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $17,480 for the year ended March 31, 1995.
d. DISTRIBUTION FEES: The Fund has entered into an agreement with RS & Co. for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, whereby RS & Co. is compensated for services in such capacity, including its expenses in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.75% of the average daily net assets of the Fund. For the year ended March 31, 1995, the Fund incurred distribution fees of $4,026,498.
e. BROKERAGE COMMISSIONS: RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. For the year ended March 31, 1995, the Fund paid brokerage commissions of $289,074 to RS & Co. which represented 14.8% of total commissions paid for the period.
On September 9, 1994 RSIM reimbursed the Fund the amount of unrealized loss and commission in respect of the Fund's investment in Golden Star Resources, due to the fact that RS&Co. had acted as an underwriter of the shares which in that instance the Fund was precluded from purchasing. RSIM has determined that investment in the shares continues to be consistent with the Fund's investment objective and has, with the acknowledgement of the Trustees, continued to hold the investment in the Fund's portfolio. The one-time payment by RSIM increased the Fund's net asset value by 2 cents per share. In the absence of the payment, the Fund's annual total return and cumulative total return since inception would have been (13.29)% and 7.00%, respectively. The Fund bears the entire investment risk on the shares from September 9, 1994.
MARCH 31, 1995 ANNUAL REPORT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
a. PORTFOLIO TURNOVER RATE: The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding options, securities sold short and short-term investments) measured as a percentage of the Fund's average monthly portfolio, for the year ended March 31, 1995, was 79%.
b. TAX BASIS OF INVESTMENTS: At March 31, 1995, the cost of investments for federal income tax purposes was $384,987,798. Accumulated net unrealized depreciation on investments was $12,264,426, consisting of gross unrealized appreciation and depreciation of $71,160,302 and $58,895,876, respectively.
c. INVESTMENT PURCHASES AND SALES: For the year ended March 31, 1995, the cost of investments purchased and the proceeds from investments sold (excluding options, securities sold short and short-term investments) were $316,588,836 and $265,702,381, respectively.
d. OPTIONS: An option contract is a contract that provides the Fund the right, but not the obligation, in exchange for a premium to buy a call or sell a put of an underlying security at a specified price within a specified period of time. The Fund may utilize options to hedge investments against adverse price fluctuations or as a means of capitalizing on price or value movements of currencies, securities or indices the Fund does not own. The risk associated with purchasing options is limited to the premium originally paid. The premium paid by the Fund for the purchase of a call or put option is included in the Fund's "Statement of Assets and Liabilities" as an investment and subsequently marked-to-market to reflect the market value of the option. The Fund limits its aggregate option positions for all purposes to 25% of the Fund's total assets. In addition, the Fund is prohibited from writing the far riskier "naked" option, where the Fund writes an option when it does not own the underlying security. At March 31, 1995, the Fund held 2.1% of its total assets in options including the Technology Put Basket Options. For the year ended March 31, 1995, the cost of options purchased and the proceeds of options sold were $55,275,077 and $25,656,277, respectively.
"CULT 3" AND "CULT 5" TECHNOLOGY PUT BASKET OPTIONS: The "Cult 3" and "Cult 5" Technology Put Basket Options (the "Options") are European style put options expiring June 12, 1995 and January 26, 1996, respectively. The Options, customized for the Fund, are based on the underlying price of 13 high technology stocks. The market value of the Options are determined daily based on the price of the underlying stocks, market volatility, exercise date and other relevant parameters.
e. SHORT SALES: Short sales are transactions in which the Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to deliver to the buyer upon the short sale; the Fund then is obligated to replace the security borrowed by purchasing it in the open market at some later date. The Fund will incur a loss if the market price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in value between those dates. All short sales must be fully collateralized. The Fund maintains the collateral in a segregated account consisting of cash and/or U.S. Government securities sufficient to collateralize the sales proceed of its short positions. The Fund may also sell short "against the box" (i.e. the Fund enters into a short sale as described above, while holding an offsetting long position in the security which is sold short). If the Fund enters into a short sale "against the box", it will segregate an equivalent amount of securities owned by the Fund as collateral while the short sale is outstanding. The Fund limits the value of short positions (excluding short sales "against the box") to 25% of the Fund's total assets. At March 31, 1995, the Fund had 20% of its total assets in short positions. For the year ended March 31, 1995, the cost of investments purchased to cover short sales and the proceeds from investments sold short were $170,799,620 and $193,650,998, respectively.
Included in the "Other Assets, Net" category in the Schedule of Net Assets are the following securities sold short where the Fund has purchased the underlying securities to effectively close out the short positions. At March 31, 1995 the Fund chose not to complete the transactions which would have required delivery of the purchased securities to the lender. The Fund does not consider these boxed positions as investments.
f. RESTRICTED SECURITIES: A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. At March 31, 1995, the Fund held restricted securities with an aggregate value of $4,143,750, which represented 1.04% of
THE ROBERTSON STEPHENS CONTRARIAN FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Fund's total net assets. Restricted securities are valued according to the guidelines and procedures adopted by the Fund's Board of Trustees.
g. WARRANTS: A warrant is an option which normally entitles the holder to purchase a proportionate amount of a particular class of the issuer's securities at a predetermined price during a specific period.
The following warrants were valued such that when the exercise price of the warrant was less than that of the underlying common stock, the warrant was priced using the Black-Scholes Valuation Formula. The Black-Scholes Valuation Formula values a warrant by determining the differential between the exercise price of the warrant and the current price of the underlying stock based on a number of factors. These factors include, but are not limited to, current price of the underlying stock, exercise price of the warrant, time to expiration, assumed riskless rate of interest, compounded rate of return on the stock and standard deviation of the return on the stock. If the exercise price was greater than that of the underlying common stock, the warrant was valued at zero. This valuation method is subject to frequent review and is in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees.
MARCH 31, 1995 ANNUAL REPORT
To the Shareholders and Board of Trustees of The Robertson Stephens Contrarian Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedules of net assets and of securities sold short, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Robertson Stephens Contrarian Fund (one of the series constituting The Robertson Stephens Investment Trust, hereinafter referred to as the "Fund") at March 31, 1995, the results of its operations for the year then ended and the changes in its net assets and the financial highlights for each of the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 1995 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above.
MARCH 31, 1995 ANNUAL REPORT
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS EMERGING GROWTH FUND
SCHEDULE OF NET ASSETS (CONTINUED)
(2) See 4d in Notes to Financial Statements
MARCH 31, 1995 ANNUAL REPORT
STATEMENT OF ASSETS AND LIABILITIES
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS EMERGING GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Per share data for each of the periods has been determined by using the average number of shares outstanding throughout each period. Ratios, except for total return and portfolio turnover rate, have been annualized.
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS EMERGING GROWTH FUND
The Robertson Stephens Emerging Growth Fund (the "Fund") is a series of the Robertson Stephens Investment Trust, a Massachusetts business trust organized on May 11, 1987 (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. The Fund became effective to offer shares to the public on November 30, 1987. The Trust currently offers four series of shares - The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund and The Robertson Stephens Emerging Markets Fund. The assets for each series are segregated and accounted for separately.
1. SIGNIFICANT ACCOUNTING POLICIES: The following policies are in conformity with generally accepted accounting principles.
- Marketable equity securities are valued at the last sale price on the principal exchange or market on which they are traded, or, if there were no sales that day, at the mean between the closing bid and asked prices. At March 31, 1995, 99.9% of the Fund's portfolio was valued in this manner.
- Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which would have a significant impact on the value of a security. At March 31, 1995, approximately 0.1% of the Fund's portfolio was valued using these guidelines and procedures.
b. REPURCHASE AGREEMENTS: Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 102% of the repurchase price under the agreement. However, in the event of default or bankruptcy, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Advisor to have satisfactory creditworthiness. At March 31, 1995, the collateral held by the Fund against the outstanding repurchase agreement was 102% of the repurchase agreement price.
c. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements of the Internal Revenue Code on both excise tax and income tax provisions applicable to regulated investment companies. The Code permits the Fund, a regulated investment company, to avoid the imposition of taxes by meeting various qualification requirements on assets, income and distributions to shareholders. The Fund intends to continue to meet these requirements. Accordingly, there is no provision for federal income taxes.
d. SECURITIES TRANSACTIONS: Securities transactions are accounted for on the date the securities are purchased and sold (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
e. INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
f. CAPITAL ACCOUNTS: The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
a. TRANSACTIONS: The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the year ended March 31, 1995 and for the year ended March 31, 1994 were as follows:
MARCH 31, 1995 ANNUAL REPORT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
a. ADVISORY FEES AND EXPENSE LIMITATION: Under the terms of an advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Fund pays Robertson Stephens Investment Management, Inc. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co"), the Fund's Distributor, is an affiliate, an investment advisory fee calculated at an annual rate of 1.00% of the average daily net assets of the Fund. For the year ended March 31, 1995, the Fund incurred investment advisory fees of $1,736,763. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees, but excluding distribution fees, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale. The current limits for the Fund are 2.5% of the Fund's average daily net assets up to $30 million, 2.0% between $30 million to $100 million and 1.5% above $100 million.
b. AFFILIATED PERSONS: Certain officers and Trustees of the Fund are also limited partners and/or employees of RS & Co. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM, and a Limited Partner and Chief Operating Officer of the Fund's Distributor, RS & Co. John P. Rohal, a Trustee of the Fund, is a Limited Partner and Director of Research for RS & Co. All affiliated and access persons, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
c. COMPENSATION OF TRUSTEES AND OFFICERS: Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $17,480 for the year ended March 31, 1995.
d. DISTRIBUTION FEES: The Fund has entered into an agreement with RS & Co., for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, whereby RS & Co. is compensated for services in such capacity including its expenses in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.25% of the average daily net assets of the Fund. For the year ended March 31, 1995, the Fund incurred distribution fees of $434,190.
e. BROKERAGE COMMISSIONS: RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. Subject to certain constraints, the Fund may make purchases of securities from offerings or underwritings in which RS & Co. has been retained by the issuer. For the year ended March 31, 1995, the Fund paid brokerage commissions of $163,607 to RS & Co. which represented 29.2% of total commissions paid for the period.
a. PORTFOLIO TURNOVER RATE: The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding short-term investments) measured as a percentage of the Fund's average monthly portfolio, for the year ended March 31, 1995, was 280%.
b. TAX BASIS OF INVESTMENTS: At March 31, 1995, the cost of investments for federal income tax purposes was $151,652,002. Accumulated net unrealized appreciation on investments was $19,417,164, consisting of gross unrealized appreciation and depreciation of $22,766,565 and $3,349,401, respectively.
c. INVESTMENT PURCHASES AND SALES: For the year ended March 31, 1995, the cost of investments purchased and the proceeds from investments sold (excluding short-term investments) were $469,586,612 and $410,505,457, respectively.
d. RESTRICTED SECURITIES: A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. If the security is subsequently registered and resold, the issuers would bear the expense of all registrations at no cost to the Fund. At March 31, 1995, the Fund held restricted securities with an aggregate value of $102,063 which represented 0.1% of the Fund's total net assets.
THE ROBERTSON STEPHENS EMERGING GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Each of the above securities was valued based on its common share price equivalent. Each common share was valued at its fair value according to the guidelines and procedures adopted by the Fund's Board of Trustees as outlined in Note 1.a., paragraph 2.
At March 31, 1995, Applied Micro Circuits Corporation Convertible Preferred Stock, Series 3 was valued at the common share price equivalent of $1.75, assuming the 2,381 shares of the Convertible Preferred Stock were converted to 25,116 shares of common stock. Managed Health Network, Inc. Convertible Preferred Stock, Series B was valued at the common share price equivalent of $1.3017, assuming the 500 shares of the Convertible Preferred Stock were converted to 44,642 shares of common stock.
MARCH 31, 1995 ANNUAL REPORT
To the Shareholders and Board of Trustees of The Robertson Stephens Emerging Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of net assets, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Robertson Stephens Emerging Growth Fund (one of the series constituting The Robertson Stephens Investment Trust, hereinafter referred to as the "Fund") at March 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented subsequent to December 31, 1990, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 1995 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. The financial statements of the Fund for the year ended December 31, 1990 were audited by other independent accountants whose report dated January 31, 1991 expressed an unqualified opinion on those statements.
MARCH 31, 1995 ANNUAL REPORT
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS EMERGING MARKETS FUND
SCHEDULE OF NET ASSETS (CONTINUED)
SCHEDULE OF SECURITIES SOLD SHORT
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES
FOR THE PERIOD MAY 2, 1994 (COMMENCEMENT OF OPERATIONS)
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS EMERGING MARKETS FUND
STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD MAY 2, 1994 (COMMENCEMENT OF OPERATIONS)
FOR THE PERIOD MAY 2, 1994 (COMMENCEMENT OF OPERATIONS)
Per share data has been determined by using the average number of shares outstanding throughout the period.
Ratios, except for total return and portfolio turnover rate, have been annualized.
If the Fund had paid all of its expenses and there had been no reimbursement by the Adviser, the ratio of expenses to average net assets for the period ended March 31, 1995 would have been 3.46% (annualized), and the ratio of net investment income to average net assets would have been 0.41% (annualized).
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT
The Robertson Stephens Emerging Markets Fund (the "Fund") is a series of the Robertson Stephens Investment Trust, a Massachusetts business trust organized on May 11, 1987 (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as a non-diversified, open-end management investment company. The Fund became effective to offer shares to the public on April 29, 1994, and it started to offer shares to the public on May 2, 1994. The Trust currently offers four series of shares - The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund and The Robertson Stephens Emerging Markets Fund. The assets for each series are segregated and accounted for separately.
1. SIGNIFICANT ACCOUNTING POLICIES: The following policies are in conformity with generally accepted accounting principles.
- Marketable equity securities including options and foreign securities are valued at the last sale price on the principal exchange or market on which they are traded, or, if there were no sales that day, at the mean between the closing bid and asked prices. Foreign securities prices are generally denominated in foreign currencies. The currencies are translated into U.S. dollars by using the exchange rates quoted at the close of The London Stock Exchange prior to when the Fund's net asset values are next determined. At March 31, 1995, 89% of the Fund's long positions and 100% of its short positions were valued in this manner.
- Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use all available resources including quotations from market makers and fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which would have a significant impact on the value of a security. At March 31, 1995, 11% of the Fund's long positions and 0% of its short positions were valued using these guidelines and procedures.
b. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements of the Internal Revenue Code on both excise tax and income tax provisions applicable to regulated investment companies. The Code permits the Fund, a regulated investment company, to avoid the imposition of taxes by meeting various qualification requirements on assets, income and distributions to shareholders. The Fund intends to continue to meet these requirements. Accordingly, there is no provision for federal income taxes.
c. SECURITIES TRANSACTIONS: Securities transactions are accounted for on the date the securities are purchased, sold, or sold short (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
d. FOREIGN CURRENCY TRANSLATION: The accounting records of the Fund are maintained in U.S. dollars. Investment securities and all other assets and liabilities of the Fund denominated in a foreign currency are translated into U.S. dollars at the exchange rate each day. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate in effect on the dates of the respective transactions.
The Fund does not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
e. INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
f. CAPITAL ACCOUNTS: The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
a. TRANSACTIONS: The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the period from May 2, 1994 (Commencement of Operations) to March 31, 1995 were as follows:
THE ROBERTSON STEPHENS EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
a. ADVISORY FEES AND EXPENSE LIMITATION: Under the terms of an advisory agreement, which is reviewed and approved annually by the Fund's Board of Trustees, the Fund pays Robertson Stephens Investment Management, L.P. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co."), the Fund's Distributor, is the sole Limited Partner, an investment advisory fee calculated at an annual rate of 1.25% of the average daily net assets of the Fund. For the period from May 2, 1994 to March 31, 1995, the Fund incurred investment advisory fees of $174,084. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees but excluding distribution fees and dividend expense for short sales, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale. The current limit for the Fund is 2.5% of the Fund's average daily net assets up to $30 million. For the year ended March 31, 1995, the expected reimbursement of advisory fees was $44,177.
b. AFFILIATED PERSONS: Certain officers and Trustees of the Fund are also limited partners and/or employees of RS & Co. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM's General Partner, RS & Co., Inc., and a Limited Partner and Chief Operating Officer of the Fund's Distributor, RS & Co. John P. Rohal, a Trustee of the Fund, is a Limited Partner and Director of Research for RS & Co. All affiliated persons and access persons of the Fund, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
c. COMPENSATION OF TRUSTEES AND OFFICERS: Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $15,863 for the period from May 2, 1994 to March 31, 1995.
d. DISTRIBUTION FEES: The Fund has entered into an agreement with RS & Co. for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, whereby RS & Co. is compensated for services in such capacity, including its expenses in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.50% of the average daily net assets of the Fund. For the period from May 2, 1994 to March 31, 1995, the Fund incurred distribution fees of $69,633.
e. BROKERAGE COMMISSIONS: RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. For the period from May 2, 1994 to March 31, 1995, the Fund paid brokerage commissions of $1,250 to RS & Co. which represented 0.73% of total commissions paid for the period.
On September 9, 1994 RSIM reimbursed the Fund the amount of realized loss and commission in respect of the Fund's investment in shares of Vengold, due to the fact that the Fund purchased the shares from RS & Co. acting as principal which in that instance the Fund was precluded from purchasing. The Fund subsequently sold all the shares on and before August 8, 1994. The one-time payment by RSIM increased the Fund's net asset value by 13 cents per share. In the absence of the payment, the Fund's total return since inception would have been (14.3)%.
a. PORTFOLIO TURNOVER RATE: The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding securities sold short and short-term investments), measured as a percentage of the Fund's average monthly portfolio, for the period from May 2, 1994 to March 31, 1995, was 124%.
b. TAX BASIS OF INVESTMENTS: At March 31, 1995, the cost of investments for federal income tax purposes was $10,612,836. Accumulated net unrealized depreciation on investments was $2,377,846, consisting of gross unrealized appreciation and depreciation of $256,316 and $2,634,162, respectively.
c. INVESTMENT PURCHASES AND SALES: For the period from May 2, 1994 to March 31, 1995, the cost of investments purchased and the proceeds from investments sold (excluding securities sold short and short-term investments) were $21,394,217 and $9,790,138, respectively.
d. SHORT SALES: Short sales are transactions in which the Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to deliver to the buyer upon the short sale; the Fund then is obligated to replace the security borrowed by purchasing it in the open market at some later date. The Fund will incur a loss if the market price of the security increases between the date of the
MARCH 31, 1995 ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS (CONTINUED)
short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in value between those dates. All short sales must be fully collateralized. The Fund maintains the collateral in a segregated account consisting of cash and/or U.S. government securities sufficient to collateralize the sales proceeds of its short positions. The Fund may also sell short "against the box" (i.e., the Fund enters into a short sale as described above, while holding an offsetting long position in the security which is sold short). If the Fund enters into a short sale "against the box," it will segregate an equivalent amount of securities owned by the Fund as collateral while the short sale is outstanding. The Fund limits the value of short sell positions (excluding short sales "against the box") to 25% of the Fund's total assets. At March 31, 1995, the Fund had 0.6% of the Fund's total assets in short positions. For the period from May 2, 1994 to March 31, 1995, the cost of investments purchased to cover short sales and the proceeds from investments sold short were $5,120,477 and $5,518,205, respectively.
e. FOREIGN SECURITIES: Foreign securities investments involve special risks and considerations not typically associated with those of U.S. origin. These risks include, but are not limited to, reevaluation of currencies, adverse political, social and economic developments and less reliable information about issuers. These risks are heightened for investments in emerging markets countries. Moreover, securities of many foreign companies and markets may be less liquid and their prices more volatile than those of U.S. companies and markets. The Fund intends to invest no more than 40% of its total assets exclusively in one foreign country. At March 31, 1995, the Fund had investments worth no more than 20% of its total assets in any one foreign country.
MARCH 31, 1995 ANNUAL REPORT
To the Shareholders and Board of Trustees of The Robertson Stephens Developing Countries Fund (Formerly The Robertson Stephens Emerging Markets Fund)
In our opinion, the accompanying statement of assets and liabilities, including the schedules of net assets and of securities sold short, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Robertson Stephens Developing Countries Fund (one of the series constituting The Robertson Stephens Investment Trust, hereinafter referred to as the "Fund") at March 31, 1995, the results of its operations, the changes in its net assets and the financial highlights for the period from May 2, 1994 (commencement of operations) through March 31, 1995, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at March 31, 1995 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provides a reasonable basis for the opinion expressed above.
MARCH 31, 1995 ANNUAL REPORT
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS VALUE + GROWTH FUND
SCHEDULE OF NET ASSETS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT
FOR THE YEAR ENDED MARCH 31, 1995
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS VALUE + GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
MARCH 31, 1995 ANNUAL REPORT
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD:
(1) From April 21, 1992 (Commencement of Operations) to 3/31/93.
(2) If the Fund had paid all of its expenses and had received no reimbursement from the Advisor, the ratio of expenses to average net assets for the periods ended March 31, 1994 and March 31, 1993 would have been 2.35% and 2.71% (annualized), respectively, and the ratio of net investment income/(loss) to average net assets would have been (1.31)% and (0.12)% (annualized), respectively.
Per share data for each of the periods has been determined by using the average number of shares outstanding throughout each period. Ratios, except for total return and portfolio turnover rate, have been annualized.
The accompanying notes are an integral part of these financial statements.
THE ROBERTSON STEPHENS VALUE + GROWTH FUND
The Robertson Stephens Value+Growth Fund (the "Fund") is a series of the Robertson Stephens Investment Trust, a Massachusetts business trust organized on May 11, 1987 (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. The Fund became effective to offer shares to the public on May 12, 1992. Prior to the public offering, shares were offered in a private placement offering on April 21, 1992, at $10 per share, to sophisticated investors under Section 4(2) of the Securities Act of 1933. The Trust currently offers four series of shares - The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund and The Robertson Stephens Emerging Markets Fund. The assets for each series are segregated and accounted for separately.
1. SIGNIFICANT ACCOUNTING POLICIES: The following policies are in conformity with generally accepted accounting principles.
- Marketable equity securities including options are valued at the last sale price on the principal exchange or market on which they are traded, or, if there were no sales that day, at the mean between the closing bid and asked prices. At March 31, 1995, 100% of the Fund's portfolio was valued in this manner.
- Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which would have a significant impact on the value of a security. At March 31, 1995, no security of the Fund was valued using these guidelines and procedures.
b. REPURCHASE AGREEMENTS: Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 102% of the repurchase price under the agreement. However, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Advisor to have satisfactory creditworthiness. At March 31, 1995, the collateral held by the Fund against the outstanding repurchase agreement was 102% of the repurchase agreement price.
c. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements of the Internal Revenue Code on both excise tax and income tax provisions applicable to regulated investment companies. The Code permits the Fund, a regulated investment company, to avoid imposition of taxes by meeting various qualification requirements on assets, income and distributions to shareholders. The Fund intends to continue to meet these requirements. Accordingly, there is no provision for federal income taxes.
d. SECURITIES TRANSACTIONS: Securities transactions are accounted for on the date the securities are purchased, sold, or sold short (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
e. INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
f. CAPITAL ACCOUNTS: The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
a. TRANSACTIONS: The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the years ended March 31, 1995 and 1994 were as follows:
THE ROBERTSON STEPHENS VALUE + GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
a. ADVISORY FEES AND EXPENSE LIMITATION: Under the terms of an advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Fund pays Robertson Stephens Investment Management, L.P. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co."), the Fund's Distributor, is the sole Limited Partner, an investment advisory fee calculated at an annual rate of 1.25% of the average daily net assets of the Fund. For the year ended March 31, 1995, the Fund incurred investment advisory fees of $1,260,821. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees, which exceed 1.9% of the Fund's average daily net assets. The advisory agreement for the Value+Growth Fund permits RSIM to seek reimbursement of any reductions made to its management fee within the two-year period following such reduction, subject to the Value+Growth Fund's ability to effect such reimbursement and remain in compliance with applicable expense limitations. At March 31, 1995, the reduction of the past management fee due back to RSIM was $172,210.
b. AFFILIATED PERSONS: Certain officers and Trustees of the Fund are also limited partners and/or employees of RS & Co. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM's General Partner, RS & Co., Inc., and a Limited Partner and Chief Operating Officer of the Fund's Distributor, RS & Co. John P. Rohal, a Trustee of the Fund, is a Limited Partner and Director of Research for RS & Co. All affiliated persons and access persons of the Fund, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
c. COMPENSATION OF TRUSTEES AND OFFICERS: Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $17,480 for the year ended March 31, 1995.
d. BROKERAGE COMMISSIONS: RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. For the year ended March 31, 1995, the Fund paid brokerage commissions of $82,270 to RS & Co. which represented 12.4% of total commissions paid for the period.
a. PORTFOLIO TURNOVER RATE: The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding options, securities sold short and short-term investments) measured as a percentage of the Fund's average monthly portfolio, for the year ended March 31, 1995, was 232%.
b. TAX BASIS OF INVESTMENTS: At March 31, 1995, the cost of investments for federal income tax purposes was $390,066,745. Accumulated net unrealized appreciation on investments was $40,305,892 consisting of gross unrealized appreciation and depreciation of $44,541,060 and $4,235,168 respectively.
c. INVESTMENT PURCHASES AND SALES: For the year ended March 31, 1995, the cost of investments purchased and the proceeds from investments sold (excluding options, securities sold short and short-term investments) were $605,628,567 and $257,806,822, respectively.
d. OPTIONS: The Fund may utilize options to hedge investments against adverse price fluctuations or as a means of capitalizing on price or value movements of currencies, securities or indices the Fund does not own. The risk associated with purchasing options is limited to the premium originally paid. The risk in writing a call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk of writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. In addition, there is the risk that the Fund may be unable to enter into a closing transaction due to lack of a secondary market. The Fund limits its aggregate option positions for all purposes to 25% of the Fund's total assets. In addition, the Fund is prohibited from writing the far riskier "naked" option - where the Fund writes an option when it does not own the underlying instrument. At March 31, 1995, the Fund did not own any options. For the year ended March 31, 1995, the cost of options purchased and the proceeds of options sold were $677,623 and $1,901,814, respectively.
THE ROBERTSON STEPHENS VALUE + GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
e. SHORT SALES: Short sales are transactions in which the Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to deliver to the buyer upon the short sale; the Fund then is obligated to replace the security borrowed by purchasing it in the open market at some later date. The Fund will incur a loss if the market price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in value between those dates. All short sales must be fully collateralized. The Fund maintains the collateral in a segregated account consisting of cash and/or U.S. government securities sufficient to collateralize the sales proceed of its short positions. The Fund may also sell short "against the box" (i.e. the Fund enters into a short sale as described above, while holding an offsetting long position in the security which is sold short). If the Fund enters into a short sale against the box, it will segregate an equivalent amount of securities owned by the Fund as collateral while the short sale is outstanding. The Fund limits the value of short sell positions (excluding short sales "against the box") to 25% of the Fund's total assets. At March 31, 1995, the Fund did not sell any securities short. For the year ended March 31, 1995, the cost of investments purchased to cover short sales was $637,500.
MARCH 31, 1995 ANNUAL REPORT
To the Shareholders and Board of Trustees of The Robertson Stephens Value + Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of net assets, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Robertson Stephens Value + Growth Fund (one of the series constituting The Robertson Stephens Investment Trust, hereinafter referred to as the "Fund") at March 31, 1995, the results of its operations for the year then ended and the changes in its net assets and the financial highlights for each of the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 1995 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above.
THE CONTRARIAN FUND SEMI-ANNUAL RESULTS
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE CONTRARIAN FUND SEMI-ANNUAL RESULTS
SCHEDULE OF NET ASSETS (CONTINUED)
The accompanying notes are an integral part of these financial statements.
SCHEDULE OF SECURITIES SOLD SHORT
2 See 4f in Notes to Financial Statements. 3 ADR - American Depository Receipts. 4 GDS - Global Depository Shares. 5 See 4g in Notes to Financial Statements.
The accompanying notes are an integral part of these financial statements.
THE CONTRARIAN FUND SEMI-ANNUAL RESULTS
SCHEDULE OF SECURITIES SOLD SHORT (CONTINUED)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE CONTRARIAN FUND SEMI-ANNUAL RESULTS
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
THE CONTRARIAN FUND SEMI-ANNUAL RESULTS
Per share data for each period has been determined by using the average number of shares outstanding throughout each period.
Ratios, except for total return and portfolio turnover rate, have been annualized.
If the Fund had paid all of its expenses and there had been no reimbursement by the Adviser, the ratio of expenses to average net assets for the year ended March 31, 1995, and the quarter ended September 30, 1995, would have been 2.58% and 2.52% respectively, and the ratio of net investment (loss) to average net assets would have been (0.42)% and (0.04)%, respectively.
The accompanying notes are an integral part of these financial statements.
The Robertson Stephens Contrarian Fund (the "Fund") is a series of the Robertson Stephens Investment Trust (the "Trust"), a Massachusetts business trust organized on May 11, 1987. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, open-end management investment company. The Fund became effective to offer shares to the public on June 30, 1993. Prior to the public offering, shares were offered in a private placement offering on June 3, 1993, at $10 per share, to sophisticated investors under Section 4(2) of the Securities Act of 1933. The Trust offers nine series of shares -- The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund, The Robertson Stephens Growth & Income Fund, The Robertson Stephens Partners Fund, The Robertson Stephens Information Age Fund (effective November 15, 1995), The Robertson Stephens Global Natural Resources Fund (effective November 15, 1995), and The Robertson Stephens Global Low-Priced Stock Fund (effective November 15, 1995). The assets for each series are segregated and accounted for separately.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES: The following policies are in conformity with generally accepted accounting principles.
Marketable equity securities including options and foreign securities are valued at the last sale price on the principal exchange or market on which they are traded; or, if there were no sales that day, at the mean between the closing bid and asked prices. Foreign securities prices are generally denominated in foreign currencies. The currencies are translated into U.S. dollars by using the exchange rates quoted at the close of The London Stock Exchange prior to when the Fund's net asset value is next determined. At September 30, 1995, 97.5% of the Fund's long positions and 100% of its short positions were valued in this manner.
Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use all available resources including quotations from market makers and fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which could have a significant impact on the value of the security. At September 30, 1995, 2.5% of the Fund's long positions were valued using these guidelines and procedures.
Principally as a result of significant stock price appreciation, on September 30, 1995 and on October 31, 1995, approximately 22.6% and 24.3%, respectively, of the Contrarian Fund's net assets were invested in the common stock of Diamond Fields Resources, a Canadian corporation. Shares of Diamond Fields Resources, are freely traded on the Toronto Stock Exchange; the shares held by the Fund are currently restricted as to resale within the U.S.
Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 100% of the
THE CONTRARIAN FUND SEMI-ANNUAL RESULTS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
repurchase price under the agreement. However, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Advisor to have satisfactory creditworthiness.
The Fund has made no provision for federal income taxes for the six months ended September 30, 1995, as it does not expect to incur any federal income tax for the year. The Fund expects to comply with requirements of the Internal Revenue Code for qualifying as a regulated investment company so as not to be subject to federal income tax.
Securities transactions are accounted for on the date the securities are purchased, sold, or sold short (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
The accounting records of the Fund are maintained in U.S. dollars. Investment securities and all other assets and liabilities of the Fund denominated in a foreign currency are translated into U.S. dollars at the exchange rate each day. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate in effect on the dates of the respective transactions.
The Fund does not isolate the portion of the fluctuations on investment resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized gain or loss and unrealized appreciation or depreciation from investments, options and securities sold short.
Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the six months ended September 30, 1995 and the year ended March 31, 1995, were as follows:
NOTE 3 TRANSACTIONS WITH AFFILIATES:
A. ADVISORY FEES AND EXPENSE LIMITATION: Under the terms of an advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Fund pays Robertson, Stephens Investment Management, L.P. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co."), the Fund's Distributor, is the sole Limited Partner, an investment advisory fee calculated at an annual rate of 1.50% of the average daily net assets of the Fund. For the six months ended September 30, 1995, the Fund incurred investment advisory fees of $3,761,190. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees but excluding distribution fees and dividend expense for short sales, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale.
Certain officers and Trustees of the Fund are also Members and/or officers of Robertson, Stephens & Company Group, L.L.C. ("RS Group"), the parent of RS & Co., the Fund's Distributor and RSIM, the Fund's Adviser. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM, a Member of RS Group, and Chief Operating Officer of RS & Co. Terry R. Otton, Chief Financial Officer of the Fund, is a Member of RS Group and Chief Financial Officer of RS & Co. John P. Rohal, a Trustee of the Fund, is a Member of RS Group and Director of Research for RS & Co. Paul H. Stephens, Portfolio Manager, is a Member of RS Group and Chief Investment Officer of RS & Co. All affiliated and access persons, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
C. COMPENSATION OF TRUSTEES AND OFFICERS: Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $14,882 for the six months ended September 30, 1995.
The Fund has entered into an agreement with RS & Co. for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, which is reviewed annually by the Fund's Board of Trustees. Under this Plan, RS & Co. is compensated for services in such capacity including its expenses in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.75% of the average daily net assets of the Fund. For the six months ended September 30, 1995, the Fund incurred distribution fees of $1,880,571.
RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. Subject to certain constraints, the Fund may make purchases of securities from offerings or underwritings in which RS & Co. has been retained by the issuer. For the six months ended September 30, 1995, the Fund paid brokerage commissions of $1,790 to RS & Co. which represented 0.35% of total commissions paid for the period.
The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding options, securities sold short and short-term investments) measured as a percentage of the Fund's average monthly investment portfolio or the six months ended September 30, 1995, was 34%.
THE CONTRARIAN FUND SEMI-ANNUAL RESULTS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. TAX BASIS OF INVESTMENTS: At September 30, 1995, the cost of investments for federal income tax purposes was $420,597,741. Accumulated net unrealized appreciation on investments was $77,863,997, consisting of gross unrealized appreciation and depreciation of $158,685,307, and $80,821,310, respectively.
C. INVESTMENT PURCHASES AND SALES: For the six months ended September 30, 1995, the cost of investments purchased and the proceeds from investments sold (excluding options, securities sold short and short-term investments) were $148,135,632 and $179,383,847, respectively.
At September 30, 1995, 3.1% of the Fund's net assets consisted of premiums paid for the purchase of S&P 500 Index put options to hedge portfolio long investments against adverse price fluctuations, and 0.9% of the Fund's net assets represent premiums paid for the purchase of put options on baskets of securities of issuers in the technology sector of the overall market, which we believe is most vulnerable to significant price decline.
The risk associated with the purchase of these put options is limited to the premium originally paid. The premium paid for the purchase of these options is included in the Fund's "Statement of Net Assets" as an investment and subsequently mark-to-market daily to reflect the market value of the options.
"CULT 5", "CULT 6", "CULT 7", AND "CULT 8" TECHNOLOGY PUT BASKET OPTIONS: The "Cult 5", "Cult 6", "Cult 7", and "Cult 8" Technology Put Basket Options (the "Options") are European style put options expiring December 26, 1995, March 26, 1996, June 28, 1996, and September 27, 1996, respectively. The Options, customized for the Fund, are based on the underlying price of different groups of high technology stocks. The "Cult 5" Basket contains 13 securities, the "Cult 6" Basket contains 14 securities, the "Cult 7" Basket contains 11 securities, and the "Cult 8" Basket contains 13 securities. The market value of the Options is determined daily based on the price of the underlying stocks, market volatility, exercise date, and other relevant parameters.
Short sales are transactions in which the Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to deliver to the buyer upon the short sale; the Fund then is obligated to replace the security borrowed by purchasing it in the open market at some later date. The Fund will incur a loss if the market price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in value between those dates. All short sales must be fully collateralized. The Fund maintains the collateral in a segregated account consisting of cash and/or U.S. Government securities sufficient to collateralize the market value of its short positions. The Fund may also sell short "against the box" (i.e. the Fund enters into a short sale as described above, while holding an offsetting long position in the security which is sold short). If the Fund enters into a short sale "against the box," it will segregate an equivalent amount of securities owned by the Fund as collateral while the short sale is outstanding. The Fund limits the value of short positions (excluding short sales "against the box") to 25% of the Fund's total assets. At September 30, 1995, the Fund had 22% of its total assets in short positions. For the six months ended September 30, 1995, the cost of investments purchased to cover short sales and the proceeds from investments sold short were $97,008,883 and $84,281,793, respectively.
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. At September 30, 1995, the Fund held restricted securities with an aggregate value of $9,625,000, which represented 1.9% of the Fund's total net assets. Restricted securities are valued according to the guidelines and procedures adopted by the Fund's Board of Trustees.
A warrant is an option which normally entitles the holder to purchase a proportionate amount of a particular class of the issuer's securities at a predetermined price during a specific period.
The following warrants were valued such that when the exercise price of the warrant was less than that of the underlying common stock, the warrant was priced using the modified Black-Scholes Valuation Formula. The Black-Scholes Valuation Formula values a warrant by determining the differential between the exercise price of the warrant and the current price of the underlying stock based on a number of factors. These factors include, but are not limited to, current price of the underlying stock, exercise price of the warrant, time to expiration, assumed riskless rate of interest, compounded rate of return on the stock, and standard deviation of the return on the stock. If the exercise price was greater than that of the underlying common stock, the warrant was valued at zero. This valuation method is subject to frequent review and is in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees.
Foreign securities investments involve special risks and considerations not typically associated with those of U.S. origin. These risks include, but are not limited to, reevaluation of currencies, adverse political, social and economic developments and less reliable information about issuers. These risks are heightened for investments in emerging markets countries. Moreover, securities of many foreign companies and markets may be less liquid and their prices more volatile than those of U.S. companies and markets. The Fund intends to invest no more than 40% of its total assets exclusively in one foreign country. At September 30, 1995, the Fund had investments worth no more than 32% of its total assets in any one foreign country.
THE DEVELOPING COUNTRIES FUND SEMI-ANNUAL RESULTS
The accompanying notes are an integral part of these financial statements.
THE DEVELOPING COUNTRIES FUND SEMI-ANNUAL RESULTS
The accompanying notes are an intergal part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
THE DEVELOPING COUNTRIES FUND SEMI-ANNUAL RESULTS
Per share data has been determined by using the average number of shares outstanding throughout the period.
Ratios, except for total return and portfolio turnover rate, have been annualized.
If the Fund had paid all of its expenses and there had been no reimbursement by the Adviser, the ratio of expenses to average net assets for the year ended March 31, 1995, and the six months ended September 30, 1995, would have been 3.46% and 3.41%, respectively, and the ratio of net investment income/(loss) to average net assets would have been 0.41% and (1.38)%, respectively.
The accompanying notes are an integral part of these financial statements.
The Robertson Stephens Developing Countries Fund (the "Fund") is a series of the Robertson Stephens Investment Trust (the "Trust"), a Massachusetts business trust organized on May 11, 1987. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as a non-diversified, open-end management investment company. The Fund became effective to offer shares to the public on April 29, 1994, and it started to offer shares to the public on May 2, 1994. The Trust offers nine series of shares -- The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund, The Robertson Stephens Growth & Income Fund, The Robertson Stephens Partners Fund, The Robertson Stephens Information Age Fund (effective November 15, 1995), The Robertson Stephens Global Natural Resources Fund (effective November 15, 1995), and The Robertson Stephens Global Low-Priced Stock Fund (effective November 15, 1995). The assets for each series are segregated and accounted for separately.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES: The following policies are in conformity with generally accepted accounting principles.
Marketable equity securities including options and foreign securities are valued at the last sale price on the principal exchange or market on which they are traded; or, if there were no sales that day, at the mean between the closing bid and asked prices. Foreign securities prices are generally denominated in foreign currencies. The currencies are translated into U.S. dollars by using the exchange rates quoted at the close of The London Stock Exchange prior to when the Fund's net asset value is next determined. At September 30, 1995, 89% of the Fund's long positions were valued in this manner.
Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use all available resources including quotations from market makers and fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which would have a significant impact on the value of a security. At September 30, 1995, 11% of the Fund's long positions were valued using these guidelines and procedures.
Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 100% of the repurchase price under the agreement. However, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Adviser to have satisfactory creditworthiness.
The Fund has made no provision for federal taxes for the quarter ended September 30, 1995, as it does not expect to incur any federal income tax for the year. The Fund expects to comply with requirements of the Internal Revenue Code for qualifying as a regulated investment company so as not to be subject to federal income tax.
Securities transactions are accounted for on the date the securities are purchased, sold, or sold short (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
THE DEVELOPING COUNTRIES FUND SEMI-ANNUAL RESULTS
The accounting records of the Fund are maintained in U.S. dollars. Investment securities and all other assets and liabilities of the Fund denominated in a foreign currency are translated into U.S. dollars at the exchange rate each day. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate in effect on the dates of the respective transactions.
The Fund does not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the six months ended September 30, 1995, and for the period ended March 31, 1995, were as follows:
NOTE 3 TRANSACTIONS WITH AFFILIATES:
A. ADVISORY FEES AND EXPENSE LIMITATION: Under the terms of an advisory agreement, which is reviewed and approved annually by the Fund's Board of Trustees, the Fund pays Robertson, Stephens Investment Management, L.P. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co."), the Fund's Distributor, is the sole Limited Partner, an investment advisory fee calculated at an annual rate of 1.25% of the average daily net assets of the Fund. For the six months ended September 30, 1995, the Fund incurred investment advisory fees of $96,227. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees but excluding distribution fees and dividend expense for short sales, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale.
Certain officers and Trustees of the Fund are also Members and/or officers of Robertson, Stephens & Company Group, L.L.C. ("RS Group"), the parent of RS & Co., the Fund's Distributor and RSIM, the Fund's Adviser. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director
RSIM, a Member of RS Group, and Chief Operating Officer of RS & Co. Terry R. Otton, Chief Financial Officer of the Fund, is a Member of RS Group and Chief Financial Officer of RS & Co. John P. Rohal, a Trustee of the Fund, is a Member of RS Group and Director of Research for RS & Co. All affiliated and access persons, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
C. COMPENSATION OF TRUSTEES AND OFFICERS: Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $11,250 for the six months ended September 30, 1995.
The Fund has entered into an agreement with RS & Co. for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, which is approved annually by the Fund's Board of Trustees. Under the Plan, RS & Co. is compensated for services in such capacity, including its expenses in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.25% of the average daily net assets of the Fund. For the six months ended September 30, 1995, the Fund incurred distribution fees of $27,759.
RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. Subject to certain constraints, the Fund may make purchases of securities from offerings or underwritings in which RS & Co. has been retained by the issuer. For the six months ended September 30, 1995, the Fund paid brokerage commissions of $0 to RS & Co.
The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding securities sold short and short-term investments), measured as a percentage of the Fund's average monthly investment portfolio for the six months ended September 30, 1995, was 65%.
B. TAX BASIS OF INVESTMENTS: At September 30, 1995, the cost of investments for federal income tax purposes was $18,734,750. Accumulated net unrealized depreciation on investments was $1,783,664, consisting of gross unrealized appreciation and depreciation of $1,231,563 and $3,015,227, respectively.
C. INVESTMENT PURCHASES AND SALES: For the six months ended September 30, 1995, the cost of investments purchased and the proceeds from investments sold (excluding securities sold short and short-term investments) were $16,852,866 and $8,860,983, respectively.
At September 30, 1995, 1.4% of the Fund's net assets consisted of premiums paid for the purchase of S&P 500 Index put options to hedge portfolio long investments against adverse price fluctuations. The risk associated with the purchase of these put options is limited to the premium originally paid. The premium paid for the purchase of these options is included in the Fund's "Statement of Net Assets" as an investment and is subsequently market-to-market daily to reflect the market value of the options.
Short sales are transactions in which the Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to deliver to the buyer upon the short sale; the Fund then is obligated to replace the security borrowed by purchasing it in the open market at some later date. The Fund will incur a loss if the market price of the security increases
THE DEVELOPING COUNTRIES FUND SEMI-ANNUAL RESULTS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in value between those dates. All short sales must be fully collateralized. The Fund maintains the collateral in a segregated account consisting of cash and/or U.S. government securities sufficient to collateralize the market value of its short positions. The Fund may also sell short "against the box" (i.e., the Fund enters into a short sale as described above, while holding an offsetting long position in the security which is sold short). If the Fund enters into a short sale "against the box," it will segregate an equivalent amount of securities owned by the Fund as collateral while the short sale is outstanding. The Fund limits the value of short sell positions (excluding short sales "against the box") to 25% of the Fund's total assets. At September 30, 1995, the Fund had 0% of the Fund's total assets in short positions. For the six months ended September 30, 1995, the cost of investments purchased to cover short sales and the proceeds from investments sold short were $70,500 and $0, respectively.
Foreign securities investments involve special risks and considerations not typically associated with those of U.S. origin. These risks include, but are not limited to, reevaluation of currencies, adverse political, social and economic developments and less reliable information about issuers. These risks are heightened for investments in emerging markets countries. Moreover, securities of many foreign companies and markets may be less liquid and their prices more volatile than those of U.S. companies and markets. The Fund intends to invest no more than 40% of its total assets exclusively in one foreign country. At September 30, 1995, the Fund had investments worth no more than 20% of its total assets in any one foreign country.
THE EMERGING GROWTH FUND SEMI-ANNUAL RESULTS
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE EMERGING GROWTH FUND SEMI-ANNUAL RESULTS
SCHEDULE OF NET ASSETS (CONTINUED)
The accompanying notes are an integral part of these financial statements.
(2) See 4d in Notes to Financial Statements.
The accompanying notes are an integral part of these financial statements.
THE EMERGING GROWTH FUND SEMI-ANNUAL RESULTS
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE EMERGING GROWTH FUND SEMI-ANNUAL RESULTS
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
Per share data for each of the periods has been determined by using the average number of shares outstanding throughout each period.
Ratios, except for total return and portfolio turnover rate, have been annualized.
The accompanying notes are an integral part of these financial statements.
THE EMERGING GROWTH FUND SEMI-ANNUAL RESULTS
The Robertson Stephens Emerging Growth Fund (the "Fund") is a series of the Robertson Stephens Investment Trust (the "Trust"), a Massachusetts business trust organized on May 11, 1987. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. The Fund became effective to offer shares to the public on November 30, 1987. The Trust offers nine series of shares -- The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund, The Robertson Stephens Growth & Income Fund, The Robertson Stephens Partners Fund, The Robertson Stephens Information Age Fund (effective November 15, 1995), The Robertson Stephens Global Natural Resources Fund (effective November 15, 1995), and The Robertson Stephens Global Low-Priced Stock Fund (effective November 15, 1995). The assets for each series are segregated and accounted for separately.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES:
The following policies are in conformity with generally accepted accounting principles.
Marketable equity securities are valued at the last sale price on the principal exchange or market on which they are traded; or, if there were no sales that day, at the mean between the closing bid and asked prices. At September 30, 1995, 99.9% of the Fund's portfolio was valued in this manner.
Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which could have a significant impact on the value of the security. At September 30, 1995, approximately 0.1% of the Fund's portfolio was valued using these guidelines and procedures.
Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 100% of the repurchase price under the agreement. However, in the event of default or bankruptcy, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Advisor to have satisfactory creditworthiness.
The Fund has made no provision for federal income taxes for the six months ended September 30, 1995, as it does not expect to incur any federal income tax for the year. The Fund expects to comply with requirements of the Internal Revenue Code for qualifying as a regulated investment company so as not to be subject to federal income tax.
Securities transactions are accounted for on the date the securities are purchased and sold (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
The Fund follows the provisions of the AICPA's Statement of Position 93-2 and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the six months ended September 30, 1995, and for the year ended March 31, 1995, were as follows:
NOTE 3 TRANSACTIONS WITH AFFILIATES:
A. ADVISORY FEES AND EXPENSE LIMITATION:
Under the terms of an advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Fund pays Robertson, Stephens Investment Management, Inc. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co"), the Fund's Distributor, is an affiliate, an investment advisory fee calculated at an annual rate of 1.00% of the average daily net assets of the Fund. For the six months ended September 30, 1995, the Fund incurred investment advisory fees of $861,209. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees, but excluding distribution fees, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale.
Certain officers and Trustees of the Fund are also Members and/or officers of Robertson, Stephens & Company Group, L.L.C. ("RS Group"), the parent of RS & Co., the Fund's Distributor and RSIM, the Fund's Adviser. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM, a Member of RS Group, and Chief Operating Officer of RS & Co. Terry R. Otton, Chief Financial Officer of the Fund, is a Member of RS Group and Chief Financial Officer of RS & Co. John P. Rohal, a Trustee of the Fund, is a Member of RS Group and Director of Research for RS & Co. All affiliated and access persons, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
C. COMPENSATION OF TRUSTEES AND OFFICERS:
Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $11,250 for the six months ended September 30, 1995.
The Fund has entered into an agreement with RS & Co., for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, which is reviewed and approved annually by the Fund's Board of Trustees. Under this Plan, RS & Co. is compensated for services in such
THE EMERGING GROWTH FUND SEMI-ANNUAL RESULTS
Notes to Financial Statements (continued)
in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.25% of the average daily net assets of the Fund. For the quarter ended September 30, 1995, the Fund incurred distribution fees of $215,302.
RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. Subject to certain constraints, the Fund may make purchases of securities from offerings or underwritings in which RS & Co. has been retained by the issuer. For the six months ended September 30, 1995, the Fund paid brokerage commissions of $67,905 to RS & Co. which represented 32% of total commissions paid for the period.
The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding short-term investments) measured as a percentage of the Fund's average monthly investment portfolio for the six months ended September 30, 1995, was 107%.
B. TAX BASIS OF INVESTMENTS:
At September 30, 1995, the cost of investments for federal income tax purposes was $136,401,752. Accumulated net unrealized appreciation on investments was $31,022,693, consisting of gross unrealized appreciation and depreciation of $37,980,974 and $6,958,281, respectively.
C. INVESTMENT PURCHASES AND SALES:
For the six months ended September 30, 1995, the cost of investments purchased and the proceeds from investments sold (excluding short-term investments) were $160,604,878 and $186,555,703, respectively.
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. If the security is subsequently registered and resold, the issuers would bear the expense of all registrations at no cost to the Fund. At September 30, 1995, the Fund held restricted securities with an aggregate value of $116,883 which represented 0.1% of the Fund's total net assets.
Each of the above securities was valued based on its common share price equivalent. Each common share was valued at its fair value according to the guidelines and procedures adopted by the Fund's Board of Trustees as outlined in Note 1.a., paragraph 2.
At September 30, 1995, Applied Micro Circuits Corporation Convertible Preferred Stock, Series 3 was valued at the common share price equivalent of $1.75, assuming the 2,381 shares of the Convertible Preferred Stock were converted to 25,116 shares of common stock. Managed Health Network, Inc. Convertible Preferred Stock, Series B was valued at the common share price equivalent of $1.6336, assuming the 500 shares of the Convertible Preferred Stock were converted to 44,642 shares of common stock.
THE GROWTH & INCOME FUND THIRD QUARTER RESULTS
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE GROWTH & INCOME FUND THIRD QUARTER RESULTS
SCHEDULE OF NET ASSETS (CONTINUED)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE GROWTH & INCOME FUND THIRD QUARTER RESULTS
SCHEDULE OF NET ASSETS (CONTINUED)
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE GROWTH & INCOME FUND THIRD QUARTER RESULTS
SCHEDULE OF NET ASSETS (CONTINUED)
(2) ADR -- American Depository Receipt
The accompanying notes are integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE GROWTH & INCOME FUND THIRD QUARTER RESULTS
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
THE GROWTH & INCOME FUND THIRD QUARTER RESULTS
Per share data for each period has been determined by using the average number of shares outstanding throughout each period.
Ratios, except for total return and portfolio turnover rate, have been annualized.
The accompanying notes are an integral part of these financial statements.
The Robertson Stephens Growth & Income Fund (the "Fund") is a series of the Robertson Stephens Investment Trust (the "Trust"), a Massachusetts business trust organized on May 11, 1987. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. The Fund became effective to offer shares to the public on July 12, 1995. The Trust offers nine series of shares -- The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund, The Robertson Stephens Growth & Income Fund, The Robertson Stephens Partners Fund, The Robertson Stephens Information Age Fund (effective November 15, 1995), The Robertson Stephens Global Natural Resources Fund (effective November 15, 1995), and The Robertson Stephens Global Low-Priced Stock Fund (effective November 15, 1995). The assets for each series are segregated and accounted for separately.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES:
The following policies are in conformity with generally accepted accounting principles.
Marketable equity securities are valued at the last sale price on the principal exchange or market on which they are traded; or, if there were no sales that day, at the mean between the closing bid and asked prices. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, 99.9% of the Fund's portfolio was valued in this manner.
Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which could have a significant impact on the value of the security. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, approximately 0.1% of the Fund's portfolio was valued using these guidelines and procedures.
Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 100% of the repurchase price under the agreement. However, in the event of default or bankruptcy, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Advisor to have satisfactory creditworthiness.
The Fund has made no provision for federal income taxes for the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, as it does not expect to incur any federal income tax for the year. The Fund expects to comply with requirements of the Internal Revenue Code for qualifying as a regulated investment company so as not to be subject to federal income tax.
THE GROWTH & INCOME FUND THIRD QUARTER RESULTS
Securities transactions are accounted for on the date the securities are purchased and sold (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the period from July 12, 1995 (Commencement of Operations) through September 30, 1995 was as follows:
Net increase 9,439,090 $ 97,401,760
NOTE 3 TRANSACTIONS WITH AFFILIATES:
A. ADVISORY FEES AND EXPENSE LIMITATION:
Under the terms of an advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Fund pays Robertson, Stephens Investment Management, Inc. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co"), the Fund's Distributor, is an affiliate, an investment advisory fee calculated at an annual rate of 1.00% of the average daily net assets of the Fund. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the Fund incurred investment advisory fees of $123,370. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees, but excluding distribution fees, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale.
Certain officers and Trustees of the Fund are also Members and/or officers of Robertson, Stephens & Company Group, L.L.C. ("RS Group"), the parent of RS & Co., the Fund's Distributor and RSIM, the Fund's Adviser. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM, a Member of RS Group, and Chief Operating Officer of RS & Co. Terry R. Otton, Chief Financial Officer of the Fund, is a Member of RS Group and Chief Financial Officer of RS & Co. John P. Rohal, a Trustee of the Fund, is a Member of RS Group and Director of Research for RS & Co. John L. Wallace, Portfolio Manager, is a Member of RS Group. All affiliated and access persons, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
C. COMPENSATION OF TRUSTEES AND OFFICERS:
Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $2,513 for the period from July 12, 1995 (Commencement of Operations) through September 30, 1995.
The Fund has entered into an agreement with RS & Co., for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, which is reviewed and approved annually by the Fund's Board of Trustees. Under this Plan, RS & Co. is compensated for services in such capacity including its expenses in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.25% of the average daily net assets of the Fund. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the Fund incurred distribution fees of $30,843.
RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. Subject to certain constraints, the Fund may make purchases of securities from offerings or underwritings in which RS & Co. has been retained by the issuer. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the Fund paid brokerage commissions of $18,590 to RS & Co. which represented 16% of total commissions paid for the period.
The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding short-term investments) measured as a percentage of the Fund's average monthly investment portfolio for the period for the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, was 21%.
B. TAX BASIS OF INVESTMENTS:
At September 30, 1995, the cost of investments for federal income tax purposes was $95,548,348. Accumulated net unrealized appreciation on investments was $4,519,371, consisting of gross unrealized appreciation and depreciation of $6,273,980 and $1,754,609, respectively.
C. INVESTMENT PURCHASES AND SALES:
For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the cost of investments purchased and the proceeds from investments sold (excluding short-term investments) were $107,665,794 and $11,700,803, respectively.
THE PARTNERS FUND THIRD QUARTER RESULTS
The accompanying notes are an integral part of these financial statements.
THE PARTNERS FUND THIRD QUARTER RESULTS
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE PARTNERS FUND THIRD QUARTER RESULTS
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
Per share data has been determined by using the average number of shares outstanding throughout the period.
Ratios, except for total return and portfolio turnover rate, have been annualized.
If the Fund had paid all of its expenses and there had been no reimbursement by the Adviser, the ratio of expenses to average net assets for the period ended September 30, 1995 would have been 5.71%, and the ratio of net investment (loss) to average net assets would have been (1.17)%
The accompanying notes are an integral part of these financial statements.
THE PARTNERS FUND THIRD QUARTER RESULTS
The Robertson Stephens Partners Fund (the "Fund") is a series of the Robertson Stephens Investment Trust (the "Trust"), a Massachusetts business trust organized on May 11, 1987. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as a non-diversified, open-end management investment company. The Fund became effective to offer shares to the public on July 12, 1995. The Trust offers nine series of shares -- The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund, The Robertson Stephens Growth & Income Fund, The Robertson Stephens Partners Fund, The Robertson Stephens Information Age Fund (effective November 15, 1995), The Robertson Stephens Global Natural Resources Fund (effective November 15, 1995), and The Robertson Stephens Global Low-Priced Stock Fund (effective November 15, 1995). The assets for each series are segregated and accounted for separately.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES:
The following policies are in conformity with generally accepted accounting principles.
Marketable equity securities including options and foreign securities are valued at the last sale price on the principal exchange or market on which they are traded; or, if there were no sales that day, at the mean between the closing bid and asked prices. Foreign securities prices are generally denominated in foreign currencies. The currencies are translated into U.S. dollars by using the exchange rates quoted at the close of The London Stock Exchange prior to when the Fund's net asset value is next determined. At September 30, 1995, 100% of the Fund's long positions were valued in this manner.
Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use all available resources including quotations from market makers and fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which would have a significant impact on the value of a security. At September 30, 1995, 0% of the Fund's long positions were valued using these guidelines and procedures.
Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 100% of the repurchase price under the agreement. However, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Adviser to have satisfactory creditworthiness.
The Fund has made no provision for federal taxes for the quarter ended September 30, 1995, as it does not expect to incur any federal income tax for the year. The Fund expects to comply with requirements of the Internal Revenue Code for qualifying as a regulated investment company so as not to be subject to federal income tax.
Securities transactions are accounted for on the date the securities are purchased and sold (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
The accounting records of the Fund are maintained in U.S. dollars. Investment securities and all other assets and liabilities of the Fund denominated in a currency are translated into U.S. dollars at the exchange rate each day. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate in effect on the dates of the respective transactions.
The Fund does not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactionsin capital shares for the period from July 12, 1995 (Commencement of Operations) through September 30, 1995 was as follows:
7/12/95 -- 9/30/95 SHARES AMOUNT
NOTE 3 TRANSACTIONS WITH AFFILIATES:
A. ADVISORY FEES AND EXPENSE LIMITATION:
Under the terms of an advisory agreement, which is reviewed and approved annually by the Fund's Board of Trustees, the Fund pays Robertson, Stephens Investment Management, L.P. ("RSIM"), of which Robertson, Stephens & Company, L.P. ("RS & Co."), the Fund's Distributor, is the sole Limited Partner, an investment advisory fee calculated at an annual rate of 1.25% of the average daily net assets of the Fund. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the Fund incurred investment advisory fees of $18,473. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees but excluding distribution fees, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale.
Certain officers and Trustees of the Fund are also Members and/or officers of Robertson, Stephens & Company Group, L.L.C. ("RS Group"), the parent of RS & Co., the Fund's Distributor and RSIM, the Fund's Adviser. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM, a Member of RS Group, and Chief Operating Officer of RS & Co. Terry R. Otton, Chief Financial Officer of the Fund, is a Member of RS Group and Chief Financial Officer of RS & Co. John P. Rohal, a Trustee of the Fund, is a Member of RS Group and Director of Research for RS & Co. Andrew P. Pilara, Jr., Portfolio Manager, is a Member of RS Group. All affiliated and access persons, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
C. COMPENSATION OF TRUSTEES AND OFFICERS:
Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation
THE PARTNERS FUND THIRD QUARTER RESULTS
and reimbursement of expenses of $2,513 for the period from July 12, 1995 (Commencement of Operations) through September 30, 1995.
The Fund has entered into an agreement with RS & Co. for distribution services and has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act, which is approved annually by the Fund's Board of Trustees. Under the Plan, RS & Co. is compensated for services in such capacity, including its expenses in connection with the promotion and distribution of the Fund's shares. The distribution fee is calculated at an annual rate of 0.25% of the average daily net assets of the Fund. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the Fund incurred distribution fees of $3,695.
RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. Subject to certain constraints, the Fund may make purchases of securities from offerings or underwritings in which RS & Co. has been retained by the issuer. For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the Fund paid brokerage commissions of $0 to RS & Co.
The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding short- term investments), measured as a percentage of the Fund's average monthly investment portfolio for the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, was 35%.
B. TAX BASIS OF INVESTMENTS:
At September 30, 1995, the cost of investments for federal income tax purposes was $3,180,254. Accumulated net unrealized appreciation on investments was $29,158, consisting of gross unrealized appreciation and depreciation of $73,877 and $44,719, respectively.
C. INVESTMENT PURCHASES AND SALES:
For the period from July 12, 1995 (Commencement of Operations) through September 30, 1995, the cost of investments purchased and the proceeds from investments sold (excluding options and short-term investments) were $3,512,589 and $422,852, respectively.
At September 30, 1995, 0.3% of the Fund's net assets consisted of premiums paid for the purchase of S&P 500 Index put options to hedge portfolio long investments against adverse price fluctuations. The risk associated with the purchase of these put options is limited to the premium originally paid. The premium paid for the purchase of these options is included in the Fund's "Statement of Net Assets" as an investment and is subsequently marked-to-market daily to reflect the market value of the options.
Foreign securities investments involve special risks and considerations not typically associated with those of U.S. origin. These risks include, but are not limited to, reevaluation of currencies, adverse political, social and economic developments and less reliable information about issuers. These risks are heightened for investments in emerging markets countries. Moreover, securities of many foreign companies and markets may be less liquid and their prices more volatile than those of U.S. companies and markets. The Fund intends to invest no more than 40% of its total assets exclusively in one foreign country. At September 30, 1995, the Fund had investments worth no more than 15% of its total assets in any one foreign country.
THE VALUE+GROWTH FUND SEMI-ANNUAL RESULTS
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE VALUE+GROWTH FUND SEMI-ANNUAL RESULTS
SCHEDULE OF NET ASSETS (CONTINUED)
(2)ADR - American Depository Receipts. (3)See Note 4.e.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
THE VALUE+GROWTH FUND SEMI-ANNUAL RESULTS
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
The accompanying notes are an integral part of these financial statements.
THE VALUE+GROWTH FUND SEMI-ANNUAL RESULTS
(1) From April 21, 1992 (Commencement of Operations) to 3/31/93.
(2) If the Fund had paid all of its expenses and had received no reimbursement from the Advisor, the ratio of expenses to average net assets for the periods ended March 31, 1994 and March 31, 1993 would have been 2.35% and 2.71%, respectively, and the ratio of net investment income/(loss) to average net assets would have been (1.31)% and (0.12)%, respectively.
Per share data for each of the periods has been determined by using the average number of shares outstanding throughout each period.
Ratios, except for total return and portfolio turnover rate, have been annualized.
The accompanying notes are an integral part of these financial statements.
The Robertson Stephens Value+Growth Fund (the "Fund") is a series of the Robertson Stephens Investment Trust (the "Trust"), a Massachusetts business trust organized on May 11, 1987. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end management investment company. The Fund became effective to offer shares to the public on May 12, 1992. Prior to the public offering, shares were offered in a private placement offering on April 21, 1992, at $10 per share, to sophisticated investors under Section 4(2) of the Securities Act of 1933. The Trust offers nine series of shares -- The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Value+Growth Fund, The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund, The Robertson Stephens Growth & Income Fund, The Robertson Stephens Partners Fund, The Robertson Stephens Information Age Fund (effective November 15, 1995), The Robertson Stephens Global Natural Resources Fund (effective November 15, 1995), and The Robertson Stephens Global Low-Priced Stock Fund (effective November 15, 1995). The assets for each series are segregated and accounted for separately.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES:
The following policies are in conformity with generally accepted accounting principles.
Marketable equity securities including options are valued at the last sale price on the principal exchange or market on which they are traded; or, if there were no sales that day, at the mean between the closing bid and asked prices. At September 30, 1995, 100% of the Fund's portfolio was valued in this manner.
Securities for which market quotations are not readily available are valued at their fair value as determined in accordance with the guidelines and procedures adopted by the Fund's Board of Trustees. The guidelines and procedures use fundamental valuation methods which include, but are not limited to, the analysis of: the effect of any restrictions on the sale of the security, product development and trends of the security's issuer, changes in the industry and other competing companies, significant changes in the issuer's financial position, and any other event which could have a significant impact on the value of the security. At September 30, 1995, no security of the Fund was valued using these guidelines and procedures.
Repurchase agreements are fully collateralized by U.S. government securities. All collateral is held by the Fund's custodian and is monitored daily to ensure that the collateral's market value equals at least 100% of the repurchase price under the agreement. However, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. The Fund's policy is to limit repurchase agreement transactions to those parties deemed by the Fund's Investment Advisor to have satisfactory creditworthiness.
The Fund has made no provisions for federal income taxes for the six months ended September 30, 1995, as it does not expect to incur any federal income tax for the year. The Fund expects to comply with requirements of the Internal Revenue Code for qualifying as a regulated investment company so as not to be subject to federal income tax.
Securities transactions are accounted for on the date the securities are purchased, sold, or sold short (trade date). Realized gains and losses on securities transactions are determined on the basis of specific identification.
THE VALUE+GROWTH FUND SEMI-ANNUAL RESULTS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Dividend income is recorded on the ex-dividend date. Interest income is accrued and recorded daily.
The Fund follows the provisions of the AICPA's Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). The purpose of this SOP is to report undistributed net investment income and accumulated net realized gain (loss) accounts in such a manner as to approximate amounts available for future distributions to shareholders, if any.
The Fund has authorized an unlimited number of shares of beneficial interest with no par value. Transactions in capital shares for the six months ended September 30, 1995 and for the year ended March 31, 1995 were as follows:
NOTE 3 TRANSACTIONS WITH AFFILIATES:
A. ADVISORY FEES AND EXPENSE LIMITATION: Under the terms of an advisory agreement, which is reviewed and approved annually by the Board of Trustees, the Fund pays Robertson, Stephens Investment Management, L.P. ("RSIM"), of which Robertson Stephens & Company, L.P. ("RS & Co."), the Fund's Distributor, is the sole Limited Partner, an investment advisory fee calculated at an annual rate of 1.25% of the average daily net assets of the Fund. For the six months ended September 30, 1995, the Fund incurred investment advisory fees of $5,746,087. RSIM has agreed to reimburse the Fund for any annual operating expenses, including investment advisory fees, but excluding dividend expense for short sales, which exceed the most stringent limits prescribed by any state in which the Fund's shares are offered for sale.
Certain officers and Trustees of the Fund are also Members and/or officers of Robertson, Stephens & Company Group, L.L.C. ("RS Group"), the parent of RS & Co., the Fund's Distributor and RSIM, the Fund's Adviser. G. Randy Hecht, President, Chief Executive Officer and a Trustee of the Fund, is also a Director of RSIM, a Member of RS Group, and Chief Operating Officer of RS & Co. Terry R. Otton, Chief Financial Officer of the Fund, is a Member of RS Group and Chief Financial Officer of RS & Co. John P. Rohal, a Trustee of the Fund, is a Member of RS Group and Director of Research for RS & Co. Ronald E. Elijah, Portfolio Manager, is a Member of RS Group. All affiliated and access persons, as defined in the 1940 Act, follow strict guidelines and policies on personal trading as outlined in the Fund's Code of Ethics.
C. COMPENSATION OF TRUSTEES AND OFFICERS: Trustees and officers of the Fund who are affiliated persons receive no compensation from the Fund. Trustees of the Fund who are not interested persons of the Trust, as defined in the 1940 Act, collectively received compensation and reimbursement of expenses of $11,250 for the six months ended September 30, 1995.
RSIM may direct orders for investment transactions to RS & Co. as broker-dealer, subject to Fund policies as stated in the prospectus, regulatory constraints, and the ability of RS & Co. to provide competitive prices and commission rates. All investment transactions in which RS & Co. acts as a broker may only be executed on an agency basis. Subject to certain constraints, the Fund may make purchases of securities from offerings or underwritings in which RS & Co. has been retained by the issuer. For the six months ended September 30, 1995, the Fund paid brokerage commissions of $156,115 to RS & Co. which represented 16.1% of total commissions paid for the period.
The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding options, securities sold short and short-term investments) measured as a percentage of the Fund's average monthly investment portfolio for the six months ended September 30, 1995, was 40%.
B. TAX BASIS OF INVESTMENTS: At September 30, 1995, the cost of investments for federal income tax purposes was $1,003,152,009. Accumulated net unrealized appreciation on investments was $366,245,951 consisting of gross unrealized appreciation and depreciation of $371,292,357 and $5,046,406, respectively.
C. INVESTMENT PURCHASES AND SALES: For the six months ended September 30, 1995, the cost of investments purchased and the proceeds from investments sold (excluding options, securities sold short and short-term investments) were $973,207,456 and $357,040,602, respectively.
Short sales are transactions in which the Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to deliver to the buyer upon the short sale; the Fund then is obligated to replace the security borrowed by purchasing it in the open market at some later date. The Fund will incur a loss if the market price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in value between those dates. All short sales must be fully collateralized. The Fund maintains the collateral in a segregated account consisting of cash and/or U.S. government securities sufficient to collateralize the greater of the sales proceed or market value of its short positions. The Fund may also sell short "against the box" (i.e. the Fund enters into a short sale as described above, while holding an offsetting long position in the security which is sold short). If the Fund enters into a short sale against the box, it will segregate an equivalent amount of securities owned by the Fund as collateral while the short sale is outstanding. The Fund limits the value of short sell positions (excluding short sales "against the box") to 25% of the Fund's total assets. At September 30, 1995, the Fund did not sell any securities short.
A right is a privilege offered by a corporation to its shareholders pro rata to subscribe to a certain security of that corporation at a specified price. At September 30, 1995, the fund held 1,130,000 rights to subscribe to 113,000 ADR shares of Ericsson (L.M.) Telephone company at US$13.47 per share.
(The Robertson Stephens Contrarian Fund) (The Robertson Stephens Developing Countries Fund) (The Robertson Stephens Emerging Growth Fund) (The Robertson Stephens Global Low-Priced Stock Fund) (THE ROBERTSON STEPHENS GLOBAL NATURAL RESOURCES FUND) (The Robertson Stephens Growth & Income Fund) (The Robertson Stephens Information Age Fund) (The Robertson Stephens Partners Fund) (The Robertson Stephens Value + Growth Fund)
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
1. The following audited financial statements for The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund (formerly, The Robertson Stephens Emerging Markets Fund), The Robertson Stephens Emerging Growth Fund, and The Robertson Stephens Value + Growth Fund, each a series of Registrant, are included in Part B:
Schedules of Net Assets as of March 31, 1995; Schedules of Securities Sold Short as of March 31, 1995 (the Contrarian Fund and Developing Countries Fund only); Statements of Assets and Liabilities as of March 31, 1995; Statements of Operations for the periods ended March 31, 1995; Statements of Changes in Net Assets for the periods ended March 31, 1995; Financial Highlights for each of the periods presented; Notes to Financial Statements; and Reports of Independent Accountant.
2. The following unaudited financial statements for The Robertson Stephens Contrarian Fund, The Robertson Stephens Developing Countries Fund (formerly, The Robertson Stephens Emerging Markets Fund), The Robertson Stephens Emerging Growth Fund, The Robertson Stephens Growth & Income Fund, The Robertson Stephens Partners Fund, and The Robertson Stephens Value + Growth Fund, each a series of Registrant, also are included in Part B:
Schedules of Net Assets as of September 30, 1995; Schedules of Securities Sold Short as of September 30, 1995 (the Contrarian Fund and Developing Countries Fund only); Statements of Net Assets as of September 30, 1995; Statements of Operations for the periods ended September 30, 1995; Statements of Changes in Net Assets for the periods ended September 30, 1995; Financial Highlights for each of the periods presented; and Notes to Financial Statements.
1.(a) Copy of Amended and Restated Agreement and Declaration of Trust 1.(b) Copy of Certificate of Amendment of Agreement and Declaration of 1.(c) Copy of Certificate of Amendment of Agreement and Declaration of 1.(d) Copy of Certificate of Amendment of Agreement and Declaration of
2. Copy of By-Laws of Registrant.(A)
5.(a) Investment Advisory Agreement between Avon Capital Management Corporation (now Robertson Stephens Investment Management, Inc.) and Registrant on behalf of Robertson Stephens Emerging Growth
5.(b) Form of Investment Advisory Agreement between Robertson Stephens Investment Management, Inc. and Registrant on behalf of Robertson
5.(c) Form of Investment Advisory Agreement between Robertson Stephens Investment Management, L.P. and Registrant on behalf of
5.(d) Agreement between Robertson Stephens Investment Management, Inc., Robertson Stephens Investment Management, L.P., Robertson, Stephens & Company, L.P. and Registrant on behalf of Robertson
5.(e) Form of Investment Advisory Agreement between Robertson Stephens Investment Management, L.P. and Registrant on behalf of Robertson Stephens Emerging Markets Fund.(I)
5.(f) Form of Investment Advisory Agreement between Robertson Stephens Investment Management, L.P. and Registrant on behalf of Robertson
5.(g) Form of Investment Advisory Agreement between Robertson Stephens Investment Management, L.P. and Registrant on behalf of Robertson Stephens Growth & Income Fund.(M)
5.(h) Form of Investment Advisory Agreement between Robertson Stephens Investment Management, L.P. and Registrant (on behalf of each of Robertson Stephens Global Low-Priced Stock Fund, Robertson Stephens Global Natural Resources Fund, and Robertson Stephens
5.(i) Form of Letter Agreement regarding the Investment Advisory Agreement listed in 5(d), above.(*)
6.(a) Underwriting Agreement and Selling Group Agreement.(F)
6.(b) Consent of the Board of Trustees of Registrant.(H)
8. Custodian Agreement between Registrant and State Street Bank and
9. Form of Administrative Services Agreement.(N)
11. Consent of Independent Accountants.*
13. Letter of Understanding Relating to Initial Capital.(A,J)
14. Disclosure Statement, Custodial Account Agreement and related documents for an Individual Retirement Account (State Street Bank
15.(a) Distribution Plan Pursuant to Rule 12b-l adopted by Registrant for Robertson Stephens Emerging Growth Fund.(A)
15.(b) Form of Distribution Plan Pursuant to Rule 12b-l adopted by Registrant for Robertson Stephens Contrarian Fund.(G)
15.(c) Form of Distribution Plan Pursuant to Rule 12b-l adopted by Registrant for Robertson Stephens Emerging Markets Fund (now, Robertson Stephens Developing Countries Fund).(I)
15.(d) Form of Distribution Plan Pursuant to Rule 12b-1 adopted by Registrant for Robertson Stephens Partners Fund.(L)
15.(e) Form of Distribution Plan Pursuant to Rule 12b-1 adopted by Registrant for Robertson Stephens Growth & Income Fund.(L)
15.(f) Form of Distribution Plan Pursuant to Rule 12b-1 (in respect of each of Robertson Stephens Global Low-Priced Stock Fund, Robertson Stephens Global Natural Resources Fund and Robertson
15.(g) Form of Distribution Plan Pursuant to Rule 12b-1 (in respect of Robertson Stephens Value + Growth Fund).(*)
16. Schedule of Computation of Performance Quotation.(D)
17.(b) Power of Attorney of Terry R. Otton.(M)
Incorporated by a reference to like-numbered exhibits:
(A) Previously filed as part of the Registration Statement filed August 12, 1987. (B) Previously filed as part of the Post-Effective Amendment No. 1 to the Registration Statement on March 3, 1988. (C) Previously filed as part of the Post-Effective Amendment No. 4 to the Registration Statement on May 1, 1991. (D) Previously filed as part of the Post-Effective Amendment No. 6 to the Registration Statement on March 12, 1992. (E) Previously filed as part of the Post-Effective Amendment No. 8 to the Registration Statement on June 30, 1992. (F) Previously filed as part of the Post-Effective Amendment No. 11 to the Registration Statement on February 5, 1993. (G) Previously filed as part of the Post-Effective Amendment No. 13 to the Registration Statement on April 30, 1993. (H) Previously filed as part of the Post-Effective Amendment No. 16 to the Registration Statement on December 8, 1993. (I) Previously filed as part of the Post-Effective Amendment No. 18 to the Registration Statement on April 29, 1994. (J) Previously filed as part of the Post-Effective Amendment No. 19 to the Registration Statement on July 5, 1994. (K) Previously filed as part of the Post-Effective Amendment No. 20 to the Registration Statement on October 14, 1994. (L) Previously filed as part of the Post-Effective Amendment No. 21 to the Registration Statement on April 28, 1995. (M) Previously filed as part of the Post-Effective Amendment No. 22 to the Registration Statement on July 3, 1995.
(N) Previously filed as part of the Post-Effective Amendment No. 23 to the Registration Statement on September 1, 1995.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
As of the date of this Registration Statement, there is no person controlled by or under common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
On December 31, 1995, Registrant had the following number of security holders:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 13,043
Shares of Beneficial Interest 1,039
Shares of Beneficial Interest 7,803
Shares of Beneficial Interest 57
Shares of Beneficial Interest 43
Shares of Beneficial Interest 3,304
Shares of Beneficial Interest 1,625
Shares of Beneficial Interest 249
Shares of Beneficial Interest 30,252
Under the terms of Registrant's By-laws, Article XI (See Exhibit 2 to this Registration Statement), Registrant may indemnify and insure its trustees, officers, employees, agents and other persons who may be indemnified by Registrant under the Investment Company Act of 1940.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to trustees and officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification by Registrant is against public policy as expressed in the Securities Act, and therefore may be unenforceable. In the event that a claim for such indemnification (except insofar as it provides for the payment by Registrant of expenses incurred or paid by a trustee, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted against Registrant by any trustee, officer or controlling person and the Securities and Exchange Commission is still of the same opinion, Registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue.
Registrant also participates in a policy of insurance which insures Registrant, its present, past and future trustees, officers, employees, agents and investment advisers against any liability incurred on account of any alleged negligent act, error or omission committed in connection with the operation of the Trust, but excluding losses incurred by reason of any fraudulent breach of trust or intention to deceive or defraud, or dishonest, criminal or malicious act finally adjudicated. Coverage for the insureds generally includes losses incurred by reason of any actual or alleged breach of duty, neglect, error, misstatement, misleading statement or other act or omission committed by such person in such capacity, but generally excludes losses incurred on account of personal dishonesty, fraudulent breach of trust, lack of good faith or intention to deceive or defraud or willful failure to act prudently.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Robertson Stephens Investment Management, Inc. ("RSIM, Inc."), a Delaware corporation, and Robertson, Stephens & Company Investment Management, L.P. ("RSIM, L.P."), a California limited partnership, are the investment advisers to Registrant. Since they commenced operations in March 1986 and June 1993, respectively, RSIM Inc.'s and RSIM, L.P.'s principal businesses have been to render investment advisory services to clients, including Registrant, limited partnerships and various private accounts.
RSIM, Inc. is wholly owned by Robertson, Stephens & Company LLC, a Delaware limited liability company, of which Robertson, Stephens & Company Group, L.L.C., a Delaware limited liability company, is the managing member and Robertson, Stephens & Company, Inc., a
California corporation, is the only other member. Robertson, Stephens & Company LLC is a registered securities broker-dealer and the principal underwriter for each of the Funds.
RSIM, L.P.'s sole general partner is Robertson, Stephens & Company, Inc., and its sole limited partner is Robertson, Stephens & Company LLC.
Information about G. Randy Hecht, an officer of RSIM, L.P. and a director of RSIM, Inc. and Robert C. Czepiel, President, Treasurer and Portfolio Manager of RSIM, Inc. for Robertson Stephens Emerging Growth Fund, is set forth in Part A herein and under Item 29 below.
Information about Paul H. Stephens, Portfolio Manager of RSIM, L.P. for Robertson Stephens Contrarian Fund, is set forth in Part A herein and under Item 29 below.
Information about Ronald E. Elijah, Portfolio Manager of RSIM, L.P. for Robertson Stephens Information Age Fund and Robertson Stephens Value+ Growth Fund, is set forth in Part A herein and under Item 29 below.
Information about Michael Hoffman, Portfolio Manager of RSIM, L.P. for Robertson Stephens Developing Countries Fund, is set forth in Part A herein.
Information about Andrew P. Pilara, Jr., Portfolio Manager of RSIM, L.P. for Robertson Stephens Partners Fund and for Robertson Stephens Global Natural Resources Fund, is set forth in Part A herein and under Item 29 below.
Information about Hannah Sullivan, Portfolio Manager of RSIM, L.P. for Robertson Stephens Global Low-Priced Stock Fund, is set forth in Part A herein.
Information about John L. Wallace, Portfolio Manager of RSIM, L.P. for Robertson Stephens Growth & Income Fund, is set forth in Part A herein and under Item 29 below.
David J. Evans, Secretary and Security Analyst of RSIM, Inc., joined RSIM, Inc. in September 1989 from CIGNA Investment Management where he was a Vice President and Portfolio Manager from September 1984 to June 1989.
Herbert L. Damner, Jr., a Director of RSIM, Inc., has been a partner of Damner, Pike & Co., a real estate firm located at 345 California Street, 21st Floor, San Francisco, CA 94104, since January 1984.
(a) Robertson, Stephens & Company LLC is the principal underwriter of each of the Funds. Robertson, Stephens & Company LLC acts as the principal underwriter, depositor and/or investment adviser for the following private investment companies:
RCS II, a Limited Partnership The Robertson Stephens Orphan Fund-C- RCS III, a CA Limited Partnership RCS Health Care Partners, LP RCS/BNP Atlantic Fund RS & Co. IV, L.P. RS Property Fund I, L.P. Environmental Venture Fund RS Residential Fund, L.P. RCS Limited Environment Private Equity Bayview Investors, L.P. Crossover Fund, L.P. Crossover II, L.P. The Robertson Stephens Black Bear Fund, L.P.
(b) The table below sets forth certain information as of December 31, 1995 as to the members of Robertson, Stephens & Company LLC, the principal underwriter of Registrant's shares. The managing member of Robertson, Stephens & Company LLC is Robertson, Stephens & Company Group, L.L.C., a Delaware limited liability company. The principal business address for each of the persons named below is 555 California Street, San Francisco, CA 94104.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required by Section 31(a) and Rule 31a-1 through 3 under the 1940 Act will be maintained by Registrant at its offices, 555 California Street, San Francisco, CA 94104 except that pursuant to Rule 31a-3 under the 1940 Act, the Transfer Agent (located at 1004 Baltimore, Kansas City, MO 64105) and Custodian (located at 225 Franklin Street, Boston, MA 02110) for Registrant, will maintain the records required by subparagraphs (b)(1) and (b)(2)(D) of Rule 31a-1.
Registrant has entered into an agreement with State Street Bank and Trust Company for certain transfer agency and shareholder services. Pursuant to the agreement, State Street Bank and Trust Company, among other things, maintains accounts for shareholders of record of registrant, processes requests to purchase and redeem shares and mails communications by Registrant to its shareholders.
The Registrant has made the following undertakings which are still applicable:
(a) Registrant has undertaken to comply with Section 16(a) of the Investment Company Act of 1940, as amended, which requires the prompt convening of a meeting of shareholders to elect trustees to fill existing vacancies in the Registrant's Board of Trustees in the event that less than a majority of the trustees have been elected to such position by shareholders. Registrant has also undertaken to promptly call a meeting of shareholders for the purpose of voting upon the question of removal of any Trustee or Trustees when requested in writing to do so by the record holders of not less than 10 percent of the Registrant's outstanding shares and to assist its shareholders in communicating with other shareholders in accordance with the requirements of Section 16(c) of the Investment Company Act of 1940, as amended.
(b) Registrant has undertaken to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders when available, upon request and without charge.
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City and County of San Francisco and State of California, on the 16th day of January, 1996.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below, on January 16, 1996, by the following persons in the capacities indicated.
G. RANDY HECHT* Principal Executive Officer
TERRY R. OTTON* Treasurer, Chief Financial Officer, ---------------- and Principal Accounting Officer
to the Powers of Attorney previously filed.
EXHIBIT NO. TITLE PAGE NO.
5(i) Form of Letter Agreement regarding the Robertson Stephens Value + Growth Fund
11 Consent of Independent Accountants
15(g) Form of Distribution Plan Pursuant to Rule 12b-1 in respect of Robertson Stephens Value + Growth Fund. | 485BPOS | 485BPOS | 1996-01-16T00:00:00 | 1996-01-16T15:18:38 |
0000950168-96-000052 | 0000950168-96-000052_0000.txt | NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE is hereby given that a Special Meeting of Shareholders (the "Special Meeting") of Triad Bank ("Triad") will be held at 10:00 a.m. on Tuesday, February 27, 1996, at Holiday Inn Four Seasons, 3121 High Point Road at I-40, Greensboro, North Carolina.
The purposes of the meeting are:
1. Proposal to Approve the Merger. To consider and vote on a proposal to approve the Agreement and Plan of Reorganization and Merger, dated as of October 19, 1995 (the "Agreement"), among Triad, United Carolina Bank ("UCB") and United Carolina Bancshares Corporation ("Bancshares") (a copy of which is attached as Appendix A to the Prospectus/Proxy Statement which accompanies this Notice), and to approve the transactions described therein, including, without limitation, the merger of Triad into UCB (the "Merger") with the result that the outstanding shares of Triad's common stock, $2.50 par value per share ("Triad Stock"), will be converted into shares of Bancshares' common stock, $4.00 par value per share, all as more fully described in the accompanying
2. Other Business. To transact such other business as may properly come before the Special Meeting or any adjournment thereof. Management of Triad is not aware of any other matters which may properly come before the Special Meeting.
UNDER NORTH CAROLINA LAW, EACH HOLDER OF TRIAD STOCK HAS THE RIGHT TO DISSENT FROM THE MERGER AND TO DEMAND PAYMENT OF THE FAIR VALUE OF HIS OR HER SHARES OF TRIAD STOCK IN THE EVENT THE MERGER IS APPROVED AND CONSUMMATED. A SHAREHOLDER'S RIGHT TO DISSENT IS CONTINGENT UPON STRICT COMPLIANCE WITH THE REQUIREMENTS OF ARTICLE 13 OF THE NORTH CAROLINA BUSINESS CORPORATION ACT. THE FULL TEXT OF ARTICLE 13 IS ATTACHED AS APPENDIX B TO THE PROSPECTUS/PROXY STATEMENT WHICH ACCOMPANIES THIS NOTICE AND IS INCORPORATED HEREIN BY REFERENCE.
EACH SHAREHOLDER IS INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. HOWEVER, TO INSURE THAT A QUORUM IS PRESENT AT THE SPECIAL MEETING, EACH SHAREHOLDER IS URGED TO COMPLETE, DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED APPOINTMENT OF PROXY IN THE ENCLOSED PREPAID ENVELOPE. SIGNING AND RETURNING AN APPOINTMENT OF PROXY WILL NOT AFFECT A SHAREHOLDER'S RIGHT TO ATTEND THE SPECIAL MEETING AND VOTE IN PERSON.
By Order of the Board of Directors
TRIAD'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE THE AGREEMENT.
For Special Meeting of Shareholders of to be Held on February 27, 1996
This Prospectus relates to shares of the common stock, $4.00 par value per share ("Bancshares Stock"), of United Carolina Bancshares Corporation ("Bancshares") that will be issued in connection with the proposed merger (the "Merger") of Triad Bank ("Triad") into United Carolina Bank ("UCB"). Bancshares is a North Carolina corporation which is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") as a bank holding company and which is the parent company of UCB. As described in the Agreement and Plan of Reorganization and Merger, dated as of October 19, 1995 (the "Agreement"), among Triad, Bancshares and UCB, it is proposed that Triad be merged into UCB and, upon consummation of the Merger, that the outstanding shares of Triad's common stock, $2.50 par value per share ("Triad Stock"), be converted and exchanged for shares of Bancshares Stock. (See "PROPOSAL 1: THE MERGER.")
Each holder of Triad Stock is entitled to exercise his or her statutory dissenter's rights in accordance with North Carolina law. (See "RIGHTS OF DISSENTING SHAREHOLDERS.") In lieu of issuing fractional shares of Bancshares Stock, cash will be distributed to each Triad shareholder otherwise entitled to receive a fractional share in an amount equal to that fraction multiplied by the "market value" of one whole share of Bancshares Stock. (See "PROPOSAL 1: THE MERGER -
This Prospectus also serves as Triad's Proxy Statement in connection with the solicitation of appointments of proxy by the Triad Board of Directors to be used at a Special Meeting of Triad's shareholders (the "Special Meeting"), including any adjournments thereof, to be held on February 27, 1996, for the purposes described herein. (See "SUMMARY - Special Meeting of Shareholders.")
The Prospectus/Proxy Statement and the accompanying form of appointment of proxy are first being mailed to shareholders of Triad on or about January 12, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Proxy Statement is January 5, 1996.
No person is authorized to give any information or make any representation other than those contained in this Prospectus/Proxy Statement, and, if given or made, such information or representation should not be relied upon as having been authorized by Bancshares, UCB or Triad. This Prospectus/Proxy Statement does not constitute an offer to sell, or a solicitation of an offer to purchase the securities offered by this Prospectus/Proxy Statement in any jurisdiction in which such offer is not authorized or to or from any person to whom it is unlawful to make such offer or solicitation. The information contained or incorporated by reference in this Prospectus/Proxy Statement regarding Bancshares and its affiliates has been furnished by Bancshares, and the information contained herein regarding Triad has been furnished by Triad. Neither the delivery of this Prospectus/Proxy Statement nor any distribution of the securities being offered hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of Bancshares, UCB or Triad since the date of this Prospectus/Proxy Statement or that the information contained herein or in the documents incorporated by reference is correct as of any time subsequent to the date hereof.
THE SHARES OF BANCSHARES STOCK OFFERED HEREBY ARE NOT DEPOSITS OF ANY BANK OR FINANCIAL INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
Bancshares is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act") and, in accordance therewith, files proxy statements, reports and other information with the Securities and Exchange Commission (the "Commission"). Proxy statements, reports and other information filed by Bancshares can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and at the Commission's Regional Offices located in Chicago (Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511) and in New York (7 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, DC 20549, at prescribed rates.
Bancshares has filed with the Commission a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "1933 Act"), with respect to the Bancshares Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus/Proxy Statement does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, all of which may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549, upon payment of the prescribed fees.
Triad also is subject to the informational requirements of the 1934 Act and, in accordance therewith, files reports, proxy statements and other information with the Federal Deposit Insurance Corporation ("FDIC"). Such reports, proxy statements and other information filed by Triad may be obtained from the FDIC at prescribed rates by addressing written requests for such copies to the FDIC, Registration and Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429. In addition, such documents may be inspected and copied at the public reference facilities of the FDIC at 1776 F Street, N.W., Room F- 643, Washington, D.C. 20429.
AS FURTHER DESCRIBED BELOW, THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS RELATING TO BANCSHARES OR TRIAD WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF DOCUMENTS RELATED TO BANCSHARES OR TRIAD (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS), WILL BE PROVIDED WITHOUT CHARGE TO ANY BENEFICIAL OWNER OF SHARES OF TRIAD STOCK UPON A REQUEST, FOR BANCSHARES DOCUMENTS, TO HOWARD V. HUDSON, JR., SECRETARY, UNITED CAROLINA BANCSHARES CORPORATION, P. O. BOX 632, WHITEVILLE, N. C. 28472, TELEPHONE (910) 642-5131 AND, FOR TRIAD DOCUMENTS, TO WANDA S. CLARK, ASSISTANT SECRETARY, TRIAD BANK, POST OFFICE BOX 22006, GREENSBORO, N.C. 27420, TELEPHONE (910) 271-4700. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS BEFORE THE SPECIAL MEETING, ANY SUCH REQUEST SHOULD BE MADE BY FEBRUARY 16, 1996.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by Bancshares with the Commission (SEC File No. 0-5583) are incorporated by reference into this Prospectus/Proxy Statement: (i) Bancshares' Annual Report on Form 10-K for the fiscal year ended December 31, 1994; (ii) Bancshares' Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995, and September 30, 1995; (iii) Bancshares' Current Reports on Form 8-K dated May 22, 1995 and October 19, 1995; and (iv) the description of Bancshares Stock contained in its Registration Statement on Form 10, as amended by Bancshares' subsequent reports filed under the 1934 Act. The following documents previously filed by Triad with the FDIC (all of which are exhibits to the Registration Statement) are incorporated by reference into this Prospectus/Proxy Statement: (i) Triad's Annual Report on Form F-2 for the fiscal year ended December 31, 1994; (ii) Triad's Quarterly Reports on Form F-4 for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995; and (iii) Triad's Current Report on Form F-3 dated October 24, 1995.
In addition, all other documents filed by Bancshares pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act prior to final adjournment of the Special Meeting shall be deemed to be incorporated by reference into this Prospectus/Proxy Statement. Any statements contained in a document incorporated or deemed to be incorporated by reference herein will be deemed to be modified or superseded for purposes of this Prospectus/Proxy Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus/Proxy Statement.
TRIAD'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 AND QUARTERLY REPORT ON FORM F-4 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 ACCOMPANY THIS PROSPECTUS/PROXY STATEMENT.
Special Meeting of Triad Shareholders
General. This Prospectus/Proxy Statement is being furnished in connection with the solicitation by Triad's Board of Directors of appointments of proxy for use at the Special Meeting, and at any adjournments thereof.
Date, Place and Time. The Special Meeting will be held on February 27, 1996, at 10:00 a.m. local time, at Holiday Inn Four Seasons, 3121 High Point Road at I-40, Greensboro, North Carolina.
Purposes of Special Meeting. The purposes of the Special Meeting are (i) to consider and vote on a proposal to approve the Agreement, a copy of which is attached as Appendix A to this Prospectus/Proxy Statement and is incorporated herein by reference, and (ii) to transact such other business as may properly come before the Special Meeting. (See "PROPOSAL 1: THE MERGER.")
Solicitation and Voting of Proxies. The persons named to represent shareholders as proxies at the Special Meeting are James E. Mims and Kenneth M. Greene (the "Proxies"). Shares represented by each appointment of proxy which is properly executed and returned, and not revoked, will be voted by the Proxies in accordance with the directions contained therein. If no directions are given, such shares will be voted by the Proxies "FOR" Proposal 1. On such other matters that may properly come before the Special Meeting, the Proxies will be authorized to vote in accordance with their best judgment.
Record Date. The close of business on January 2, 1996 has been fixed as the record date (the "Record Date") for the determination of shareholders entitled to notice of and to vote at the Special Meeting. Only those shareholders of record on the Record Date will be eligible to vote on the matters described herein.
Voting Securities. The voting securities of Triad are the shares of Triad Stock, of which 1,832,959 shares were issued and outstanding on the Record Date. As of September 30, 1995, the directors and executive officers of Triad and their affiliates beneficially owned and were entitled to vote approximately 20% of the outstanding shares of Triad Stock. The directors and executive officers of Triad are expected to vote their shares in favor of the Agreement. Information as to the nature of such persons' beneficial ownership is included in the section of this Prospectus/Proxy Statement entitled "Triad Bank - Beneficial Ownership of Securities."
Votes Required for Approval. At the Special Meeting, each shareholder will be entitled to cast one vote for each share of Triad Stock held of record on the Record Date on each matter submitted for voting. The affirmative vote of the holders of two thirds of the outstanding shares of Triad Stock is required to approve the Agreement. Because the affirmative vote of two-thirds of all outstanding shares of Triad Stock is required to approve the Agreement, abstentions, broker nonvotes and shares otherwise not voted at the Special Meeting will have the same effect as votes against the Agreement.
Revocation of Appointment of Proxy. Any shareholder who executes an appointment of proxy has the right to revoke it at any time before it is exercised by filing with the Secretary of Triad either an instrument revoking it or a duly executed appointment of proxy bearing a later date, or by attending the Special Meeting and announcing his intention to vote in person.
Proxy Solicitation Expenses. Except under certain circumstances involving a wrongful termination or breach of the Agreement, the cost of soliciting proxies will be deemed to be incurred and shall be paid 50% by Triad and 50% by Bancshares. In addition to the use of the mails, appointments of proxy may be solicited personally or by telephone by Triad's officers, directors and employees, none of whom will be compensated separately for any such solicitation activities.
The following is a brief summary of information about the Agreement (a copy of which is attached as Appendix A to this Prospectus/Proxy Statement) and the transactions described therein and is not intended to be a complete statement of all material facts regarding the Merger. This summary is qualified in its entirety by reference to the more detailed information contained elsewhere herein (see "PROPOSAL 1: THE MERGER"), the accompanying Appendices, and the other documents referred to or incorporated herein by reference.
Parties to the Merger. Bancshares is a North Carolina business corporation which is registered with the Federal Reserve as a bank holding company and is the parent company of UCB. UCB is a North Carolina commercial bank. Bancshares' and UCB's principal offices are located at 127 West Webster Street (Post Office Box 632), Whiteville, North Carolina 28472, and their telephone number is (910) 642-5131. (See "UNITED CAROLINA BANCSHARES CORPORATION AND UNITED CAROLINA BANK.") At September 30, 1995, Bancshares' consolidated financial statements reflected total assets of $3.8 billion, total deposits of $3.4 billion and total stockholders' equity of $292.3 million.
Triad is a North Carolina commercial bank. Its principal office is located at 113 North Greene Street (Post Office Box 22006), Greensboro, North Carolina 27401, and its telephone number is (910) 271-4700. (See "TRIAD BANK.") At September 30, 1995, Triad's financial statements reflected total assets of $199.2 million, total deposits of $181.3 million, and total stockholders' equity of $15.0 million.
Effect of Merger. The Merger is provided for in the Agreement which has been entered into among Bancshares, UCB and Triad. At the time the Merger becomes effective (the "Effective Time"), Triad will be merged into and its corporate existence will be combined with that of UCB, Triad will cease to exist as a separate corporation, and UCB will be the surviving corporation and continue to conduct business under its charter and with its then current management. (See "PROPOSAL 1: THE
Conversion of Triad Stock. At the Effective Time, each outstanding share of Triad Stock (other than shares as to which Triad's shareholders properly exercise their "Dissenter's Rights" under North Carolina law) will be converted into, and thereafter may be exchanged for, 0.569444 of a share (the "Exchange Rate") of Bancshares Stock. However, if the average closing price of Bancshares Stock on the Nasdaq National Market for the 30 consecutive trading days immediately preceding the Special Meeting (the "30-Day Average") is greater than $40.39 per share, then the Exchange Rate will be adjusted to equal the ratio (rounded to six decimal places) produced by dividing $23.00 by the 30-Day Average, and if the 30-Day Average is less than $31.61 per share, then the Exchange Rate will be adjusted to equal the ratio (rounded to six decimal places) produced by dividing $18.00 by the 30-Day Average. However, Bancshares may terminate the Agreement (unless Bancshares has agreed to be acquired) if the 30-Day Average exceeds $43.20 and Triad may terminate the Agreement if the 30-Day Average is less than $28.80. Given these minimum and maximum prices, the Exchange Rate could fluctuate between a high of .625000 and a low of .532407. As of January 4, 1996, the 30-Day Average was $37.16 which would not result in a change to the Exchange Rate. (See "PROPOSAL 1: THE MERGER - Conversion of Triad Stock and Triad Options; Exchange Rate" and
Treatment of Fractional Shares. In lieu of issuing fractional shares of Bancshares Stock, cash will be distributed to each Triad shareholder otherwise entitled to receive a fractional share in an amount equal to that fraction multiplied by the "market value" (as defined in the Agreement) of one whole share of Bancshares Stock. (See "PROPOSAL 1: THE MERGER - Treatment of Fractional Shares.")
Recommendations and Reasons. TRIAD'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TRIAD'S SHAREHOLDERS VOTE TO APPROVE THE AGREEMENT. Triad's Board of Directors has adopted the Agreement and believes the Merger is in the best interests of Triad and its shareholders and unanimously recommends that Triad's shareholders vote FOR approval of the Agreement. The Board of Directors considered a variety of factors in approving the Agreement, including without limitation (i) the amount and nature of the consideration to be received by Triad's shareholders, (ii) the greater liquidity and the potential for increases in the value of Bancshares Stock as compared to Triad Stock, (iii) Bancshares' cash dividend and earnings record, (iv) the treatment of Triad's officers and employees, (v) the more efficient and profitable operation of Triad through economies of scale, and (vi) the ability to offer expanded services to Triad's customers. (See "PROPOSAL 1: THE MERGER -- Recommendation," and "--Background of and Reasons for
Fairness Opinion. Triad's Board of Directors retained The Carson Medlin Company ("Carson Medlin") to provide it with an opinion of the fairness of the Merger to Triad's shareholders from a financial point of view. After a review of a variety of relevant factors, Carson Medlin has given the Board of Directors a written opinion dated January 5, 1996 (the "Fairness Opinion", a copy of which is attached as Appendix C to this Prospectus/Proxy Statement) to the effect that the consideration to be received by Triad's shareholders in connection with the Merger as provided in the Agreement is fair from a financial point of view. For its services, Triad has paid Carson Medlin a fee of $15,000 for services rendered to date and has agreed to pay Carson Medlin an additional fee of $20,000 if the Merger is consummated. Triad also has agreed to reimburse Carson Medlin for its out-of-pocket expenses incurred in connection with activities contemplated by its engagement by Triad. Additionally, Triad has agreed to indemnify Carson Medlin against certain liabilities that may arise in connection with its engagement. Triad's and Bancshares' respective obligations to consummate the Merger are conditioned on Triad's receipt from Carson Medlin immediately prior to consummation of the Merger of a letter stating that it remains Carson Medlin's opinion that the terms of the Merger are fair to Triad's shareholders from a financial point of view. (See "PROPOSAL 1: THE MERGER -- Fairness Opinion.")
Required Approval of Triad's Shareholders. Under North Carolina law, the Agreement must be approved by the affirmative vote of the holders of two-thirds of the total outstanding shares of Triad Stock, in person or by proxy, at the Special Meeting. The Agreement must be approved by such vote in order to consummate the Merger. (See "PROPOSAL
Required Regulatory Approvals. The Merger is subject to approval by the North Carolina Commissioner of Banks (the "Commissioner"), the North Carolina State Banking Commission (the "Banking Commission"), and the FDIC. Applications for all such required approvals have been filed and are pending. While no assurances are or can be given, Bancshares and Triad believe that all such required regulatory approvals will be obtained. (See "PROPOSAL 1: THE MERGER -- Required Regulatory
Conditions to Merger. In addition to required regulatory and shareholder approvals, consummation of the Merger is conditioned upon the fulfillment of certain other conditions described in the Agreement, including without limitation, (i) receipt of an opinion to the effect that, among other things, for federal income tax purposes the Merger will constitute a "reorganization" as defined in (section mark) 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) receipt of the Fairness Opinion and receipt of written confirmation of the Fairness Opinion immediately prior to the Effective Time; (iii) receipt by Bancshares of an opinion of KPMG Peat Marwick LLP to the effect that the Merger qualifies for pooling-of-interests accounting treatment, and (iv) certain other conditions customary in transaction of this nature. (See "PROPOSAL 1: THE MERGER -- Conditions to Merger.")
Waiver and Amendment. Prior to the Effective Time, any provision of the Agreement (other than provisions relating to regulatory approvals and other approvals required by law) may be waived by the party entitled to the benefits of such provisions. Additionally, the Agreement may be amended, modified or supplemented by Bancshares, UCB and Triad at any time prior to the Effective Time, and whether before or after approval by Triad's shareholders, by an agreement in writing approved by a majority of the members of their respective Boards of Directors. However, except as otherwise provided in the Agreement, following approval of the Agreement by Triad's shareholders, no such amendment may change the Exchange Rate without shareholder approval of such change. (See "PROPOSAL 1: THE MERGER -- Waiver, Amendment of Agreement.")
Termination of the Agreement. The Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time, whether before or after approval by Triad's shareholders, by the mutual agreement of Bancshares, UCB and Triad, and may be terminated by either Bancshares or Triad under certain circumstances described in the Agreement. (See PROPOSAL 1: THE MERGER -- Termination of Agreement.")
Effective Time. Assuming the receipt of all required approvals, it currently is expected that the Merger will become effective during the first half of 1996. (See "PROPOSAL 1: THE MERGER -- Closing Date
Time.") The Board of Directors of either Triad or UCB may terminate the Agreement if the Effective Time shall not have occurred by July 31, 1996. (See "PROPOSAL 1: THE MERGER -- Termination of
Directors and Officers. Following the Effective Time, Bancshares' and UCB's then current directors and executive officers will continue to serve for the remainder of their respective terms of office as the directors and executive officers of Bancshares and UCB. Following the Effective Time, Bancshares' Board of Directors will appoint one member of Triad's Board of Directors (who will be selected by mutual agreement of Bancshares and Triad) to serve as a director of UCB. See "PROPOSAL 1: THE MERGER -- Interests of Certain Persons with Respect to the
Interests of Certain Persons. In order to assure itself of their assistance and continued services during the transition period following the Effective Time, (i) at the Effective Time UCB will enter into an employment agreement with each of James E. Mims (who serves as a director of Triad and its Chairman and Chief Executive Officer) and with Carl I. Carlson, III (who serves as a director of Triad and its President), and (ii) Triad's directors and advisory board members (other than the director appointed to UCB's Board of Directors and directors who also are employees of Triad or who do not desire to serve as such) will be appointed to serve as local advisory board members of UCB for one of UCB's city offices in Triad's former geographic market and will receive fees for a period of one year which approximate the fee schedules for services as directors and advisory board members, respectively, of Triad in 1995. Also at the Effective Time (i) all outstanding options to purchase Triad Stock will be converted into options to purchase Bancshares Stock, (ii) title to the automobiles owned by Triad and used by Mr. Mims and Mr. Carlson shall be transferred to Mr. Mims and Mr. Carlson, respectively, (iii) UCB, for a period of six months after the Effective Time, will assume Triad's obligations under two life insurance policies on Mr. Carlson, and (iv) UCB will assume Triad's obligations under a split dollar life insurance policy for James E. Mims currently maintained by Triad. (See "PROPOSAL 1: THE MERGER -- Interests of Certain Persons With Respect to the
Accounting Treatment. It is a condition to the Agreement that the Merger be accounted for as a pooling-of-interests for accounting and financial reporting purposes. Generally, among other requirements, if the number of fractional shares, shares repurchased by Triad or by Bancshares, shares of Triad shareholders who exercise their dissenter's rights, and the like acquired for cash, together would represent more than 10% of the shares to be issued by Bancshares in connection with the Merger, the Merger will not qualify for the pooling-of-interests method of accounting. If the Merger will not qualify for the pooling-of-interests method of accounting for any reason, Bancshares will be entitled to terminate the Agreement and abandon the Merger. (See "PROPOSAL 1: THE MERGER -- Accounting Treatment,""--Termination of Agreement," and "RIGHTS OF DISSENTING SHAREHOLDERS.")
Income Tax Consequences. Triad and Bancshares have received an opinion (the "Tax Opinion") from KPMG Peat Marwick LLP, tax advisors to Triad and Bancshares, to the effect that the Merger will constitute a tax-free reorganization under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code, with no gain or loss being recognized by Triad's shareholders upon the conversion and exchange of shares of Triad Stock into shares of Bancshares Stock (except with respect to cash received in lieu of fractional shares of Bancshares Stock or in redemption of shares of Triad Stock as to which Dissenter's Rights are exercised.) Because of the complexity of federal income tax laws and because tax consequences may vary depending on a shareholder's individual circumstances or tax status, it is recommended that each of Triad's shareholders consult his or her own tax advisor concerning the federal (and applicable state, local or other) tax consequences of the Merger. (See "PROPOSAL 1: THE MERGER -- Certain Income Tax Consequences.")
Rights of Dissenting Shareholders. Subject to certain conditions, each Triad shareholder has the right under North Carolina law to assert dissenter's rights and to receive the "fair value" of his or her shares of Triad Stock in cash ("Dissenter's Rights"). Any shareholder who desires to assert Dissenter's Rights must, among other things, (i) give to Triad, before the vote on the Agreement is taken, timely written notice of his or her intent to demand payment for his or her shares if the Merger is consummated, (ii) not vote his or her shares in favor of the Agreement, (iii) demand payment and deposit his or her share certificates by the date set forth in and in accordance with the terms and conditions of a "dissenter's notice" sent to such shareholder by Triad, and (iv) otherwise satisfy the requirements specified in Appendix B to the Prospectus/Proxy Statement. Assuming shareholder approval and consummation of the Merger, a shareholder who properly exercises Dissenter's Rights will be offered the amount Triad estimates to be the fair value of his or her shares of Triad Stock, plus accrued interest to the date of payment, and will be paid such amount in cash provided the shareholder agrees in writing to accept such amount in full satisfaction of his or her demand. In order to exercise Dissenter's Rights, a shareholder MUST follow carefully ALL steps prescribed in Appendix B. (See "RIGHTS OF DISSENTING SHAREHOLDERS" and Appendix B.) A shareholder who returns a signed appointment of proxy but fails to provide instructions as to the manner in which such shares are to be voted will be deemed to have voted in favor of the Agreement and will not be entitled to assert Dissenter's Rights.
Differences in Capital Stock of Bancshares and Triad. In connection with the Merger, Triad's shareholders (other than shareholders who exercise Dissenter's Rights) will become shareholders of Bancshares. There are certain differences between the rights of shareholders of Bancshares as opposed to shareholders of Triad. Shareholders should consider carefully the difference in Bancshares Stock and Triad Stock under the governing instruments of those corporations and North Carolina law. (See "CAPITAL STOCK OF BANCSHARES AND TRIAD -- Differences in Capital Stock of Bancshares and Triad.")
Resales of Bancshares Stock Received in Merger. The shares of Bancshares Stock into which Triad Stock will be converted in the Merger will be freely transferable by the holders thereof except in the case of shares held by persons who may be deemed to be "Affiliates" of Triad or Bancshares under applicable federal securities laws. Generally, Triad's Affiliates include its directors, executive officers, principal shareholders and other persons who may be deemed to "control" Triad. (See "PROPOSAL 1: THE MERGER -- Restrictions on Resale of Bancshares Stock Received by Certain Persons.")
SELECTED FINANCIAL INFORMATION AND UNAUDITED COMPARATIVE PER SHARE DATA
The following table sets forth certain selected historical consolidated financial information for Bancshares at the date and for the periods indicated. This selected financial information has been derived from and should be read in conjunction with Bancshares' audited consolidated financial statements and interim unaudited financial statements, including the related notes thereto, which are incorporated by reference in this Prospectus/Proxy Statement. (See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.") Management of Bancshares believes such unaudited consolidated financial statements as of and for the nine months ended September 30, 1995 and 1994 include all adjustments (which consist only of normal recurring accruals) necessary for a fair presentation of such results for such interim periods. Results for the nine months ended September 30, 1995, are not necessarily indicative of results that may be expected for any other interim period or for the full year.
The following table sets forth certain selected historical financial information for Triad at the dates and for the periods indicated. This selected financial information has been derived from and should be read in conjunction with Triad's audited financial statements and interim unaudited financial statements, including the related notes thereto, which are incorporated by reference in this Prospectus/Proxy Statement. (See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.") Management of Triad believes that such unaudited financial statements as of and for the nine months ended September 30, 1995 and 1994 include all adjustments (which consist only of normal recurring accruals) necessary for a fair presentation of such results for such interim periods. Results for the nine months ended September 30, 1995, are not necessarily indicative of results that may be expected for any other interim period or for the full year.
The following tables set forth Bancshares' and Triad's book values, cash dividends declared and net income per share at the date and for the periods presented (i) on a historical basis, and (ii) on a pro forma combined and equivalent per share of Triad Stock basis (each assuming that the Merger became effective on the specified dates and was accounted for as a "pooling-of-interests"). The following information does not include the effects of a recently announced merger by Bancshares which is not considered to be material. See "UNITED CAROLINA BANCSHARES AND UNITED CAROLINA BANK - Recent Events."
(1) Pro forma combined amounts are calculated using the shares of Triad Stock outstanding multiplied by the Exchange Rate of 0.569444 of a share of Bancshares Stock for each share of Triad Stock plus the shares of Bancshares outstanding for the period indicated.
(2) Equivalent per share amount is calculated by multiplying the pro forma combined amount by the Exchange Rate of 0.569444 of a share of Bancshares Stock for each share of Triad Stock.
(1) Pro forma combined amounts are calculated using the shares of Triad Stock outstanding multiplied by the Exchange Rate of 0.569444 of a share of Bancshares Stock for each share of Triad Stock plus the shares of Bancshares outstanding for the period indicated.
(2) Equivalent per share amounts are calculated by multiplying the pro forma combined amounts by the Exchange Rate of 0.569444 of a share of Bancshares Stock for each share of Triad Stock.
(3) Reflects fully diluted income per common share before cumulative effect of a change in accounting method and extraordinary item.
The following table sets forth (i) on a historical basis, the closing price per share of Bancshares Stock on the Nasdaq National Market on October 18, 1995 (the last trading date prior to the public announcement of the Merger), and (ii) the market value of a share of Triad Stock on that date, and (iii) the equivalent pro forma market value of Triad Stock on that date (assuming that the Merger became effective on that date and was accounted for as a pooling-of-interests). On October 18, 1995, the last reported sale price for Bancshares Stock on the Nasdaq National Market was $36.25. The last reported sale price of Triad Stock on October 18, 1995 was $15.25. (See "MARKET AND DIVIDEND INFORMATION REGARDING TRIAD STOCK AND BANCSHARES STOCK.")
Bancshares Stock (1) . . . . . . . . . . . . . . . . . . . $ 36.25
Triad Stock (1) . . . . . . . . . . . . . . . . . . . . . . $ 15.375
Equivalent pro forma Triad Stock (2) . . . . . . . . . . . $ 20.64
(1) The price shown for Bancshares Stock is the closing price on the Nasdaq National Market on the indicated date. The value shown for the Triad Stock is the average of the closing bid and asked prices of Triad Stock on October 18, 1995.
(2) The equivalent pro forma amount is calculated by multiplying the closing price of Bancshares Stock on October 18, 1995, by the Exchange Rate.
The following is a summary of information about the Merger and certain of the important terms and conditions of the Agreement and related matters and is not intended to be a complete description of all material facts regarding the Merger. This summary is subject to and qualified in all respects by reference to the Agreement attached hereto as Appendix A, the statutes regarding Dissenter's Rights attached hereto as Appendix B, and to the other Appendices to this Prospectus/Proxy Statement (each of which is incorporated herein by reference). Each Triad Shareholder is urged to read the Agreement, this Prospectus/Proxy Statement and the other Appendices in their entirety.
At the Special Meeting, a proposal will be introduced for Triad's shareholders to approve the Agreement. The Agreement provides for the Merger of Triad into UCB and the conversion and exchange of the outstanding shares of Triad Stock (other than shares held by Triad shareholders who properly exercise their Dissenter's Rights) into and for newly issued shares of Bancshares Stock. At the Effective Time, (i) Triad will be merged into and its existence will be combined with that of UCB, and Triad will cease to exist as a separate entity, (ii) Triad's shareholders (other than shareholders who exercise their Dissenter's Rights) will become shareholders of Bancshares, and (iii) UCB will be the surviving corporation in the Merger and will continue to exist (under the management of its current officers and directors) as a wholly-owned subsidiary of Bancshares and to conduct its business as a North Carolina banking corporation under the supervision and regulation of the Commissioner and the FDIC. (See " - Conversion of Triad Stock and Triad Options; Exchange Rate" and "RIGHTS OF DISSENTING SHAREHOLDERS.") Triad's deposit accounts will become deposit accounts of UCB and will continue to be insured by the FDIC to the maximum amount permitted by law.
Conversion of Triad Stock and Triad Options; Exchange Rate
At the Effective Time, and without any action on the part of Bancshares, Triad or Triad's shareholders, each share of Triad Stock held of record by Triad's shareholders (other than shares as to which a shareholder properly exercises Dissenter's Rights) automatically will be converted into and become, and thereafter may be exchanged for, 0.569444 of a newly issued share of Bancshares Stock. (See "RIGHTS OF DISSENTING SHAREHOLDERS.") However, if the 30-Day Average is greater than $40.39 per share, then the Exchange Rate will be adjusted to equal the ratio (rounded to six decimal places) produced by dividing $23.00 by the 30-Day Average, and if the 30-Day Average is less than $31.61 per share, then the Exchange Rate will be adjusted to equal the ratio (rounded to six decimal places) produced by dividing $18.00 by the 30-Day Average. Provided, however, in the event the 30-Day Average is greater than $43.20 and Bancshares or UCB has become a party to an agreement in principle or a binding agreement that contemplates a merger of Bancshares or UCB into or with any other entity (other than with the other or with any affiliated corporation) and in which Bancshares or UCB will not be the surviving corporation or a sale of substantially all of Bancshares' or UCB's assets to any other such entity, the Exchange Rate shall be fixed at 0.569444. However, Bancshares may terminate the Agreement (unless Bancshares has agreed to be acquired) if the 30-Day Average exceeds $43.20 and Triad may terminate the Agreement if the 30-Day Average is less than $28.80. Given these minimum and maximum prices, the Exchange Rate could fluctuate between a high of .625000 and a low of .532407. As of January 4, 1996, the 30-Day Average was $37.16 which would not result in a change to the Exchange Rate. If there is a change in the number of outstanding shares of Bancshares Stock or Triad Stock prior to the Effective Time as a result of a stock dividend, stock split, reclassification or other subdivision or combination of outstanding shares, then an appropriate and proportionate adjustment will be made in the Exchange Rate as necessary to eliminate any dilutive or antidilutive effect of such change in outstanding shares. Management of Bancshares and Triad currently are not aware of any change (completed or proposed) in the outstanding shares of Bancshares Stock or Triad Stock such as would result in an adjustment in the Exchange Rate.
At the Effective Time, all rights with respect to then outstanding options held by certain employees and directors of Triad to purchase shares of Triad Stock ("Triad Options"), whether or not then exercisable, will be converted into (at the Exchange Rate) and will become rights to purchase Bancshares Stock equal to the number of shares of Triad Stock originally covered by the options multiplied by the Exchange Rate, and Bancshares will assume Triad's obligations with respect to each such Triad Option in accordance with the terms of the applicable stock option plan and agreement under which such Triad Option was granted. (See " - Interests of Certain Persons With Respect to the
Surrender and Exchange of Certificates
Following the Effective Time, all certificates (other than shares held by Triad shareholders who properly exercise their Dissenter's Rights) formerly evidencing shares of Triad Stock ("Old Certificates") will evidence the right of the registered holders thereof to receive and may be exchanged for certificates ("New Certificates") evidencing the number of whole shares of Bancshares Stock into which such holders' shares of Triad Stock will have been converted.
As of the Effective Time, Triad's stock transfer books will be closed and no further transfer of Triad Stock or of an Old Certificate will be recognized or registered on Triad's stock transfer records. As soon as possible following the Effective Time, Triad's shareholders will receive transmittal forms with instructions for forwarding their Old Certificates for surrender to Bancshares' exchange agent (the "Exchange Agent"). Upon proper surrender to the Exchange Agent of their Old Certificates (together with properly completed transmittal forms), each Triad shareholder will be entitled to receive (i) New Certificates representing the number of whole shares of Bancshares Stock into which his or her shares of Triad Stock will have been converted, together with cash (without interest) for any fractional share (see " - Treatment of Fractional Shares"), or (ii) in the case of a shareholder properly exercising his or her Dissenter's Rights, the amount of cash determined as provided in Article 13 of the North Carolina Business Corporation Act. (See "RIGHTS OF DISSENTING SHAREHOLDERS.")
Until surrendered as described above, each Old Certificate will be deemed for all corporate purposes to evidence only the right to receive the number of shares of Bancshares Stock to which the Triad shareholder will have become entitled plus cash for any fractional share interest or the right to Dissenter's Rights. However, after the Effective Time and regardless of whether they have surrendered their Old Certificates, Triad's shareholders will be entitled to vote and to receive any dividends or other distributions (for which the record date is after the Effective Time) on the number of whole shares of Bancshares Stock into which their Triad Stock has been converted; provided, however, that no such dividends or other distributions will be paid to the holders of such Old Certificates unless and until the Old Certificates are surrendered. Upon surrender and exchange of each Old Certificate, there will be paid the amount, without interest thereon, of dividends and other distributions, if any, which became payable on the shares of Bancshares Stock represented by such certificate after the Effective Time but had not been paid to the record owner thereof.
Shareholders whose Old Certificates have been lost, stolen or destroyed will be required to furnish to Bancshares evidence satisfactory to the Exchange Agent of ownership of such Old Certificates and of such loss, theft or destruction, and to furnish appropriate and customary indemnification (including an indemnity bond) in order to receive the New Certificates and cash to which they are entitled.
TRIAD'S SHAREHOLDERS SHOULD NOT FORWARD THEIR OLD CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY RECEIVE INSTRUCTIONS TO DO SO.
No fraction of a share of Bancshares Stock, or any script or certificate representing any such fractional share, will be issued in connection with the Merger, and no right to vote or to receive any dividend or other distribution shall attach to any such fractional share. At the Effective Time, Bancshares will deliver cash to the Exchange Agent in an amount equal to the aggregate "market value" of all such fractional shares. Each Triad shareholder who otherwise would be entitled to receive a fraction of a share of Bancshares Stock shall, upon the surrender and exchange of his or her Old Certificates, and in lieu of such fractional share, be entitled to receive cash (without interest) from the Exchange Agent in an amount equal to that fraction multiplied by the "market value" of one whole share of Bancshares Stock. As used above, "market value" shall be equal to the average of the closing prices of Bancshares Stock on the Nasdaq National Market for the 30 consecutive trading days immediately preceding the Special Meeting.
Background of and Reasons for the Merger.
Since its organization in 1982, Triad has operated as a community-oriented commercial bank serving the Piedmont Triad region of North Carolina. The community-oriented banking philosophy of Triad generally has allowed it to compete effectively and profitably with the other banking institutions in its local market. During the last ten years, however, competition has dramatically increased with other types of financial institutions offering services traditionally offered only by banks. This increased competition has created an increase in public demand for a broader range of consumer services from community banking institutions. Providing such services and products to customers requires significant amounts of technology, in terms of both equipment and software. Additionally, since 1991 the federal banking agencies have imposed many additional regulations on banks. The increased regulatory oversight has burdened Triad due to its small size relative to many of its competitors.
The increase in competition has been accelerated in the last few years through the consolidation in the banking industry in North Carolina whereby many smaller financial institutions have been acquired by larger state-wide or regional banks. Given the rapid increase in technology and the greater size of many of Triad's competitors, Triad would have to expend significant amounts of capital to invest in the equipment and software necessary to remain competitive.
Given Triad's attractive franchise in Greensboro, Winston-Salem and Asheboro, UCB became interested in acquiring Triad to expand its operations into the Piedmont Triad region of North Carolina. During July 1995, UCB approached Triad to indicate that, if Triad chose to consider being acquired, UCB would be interested in discussing a possible combination transaction. In mid-August 1995, Triad's Chairman indicated to UCB that Triad's Board of Directors would be willing to discuss a possible combination with UCB. In mid-September 1995, UCB informally proposed the terms of an acquisition of Triad. On September 25, 1995, Triad's Board of Directors agreed to begin merger negotiations with UCB.
Triad recognized that remaining an independent institution may not best serve the long-term interests of Triad and its shareholders. In recent years, Greensboro, Winston-Salem and Asheboro have lost several large community financial institutions which were acquired by state-wide banks. Additionally, the increased competition to provide cost-effective services and products is a challenge to Triad which has fewer resources than many of its competitors in its market area. Further, Triad Stock is lightly traded, and, therefore, Triad's shareholders have limited ability to sell their Triad Stock.
To assist in its decision, Triad engaged Carson Medlin and sought the advice of special legal counsel. The Board of Directors believed that UCB's proposal was an attractive offer and that Triad could not create greater shareholder value from independent operations in the foreseeable future. Carson Medlin gave the Board of Directors its oral opinion that the UCB proposal was fair, from a financial viewpoint, to Triad's shareholders. The Board of Directors of Triad also believed that the Merger would give shareholders of Triad the opportunity for growth in a widely traded stock and ownership in a company with a good history of earnings and cash dividends. Further, the Board of Directors considered it important to recognize the contribution of its employees to the profitability of Triad. As the acquisition would be a new market for UCB, the Merger would offer the best alternative to maintaining Triad's existing branch and employee structure rather than an acquisition by a bank with existing branches and personnel in Triad's market area.
On October 13, 1995, the Chairman, President and Executive Vice President of UCB and Bancshares met with Triad's Board of Directors and formally proposed the terms of the Merger. Considering all of the factors discussed above, the Board of Directors of Triad determined it to be in the best interests of Triad and its shareholders to agree to be acquired by UCB. On October 17, 1995, Triad's Board of Directors approved the Agreement which, in turn, was approved by UCB's and Bancshares' Boards of Directors on October 19, 1995.
TRIAD'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TRIAD'S SHAREHOLDERS VOTE TO APPROVE THE AGREEMENT. Triad's Board of Directors has adopted the Agreement and believes the Merger is in the best interests of Triad and its shareholders and unanimously recommends that Triad's shareholders vote FOR approval of the Agreement. The Board of Directors considered a variety of factors in approving the Agreement, including without limitation (i) the amount and nature of the consideration to be received by Triad's shareholders, (ii) the greater liquidity in and potential for increases in the value of Bancshares Stock as compared to Triad Stock, (iii) Bancshares' cash dividend and earnings record, (iv) the treatment of Triad's officers and employees, (v) the more efficient and profitable operation of Triad through economies of scale, and (vi) the ability to offer expanded services to Triad's customers.
Engagement of Financial Advisor. The Board of Directors of Triad retained Carson Medlin to act as its financial advisor in connection with the Merger. Triad selected Carson Medlin as its financial advisor on the basis of Carson Medlin's historical relationship with Triad as well as such firm's experience and expertise in transactions similar to the Merger. Carson Medlin is a National Association of Securities Dealers, Inc. member investment banking firm which specializes in the securities of United States financial institutions. As part of its investment banking activities, Carson Medlin is regularly engaged in the valuation of United States financial institutions and transactions relating to their securities. Except as described herein, Carson Medlin is not affiliated in any way with Triad, Bancshares or their respective affiliates.
As part of its engagement, representatives of Carson Medlin attended the meeting of Triad's Board held on October 17, 1995, at which meeting the terms of the proposed Merger were discussed and considered. At that meeting Carson Medlin rendered its oral opinion that, as of that date, the consideration to be received by the shareholders of Triad Stock pursuant to the Merger consisting of 0.569444 shares of Bancshares Stock for each share of Triad Stock is fair, from a financial point of view, to the shareholders of Triad. Carson Medlin delivered its written opinion dated November 28,1995 to the Board of Directors of Triad on November 28, 1995, stating that the aggregate consideration to be received by the shareholders of Triad for their Triad Stock is fair, from a financial point of view. Carson Medlin subsequently confirmed such opinion in writing as of the date of this Prospectus/Proxy Statement. The opinion delivered orally on October 17, 1995, the written opinion dated November 28, 1995 and the updated written opinion dated the date of this Prospectus/Proxy Statement are collectively referred to hereafter as the "Opinion".
The full text of Carson Medlin's written opinion dated the date of this Prospectus/Proxy Statement is attached as Appendix C to this Prospectus/Proxy Statement and should be read in its entirety with respect to the assumptions made, matters considered and qualification and limitations on the review undertaken by Carson Medlin in connection therewith. The Carson Medlin Opinion is substantially identical to the written opinion delivered to the Triad Board dated November 28, 1995. Carson Medlin's Opinion does not constitute a recommendation to any Triad shareholder as to how such shareholder should vote at the Special Meeting or as to any other matter. The summary of the Opinion of Carson Medlin set forth in this Prospectus/Proxy Statement is qualified in its entirety by reference to the full text of such Opinion attached as Appendix C.
Carson Medlin has relied upon, without independent verification, the accuracy and completeness of the information reviewed by it for purposes of its Opinion. Carson Medlin did not undertake any independent evaluation or appraisal of the assets and liabilities of Triad, nor was it furnished with any such appraisals. Carson Medlin assumed that the financial forecasts reviewed by it have been reasonably prepared on a basis reflecting the best currently available judgments and estimates of the management of Triad, and that such projections will be realized in the amounts and at the times contemplated thereby. Carson Medlin is not expert in the evaluation of loan portfolios, under-performing or non-performing assets, net charge-offs or the adequacy of allowances for losses with respect thereto, has not reviewed any individual credit files, and has assumed that such allowances for each of Triad and Bancshares are in the aggregate adequate to cover such losses. Carson Medlin assumed that the Merger will be recorded as a pooling-of-interests under generally accepted accounting principles. Carson Medlin's Opinion is necessarily based on economic, market and other conditions as in effect on the date of its analysis, and on information as of various earlier dates made available to it.
Certain financial forecasts furnished to Carson Medlin and used by it in certain of its analyses were prepared by the management of Triad. Neither Triad nor Bancshares publicly discloses their management's internal financial projections of the type provided to Carson Medlin in conjunction with its review of the Merger. Such projections were not prepared for, or with a view toward, public disclosure.
In connection with rendering its Opinion, Carson Medlin performed a variety of financial analyses. The preparation of a financial fairness opinion of this nature involves various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances, and, therefore, is not readily susceptible to partial analysis or summary description. Carson Medlin believes that its analyses must be considered together as a whole and that selecting portions of such analyses and the facts considered therein, without considering all other factors and analyses, could create an incomplete view of the analyses and the process underlying Carson Medlin's Opinion. In its analyses, Carson Medlin made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of Triad and Bancshares and which may not be realized. Any estimates contained in Carson Medlin's analyses are not necessarily predictive of future results or values, which may be significantly more or less favorable than such estimates. Estimates of values of companies such as Triad and Bancshares do not purport to be appraisals or necessarily reflect the prices at which such companies or their securities may actually be sold. None of the analyses performed by Carson Medlin were assigned a greater significance by Carson Medlin than any other.
In connection with rendering its Opinion, Carson Medlin reviewed (i) the Merger Agreement ; (ii) the Annual Reports to shareholders of Triad and Bancshares, including the audited financial statements, for the five years ended December 31, 1994 ; (iii) Bank Call Reports for Triad for the five years ended December 31, 1994 and the nine month period ended September 30, 1995; (iv) certain interim financial statements of Bancshares including the Quarterly Report to shareholders for the nine month period ended September 30, 1995; (v) certain financial and operating information with respect to the business, operations and prospects of Triad and Bancshares; and (vi) this Prospectus/Proxy Statement.
Carson Medlin also (a) held discussions with members of the senior management of Triad and Bancshares regarding the historical and current business operations, financial condition and future prospects of their respective companies; (b) reviewed the historical market prices and trading activity for the common stocks of Triad and Bancshares and compared them with those of certain publicly traded companies which it deemed to be relevant; (c) compared the results of operations of Triad and Bancshares with those of certain banking companies which it deemed to be relevant; (d) compared the proposed financial terms of the Merger with the financial terms, to the extent publicly available, of certain other recent business combinations of commercial banking organizations; (e) analyzed the pro forma financial impact of the Merger on Bancshares; and (f) conducted such other studies, analyses, inquiries and examinations as Carson Medlin deemed appropriate.
The following is a summary of selected analyses performed by Carson Medlin in connection with its Opinion.
Transaction Summary. Carson Medlin noted that the value of the aggregate consideration to be received by the shareholders and optionholders of Triad pursuant to the Merger valued at September 30, 1995 was approximately $40 million. This value represented 267% of Triad's September 30, 1995 stated book value, 21.7x Triad's annualized nine months September 30, 1995 earnings, a 15.7% premium on Triad's core deposits based on September 30, 1995 stated book value, and 20.1% of Triad's September 30, 1995 total assets. This value represented 233% of Triad's September 30, 1995 book value as adjusted for the pro forma exercise of Triad stock options and the pro forma issuance of shares of Triad Stock pursuant to Triad's Directors Deferred Compensation Plan, 26.5x Triad's annualized earnings for the nine months ended September 30, 1995, excluding the effect of the net operating loss carryforward realized during the period, and a 14.6% premium on Triad's core deposits based on September 30, 1995 book value as adjusted for the pro forma exercise of Triad stock options and the pro forma issuance of Triad Stock pursuant to Triad's Directors Deferred Compensation Plan.
Stock Trading History. Carson Medlin examined the history of the trading prices for Bancshares Stock and the relationship between movements of Bancshares Stock prices and movements in the CRSP Total Return Index for the NASDAQ Stock Market (US) and the CRSP Total Return Index for the NASDAQ Bank Stocks.
This analysis showed that for the five year period ending December 31, 1994, the increase in the market value of Bancshares Stock (including the reinvestment of cash dividends) was 215.8% compared to an increase (including dividend reinvestment) in the CRSP Total Return index for the NASDAQ Stock Market (US) of 176.9% and an increase (including dividend reinvestment) of 198.7% in the CRSP Total Return Index for NASDAQ Bank Stocks. During the five year period the equities market increased its valuation of Bancshares slightly more than that of NASDAQ banks and more than the broader NASDAQ market.
Carson Medlin also compared Bancshares stock price performance to those of four other North Carolina-based publicly-traded mid-size regional bank holding companies, defined as those with assets between $3.4 and $20.7 billion (the "Peer Banks"). The four Peer Banks include: Centura Banks, Inc., CCB Financial Corporation, Southern National Corporation, and First Citizens BancShares, Inc. Carson Medlin considers this North Carolina group of financial institutions comparable to Bancshares as to financial characteristics and stock price performance and trading volume.
During the 12 months ending September 30, 1995, the ratio of stock price to trailing 12 months earnings per share for the Peer Banks was: a low 9.2 x, a high 17.2 x, and a mean of 10.7 x. Bancshares's price to earnings ratio for the same period ranged from a low of 9.8 x to a high of 15.6 x, with a mean of 13.2 x. Bancshares Stock has traded on average at a higher price to earnings ratio than the Peer Banks.
During the 12 months ending September 30, 1995, the stock price as a percentage of book value for Peer Banks was: a low of 101%, a high of 189%, and a mean of 144%. Bancshares price to book ratio for the same period ranged from a low of 131% to a high of 182%, with a mean of 157%. Bancshares Stock has traded on average at a higher price to book value ratio than the Peer Banks.
Carson Medlin also compared the recent trading volume in Bancshares Stock, which trades on the NASDAQ National Market System, with that of the Peer Banks.
During the four quarters ending September 30, 1995, the monthly trading volume as a percentage of the total outstanding shares of the Peer Banks ranged from a low of .20% to a high of 10.00%, with a mean of 1.95%. Bancshares's recent monthly trading volume to outstanding shares ranged from a low of .25% to a high of 2.50% with a mean of 1.16%. Carson Medlin considers Bancshares Stock to be liquid and marketable in comparison with the Peer Banks in particular and other regional bank holding companies in general.
Carson Medlin also considered recent trading prices and volumes of Triad Stock. As Triad Stock has not traded in volumes sufficient to be meaningful, Carson Medlin placed relatively less importance on the market price of Triad Stock than on other indicators of its value.
Industry Comparative Analysis. In connection with rendering its Opinion, Carson Medlin compared selected operating results of Triad to those of 44 publicly-traded community commercial banks in Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia (the "SIBR Banks") as contained in the SOUTHEASTERN INDEPENDENT BANK REVIEW(TM), a proprietary research publication published by Carson Medlin quarterly since 1991. The SIBR Banks range in asset size from approximately $82 million to $1.8 billion and in shareholders' equity from approximately $9 million to $184 million. Approximately 91% are listed on NASDAQ (including Bulletin Board, NASDAQ Small Cap Market, and NASDAQ National Market System) and 9% are not traded on an established market. Carson Medlin considers this group of financial institutions more comparable to Triad than larger, more widely traded regional financial institutions as to financial characteristics. Carson Medlin compared, among other factors, the profitability, capitalization, deposit growth rate, loan to deposit ratio, and asset quality of Triad to these financial institutions. In comparison to the average for the SIBR Banks, Triad has a lower level of shareholders' equity to total assets, is less profitable and has slightly lower asset quality ratios.
Carson Medlin also compared selected operating results of Bancshares to the four Peer Banks. Carson Medlin compared selected balance sheet data, asset quality, capitalization and profitability ratios and stock market statistics, using financial data at or for the nine months ended September 30, 1995 and stock market data as of September 30, 1995. This comparison showed, among other things, that (i) Bancshares's net interest margin was 4.80% compared to a mean of 4.40% for the Peer Banks; (ii) Bancshares's efficiency ratio (defined as noninterest expense divided by the sum of noninterest income and net interest income before provision for loan losses) was .60% compared to a mean of .64% for the Peer Banks; (iii) Bancshares's return on average assets was 1.25% compared to a mean of 0.98% for the Peer Banks; (iv) Bancshares's return on average equity was 16.08% compared to a mean of 12.78% for the Peer Banks; (v) Bancshares's average stockholders' equity to average total assets was 7.78% compared to a mean of 7.58% for the Peer Banks; (vi) Bancshares's nonperforming assets to total assets were .30% compared to a mean of .33% for the Peer Banks; and, (vii) Bancshares's loan loss reserves to nonperforming assets was 365% compared to a mean of 315% for the Peer Banks; and, (viii) Bancshares's market capitalization was $513 million compared to the Peer Banks, which ranged from a high of $2.7 billion to a low of $487 million.
Comparable Transaction Analysis. Carson Medlin reviewed certain information relating to 20 announced or completed bank mergers in markets in the southeastern United States that it deemed to have demographic characteristics similar to that of Triad's. These 20 transactions were publicly announced between January 1993 and June 1995 and involved acquired banks with total assets between $79 million and $1,030 million (the "SE Comparable Transactions"). The SE Comparable Transactions were (acquiror/acquiree): Regions Financial/Union Bank & Trust , National Commerce/Alabama National, AmSouth Bancorp./First National Bank of Clearwater, AmSouth Bancorp./Orange Banking Corp., AmSouth Bancorp./Citizens National Bank, AmSouth Bancorp./Tampa Banking Company, Huntington Bancshares/Security National Corp., Bank South Corp./Chattahoochee Bancorp., Triangle Bancorp/New East Bancorp, Centura Banks Inc./First Charlotte Financial, United Carolina Bancshares/Bank of Iredell, CCB Financial Corp./Security Capital Corp., Triangle Bancorp/Village Bank, BB&T Financial Corp./LSB Bancshares (SC), NationsBank/ RHNB Corp., Synovus Financial Corp./NBSC Corp., First Virginia Banks/Cleveland Bank & Trust, First Tennessee National Corp./Community Bancshares, Bancorp South Inc./Wes-Tenn Bancorp., Mercantile Bankshares Corp./Fredericksburg National Bank. Carson Medlin considered, among other factors, the earnings, capital level, asset size and quality of assets of the acquired financial institutions. Carson Medlin compared the transaction prices to trailing four quarters earnings, stated book value, and total assets.
For the SE Comparable Transactions, Carson Medlin calculated a range of purchase prices as a percentage of book value from a low of 107.9% to a high of 287.4%, with a mean of 213.0%. The aggregate consideration to be received by Triad's shareholders and optionholders implied by the terms of the Agreement is approximately $40 million. This is 267% of Triad's stated book value and 233% of Triad's book value as adjusted for the pro forma exercise of Triad stock options and the pro forma issuance of shares of Triad Stock pursuant to Triad's Directors Deferred Compensation Plan. Both measures are above the average for the SE Comparable Transactions.
Carson Medlin calculated a range of purchase prices as a multiple of earnings for the SE Comparable Transactions from a low of 11.2 x to a high of 32.0 x, with a mean of 18.6 x. The aggregate consideration implied by the terms of the Agreement gives a price to earnings multiple of 21.7 x Triad's annualized nine months September 30, 1995 earnings and 26.5 x Triad's annualized nine months earnings adjusted for the effect of the net operating loss carryforward applied in the year. Both measures are above the average for the SE Comparable Transactions.
Finally, Carson Medlin calculated a range of purchase prices as a percentage of total assets for the SE Comparable Transactions from a low of 12.3% to a high of 26.2%, with a mean of 18.4%. Based on Triad's September 30, 1995 total assets of $199.2 million, the purchase price implied by the terms of the Agreement is approximately 20.1% of Triad's total assets, above the average for the SE Comparable Transactions.
No company or transaction used in the preceding Industry Comparative or Comparable Transaction Analyses as a comparison is identical to Triad or the contemplated transaction. Accordingly, an analysis of the results of these analyses necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of Triad and other factors that could affect the value of the companies to which it is being compared. Mathematical analysis (such as determining the average or median) is not, in itself, a meaningful method of using comparable industry or transaction data.
Review of Research on Bancshares. Carson Medlin reviewed certain research reports concerning Bancshares published in 1995. The investment firms originating these reports included Wheat First Butcher Singer, The Robinson-Humphrey Company, The Chicago Corp., Keefe Bruyette & Woods, J.C. Bradford, Interstate/Johnson Lane, Davenport & Co., and Alex. Brown & Sons. Information considered in these reports by Carson Medlin included, but was not authors' qualitative assessments of Bancshares as well as estimates of Bancshares's future profitability. Carson Medlin concluded that these research reports, considered collectively, were positive regarding Bancshares's operations and future prospects.
Present Value Analysis. Carson Medlin calculated the present value of Triad Stock on the basis of Triad remaining an independent bank and assuming Triad management's estimate of future earnings, dividends and asset growth rates. The analysis considered two growth scenarios, discount rates of 14% through 16% chosen to reflect different assumptions regarding the required rates of return of holders or prospective buyer's of Triad Stock, and an "exit point" of 5 years at 200% of book value. On the basis of these various assumptions, Carson Medlin calculated a present value of Triad Stock on a stand-alone basis ranging from $17 million to $33 million. As of September 30, 1995, the terms of the Agreement imply aggregate consideration to be received by Triad shareholders and optionholders of approximately $40 million.
Contribution Analysis. According to the terms of the Agreement, Triad shareholders will receive approximately 1,035,609 shares of Bancshares Stock (based on Triad's September 30, 1995 outstanding shares of 1,818,623). At September 30, 1995, there were 14,768,740 shares of Bancshares common stock outstanding. Accordingly, on a pro forma basis, as of September 30, 1995, Triad shareholders would hold approximately 6.55% of the outstanding shares of Bancshares subsequent to the Merger.
Carson Medlin analyzed the contribution of each of Triad and Bancshares to the assets, liabilities and earnings of the pro forma combined company as of September 30, 1995. For the nine months ended September 30, 1995, Triad would have contributed 3.99% of net income. At September 30, 1995, Triad would have contributed 4.89% of earning assets, 5.01% of total assets, 5.07% of total deposits, and 4.87% of stockholders equity. Carson Medlin concluded that Triad's percentage contribution of financial factors to the combined company is less than the percentage ownership of Bancshares for Triad shareholders resulting from the Merger.
Shareholder Claims Analysis. Carson Medlin compared the ownership of one share of Triad Stock to the ownership of .569444 shares of Bancshares Stock from the perspective of claims on various balance sheet and income statement variables. In making these comparisons, Carson Medlin found that Triad shareholders would have a claim to more in the way of stockholders' equity, earnings, dividends, total assets, and expected market value. In view of the higher expected value of .569444 shares of Bancshares Stock as compared to one share of Triad Stock at the date of the analysis, Carson Medlin concluded that .569444 shares of Bancshares Stock is likely to have a higher value than one share of Triad Stock at the date of consummation of the Merger.
The opinions expressed by Carson Medlin are based upon market, economic and other relevant considerations as they existed and have been evaluated as of the date of the opinions. Events occurring after the date of issuance of the opinions, including but not limited to, changes affecting the securities markets, the results of operations or material changes in the assets or liabilities of Triad or Bancshares could materially affect the assumptions used in preparing the opinion.
The Opinion was based upon market, economic and other relevant considerations as they existed and have been evaluated as of the date thereof. Events occurring after the date of issuance of the Opinion, including but not limited to, changes affecting the securities markets, the results of operations or material changes in the assets or liabilities of Triad or Bancshares could materially affect the assumptions used in preparing the Opinion.
Fees. For its services, Triad has paid Carson Medlin a $15,000 fee for services rendered to date and has agreed to pay Carson Medlin an additional fee of $20,000 if the Merger is consummated. Triad also has agreed to reimburse Carson Medlin for its out-of-pocket expenses incurred in connection with activities contemplated by its engagement and to indemnify Carson Medlin against certain liabilities that may arise in connection with its engagement.
The Agreement must be approved by Triad's shareholders before the Merger may be consummated. Under North Carolina law, the affirmative vote at the Special Meeting of the holders of at least two-thirds of the total outstanding shares of Triad Stock is required to approve the Agreement.
The Merger is subject to approval by the Commissioner, the Banking Commission and the FDIC.
The Agreement provides that UCB's obligation to consummate the Merger is conditioned on receipt of all requisite regulatory approvals upon terms and conditions that are not reasonably considered by Bancshares or UCB to be materially disadvantageous or burdensome or to impact so adversely the economic or business benefits of the Agreement to Bancshares and UCB as to render it inadvisable for them to consummate the Merger. Applications for all required regulatory approvals have been filed and currently are pending. Although no assurances are or can be given that such approvals will be obtained, Bancshares and Triad have no reason to believe that any such regulatory approval will not be obtained.
After final FDIC approval is received, a 15 to 30-day waiting period is required prior to consummation of the Merger to allow the United States Department of Justice to review the transaction for antitrust considerations.
Conduct of Business Pending the Merger
The Agreement provides that, during the period from the date of the Agreement to the Effective Time, except as provided in the Agreement, Triad will conduct its business in the regular and usual course in substantially the same manner as such business previously has been conducted and, to the extent consistent with such business and within its ability to do so, Triad will, among other things, preserve intact its business organization, retain the services of its officers and employees and preserve its business relationships. The Agreement also provides that, prior to the Effective Time, and except in the ordinary course of business or as otherwise permitted by the Agreement or as required by applicable law or regulation, Triad will not, among other prohibited actions, (i) incur indebtedness for borrowed money, (ii) sell, transfer, mortgage, pledge or otherwise dispose of any of its properties or assets, or acquire any significant assets, (iii) increase the compensation or benefits of any of its employees, (iv) settle any claim, action or proceeding against it involving monetary damages, (v) make any change in its capital stock, or issue, sell, purchase, redeem or retire shares of such stock, (vi) amend its charter or bylaws, (vii) grant or issue any additional stock options, (viii) enter into any new employment agreements or adopt any new employee benefit plans, (ix) change its accounting practices, (x) acquire or open any new branch offices, or (xi) enter into any contract other than in the ordinary course of its business.
The Agreement provides that Triad will not declare or pay any dividends or make any other distributions on its capital stock. However, if the Merger is not consummated prior to July 31, 1996 (and provided the Agreement is extended) then in the event Bancshares declares and pays a quarterly dividend between August 1, 1996 and the Effective Time the Exchange Rate will be increased on a pro rata basis by any cash dividend declared and paid by Bancshares.
The Agreement provides that Triad will not, directly or indirectly, encourage, solicit or attempt to initiate or procure discussions, negotiations or offers with or from any person or entity other than Bancshares or UCB relating to a merger or other acquisition of Triad or the purchase or acquisition of any Triad Stock or any significant part of Triad's assets, or provide assistance to any person in connection with any such offer. Further, Triad will not disclose to any person or entity any information not customarily disclosed to the public concerning Triad or its business.
The Agreement requires that the Merger be treated as a "pooling-of-interests" for accounting purposes. Accordingly, at the Effective Time and under generally accepted accounting principles, the consolidated assets and liabilities of Triad will be reported on the books of Bancshares at their respective book values and Bancshares' consolidated financial statements for periods prior to the Effective Time will be restated to reflect Triad's consolidated assets, liabilities and operations for such periods.
Among other requirements, in order for the Merger to qualify for pooling-of-interests accounting treatment, substantially all (at least 90%) of the outstanding shares of Triad Stock must be exchanged for Bancshares Stock. Generally, if the number of fractional shares of Bancshares Stock resulting from the Merger for which cash is paid, shares repurchased by Triad or by Bancshares, and shares of holders of Triad Stock who exercise their Dissenter's Rights, and the like together represent more than 10% of the shares to be issued by Bancshares in connection with the Merger, then the Merger will not qualify for the pooling-of-interests method of accounting. Bancshares' and UCB's obligations to consummate the Merger are conditioned on receipt by Bancshares of assurances from its independent accountants, KPMG Peat Marwick LLP, in form and content satisfactory to Bancshares, to the effect that the Merger will qualify to be treated as a pooling-of-interests for accounting purposes. If such assurances cannot be obtained or if any event has occurred or any condition or circumstance exists that makes it likely that the Merger does not qualify for pooling-of-interests accounting treatment, then Bancshares and UCB would be entitled to terminate the Agreement and abandon the Merger. (See " - Conditions to Merger.")
The following is a summary discussion of the material federal income tax consequences of the Merger to Triad's shareholders. The summary is based on the law as currently constituted and is subject to change in the event of changes in the law, including amendments to applicable statutes or regulations or changes in judicial or administrative rulings, some of which could be given retroactive effect.
THIS SUMMARY IS NOT A COMPLETE DESCRIPTION OF ALL TAX CONSEQUENCES OF THE MERGER. The summary does not address any foreign, state or local tax consequences, except for certain North Carolina income tax consequences, nor does it address all aspects of federal income taxation that may apply to the Merger. Also, the Tax Opinion does not address income tax considerations that may affect the treatment of a participant in a Triad stock option plan or a Triad shareholder who acquired Triad Stock pursuant to such a plan. Each Triad shareholder's individual circumstances may affect the tax consequences of the Merger to such shareholder. Therefore, Triad's shareholders are urged to consult their own tax advisors as to the specific tax consequences to them of the Merger and the exchange of their Triad Stock for shares of Bancshares Stock (including, without limitation, tax return reporting requirements, the application and effect of federal, foreign, state and local and other tax laws, and the implications of any proposed changes in the tax laws).
Bancshares and Triad have received an opinion of KPMG Peat Marwick LLP (the "Tax Opinion"), tax advisors to Bancshares and Triad, which reaches certain conclusions with respect to certain federal and North Carolina income tax consequences of the Merger. Where appropriate or useful, this discussion will refer to the Tax Opinion and particular conclusions expressed therein. Additionally, the facts upon which the Tax Opinion is based are set forth in such Tax Opinion which is an exhibit to Bancshares' Registration Statement. (See "AVAILABLE INFORMATION.") However, the Tax Opinion represents only that advisor's best judgment as to the matters expressed therein and has no binding effect on the Internal Revenue Service (the "IRS") or any official status of any kind. There is no assurance that the IRS could not successfully contest in the courts an opinion expressed by the advisor as set forth in the Tax Opinion or that legislative, administrative or judicial decisions or interpretations may not be forthcoming that would significantly change the opinions set forth in the Tax Opinion. The IRS will not currently issue private letter rulings concerning a transaction's qualification under certain types of reorganizations or certain federal income tax consequences resulting from such qualification. Accordingly, no private letter ruling has been, nor is it anticipated that such a ruling will be, requested from the IRS with respect to the Merger.
The Tax Opinion concludes that:
(i) The Merger will constitute a tax-free reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the
(ii) No gain or loss will be recognized by Bancshares, UCB or Triad by reason of the Merger;
(iii) No gain or loss will be recognized by Triad's shareholders upon their receipt of Bancshares Stock (including any fractional share interests to which they may be entitled) solely in exchange for their holdings of Triad Stock;
(iv) The tax basis in the Bancshares Stock received by a Triad shareholder (including any fractional share interests to which they may be entitled) will be the same as the tax basis in the Triad Stock
(v) The holding period for Bancshares Stock received by a Triad shareholder (including any fractional share interests to which they may be entitled) in exchange for Triad Stock will include the period during which the shareholder held the Triad Stock surrendered in the exchange, provided that the Triad Stock was held as a capital asset
(vi) The receipt of cash in lieu of a fractional share of Bancshares Stock will be treated as if the fractional share of Bancshares Stock was distributed as part of the exchange to the Triad shareholder and then redeemed by Bancshares, resulting in capital gain or loss measured by the difference, if any, between the amount of cash received for such fractional share and the shareholder's basis in the
(vii) Cash received by a Triad shareholder who exercises his or her Dissenter's Rights will be treated as having been received by the shareholder as a distribution in redemption of his or her stock. If the redemption meets one of the four tests set forth in Section 302 of the Code, it will result in capital gain or loss measured by the difference, if any, between the amount of cash received and the shareholder's basis in the stock. If the redemption does not meet one of the four tests of Section 302, such distribution will be treated as a dividend pursuant to Section 301.
The Tax Opinion also concludes that the Merger will be treated in substantially the same manner for North Carolina income tax purposes as for federal income tax purposes.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS IN ORDER TO MAKE AN INDIVIDUAL EVALUATION OF THE FEDERAL, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER.
Consummation of the Merger is subject to various conditions described in the Agreement, including without limitation: (i) approval of the Agreement by Triad's shareholders; (ii) receipt of all required regulatory approvals without the imposition by any regulatory agency of a condition to any such approval that is considered by Bancshares or UCB to be materially disadvantageous or burdensome or to impact the economic or business benefits of the Merger so adversely that it would not be advisable to consummate it; (iii) receipt of the Tax Opinion; (iv) receipt of the Fairness Opinion and confirmation of the Fairness Opinion immediately prior to the Effective Time; (v) satisfaction of all requirements for the shares of Bancshares Stock to be issued in connection with the Merger to be listed on the Nasdaq National Market as of the Effective Time; and (vi) execution of employment agreements with certain officers of Triad as of the Effective Time.
Bancshares' and Triad's separate obligations under the Agreement are subject to various other conditions described in the Agreement, including without limitation: (i) the absence of a material adverse change in the financial condition, results of operations or business of the other party; (ii) compliance by the other party with all laws and regulations applicable to the transactions described in the Agreement; (iii) the absence of any violation or breach by the other party of any of its obligations, covenants, agreements, representations or warranties under the Agreement; and (iv) the receipt of certain certificates and opinions of the other party's senior officers and legal counsel.
Additionally, Bancshares' obligations are subject to certain additional conditions, including without limitation: (i) receipt of a written agreement as to certain matters from persons who are considered "Affiliates" of Triad (see " - Restrictions on Resale of Bancshares Stock Received by Certain Persons"); (ii) receipt by Bancshares of certain assurances satisfactory to it to the effect that the Merger may be treated as a "pooling-of-interests" for accounting purposes; and (iii) that the aggregate of certain of Triad's expenses associated with the Merger not exceed $175,000.
Prior to the Effective Time, any provision of the Agreement (other than provisions relating to regulatory approvals, shareholder approval and other approvals required by law) may be waived by the party entitled to the benefits of such provision. Additionally, the Agreement may be amended, modified or supplemented by Bancshares, UCB and Triad at any time prior to the Effective Time, and whether before or after approval by Triad's shareholders, by an agreement in writing approved by a majority of the members of their respective Boards of Directors. However, except as otherwise provided in the Agreement, following approval of the Agreement by Triad's shareholders, no such amendment may change the Exchange Rate without shareholder approval of such change.
The Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time, whether before or after approval by Triad's shareholders, upon the mutual agreement of Bancshares, UCB and Triad, and may be terminated by either Bancshares or Triad if, among other things: (i) the other party shall have violated or failed to perform fully any of its obligations, covenants or agreements in any material respect; (ii) any of the other party's representations or warranties shall have been false or misleading in any material respect when made, or if there has occurred any event or development or there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading; (iii) Triad's shareholders fail to ratify and approve the Agreement, or the Special Meeting is not held, on or before April 30, 1996; (iv) any condition to the obligations of the terminating party is not satisfied or effectively waived, or the Merger has not become effective, by July 31, 1996 (or such later date as shall be mutually agreeable to Bancshares, UCB and Triad).
Additionally, Bancshares and UCB may terminate the Agreement if, based on the advice of their legal counsel or consultants, they believe Triad, or UCB as the successor to Triad, could incur or become responsible or liable at any time or over a period of time or over a period of time in an amount equal to or greater than $350,000 for expenses or monetary damages on account of any and all remediation, corrective action or damages relating to any discharge, disposal, release or emission by any person of any "hazardous substance" (as defined in the Agreement) on, from or relating to any real property belonging to Triad or serving as collateral for any of Triad's loans, or relating to any condition or event with respect to any such real property which constitutes a violation of any "environmental laws" (as defined in the Agreement).
Further, Bancshares or UCB may terminate the Agreement if the 30-Day Average is greater than $43.20 unless Bancshares or UCB has become a party to an agreement in principle or a binding agreement that contemplates a merger of Bancshares or UCB into or with any other entity (other than with the other or with any affiliated corporation) and in which Bancshares or UCB will not be the surviving corporation, or a sale of substantially all of Bancshares' or UCB's assets to any other such entity, in which event Bancshares shall not be able to terminate the Agreement on account of the 30-Day Average exceeding $43.20.
Lastly, Triad may terminate the Agreement if the 30-Day Average is less than $28.80.
In the event of the termination and abandonment of the Merger pursuant to the termination provisions thereof, the Agreement will become void and have no effect, except that certain provisions of the Agreement relating to expenses, indemnification and confidentiality of information obtained pursuant to the Agreement or in connection with the negotiation thereof will survive any such termination and abandonment.
Closing Date and Effective Time
Following and subject to the fulfillment of all conditions described in the Agreement, the closing of the Merger will be held on a date specified by Bancshares (the "Closing Date") within 30 days after the expiration of required waiting periods following receipt of regulatory approvals. The Effective Time of the Merger will be the date and time specified in Articles of Merger filed with the North Carolina Secretary of State (or, if a time is not so specified, then at the time Articles of Merger are so filed). However, in no event may the Effective Time be more than 10 days following the Closing Date. Although there is no assurance as to whether or when the Merger will occur, it currently is expected that the Merger will become effective during the first half of 1996.
Interests of Certain Persons With Respect to the Merger
Certain members of Triad's management and Board of Directors have certain interests in the Merger that are in addition to their interests as shareholders of Triad generally. Triad's Board of Directors was aware of these interests and considered them, among other things, in adopting the Agreement and recommending the transactions contemplated thereby.
Indemnification. Pursuant to the Agreement, from and after the Effective Time UCB will indemnify the present and former officers and directors of Triad against liabilities arising from actions or omissions in their official capacities as officers and directors occurring on or prior to the Effective Time to the extent they would have had a right to indemnification from Triad.
Employment Agreements. In order to assure itself of their assistance and continued services during the transition period following the Effective Time, UCB has agreed to enter into an employment agreement with James E. Mims (who currently serves as a director and as Chairman and Chief Executive Officer of Triad) and with Carl I. Carlson, III (who currently serves as a director and as President of Triad). As currently proposed, Mr. Mims' employment agreement provides for a term ending on December 31, 1998 during which time Mr. Mims will be paid a base salary at an annual rate equal to Mr. Mims' base salary with Triad immediately prior to the Effective Time, which amount shall be increased by 5% effective on each anniversary date of the agreement. Additionally, at the end of the term of the agreement, Mr. Mims shall retire and, upon retirement, UCB shall pay Mr. Mims $5,000 per month for 60 months (or until his death, whichever occurs sooner) as retirement benefits. Mr. Mims' agreement contains a covenant generally prohibiting Mr. Mims from competing against UCB within Triad's former banking market for a period of time following termination of his employment with UCB. The employment agreement for Mr. Carlson is for a term of six months. Under the agreement, Mr. Carlson will be paid an aggregate of $200,000 in monthly installments, which reflects the cash payment which he was due under his current employment agreement with Triad as a result of the acquisition of Triad by Bancshares and the termination of employment in his current position. Additionally, for the term of the agreement, Mr. Carlson will be paid $7,500 per month and UCB will assume Triad's obligations under two life insurance policies maintained by Triad on the life of Mr. Carlson. After the expiration of the agreement, Mr. Carlson will join UCB as a regional trust officer. The employment agreements with Mr. Mims and Mr. Carlson will supersede employment agreements currently in effect between Triad and Mr. Mims and Mr. Carlson.
The Agreement provides that UCB will assume Triad's obligations under a split dollar life insurance policy for James E. Mims maintained by Triad. Also, subject to certain conditions, Triad shall transfer to Mr. Mims and Mr. Carlson at the Effective Time the title to the automobiles owned by Triad on the date of the Agreement and being used by Mr. Mims and Mr. Carlson, respectively.
Triad Stock Options. There currently are outstanding Triad Options to purchase up to an aggregate of 148,243 shares of Triad Stock which are held by certain Triad employees and directors under Triad's Employee Stock Option Plan and its Stock Options Policy for Non-Employee Directors. At the Effective Time, each Triad Option previously granted by Triad which was outstanding on the date of the Agreement automatically will be converted into an option to purchase a number of shares of Bancshares Stock equal to the number of shares of Triad Stock covered by the option at the Effective Time multiplied by the Exchange Rate (rounded to the nearest whole share). The purchase or exercise price of each share of Bancshares Stock under each such option shall be equal to the per share purchase or exercise price of the Triad Stock previously covered by such option divided by the Exchange Rate (and rounded to the nearest cent). Bancshares' obligations with respect to each such converted Triad Option shall be in accordance with the terms of the applicable Triad option plan and the related option agreement under which such Triad Option originally was granted. From and after the Effective Time, each Triad Option so converted may be exercised solely for a number of shares of Bancshares Stock and for a purchase price calculated as described above. Under the Agreement, no further options to acquire Triad Stock may be granted by Triad except for options to be granted on approximately 5,040 shares to directors of Triad under Triad's Stock Options Policy for Non-Employee Directors for their service as directors in fiscal 1995.
Directors Deferred Compensation. There currently are 28,561 shares of Triad Stock issuable to directors of Triad under Triad's Directors Deferred Compensation Plan. An aggregate of approximately 30,000 shares is anticipated to be due the directors immediately before the Effective Time. Immediately before the Effective Time, all shares due will be issued to the directors. At the Effective Time, each share of Triad Stock issued to a director under the plan automatically will be converted into Bancshares Stock at the Exchange Rate.
UCB Board of Directors. Following the Effective Time, Bancshares' Board of Directors will appoint one member of Triad's Board of Directors (who will be selected by mutual agreement of Bancshares and Triad) to serve as a director of UCB until the next meeting of shareholders at which members of UCB's Board of Directors are elected. Thereafter, such person shall be nominated and recommended as a director of UCB for a one-year term at such meeting of UCB's shareholders. Such person's continued service as a director of UCB shall be subject to customary regulatory approvals, his or her qualification to serve as a director under applicable banking regulations and to Bancshares' and UCB's bylaws. For his services as a director of UCB, the person as appointed as described above, provided he remains a director of UCB, shall be compensated until the end of such person's full one-year term as a director of UCB in accordance with UCB's then current fee schedule.
Advisory Board Members. To assure itself of their assistance and continued services during the transition period following the Effective Time, Bancshares and UCB have agreed that, following the Effective Time, and subject to their willingness to serve, each of Triad's directors and advisory board members at the Effective Time (other than directors who also are employees of Triad and the member who becomes a director of UCB) will be appointed to serve as a member of the local advisory board for one of the UCB city offices in Triad's former geographic market. For service as an advisory board member, each Triad director who serves as an advisory board member for UCB for a period of one year following the Effective Time will be paid a retainer of $1,500 and fees equal to $300 per meeting attended and each Triad advisory board member will be paid a retainer of $200 and fees equal to $50 per meeting attended. These fees approximate the fee schedules for directors and advisory board members, respectively, of Triad in 1995. After the first year following the Effective Time, Triad's directors and advisory board members who continue to serve as advisory board members will receive fees in accordance with UCB's standard fee schedule for its local advisory boards.
Other Employees. UCB has agreed that, so long as they remain employed by Triad at the Effective Time, it will attempt in good faith, but shall have no obligation, to locate suitable employment (at an office of UCB located within a reasonable commuting distance from their respective job locations at the Effective Time) for, and to offer employment to, all employees of Triad. Any such employment offered by UCB will be on an "at will" basis and will be in such a position, at such location, and for such compensation as UCB shall determine in its sole discretion. Triad will be permitted to pay severance compensation to any employee of Triad at the Effective Time who is not offered employment by UCB (other than any employee who is party to an employment agreement with Triad). The amount of such compensation paid to any employee shall not exceed the total of (i) two months' salary or normal wages (at the person's then current salary or wage rate as an employee of Triad) plus (ii) one week's salary or wages (at the person's then current salary or wage rate as an employee of Triad) multiplied by a number (which in no event shall be less than three or more than 14) equal to the person's number of complete years of service as an employee of Triad. If an employee of Triad becomes an employee of UCB and such individual's employment is terminated without cause within 90 days following the Effective Time, then such individual will be entitled to receive the severance compensation described above, less any salary paid to such employee between the Effective Time and the date of termination.
In the cases of Richard M. Cobb and James C. Edwards (who currently serve as Senior Vice President/Chief Financial Officer and Senior Vice President/Director of Marketing, respectively, of Triad) in the event either of them is employed by Triad at the Effective Time and either of them is not offered employment by UCB or refuses to accept an offer of employment from UCB, then Triad will be permitted to pay severance compensation to such employee in an amount equal to the total of 12 months' salary (at the person's then current salary rate as an employee of Triad). In the event either Mr. Cobb or Mr. Edwards becomes an employee of UCB, UCB agrees that, if such employee voluntarily elects to terminate employment with UCB at any time within 12 months following the Effective Time, then UCB will pay to such terminated employee severance compensation in an amount equal to the amount of severance compensation such person would have received from Triad as provided above as if he had not accepted employment with UCB, less any salary or wages paid to such employee by UCB between the Effective Time and the date of such employee's termination; and provided further that in the event Mr. Cobb or Mr. Edwards becomes an employee of UCB, UCB agrees that, if such employee's employment is terminated by UCB within 12 months following the Effective Time without cause, then UCB will pay to such terminated employee severance compensation in an amount equal to the amount of severance compensation such person would have received from Triad as provided above.
In addition, in the case of certain employees of Triad who will not be offered employment with UCB following the Effective Time or who will be offered employment with UCB but at salary or wage rates that are lower than their rates as employees at Triad, UCB may specifically request in writing that such employees remain employed by Triad until the Effective Time and, in the case of each such employee who does remain so employed until the Effective Time, then (whether or not such person becomes an employee of UCB) UCB will pay to such employee as a bonus an amount equal to 10% of the employee's then current annual salary or wage rate as an employee of Triad. No such bonus shall be payable to any employee unless UCB shall have specifically requested in writing that such employee remain until the Effective Time (and which written request shall specifically refer to such bonus). Employees of Triad who receive such a written request but who terminate their employment prior to the Effective Time shall not be entitled to receive such bonus payment.
Employee Benefits. Triad employees who become employees of UCB in connection with the Merger ("New Employees") shall become entitled to receive all employee benefits and to participate in all benefit plans provided by UCB on the same basis (including costs) and subject to the same eligibility and vesting requirements, and to the same conditions, restrictions and limitations, as generally are in effect and applicable to other newly hired employees of UCB. However, subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended, the Code, any governmental rules, regulations and policies thereunder, or any other law or regulations applicable to the operation of any such plan or program, each New Employee shall be given credit for his or her full years of service with Triad (including its predecessor banks, Bankers Trust of North Carolina and Piedmont State Bank) for purposes of (i) entitlement to vacation and sick leave, and (ii) eligibility for participation and vesting in Bancshares' Section 401(k) savings plan and in its defined benefit pension plan; provided however, that if Triad's pension plan is merged into UCB's pension plan each New Employee shall be given credit for past service with Triad (but not for past service with Triad's predecessor banks, Bankers Trust of North Carolina and Piedmont State Bank) for purposes of the calculation and determination of benefits under UCB's pension plan.
Restrictions on Resale of Bancshares Stock Received by Certain Persons
Certain restrictions under the 1933 Act will apply to the resale of shares of Bancshares Stock issued to certain persons in connection with the Merger. Any person who was an "Affiliate" of Triad at the time the Agreement is submitted to a vote of Triad's shareholders may not resell or transfer shares of Bancshares Stock received by him during a period of three years following the Effective Time unless (i) such person's offer and resale of those shares has been registered under the 1933 Act, (ii) such person's offer and resale is made in compliance with Rule 145 promulgated under the 1933 Act (which permits limited sales under certain circumstances), or (iii) another exemption from registration is available. Additionally, as a condition of treating the Merger as a pooling-of-interests for accounting purposes, Triad's Affiliates will be prohibited from selling or transferring any shares of Bancshares Stock until Bancshares shall have published results of its combined operations for a period covering at least 30 days following the Effective Time.
An Affiliate of Triad, as defined by rules promulgated under the 1933 Act, is a person who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with Triad. The above restrictions are expected to apply to the directors and executive officers of Triad (and to any relative or spouse of any such person or any relative of any such spouse, any of whom live in the same home as such person, and any trust, estate, corporation or other entity in which such person has a 10% or greater beneficial or equity interest), and may apply to any current shareholder of Triad that owns an amount of stock sufficient to be considered to "control" Triad or that otherwise is an Affiliate of Triad. Stock transfer instructions will be given by Bancshares to its stock transfer agent with respect to the Bancshares Stock to be received by persons deemed by Bancshares to be subject to these restrictions, and the certificates for such stock may be appropriately legended.
The Agreement provides that Triad will use its best efforts to cause each person considered by Bancshares to be an Affiliate of Triad to deliver to Bancshares a written agreement (an "Affiliate Agreement") providing that such person will not offer, sell, pledge, transfer or otherwise dispose of any shares of Bancshares Stock except in compliance with the restrictions described above. Bancshares' obligation to consummate the Merger is conditioned on its receipt of the Affiliate Agreements.
Persons who are or may be Affiliates of Triad should consult with their own legal counsel regarding the application of the above restrictions to their Bancshares Stock.
The Agreement provides that Triad, Bancshares and UCB each will pay its own legal, accounting and financial advisory fees and all its other costs and expenses (including filing fees, printing costs and travel expenses) incurred or to be incurred in connection with the performance of its obligations under the Agreement or otherwise in connection with the Merger. Except under certain circumstances involving a wrongful termination or breach of the Agreement, the cost of soliciting proxies will be deemed to be incurred and shall be paid 50% by Triad and 50% by Bancshares. However, in the event the Agreement is terminated following a breach or violation of the Agreement by Bancshares or UCB, then Bancshares or UCB will be obligated to reimburse Triad for up to $175,000 in the above costs and expenses actually incurred by Triad. In the event the Agreement in terminated following a breach or violation of the Agreement by Triad, then Triad will be obligated to reimburse Bancshares and UCB for up to $100,000 in the above costs and expenses actually incurred by Bancshares and UCB.
If the Agreement is terminated because Bancshares or UCB has entered prior to the date of the Agreement, or terminates this Agreement in anticipation of entering, into a letter of intent or an agreement with any individual or entity that provides for such individual or entity to acquire Bancshares or UCB, merge with Bancshares or UCB where Bancshares or UCB is not the surviving entity, or purchase all or substantially all of the assets of Bancshares or UCB or prior to termination of the Agreement, or Bancshares or UCB engages in negotiations relating to any such transaction and a letter of intent or agreement with respect thereto is entered into within 12 months following the termination of the Agreement, or Bancshares or UCB engages in an acquisition and the result of engaging in such acquisition is that any of the conditions set forth in the Agreement shall fail to be satisfied on or before July 31, 1996 or the Effective Time shall otherwise not occur on or before July 31, 1996, then Bancshares and UCB shall pay to Triad a termination fee of $500,000 and reimburse Triad its expenses incurred as a result of the Agreement. If the Agreement is terminated because Triad has entered prior to the date of the Agreement, or terminates the Agreement in anticipation of entering, into a letter of intent or an agreement with any individual or entity that provides for such individual or entity to acquire Triad, merge with or into Triad, or purchase all or substantially all of the assets of Triad, or prior to the termination of this Agreement, Triad engages in negotiations relating to any such transaction and a letter of intent or agreement with respect thereto is entered into within 12 months following the termination of the Agreement, then Triad shall pay to Bancshares, or at the election of Bancshares to UCB, a termination fee of $500,000 and reimburse Bancshares and UCB their expenses incurred as a result of the Agreement.
The Merger will give rise to Dissenter's Rights under Article 13 of the North Carolina Business Corporation Act ("Article 13"). Pursuant to Article 13, any Triad shareholder who objects to the Merger may exercise Dissenter's Rights and become entitled to be paid the fair value of such shareholder's shares of Triad Stock if the Merger is consummated. The following is only a summary of the Dissenter's Rights of Triad's shareholders. A complete copy of Article 13 is attached hereto as Appendix B and incorporated by reference into this Prospectus/ Proxy Statement. Any shareholder who intends to exercise Dissenter's Rights should review the text of Article 13 carefully and comply exactly with its requirements, and also should consult with his attorney. Except as provided below, no further notices will be given to shareholders by Triad regarding the existence of Dissenter's Rights or any time periods within which those rights must be exercised.
Article 13 provides for a shareholder's Dissenter's Rights and the detailed procedure for exercising those rights that must be followed by a dissenting shareholder. In summary, that procedure is described below.
Any shareholder who desires to assert Dissenter's Rights must (i) give to Triad, and Triad must actually receive, before the vote on the Merger is taken, written notice of the shareholder's intent to demand payment for his shares if the Merger is consummated, and (ii) not vote his shares in favor of the Merger. Failure by a shareholder to satisfy both requirements will mean that the shareholder will not be entitled to assert Dissenter's Rights and obtain payment for his shares under Article 13. (Shareholders should note that if they sign and return a blank appointment of proxy with no instructions as to how their shares should be voted, they will be deemed to have voted in favor of the Merger and thereafter will not be entitled to assert Dissenter's
If the Agreement is approved by Triad's shareholders at the Special Meeting (or at any adjournments thereof), then, within 10 days of the date the Merger is consummated, Triad must send a written notice (by registered or certified mail, return receipt requested) to each shareholder who has taken the actions described above and is entitled to exercise Dissenter's Rights. That notice will:
(a) State where the dissenting shareholder's payment demand must be sent, and where and when share certificates must be deposited;
(b) Supply a form for demanding payment;
(c) Set a date by which Triad must receive the dissenting shareholder's payment demand (which may not be fewer than 30 nor more than 60 days after the date the dissenter's notice is mailed); and,
(d) Be accompanied by a copy of Article 13.
A shareholder who has been sent the dissenter's notice must demand payment AND must deposit his share certificates by the date set forth in and in accordance with the terms and conditions of the dissenter's notice; otherwise, such shareholder will not be entitled to payment for his shares under Article 13. A shareholder who demands payment and deposits his share certificates as required retains all other rights as a shareholder until such rights are cancelled or modified by consummation of the Merger.
As soon as the Merger is consummated or upon receipt of a payment demand, Triad will offer to pay each dissenter who timely demanded payment and deposited his share certificates the amount Triad estimates to be the fair value of his shares, plus interest accrued to the date of payment, and will pay this amount to each dissenter who agrees in writing to accept it in full satisfaction of his demand. Triad's offer of payment will be accompanied by:
(a) Certain of Triad's most recent available financial statements;
(b) A statement of Triad's estimate of the fair value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment if dissatisfied with Triad's offer; and,
(e) A copy of Article 13.
If Triad does not consummate the Merger within 60 days after the date set for demanding payment and depositing share certificates, Triad must return the deposited certificates, and if, thereafter, the Merger is consummated, Triad must send a new dissenter's notice and repeat the payment demand procedure set forth above.
If a dissenter believes that the amount offered by Triad as described above is less than the fair value of his shares or that the interest due is incorrectly calculated, or if Triad fails to make payment to a dissenter who accepts its offer within 30 days after such acceptance, or if Triad fails to consummate the Merger and does not return the deposited certificates within 60 days after the date set for demanding payment, then the dissenter may notify Triad in writing of his own estimate of the fair value of his shares and the amount of interest due and may demand payment of his estimate, or may reject Triad's offer and demand payment of the fair value of his shares and interest due. In any such event, if a dissenting shareholder fails to take any such action within the 30-day period, he will be deemed to have waived his rights under Article 13 and to have withdrawn his dissent and demand for payment.
If a dissenter has taken all required actions and his demand for payment remains unsettled, the dissenter may commence a proceeding within 60 days after the date of his payment demand and petition the court to determine the fair value of his shares and accrued interest. Upon service on it of the petition filed with the court, Triad must pay to the dissenter the amount originally offered by Triad. If the dissenter does not commence the proceeding within said 60-day period, he has an additional 30 days to either (i) accept in writing the amount offered by Triad, upon which acceptance Triad will pay such amount in full satisfaction of the dissenter's demand, or (ii) withdraw his demand for payment and resume the status of a nondissenting shareholder. A dissenter who takes no action within this 30-day period is deemed to have withdrawn his dissent and demand for payment.
In the court proceeding described above, the court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value, and has discretion to make all dissenters whose demands remain unsettled parties to the proceeding. Each dissenter made a party to the proceeding must be served with a copy of the petition and is entitled to judgment for the amount, if any, by which the court finds the fair value of his shares, plus interest, to exceed the amount paid by Triad. Court costs, appraisal and counsel fees may be assessed by the court as it deems equitable.
Article 13 contains certain additional provisions with respect to dissent by nominees who hold shares for others, and by beneficial owners whose shares are held in the name of other persons, and reference is made to Appendix B for a more complete description thereof.
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet as of September 30, 1995, and the unaudited pro forma combined condensed statements of income for the nine months ended September 30, 1995, and for the years ended December 31, 1994, 1993, and 1992 combine the historical financial statements of Bancshares and Triad and are presented under the "pooling-of-interests" method of accounting for business combinations. The pro forma combined condensed balance sheet gives effect to the Merger as if the transaction had occurred on September 30, 1995. The pro forma combined condensed statements of income give effect to the Merger as if the transaction had occurred at the beginning of each of the periods presented. The Merger represents a stock exchange whereby Triad shareholders will receive .56944 shares of Bancshares Stock for each share of Triad Stock.
The pro forma statements are provided for informational purposes. The unaudited pro forma financial information presented is not necessarily indicative of what the actual financial position or results of operations would have been had the Merger been completed as of September 30, 1995, or as of the beginning of each of the periods presented and is not indicative of future financial position or future results. The pro forma financial statements should be read in conjunction with the audited financial statements and the notes thereto of Bancshares and Triad and their unaudited interim financial statements incorporated herein by reference.
United Carolina Bancshares Corporation and Subsidiaries Pro Forma Combined Condensed Balance Sheets
See Notes to Pro Forma Combined Condensed Financial Information.
United Carolina Bancshares Corporation and Subsidiaries Pro Forma Combined Condensed Statements of Income For the Nine Months Ended September 30, 1995 (Dollars in thousands except per share data)
See Notes to Pro Forma Combined Condensed Financial Information
United Carolina Bancshares Corporation and Subsidiaries Pro Forma Combined Condensed Statements of Income For the Year Ended December 31, 1994 (Dollars in thousands except per share data)
See Notes to Pro Forma Combined Condensed Financial Information
United Carolina Bancshares Corporation and Subsidiaries Pro Forma Combined Condensed Statements of Income For the Year Ended December 31, 1993 (Dollars in thousands except per share data)
See Notes to Pro Forma Combined Condensed Financial Information
United Carolina Bancshares Corporation and Subsidiaries Pro Forma Combined Condensed Statements of Income For the Year Ended December 31, 1992 (Dollars in thousands except per share data)
See Notes to Pro Forma Combined Condensed Financial Information
Notes to Pro Forma Combined Condensed Financial Information
(1) Adjustment based on an exchange ratio of .569444 for the conversion of Triad Stock to Bancshares Stock. At September 30, 1995, Triad had 1,818,623 shares outstanding.
(2) Except for the nine month period ended September 30, 1995, the dilutive effect of common stock equivalents had an immaterial effect on earnings per share for Triad. For the nine months ended September 30, 1995, the earnings per share amount reflects fully diluted earnings per share. For all periods presented, the dilutive effect of common stock equivalents had an immaterial effect on earnings per share of Bancshares on an historical and pro forma combined basis.
MARKET AND DIVIDEND INFORMATION REGARDING TRIAD STOCK AND BANCSHARES STOCK
On September 30, 1995, there were 1,818,623 outstanding shares of Triad Stock held by an aggregate of approximately 1,400 shareholders of record. There is no established market in which the Triad Stock is regularly traded nor any uniformly quoted price for Triad Stock. To the knowledge of management of Triad, the last trade price of Triad Stock prior to the date the Merger was publicly announced was $15.25. The last trade price of Triad Stock known to management of Triad prior to January 4, 1996, was $18.00.
The following table presents the high and low average of the closing bid and asked prices for Triad Stock known to management of Triad for the periods indicated and the amounts of cash dividends declared, with respect to Triad Stock for each quarterly period since January 1, 1993. (See "CAPITAL STOCK OF BANCSHARES AND TRIAD.")
The outstanding shares of Bancshares Stock are held by an aggregate of approximately 7,800 shareholders of record. Bancshares Stock is traded in the over-the-counter market and is listed on the Nasdaq National Market. On October 18, 1995, the last trading day before public announcement of the Merger, the last sale price of Bancshares Stock on the Nasdaq National Market was $36.25. On January 4, 1996, the last reported sale price for Bancshares Stock on the Nasdaq National Market was $33.25. The following table lists the high and low closing prices as reported by Nasdaq, and the amounts of cash dividends declared, with respect to Bancshares Stock for each quarterly period since January 1, 1993. (See "CAPITAL STOCK OF
(1) As of January 5, 1996, the fourth quarter 1995 cash dividend had not been declared.
The following table sets forth (i) the unaudited historical capitalization of Bancshares as of September 30, 1995, (ii) the unaudited historical capitalization of Triad as of September 30, 1995, and (iii) the unaudited pro forma capitalization of Bancshares at September 30, 1995, assuming the Merger had been consummated as of that date (and with no shareholder of Triad exercising Dissenter's Rights). This financial information is based on and should be read in conjunction with Bancshares' and Triad's interim unaudited financial statements, including the related notes thereto, which are incorporated herein by reference. In addition, the following information does not include the effects of a recently announced merger by Bancshares which is not considered to be material. (See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE", "UNITED CAROLINA BANCSHARES CORPORATION AND UNITED CAROLINA BANK - Recent Events" and "FINANCIAL STATEMENTS OF TRIAD
(1) Assumes the Merger became effective at September 30, 1995, and that all shares of Triad Stock outstanding on that date were converted into 1,035,603 shares of Bancshares Stock at the Exchange Rate of 0.569444.
UNITED CAROLINA BANCSHARES CORPORATION AND UNITED CAROLINA BANK
Bancshares is a North Carolina business corporation organized in 1970 and which is registered with the Federal Reserve as a bank holding company. Bancshares' principal business is providing banking and other financial services through its two wholly-owned bank subsidiaries, UCB and United Carolina Bank of South Carolina ("UCBSC"). UCB is a North Carolina banking corporation which has its principal offices in Whiteville, North Carolina, and operates 126 banking offices in 29 counties in the southeastern and south central regions of North Carolina. UCBSC is a South Carolina banking corporation which has its principal offices in Greer, South Carolina, and operates 14 banking offices located in three counties in the northwestern and eastern regions of South Carolina. Bancshares' and UCB's principal offices are located at 127 West Webster Street, Whiteville, North Carolina.
On September 19, 1995, Bancshares and UCB announced that UCB had entered into a definitive agreement with Seaboard Savings Bank, Inc., SSB, Plymouth, North Carolina ("Seaboard"), pursuant to which Seaboard will merge with and into UCB. Terms of UCB's agreement with Seaboard provide for Bancshares to exchange 0.9104 shares of Bancshares Stock for each of Seaboard's outstanding shares of common stock (305,647 shares outstanding at September 30, 1995), subject to adjustment. At September 30, 1995 Seaboard reported $47.7 million in total assets, $36.9 million in loans, and $40.3 million in total deposits, and had common shareholders equity totaling $6.0 million. Seaboard owns and operates its main office in Plymouth, North Carolina and one branch in each of Columbia and Williamston, North Carolina. Subject to required regulatory approvals and the approval of Seaboard's shareholders, it currently is expected that Seaboard will be merged into UCB during the first calendar quarter of 1996.
The following table gives the number of shares and percentage of the outstanding Bancshares Stock beneficially owned as of September 30, 1995, by each of Bancshares' directors and certain of its executive officers individually, and by all Bancshares' directors and executive officers as a group:
(1) Except as otherwise noted, and to the best knowledge of management of Bancshares, each individual and the group has sole voting and investment power with respect to all shares beneficially owned. The named individuals and group have shared voting and investment power as to the following numbers of shares: Mr. Carter - 27,905 shares; Mr. Cleveland - 496 shares; Mr. Cresimore -46 shares; Mr. High - 85 shares; Mr. Sasser - 417 shares; Mr. Shaw - 34,990 shares; Mr. Wells - 7,353 shares; Mr. Monger - 500
shares; all directors and executive officers as a group - 78,035 shares. The named individuals and group have shared voting power only as to the following numbers of shares held in trust for their respective accounts pursuant to the terms of Bancshares' 401(k) Savings Plan. Mr. Sasser - 27,292 shares; Mr. Miller - 8,158 shares; Mr. Etheridge - 12,213 shares; Mr. Monger - 10,087 shares; Mr. Thomas -10,772 shares; all directors and executive officers as a group - 110,856 shares.
(2) Includes 9,935 shares held in trust for Mr. Adams and his children. Mr. Adams has no voting or investment power with respect to those shares.
(3) Does not include 13,500 shares held of record by Mr. Shaw's spouse and 186 shares held of record by Mr. Shaw's daughter. Mr. Shaw disclaims any beneficial ownership of those shares.
Triad is a North Carolina commercial bank which was organized in 1982 with two branches located in Greensboro. By mid-1993, Triad had grown to seven branches in Greensboro and Winston-Salem. In December 1993, BTNC Corporation and its wholly owned subsidiary, Bankers Trust of North Carolina, merged with and into Triad adding two branches in Greensboro and one branch in Asheboro. Triad opened a new branch in Greensboro in May 1994. Triad also has a loan production office in each of Kernersville and Burlington, North Carolina.
Triad is a community-oriented financial institution which offers a variety of financial services to meet the needs of the communities it serves and which is primarily engaged in the business of taking deposits and making loans. Triad's principal lending activity is making commercial and consumer loans in Triad's market area. However, Triad also offers other types of loans, including, without limitation, home equity loans (predominantly second mortgage loans secured by the equity in the home), multi-family residential mortgage loans, construction/permanent loans, and commercial real estate loans. Triad's primary source of revenue is interest income from its lending activities and, to a lesser extent, from its investment portfolio.
As of September 30, 1995, no shareholder known to management of Triad beneficially owned more than 5% of the outstanding shares of Triad Stock. As of the September 30, 1995, the beneficial ownership of Triad Stock by directors and by directors and executive officers as a group, was as follows:
(1) Except as otherwise noted, to the best knowledge of management of Triad the above individuals and group exercise sole voting and investment power with respect to all shares shown as beneficially owned.
(2) The calculations of the percentage of class beneficially owned by each individual and by the group as a whole are based, in each case, on a number of total outstanding shares equal to 1,818,623 shares currently outstanding plus the number of shares capable of being issued to that individual (if any) and to the group, respectively, as a whole within 60 days after September 30, 1995 upon the exercise of stock options held by each of them (if any) and by the group, respectively.
(3) Mr. Auman exercises sole voting and investment power with respect to 65,145 shares and sole investment power with respect to the 630 shares for which he holds exercisable options.
(4) Mr. Carl I. Carlson, III exercises sole voting and investment power with respect to 2,830 shares, shared voting and investment power with respect to 9,808 shares, and sole investment power with respect to 18,502 shares for which he holds exercisable options.
(5) Mr. Stephen C. Carlson exercises sole voting and investment power with respect to 14,069 shares, and sole investment power only with respect to 315 shares for which he holds exercisable options.
(6) Mr. Curtis exercises sole voting and investment power with respect to 210 shares and sole investment power only with respect to 630 shares for which he holds exercisable options.
(7) Mr. Falk exercises sole voting and investment power with respect to 17,996 shares, and sole investment power only with respect to the 3,780 shares for which he holds exercisable options.
(8) Dr. Garber exercises sole voting and investment power with respect to 2,448 shares, shared voting and investment power with respect to 3,439 shares, and sole investment power only with respect to the 3,150 shares for which he holds exercisable options.
(9) Mr. Greene exercises sole voting and investment power with respect to 1,050 shares and sole investment power only with respect to 630 shares for which he holds exercisable options.
(10) Ms. Hull exercises sole voting and investment power with respect to 10,833 shares, shared voting and investment power with respect to 4,184 shares and sole investment power only with respect to 630 shares for which she holds exercisable options.
(11) Mr. King exercises sole voting and investment power with respect to 4,090 shares, shared voting and investment power with respect to 242 shares, and sole investment power only with respect to 3,780 shares for which he holds exercisable options.
(12) Mr. Lawson exercises sole voting and investment power with respect to 2,966 shares, and sole investment power only with respect to 3,780 shares for which he holds exercisable options.
(13) Mr. Lewis exercises sole voting and investment power with respect to 27,282 shares, shared voting and investment power with respect to 11,761 shares, and sole investment power only with respect to 630 shares for which he holds exercisable options.
(14) Mr. Matney exercises sole voting and investment power with respect to 15,363 shares, shared voting and investment power with respect to 16,136 shares, and sole investment power only with respect to 21,982 shares for which he holds exercisable options.
(15) Mr. Millikan exercises sole voting and investment power with respect to 7,300 shares and sole investment power only with respect to 315 shares for which he holds exercisable options.
(16) Mr. Mims exercises sole voting and investment power with respect to 12,158 shares, and sole investment power only with respect to 18,786 shares for which he holds exercisable options.
(17) Mr. Schenck exercises sole voting and investment power with respect to 5,192 shares, shared voting and investment power with respect to 2,238 shares, and sole investment power only with respect to 630 shares for which he holds exercisable options.
(18) Mr. Stanley exercises sole voting and investment power with respect to 84,608 shares, and sole investment power only with respect to 3,780 shares for which he holds exercisable options.
(19) Mr. Stone exercises sole voting and investment power with respect to 4,924 shares and sole investment power only with respect to 630 shares for which he holds exercisable options.
(20) Ms. Taylor exercises sole voting and investment power with respect to 255 shares, and sole investment power only with respect to 315 shares for which she holds exercisable options.
(21) Mr. Timberlake exercises sole voting and investment power with respect to 12,006 shares, shared voting and investment power with respect to 9,940 shares, and sole investment power only with respect to 1,155 shares for which he holds exercisable options.
(22) Includes a total of 306,593 shares as to which the persons included in the group exercise sole voting and investment power and 105,796 shares as to which voting and investment power is shared. Also includes 107,993 shares for which the group holds options to purchase which are capable of being exercised within 60 days of September 30, 1995 as to which such individuals have sole investment power only. The 2,264 shares held in trust for Carl I. Carlson, III and Stephen C. Carlson are included in the beneficial ownership of Carl I. Carlson, III and Stephen C. Carlson, as beneficiaries under a trust, and are reflected separately in the beneficial ownership of each such individual, but are included only once in the beneficial ownership of the group.
Federal and state legislation and regulation have significantly affected the operations of financial institutions in the past several years and have increased competition among commercial banks, savings institutions and other providers of financial services. In addition, federal legislation has imposed new limitations on the investment authority of, and higher insurance and examination assessments on, financial institutions and has made other changes that may adversely affect the future operations and competitiveness of regulated financial institutions with other financial intermediaries. The operations of regulated depository institutions and their holding companies, including Bancshares and its depository institution subsidiaries, will continue to be subject to changes in applicable statutes and regulations from time to time.
Bancshares. Bancshares is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA") and is subject to the regulations of the Federal Reserve. Under the BHCA, Bancshares' activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits Bancshares from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank holding company or savings bank holding company without prior approval of the Federal Reserve. (See "PROPOSAL 1: THE MERGER - Required Regulatory Approvals.") Congress has approved legislation which permits adequately capitalized and managed bank holding companies to acquire control of a bank in any state (the "Interstate Banking Law"). Existing state laws setting minimum age restrictions on target banks can be retained, so long as the age requirement does not exceed five years. Acquisitions will be subject to anti-trust provisions that cap at 10% the portion of the United States' bank deposits a single bank holding company may control, and cap at 30% the portion of a state's deposits a single bank holding company may control. States have the authority to waive the 30% cap.
Under the Interstate Banking Law, beginning on June 1, 1997, banks also will be permitted to merge with one another across state lines, subject to concentration, capital and Community Reinvestment Act requirements and regulatory approval. A state can authorize mergers earlier than June 1, 1997, or it can opt out of interstate branching by enacting legislation before June 1, 1997. Effective with the date of enactment, a state can also choose to permit out-of-state banks to open new branches within its borders. In addition, if a state chooses to allow interstate acquisition of branches, then an out-of-state bank also may acquire branches by merger.
Interstate branches that primarily siphon off deposits without servicing a community's credit needs will be prohibited. If loans are less than 50% of the average of all institutions in the state, the branch will be reviewed to see if it is meeting the community credit needs. If it is not, the branch may be closed and the bank may be restricted from opening a new branch in the state.
The Interstate Banking Law also modifies the controversial safety and soundness provisions contained in Section 39 of the 1991 Banking Law described below which required the banking regulatory agencies to write regulations governing such matters as internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation and fees and whatever else those agencies determined to be appropriate. The legislation exempts bank holding companies from these provisions and requires the agencies to write guidelines, as opposed to regulations, dealing with these areas. It also gives more discretion to the banking regulatory agencies with regard to prescribing standards for banks' asset quality, earnings and stock valuation.
The Interstate Banking Law also expands current exemptions from the requirement that banks be examined on a 12-month cycle. Exempted banks will be inspected every 18 months. Other provisions address paperwork reduction and regulatory improvements, small business and commercial real estate loan securitization, truth-in-lending amendments on high cost mortgages, strengthening of the independence of certain financial regulatory agencies, money laundering, flood insurance reform and extension of certain statutes of limitations. At this time, Bancshares is unable to predict how the Interstate Banking Law may affect its operations.
Additionally, the BHCA prohibits Bancshares from engaging in, or acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business, including thrifts, unless such business is determined by the Federal Reserve to be so closely related to banking as to be properly incident thereto. The BHCA generally does not place territorial restrictions on the activities of such non-banking related activities.
Federal Reserve approval (or, in certain cases, non-disapproval) also must be obtained prior to any person acquiring control of Bancshares or one of its depository institution subsidiaries. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the institution or holding company or controls in any manner the election of a majority of the directors of the institution or the holding company. Control is presumed to exist if a person acquires more than 10% of any class of voting stock and the institution or the holding company has registered securities under Section 12 of the 1934 Act or the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding companies and their insured depository institution subsidiaries by law and regulatory policies that are designed to minimize potential loss to depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default or in default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991 Banking Law"), to reduce the likelihood of receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all acceptable capital standards as of the time the institution fails to comply with such capital restoration plan. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its depository institution subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the Federal Reserve also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any depository institution subsidiary of the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit Insurance Act ("FDIA") require insured depository institutions under common control to reimburse the FDIC for any loss suffered by either the SAIF or the Bank Insurance Fund ("BIF") of the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's claim is superior to claims of shareholders of the insured depository institution or its holding company but subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.
Bancshares is subject to the obligations and restrictions described above, and its depository institution subsidiaries are subject to the cross-guarantee provisions of the FDIC. However, management of Bancshares currently does not expect that any of these provisions will have an impact on the operations of Bancshares or its subsidiaries.
Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital is required to be "Tier I capital," principally consisting of common shareholders' equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain goodwill items. The remainder ("Tier II capital") may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum leverage capital ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum.
The following table sets forth Bancshares' regulatory capital position at September 30, 1995. (For the regulatory capital positions of Bancshares' depository institution subsidiaries as of September 30, 1995, see the discussions below).
Under current federal law, transactions between depository institutions and any affiliate are governed by Section 23A and 23B of the Federal Reserve Act. An affiliate of a depository institution is any company or entity that controls, is controlled by or is under common control with the institution. In a holding company context, the parent holding company of a depository institution and any companies which are controlled by such parent holding company are affiliates of the depository institution. Generally, Sections 23A and 23B (i) limit the extent to which the depository institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or the subsidiary as those provided to a nonaffiliate. The term "covered transaction" includes the making of loans or other extensions of credit to an affiliate, the purchase of assets from an affiliate, the purchase of, or an investment in, the securities of an affiliate, the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person, or issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition to the restrictions imposed by Sections 23A and 23B, no depository institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities that are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates that are subsidiaries of the institution.
Additionally, the FDIC has adopted regulations that affect contracts between a bank holding company or its non-depository subsidiaries or related interests under common control, and the holding company's insured depository institution affiliates. Certain types of contracts between an insured depository institution and any company which directly or indirectly controls it (or which is under common control with it) could be considered unsafe and unsound, including those relating to: (i) making or purchasing loans, (ii) servicing loans, (iii) performing trust functions, (iv) providing bookkeeping or data processing services, (v) furnishing management services, (vi) selling or transferring any department or subsidiary, (vii) payments for intangible assets, (viii) transferring any asset for less than fair market value as evidenced by an independent written appraisal, or (ix) prepaying any liability more than 30 days prior to its due date. The FDIC also has proposed regulations which would prohibit any insured depository institution from entering into any contract with any person to provide goods, products or services if such contract is determined to adversely affect the safety or soundness of the insured institution.
Section 4(i) of the BHCA authorizes the Federal Reserve to approve the application of a bank holding company to acquire any savings institution under Section 4(c)(8) of the BHCA. In approving such an application, the Federal Reserve is precluded from imposing any restrictions on transactions between the bank holding company and the acquired savings institution, except as required by Section 23A or 23B of the Federal Reserve Act or any other applicable law. Further, the FDIA, as amended by the 1991 Banking Law, authorizes the merger or consolidation of any BIF member with any SAIF member, the assumption of any liability by any BIF member to pay any deposits of any SAIF member or vice versa, or the transfer of any assets of any BIF member to any SAIF member in consideration for the assumption of liabilities of such BIF member or vice versa, provided that certain conditions are met and, in the case of any acquiring, assuming or resulting depository institution which is a BIF member, such institution continues to make payment of SAIF assessments on the portion of liabilities attributable to any acquired, assumed or merged SAIF-insured institution.
As a result of its ownership of a North Carolina-chartered commercial bank, Bancshares is registered under the bank holding company laws of North Carolina. Accordingly, Bancshares and UCB are subject to regulation by the Commissioner. The Commissioner has asserted authority to examine North Carolina bank holding companies and their affiliates and is in the process of formulating regulations in this area.
UCB. UCB is organized as a North Carolina commercial bank and is subject to various statutory requirements and to rules and regulations promulgated and enforced by the Commissioner and the FDIC. Its deposits are insured by the BIF, but a small portion of UCB's deposits are SAIF-insured as a result of an earlier acquisition of a thrift institution. Upon consummation of the Merger, the portion of UCB's deposits attributable to Triad will be BIF-insured.
North Carolina commercial banks, such as UCB, are subject to legal limitations on the amounts of dividends they are permitted to pay. Prior approval of the Commissioner is required if the total of all dividends declared by UCB in any calendar year exceeds its net profits (as defined by statute) for that year combined with its retained net profits (as defined by statute) for the preceding two calendar years, less any required transfers to surplus. Also, under the 1991 Banking Law an insured depository institution, such as UCB, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" (as such term is defined in the statute). Based on its current financial condition, Bancshares does not expect that this provision will have any impact on UCB's ability to pay dividends.
As an FDIC-insured commercial bank which is not a member of the Federal Reserve System, UCB is subject to capital requirements imposed by the FDIC. Under the FDIC's regulations, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of Tier I capital to average total consolidated assets. All other banks are required to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%.
The following table sets forth UCB's regulatory capital positions at September 30, 1995:
UCB also is subject to insurance assessments imposed by the FDIC. Under current law, as amended by the 1991 Banking Law, the insurance assessment to be paid by BIF-insured institutions shall be as specified in a schedule required to be issued by the FDIC that would specify, at semiannual intervals, target reserve ratios designed to increase the reserve ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC may determine in accordance with the statute) in 15 years. Further, the FDIC is authorized, under the 1991 Banking Law, to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Treasury Department. Effective January 1, 1993, the FDIC replaced the uniform assessment rate with a transitional risk-based assessment schedule which became fully effective in January 1994, having assessments ranging from 0.23% to 0.31 % of an institution's average assessment base. Effective July 1, 1995, the FDIC reduced assessments to 0.04% for the strongest banks, but left unchanged the 0.31% assessment rate for the weakest banks. On November 14, 1995, the FDIC again reduced assessments (effective January 1, 1996) from a range of 0.04% to 0.31% to a range of 0% to 0.27%. This reduction was a result of the BIF's reserve ratio being over 1.30%. These recent premium reductions do not affect the deposit premiums paid on SAIF-insured deposits. The actual assessment to be paid by each BIF member is based on an institution's assessment risk classification, which is determined based on whether the institution is considered "well capitalized," "adequately capitalized" or "under capitalized," as such terms have been defined in applicable federal regulations adopted to implement the prompt corrective action provisions of the 1991 Banking Law, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. (See "- Impact of the 1991 Banking Law".) Based on the current financial condition and capital levels of UCB, Bancshares does not expect that the transitional risk-based assessment schedule will have a material impact on UCB's future earnings.
Various proposals are currently being considered by committees of the United States Congress concerning a possible merger of the SAIF and BIF of the FDIC. One of the principal issues under discussion is the amount of additional funds needed to recapitalize the SAIF prior to such a merger. Substantially all of the proposals under consideration contemplate a one-time special assessment to be levied on SAIF-insured deposits, which assessment has ranged from $.66 to $.85 per $100 of SAIF-insured deposits maintained by the institution assessed. In addition, the various proposals differ as to whether the proposed assessment will be deductible for tax purposes by the institution assessed. At September 30, 1995, UCB had approximately $125 million of SAIF-insured deposits which would be subject to such a special assessment. Due to the uncertainty as to which, if any, of the various proposals will be adopted and the ultimate amount and tax deductability of the assessment to be levied on UCB, the impact of the proposals and the assessment on UCB is impossible to predict with certainty at this time.
Further, under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution's loan-to-one-borrower limit as established by federal law (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any "interested" director may not participate in the voting. The Federal Reserve has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons.
UCB is subject to FDIC-imposed loan-to-one-borrower limits which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus. These limits also authorize banks to make loans to one borrower, for any purpose, in an amount not to exceed $500,000.
Regulations promulgated by the FDIC pursuant to the 1991 Banking Law place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. Under these regulations, "well capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates), and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of the 1991 Banking Law. (See " - Impact of the 1991 Banking Law".)
UCB is subject to examination by the FDIC and the Commissioner. In addition, UCB is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting laws and laws relating to branch banking. UCB, as an insured North Carolina commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the bank is, and continues to be, in compliance with all applicable capital standards.
Under Chapter 53 of the North Carolina General Statutes, if the capital stock of a North Carolina commercial bank is impaired by losses or otherwise, the Commissioner is authorized to require payment of the deficiency by assessment upon the bank's shareholders, pro rata, and to the extent necessary, if any such assessment is not paid by any shareholder, upon 30 days notice, to sell as much as is necessary of the stock of such shareholder to make good the deficiency. Bancshares is the sole shareholder of UCB.
Triad. Triad is a North Carolina commercial bank. Triad's deposits are insured by the FDIC through the BIF, and it is subject to examination and regulation by the FDIC and the Commissioner and to regulations governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities, and general investment authority to the same extent as UCB.
The following table sets forth the consolidated FDIC regulatory capital positions of Triad as of September 30, 1995:
Impact of the 1991 Banking Law. Among other things, the 1991 Banking Law provides increased funding for the BIF and the SAIF, and provides for expanded regulation of depository institutions and their affiliates, including parent holding companies.
The 1991 Banking Law provides authority for special assessments against insured deposits and for the development of a general risk-based deposit insurance assessment system which the FDIC implemented on a transitional basis effective
January 1, 1993. The BIF and SAIF funding provisions could result in a significant increase in the assessment rate on deposits of BIF and SAIF institutions over the next 15 years. No assurance can be given at this time as to what levels of assessments against insured deposits will be applied in the future.
The 1991 Banking Law provides the federal banking agencies with broad powers to take corrective action to resolve the problems of insured depository institutions. The extent of these powers will depend upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." In September 1992, each of the federal banking agencies issued final uniform regulations to be effective December 19, 1992, which define such capital levels. Under the final regulations, an institution is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating; (B) "significantly undercapitalized" if the institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C) "critically undercapitalized" if the institution has a ratio of tangible equity to total assets equal to or less than 2%.
The 1991 Banking Law also amended the prior law with respect to the acceptance of brokered deposits by insured depository institutions to permit only a "well capitalized" (as defined in the statute as significantly exceeding each relevant minimum capital level) depository institution to accept brokered deposits without prior regulatory approval. In June 1992, the FDIC issued final regulations implementing these provisions regulating brokered deposits. Under the regulations, "well-capitalized" banks may accept brokered deposits without restrictions, "adequately capitalized" banks may accept brokered deposits with a waiver from the FDIC (subject to certain restrictions on payment of rates), while "under-capitalized" banks may not accept brokered deposits. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "under capitalized" are the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of the 1991 Banking Law (as described in the previous paragraph). Bancshares does not believe that these regulations have had or will have a material adverse effect on the current operations of its depository institution subsidiaries.
To facilitate the early identification of problems, the 1991 Banking Law requires the federal banking agencies to review and, under certain circumstances, prescribe more stringent accounting and reporting requirements than those required by generally accepted accounting principles. The FDIC issued a final rule, effective July 2, 1993, implementing those provisions. The rule, among other things, requires that management report on the institution's responsibility for preparing financial statements and establishing and maintaining an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness, and that independent auditors attest to and report separately on assertions in management's reports concerning compliance with such laws and regulations, using FDIC-approved audit procedures.
The 1991 Banking Law further requires the federal banking agencies to develop regulations requiring disclosure of contingent assets and liabilities and, to the extent feasible and practicable, supplemental disclosure of the estimated fair market value of assets and liabilities. The 1991 Banking Law also requires annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state chartered institutions examined by state regulators. Moreover, the federal banking agencies are required to set operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions and depository institution holding companies, as well as compensation standards for insured depository institutions that prohibit excessive compensation, fees or benefits to officers, directors, employees, and principal shareholders.
The foregoing necessarily is a general description of certain provisions of the 1991 Banking Law and does not purport to be complete. Several of the provisions of the 1991 Banking Law will be implemented through regulations issued by the various federal banking agencies, only a portion of which have been adopted in final form. The effect of the 1991 Banking Law on Bancshares and its subsidiaries will not be fully ascertainable until after all of the provisions are effective and after all of the regulations are adopted.
CAPITAL STOCK OF BANCSHARES AND TRIAD
Authorized Capital. The authorized capital stock of Bancshares consists of (i) 40,000,000 shares of $4.00 par value common stock (which is the Bancshares Stock into which outstanding shares of Triad Stock will be converted), of which 14,768,740 shares were issued and outstanding at September 30, 1995, and (ii) 2,000,000 shares of $10.00 par value preferred stock, of which there were no shares issued and outstanding at September 30, 1995.
Voting Rights. The holders of Bancshares Stock are entitled to one vote per share held of record on all matters submitted to a vote of shareholders. Bancshares' shareholders are not entitled to vote cumulatively in the election of directors.
Merger, Share Exchange, Sale of Assets and Dissolution. In general, North Carolina law requires that any merger, share exchange, voluntary liquidation or transfer of substantially all the assets (other than in the ordinary course of business) of a business corporation be approved by the corporation's shareholders by a majority of the votes entitled to be cast on the proposed transaction. However, Bancshares charter provides that, except as described below, the affirmative vote of the holders of not less than 75% of the outstanding shares of each class of Bancshares' capital stock entitled to vote will be required to authorize (i) any merger or consolidation of Bancshares into or with any other corporation, (ii) any sale, lease, exchange, mortgage, transfer or other disposition of all or any substantial part (more than 10%) of Bancshares' assets, (iii) the issuance or transfer of any securities of Bancshares or any subsidiary to an "Interested Shareholder" (any person who, together with his or its affiliates, beneficially owns 10% or more of any class of Bancshares' capital stock), (iv) any recapitalization or reclassification of securities that would have the effect of increasing the voting power of any Interested Shareholder, or (v) the adoption of any plan proposed by an Interested Shareholder for Bancshares' liquidation or dissolution. The above "supermajority" vote will not be required if the transaction to be approved has been approved by at least two-thirds of Bancshares' directors and satisfies certain "fair price" requirements.
Charter Amendments. Subject to certain conditions, an amendment to Bancshares' charter, including a provision to increase the authorized capital stock of Bancshares, may be effected if the amendment is approved by a simple majority of the votes cast on the amendment by every voting group entitled to vote on the amendment (and by a majority of the votes entitled to be cast on the amendment by any separate voting group with respect to which the amendment would create Dissenter's Rights). However, the affirmative vote of the holders of not less than 75% of the outstanding voting shares of all classes of Bancshares capital stock is required to approve any modification or amendment of the "supermajority" provision contained in Bancshares' charter (as described above). Additionally, North Carolina law allows Bancshares' Board of Directors, as a condition to its approval of any charter amendment, to require that the amendment be approved by a vote of shareholders greater than otherwise would be required by law.
Dividends. Holders of Bancshares Stock are entitled to dividends when and if declared by Bancshares' Board of Directors from funds legally available, whether in cash or in stock. (See "- Differences in Capital Stock of Bancshares and Triad.")
Miscellaneous. In accordance with North Carolina law, holders of Bancshares Stock are entitled, upon dissolution or liquidation, to participate ratably in the distribution of assets legally available for distribution to shareholders after payment of debts. Shareholders do not have preemptive rights to acquire other or additional shares which might be issued by Bancshares, or any redemption, sinking fund or conversion rights. Bancshares Stock may be used as collateral to secure a loan from UCB.
Differences in Capital Stock of Bancshares and Triad
Upon consummation of the Merger, Triad's shareholders (other than those shareholders who exercise Dissenter's Rights) will become shareholders of Bancshares. Certain legal distinctions exist between owning Bancshares Stock and Triad Stock.
Triad is a North Carolina commercial bank, and the rights of the holders of Triad Stock are governed by Chapter 53 of the North Carolina General Statutes which is applicable to North Carolina banks ("Chapter 53") and Chapter 55 of the North Carolina General Statutes which is applicable to North Carolina business corporations ("Chapter 55"). Bancshares is a North Carolina business corporation and the rights of the holders of Bancshares Stock are governed solely by Chapter 55.
Because of differences between Chapter 53 and Chapter 55, the Merger will result in certain changes in the rights of Triad's shareholders who receive Bancshares Stock in exchange for their Triad Stock. While it is not practical to describe all differences, those basic differences which will have the most significant effect on the rights of Triad's shareholders if they become shareholders of Bancshares are discussed below.
The following is only a general summary of certain differences in the rights of holders of Bancshares Stock and those of holders of Triad Stock. Shareholders should consult with their own legal counsel with respect to specific differences and changes in their rights as shareholders which will result from the Merger.
Charter Amendments. Chapter 53 requires that, following shareholder approval, amendments to Triad's charter must be approved by the Commissioner. Amendments to Bancshares' charter are not required to be approved by the Commissioner or by any other banking regulator.
Dividends. The shareholders of Bancshares and Triad are entitled to dividends when and if declared by their respective Boards of Directors, subject to the restrictions described below.
Pursuant to Chapter 55, Bancshares is authorized to pay dividends as are declared by its Board of Directors, provided that no such distribution results in its insolvency on a going concern or balance sheet basis. The principal sources of funds for the payment of dividends by Bancshares are dividends from UCB. The ability of UCB to pay dividends is subject to statutory and regulatory restrictions on the payment of cash dividends, including the requirement under North Carolina banking laws that cash dividends be paid only out of undivided profits and only if the bank has surplus of a specified level. Federal bank regulatory authorities also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payment may be deemed to constitute an unsafe and unsound practice.
Triad, as a North Carolina bank, is subject to the same restrictions on the payment of dividends as UCB.
Merger, Share Exchange, Sale of Assets, or Dissolution. Pursuant to Chapter 53, Triad may not merge or consolidate with any other entity, or sell substantially all of its assets to any other entity, without the prior approval of the holders of at least two-thirds of its outstanding shares and the prior written approval of the Commissioner. (See "PROPOSAL 1: THE MERGER Required Regulatory Approvals.") In addition, pursuant to Chapter 53, Triad may not be dissolved without the prior approval of the holders of at least two-thirds of its outstanding shares. As described above (see "- Capital Stock of Bancshares"), different levels of shareholder approval are required in order for Bancshares to engage in those transactions under Chapter 55 and Bancshares' charter.
The prior approval of Bancshares' shareholders is not required to effect a merger of a bank into UCB or UCBSC provided that Bancshares remains in control of its subsidiary following consummation of the merger. Therefore, future acquisitions by Bancshares through the merger of a third party bank with or into UCB or UCBSC could be effected without the approval of Bancshares' shareholders.
Repurchase of Capital Stock. Under federal and North Carolina law, Triad may not purchase any of its capital stock without the prior approval of the FDIC and the Commissioner. No repurchase will be allowed if the effect of such transaction would be to reduce the net worth of Triad to an amount which is less than the minimum amount required by applicable federal and state regulations. Further, shareholder approval is necessary under North Carolina law.
Under Chapter 55, Bancshares may repurchase its capital stock by action of its Board of Directors without the prior approval of its shareholders. However, as a bank holding company, Bancshares is required to give the Federal Reserve at least 45 days' prior written notice of the purchase or redemption of any shares of its outstanding equity securities if the gross consideration to be paid for such purchase or redemption, when aggregated with the net consideration paid by Bancshares for all purchases or redemptions of its equity securities during the 12 months preceding the date of notification, equals or exceeds 10% of Bancshares' consolidated net worth as of the date of such notice. The Federal Reserve may permit a purchase or redemption to be accomplished prior to expiration of the 45-day notice period if it determines that the repurchase or redemption would not constitute an unsafe or unsound practice and that it would not violate any applicable law, rule, regulation or order, or any condition imposed by, or written agreement with, the Federal Reserve.
Regulation of Transferability. The capital stock of Triad, unlike that of Bancshares, is exempt from the registration requirements of the 1933 Act and the North Carolina Securities Act. The effect of such exemptions is to allow Triad and its shareholders to sell Triad Stock without registration under such laws. In contrast, the public sale by Bancshares of its stock, and resales of Bancshares Stock by certain persons who at the time of resale are "affiliates" of Bancshares, must be registered under the 1933 Act and the North Carolina Securities Act or meet certain statutory and regulatory requirements to qualify for an exemption from registration. The exemption from registration under the 1933 Act most often used by affiliates of public corporations is Rule 144 which limits the amount of stock that can be sold during any three-month period and requires, among other things, that affiliates' shares be sold in "brokers' transactions" without any solicitation of offers to purchase such shares.
Chapter 55 provides for indemnification by a corporation of its officers, directors, employees and agents, and any person who is or was serving at the corporation's request as a director, officer, employee or agent of another entity or enterprise or as a trustee or administrator under an employee benefit plan, against liability and expenses, including reasonable attorney's fees, in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities.
Permissible Indemnification. Under Chapter 55, a corporation may, but is not required to, indemnify or agree to indemnify any such person against liability and expenses incurred in any such proceeding, provided such person conducted himself or herself in good faith and (i) in the case of conduct in his or her official corporate capacity, reasonably believed that his or her conduct was in the corporation's best interests, and (ii) in all other cases, reasonably believed that his or her conduct was at least not opposed to the corporation's best interests; and, in the case of a criminal proceeding, where he or she had no reasonable cause to believe his or her conduct was unlawful. However, a corporation may not indemnify such person either in connection with a proceeding by or in the right of the corporation in which such person was adjudged liable to the corporation, or in connection with any other proceeding charging improper personal benefit to such person (whether or not involving action in an official capacity) in which such person was adjudged liable on the basis that personal benefit was improperly received.
Mandatory Indemnification. Unless limited by the corporation's charter, Chapter 55 requires a corporation to indemnify a director or officer of the corporation who is wholly successful, on the merits or otherwise, in the defense of any proceeding to which such person was a party because he or she is or was a director or officer of the corporation against reasonable expenses incurred in connection with the proceeding.
Advance for Expenses. Expenses incurred by a director, officer, employee or agent of the corporation in defending a proceeding may be paid by the corporation in advance of the final disposition of the proceeding as authorized by the board of directors in the specific case, or as authorized by the charter or bylaws or by any applicable resolution or contract, upon receipt of an undertaking by or on behalf of such person to repay amounts advanced unless it ultimately is determined that such person is entitled to be indemnified by the corporation against such expenses.
Court-Ordered Indemnification. Unless otherwise provided in the corporation's charter, a director or officer of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court deems necessary, may order indemnification if it determines either (i) that the director or officer is entitled to mandatory indemnification as described above, in which case the court also will order the corporation to pay the reasonable expenses incurred to obtain the court-ordered indemnification, or (ii) that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not such person met the requisite standard of conduct or was adjudged liable to the corporation in connection with a proceeding by or in the right of the corporation or on the basis that personal benefit was improperly received in connection with any other proceeding so charging (but if adjudged so liable, indemnification is limited to reasonable expenses incurred).
Voluntary Indemnification. In addition to and separate and apart from "permissible" and "mandatory" indemnification described above, a corporation may, by charter, bylaw, contract or resolution, indemnify or agree to indemnify any one or more of its officers, directors, employees and agents against liability and expenses in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities. However, the corporation may not indemnify or agree to indemnify a person against liability or expenses he or she may incur on account of activities which were at the time taken known or believed by such person to be clearly in conflict with the best interests of the corporation. Any provision in a corporation's charter or bylaws or in a contract or resolution may include provisions for recovery from the corporation of reasonable costs, expenses and attorneys' fees in connection with the enforcement of rights to indemnification granted therein and may further include provisions establishing reasonable procedures for determining and enforcing such rights.
Parties Entitled to Indemnification. Chapter 55 defines "director" to include ex-directors and the estate or personal representative of a director. Unless its charter provides otherwise, a corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent as to a director and also may indemnify and advance expenses to an officer, employee or agent who is not a director to the extent, consistent with public policy, as may be provided in its charter or bylaws, by general or specific action of its board of directors, or by contract.
Indemnification by Bancshares and UCB. Subject to such restrictions as are provided by federal securities law, Bancshares' and UCB's Bylaws provide for indemnification of their respective directors and officers to the fullest extent permitted by law and require their respective Boards of Directors to take all actions necessary and appropriate to authorize such indemnification. In addition, Bancshares and UCB currently maintain directors' and officers' liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling Bancshares pursuant to the foregoing provisions, Bancshares has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in said Act and is, therefore, unenforceable.
Release of Director Liability. As permitted by Chapter 55, Bancshares' Articles of Incorporation limit the personal liability of its directors in any action by or in the right of the corporation or otherwise for monetary damages for breach of their duties as directors.
The validity of the shares of Bancshares Stock to be issued to Triad's shareholders in connection with the Merger will be passed upon for Bancshares by Howard V. Hudson, Jr., Esq., who is employed as General Counsel and Secretary of Bancshares and UCB and, at September 30, 1995, beneficially owned 16,052 shares of Bancshares Stock. Certain other legal matters will be passed upon for Bancshares and UCB by McCoy, Weaver, Wiggins, Cleveland & Raper, Fayetteville, North Carolina, which serves as special counsel to Bancshares and UCB with respect to the Merger. Certain members of that firm beneficially own an aggregate of approximately 29,095 shares of Bancshares Stock. Certain legal matters will be passed upon for Triad by Ward and Smith, P.A., Raleigh, North Carolina.
The federal and North Carolina income tax consequences of the Merger have been passed upon by KPMG Peat Marwick LLP, Raleigh, North Carolina.
The consolidated financial statements of Bancshares as of December 31, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1994, have been incorporated by reference herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to the fact that on December 31, 1993, Bancshares adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and on January 1, 1993, Bancshares adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The report of KPMG Peat Marwick LLP also refers to the fact that on January 1, 1994, Bancshares adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits."
The financial statements of Triad as of December 31, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1994, have been incorporated by reference herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to the fact that on January 1, 1994, Triad adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and on January
1, 1993, Triad adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Triad's Board of Directors does not intend to bring any matter before the Special Meeting other than as specifically set forth in this Prospectus/Proxy Statement, and it knows of no other business that will be brought before the Special Meeting by any other person. However, should other matters properly be presented for action at the Special Meeting, the Proxies or their substitutes, will be authorized to vote shares represented by appointments of proxy according to their best judgment on such matters.
If for any reason the Merger is not consummated, then a 1996 Annual Meeting of Triad's shareholders likely would be held during May 1996. In such event, any proposal (other than nominations for directors) of a shareholder intended to be presented at that meeting would have to have been received by Triad at its main office in Greensboro, North Carolina, no later than January 31, 1996, to be considered timely received for inclusion in the proxy statement and appointment of proxy issued in connection with that meeting.
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (hereinafter called "Agreement") entered into as of the 19th day of October, 1995, by and among TRIAD BANK ("Triad"), UNITED CAROLINA BANK ("UCB") and UNITED CAROLINA BANCSHARES CORPORATION ("Bancshares").
WHEREAS, Triad is a North Carolina banking corporation with its principal office and place of business located in Greensboro, North Carolina; and BT Financial Corp. (the "Subsidiary") is a North Carolina business corporation with its principal office and place of business located in Greensboro, North Carolina, and is the wholly-owned subsidiary of Triad; and,
WHEREAS, UCB is a North Carolina banking corporation with its principal office and place of business located in Whiteville,
WHEREAS, Bancshares is a North Carolina business corporation with its principal office and place of business located in Whiteville, North Carolina, and is the parent company of UCB; and,
WHEREAS, Bancshares, UCB and Triad have agreed that it is in their mutual best interests and in the best interests of their respective shareholders for Triad to be merged into UCB with the effect that each of the outstanding shares of Triad's common stock will be converted into newly issued shares of Bancshares' common stock, all in the manner and upon the terms and conditions contained in
WHEREAS, to effectuate the foregoing, Bancshares, UCB and Triad desire to adopt this Agreement as a plan of reorganization in accordance with the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended; and,
WHEREAS, while Triad's Board of Directors has approved this Agreement, Triad has executed this Agreement subject to the approval of its shareholders and has agreed to call a special meeting of its shareholders for the purpose of voting on the Agreement and will recommend to its shareholders that they approve the Agreement and the transactions described herein; and,
WHEREAS, Bancshares' and UCB's Boards of Directors have approved this Agreement and the transactions described herein, including the issuance by Bancshares of shares of its common stock to Triad's shareholders to effectuate such transactions.
NOW, THEREFORE, in consideration of the premises, the mutual benefits to be derived from this Agreement, and of the representations, warranties, conditions, covenants and promises herein contained, and subject to the terms and conditions hereof, Bancshares, UCB and Triad hereby adopt and make this Agreement and mutually agree as follows:
ARTICLE I. AGREEMENT TO MERGE
1.01. NAMES OF MERGING CORPORATIONS. The names of the corporations proposed to be merged are TRIAD BANK ("Triad") and UNITED CAROLINA BANK ("UCB").
1.02. NATURE OF TRANSACTION. Subject to the provisions of this Agreement, at the "Effective Time" (as defined in Paragraph 1.07. below), Triad shall be merged into and with UCB pursuant to N.C. GEN. STAT. (section mark) 53-12 (the "Merger").
1.03. EFFECT OF MERGER; SURVIVING CORPORATION. At the Effective Time and as provided in N.C. GEN. STAT. (section mark) 53-13, by reason of the Merger the separate corporate existence of Triad shall cease while the corporate existence of UCB as the surviving corporation in the Merger shall continue with all of its purposes, objects, rights, privileges, powers and franchises, all of which shall be unaffected and unimpaired by the Merger. Following the Merger, UCB shall continue to operate as the wholly-owned banking subsidiary of Bancshares and, as a North Carolina banking corporation, will continue to conduct its business at the then legally established branch and main offices of UCB and Triad. The duration of the corporate existence of UCB, as the surviving corporation, shall be perpetual and unlimited.
1.04. ASSETS AND LIABILITIES OF TRIAD. At the Effective Time and by reason of the Merger, and in accordance with N.C. GEN. STAT. (section mark)(section mark) 53-13, 53-17 and 55-11-06, all of Triad's property, assets and rights of every kind and character (including without limitation all real, personal or mixed property, all debts due on whatever account, all other choses in action and all and every other interest of or belonging to or due to Triad, whether tangible or intangible) shall be transferred to and vest in UCB, and UCB shall succeed to all the rights, privileges, immunities, powers, purposes and franchises of a public or private nature (including all trust and fiduciary properties, powers and rights) of Triad, all without any conveyance, assignment or further act or deed; and, UCB shall become responsible for all of the liabilities, duties and obligations of every kind, nature and description (including duties as trustee or fiduciary) of Triad as of the Effective Time.
1.05. CONVERSION AND EXCHANGE OF STOCK.
a. CONVERSION OF TRIAD STOCK. At the Effective Time, all rights of Triad's shareholders with respect to all then outstanding shares of Triad's $2.50 par value common stock ("Triad
Stock") shall cease to exist, and, as consideration for and to effectuate the Merger (and except as otherwise provided below) each such outstanding share of Triad Stock (other than any shares held by Triad as treasury shares or shares held by Bancshares or as to which rights of dissent and appraisal are properly exercised as provided below) shall be converted, without any action on the part of the holder of such share, Bancshares, UCB or Triad, into .569444 (the "Exchange Rate") newly issued shares of Bancshares' $4.00 par value common stock ("Bancshares Stock"). Notwithstanding anything contained herein to the contrary, (i) if the average of the closing prices of Bancshares Stock on the Nasdaq National Market for the thirty (30) consecutive trading days immediately preceding the date of the Shareholder Meeting (as defined below) (the "30-Day Average") is greater than $40.39, then the Exchange Rate shall be adjusted to be equal to the ratio (rounded to six decimal places) of $23.00 to the 30-Day Average, and (ii) if the 30-Day Average is less than $31.61, then the Exchange Rate shall be adjusted to be equal to the ratio (rounded to six decimal places) of $18.00 to the 30-Day Average. Provided, however, in the event the 30-Day Average is greater than $43.20 and Bancshares or UCB has become a party to an agreement in principle or a binding agreement that contemplates a merger of Bancshares or UCB into or with any other entity (other than with the other or with any affiliated corporation) and in which Bancshares or UCB will not be the surviving corporation or a sale of substantially all of Bancshares' or UCB's assets to any other such entity, the Exchange Rate shall be fixed at .569444.
At the Effective Time, and without any action by Triad, UCB, Bancshares or any holder thereof, Triad's stock transfer books shall be closed as to holders of Triad Stock immediately prior to the Effective Time and, thereafter, no transfer of Triad Stock by any such holder may be made or registered; and the holders of shares of Triad Stock shall cease to be, and shall have no further rights as, stockholders of Triad other than as provided herein. Following the Effective Time, certificates representing shares of Triad Stock outstanding at the Effective Time (herein sometimes referred to as "Old Certificates") shall evidence only the right of the registered holder thereof to receive, and may be exchanged for, (i) certificates for the number of whole shares of Bancshares Stock to which such holders shall have become entitled on the basis set forth above, plus cash for any fractional share interests as provided herein, (ii) in the case of shares as to which rights of dissent and appraisal are properly exercised (as provided below), cash as provided in Article 13 of the North Carolina Business Corporation Act.
b. ISSUANCE OF SHARES BY BANCSHARES; EXCHANGE PROCEDURES. At the Effective Time, Bancshares shall issue and deliver to UCB, in its capacity as Bancshares' agent for purposes of the exchange of Bancshares Stock for Triad Stock (the "Exchange Agent"), one certificate representing the aggregate number of whole shares of Bancshares Stock into which the outstanding shares of Triad Stock have been converted as provided above. As promptly as practicable following the Effective Time, Bancshares shall send or cause to be sent to each former shareholder of Triad of record immediately prior to the Effective Time written instructions and transmittal materials (a "Transmittal Letter") for use in surrendering Old Certificates to the Exchange Agent. Upon the proper delivery to the Exchange Agent (in accordance with the above instructions, and accompanied by a properly completed Transmittal Letter) by a former shareholder of Triad of his or her Old Certificates, the Exchange Agent shall register in the name of such shareholder the shares of Bancshares Stock and deliver said New Certificates to the individual shareholder entitled thereto upon and in exchange for the surrender and delivery to the Exchange Agent by said individual shareholder of his or her Old Certificates.
c. TREATMENT OF FRACTIONAL SHARES. No scrip or certificates representing fractional shares of Bancshares Stock will be issued to any former shareholder of Triad, and, except as provided below, no such shareholder will have any right to vote or receive any dividend or other distribution on, or any other right with respect to, any fraction of a share of Bancshares Stock resulting from the above exchange. In the event the exchange of shares would result in the creation of fractional shares, then, in lieu of the issuance of fractional shares of Bancshares Stock, Bancshares shall deliver cash to the Exchange Agent in an amount equal to the aggregate market value of all such fractional shares, and the Exchange Agent shall divide such cash among and remit it (without interest) to the former shareholders of Triad in accordance with their respective interests. For purposes of this Paragraph 1.05.c., the "aggregate market value" of all fractional shares of Bancshares Stock shall be equal to the total of such fractional shares multiplied by the average of the closing prices of Bancshares Stock on the Nasdaq National Market for the thirty (30) consecutive trading days immediately preceding the Shareholder Meeting (as defined below).
d. SURRENDER OF CERTIFICATES. Subject to Paragraph 1.05.f. below, no certificate for any shares, or cash for any fractional share, of Bancshares Stock shall be delivered to any former shareholder of Triad unless and until such shareholder shall have properly surrendered to the Exchange Agent the Old Certificate(s) formerly representing his or her shares of Triad Stock, together with a properly completed Transmittal Letter in such form as shall be provided to the shareholder by Bancshares for that purpose. Further, until such Old Certificate(s) are so surrendered, no dividend or other distribution payable to holders of record of Bancshares Stock as of any date subsequent to the Effective Time shall be delivered to the holder of such Old Certificate(s). However, upon the proper surrender of such Old Certificate(s) the Exchange Agent shall pay to the registered holder of the shares of Bancshares Stock represented by such Old Certificate(s) the amount of any such cash, dividends or distributions which have accrued but remain unpaid with respect to such shares. Neither Bancshares, UCB, Triad, nor the Exchange Agent, shall have any obligation to pay any interest on any such cash, dividends or distributions for any period prior to such payment. Further, and notwithstanding any other provision of this Agreement, neither Bancshares, UCB, Triad, nor the Exchange Agent shall be liable to a former holder of Triad Stock for any amount paid or property delivered in good faith to a public official pursuant to any applicable abandoned property, escheat, or similar law.
e. ANTIDILUTIVE ADJUSTMENTS. If, following the date of this Agreement, Bancshares shall change the number of outstanding shares of Bancshares Stock as a result of a dividend payable in shares of Bancshares Stock, a stock split, a reclassification or other subdivision or combination of outstanding shares, and if the record date of such event occurs prior to the Effective Time, then an appropriate and proportionate adjustment will be made to increase or decrease the number of shares of Bancshares Stock to be issued in exchange for each of the shares of Triad Stock.
f. DISSENTERS. Any shareholder of Triad who has and properly exercises the right of dissent and appraisal with respect to the Merger as provided in Article 13 of the North Carolina Business Corporation Act ("Dissenters Rights") shall be entitled to receive payment of the fair value of his or her shares of Triad Stock in the manner and pursuant to the procedures provided therein. Shares of Triad Stock held by persons who exercise Dissenters Rights shall not be converted into Bancshares Stock as provided in Paragraph 1.05.a. above. However, if any shareholder of Triad who exercises Dissenters Rights shall fail to perfect his or her right to receive cash as provided above, or effectively shall waive or lose such right, then each of his or her shares of Triad Stock, at Bancshares' sole option, shall be deemed to have been converted into the right to receive Bancshares Stock as of the Effective Time as provided in Paragraph 1.05.a. above. Any shares of Bancshares Stock authorized to be issued pursuant to this Agreement but not exchanged for shares of Triad Stock because of the exercise of Dissenters Rights may be sold by the Exchange Agent at public auction or by private sale, or through a dealer or by any other reasonable method, at its election, for the best available price, and the net proceeds of any such sale shall be retained by Bancshares.
g. LOST CERTIFICATES. Any shareholder of Triad whose certificate evidencing shares of Triad Stock has been lost, destroyed, stolen or otherwise is missing shall be entitled to receive a certificate representing the shares of Bancshares Stock to which he or she is entitled in accordance with and upon compliance with conditions imposed by the Exchange Agent or Bancshares pursuant to the provisions of N.C. GEN. STAT. (section mark) 25-8-405 and N.C. GEN. STAT. (section mark) 25-8-104 (including without limitation a requirement that the shareholder provide a lost instruments indemnity or surety bond in form, substance and amount satisfactory to the Exchange Agent and Bancshares).
h. TREATMENT OF TRIAD'S STOCK OPTIONS. At the Effective Time, each option previously granted by Triad to purchase shares of Triad Stock and which is outstanding on the date of this Agreement automatically shall be converted into an option to purchase a number of shares of Bancshares Stock equal to the number of shares of Triad Stock originally covered by the option multiplied by the Exchange Rate (rounded to the nearest whole share); provided, however, in no event shall options to purchase more than 162,579 shares of Triad Stock be converted into options to purchase Bancshares Stock. The purchase or exercise price of each share of Bancshares Stock under each such option shall be equal to the per share purchase or exercise price of Triad Stock previously covered by such option divided by the Exchange Rate (and rounded to the nearest cent). All other terms of each such stock option shall apply to the purchase of Bancshares Stock thereunder and shall be unaffected by the Merger or conversion, including but not limited to stock appreciation rights, exercise and vesting provisions of each such stock option except that the Merger will trigger the immediate vesting provisions of each such option in accordance with the terms of each such option.
i. OUTSTANDING BANCSHARES AND UCB STOCK. The status of the shares of Bancshares Stock and the shares of the capital stock of UCB which are outstanding immediately prior to the Effective Time shall not be affected by the Merger.
1.06. ARTICLES, BY-LAWS AND MANAGEMENT. The Articles of Incorporation and By-Laws of UCB in effect at the Effective Time shall be the Articles of Incorporation and By-Laws of UCB as the surviving corporation. The officers and directors of UCB in office at the Effective Time shall continue to hold such offices until removed as provided by law or until the election or appointment of their respective successors.
1.07. CLOSING; ARTICLES OF MERGER; EFFECTIVE TIME. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Ward and Smith, P.A. in Raleigh, North Carolina, or at such other place as Bancshares shall designate, on a date specified by Bancshares (the "Closing Date") after the expiration of any and all required waiting periods following the effective date of required approvals of the Merger by governmental or regulatory authorities (but in no event more than thirty (30) days following the expiration of all such required waiting periods). At the Closing, Bancshares, UCB and Triad shall take such actions (including without limitation the delivery of certain closing documents) as are required herein and as shall otherwise be required by law to consummate the Merger and cause it to become effective, and shall execute Articles of Merger under North Carolina law which shall contain a "Plan of Merger" substantially in the form attached as Schedule A hereto.
Subject to the terms and conditions set forth herein (including without limitation the receipt of all required approvals of government and regulatory authorities), the Merger shall be effective on the date and at the time (the "Effective Time") designated in the Articles of Merger executed at the Closing and filed with the North Carolina Secretary of State in accordance with law; provided, however, that the date and time so specified as the Effective Time shall in no event be more than ten days following the Closing Date. If the Articles of Merger do not designate a date or specific time as the Effective Time, then the Effective Time shall be that date and time when the Articles of Merger are properly filed with the North Carolina Secretary of State.
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF TRIAD
Except as otherwise specifically provided herein or as "Previously Disclosed" (as defined in Paragraph 10.01. below) to UCB, Triad hereby makes the following representations and warranties to UCB and Bancshares.
2.01. ORGANIZATION; STANDING; POWER. Triad (i) is duly organized and incorporated, validly existing and in good standing as a banking corporation under the laws of North Carolina; (ii) has all requisite power and authority (corporate and other) to own, lease and operate its properties and to carry on its business as now being conducted; (iii) is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased or operated by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a material adverse effect on Triad; and, (iv) is not transacting business or operating any properties owned or leased by it in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a material adverse effect on Triad.
2.02. CAPITAL STOCK. Triad's authorized capital stock consists of 4,000,000 shares of common stock, $2.50 par value per share. As of the date of this Agreement, 1,818,623 shares of Triad Stock are issued and outstanding, which constitute Triad's only issued and outstanding securities.
The Subsidiary's authorized capital stock consists of 100,000 shares of common stock, $1.00 par value per share ("Subsidiary Stock") of which 10,000 shares are issued and outstanding and constitute the Subsidiary's only outstanding securities. All outstanding shares of Subsidiary Stock are owned of record and beneficially by Triad.
Each outstanding share of Triad Stock and Subsidiary Stock, respectively, (i) has been duly authorized and is validly issued and outstanding, and is fully paid and nonassessable (except to the extent assessable under applicable North Carolina banking law), (ii) has not been issued in violation of the preemptive rights of any shareholder, and (iii) has been issued pursuant to and in compliance with the requirement of an applicable from registration requirements under the Securities Act of 1933, as amended (the "1933 Act").
2.03. PRINCIPAL SHAREHOLDERS. No person or entity is known to Triad to beneficially own, directly or indirectly, more than 5% of the outstanding shares of Triad Stock.
2.04. SUBSIDIARIES. Triad is the record and beneficial owner of all of the issued and outstanding shares of Subsidiary Stock. Otherwise, neither Triad nor the Subsidiary has any subsidiary (direct or indirect), nor owns any stock or other equity interest in any corporation, service corporation, joint venture, partnership or other entity.
ETC.. With the exception of options to purchase an aggregate of 162,579 shares of Triad Stock which have been issued and are outstanding under Triad's Stock Options Policy for Non-Employee Directors and Triad's Employees' Stock Option Plan and shares to be issued pursuant to the Directors Deferred Compensation Plan, neither Triad nor the Subsidiary has any outstanding (i) securities or other obligations (including debentures or other debt instruments) which are convertible into shares of Triad Stock or Subsidiary Stock or any other securities of Triad or the Subsidiary, (ii) options, warrants, rights, calls or other commitments of any nature which entitle any person to receive or acquire any shares of Triad Stock or Subsidiary Stock or any other securities of Triad or the Subsidiary, or (iii) plan, agreement or other arrangement pursuant to which shares of Triad Stock or Subsidiary Stock or any other securities of Triad or the Subsidiary, or options, warrants, rights, calls or other commitments of any nature pertaining thereto, have been or may be issued.
2.06. AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has been duly and validly approved by Triad's Board of Directors and executed and delivered on Triad's behalf. Subject only to approval of this Agreement by the shareholders of Triad in the manner required by law (as contemplated by Paragraph 6.01.a. below), (i) Triad has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings and approvals required to authorize Triad to enter into this Agreement and to perform its obligations and agreements and carry out the transactions described herein have been duly and properly completed or obtained, and (iii) this Agreement has been executed on behalf of Triad and constitutes a valid and binding agreement of Triad enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors' rights generally, (B) by legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).
2.07. VALIDITY OF TRANSACTIONS; ABSENCE OF REQUIRED CONSENTS OR WAIVERS. Except where the same would not have a material adverse effect on Triad and the Subsidiary considered as one enterprise, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by Triad with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, Triad's Articles of Incorporation or Bylaws, or any contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which Triad or the Subsidiary is bound or by which it, its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of Triad's or the Subsidiary's properties or assets; (iii) violate any applicable federal or state statute, law, rule or regulation, or any judgment, order, writ, injunction or decree of any court, administrative or regulatory agency or governmental body; (iv) result in the acceleration of any obligation or indebtedness of Triad or the Subsidiary; or, (v) interfere with or otherwise adversely affect Triad's or the Subsidiary's ability to carry on its business as presently conducted, or interfere with or otherwise adversely affect the ability of Bancshares or UCB to carry on such business after the Effective Time.
No consents, approvals or waivers are required to be obtained from any person or entity in connection with Triad's execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of Triad's shareholders as described in Paragraph 7.01.c. below and of governmental or regulatory authorities as described in Paragraph 7.01.a. below.
2.08. TRIAD BOOKS AND RECORDS. Triad's and the Subsidiary's books of account and business records have been maintained in substantial compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books and records are complete and reflect accurately in all material respects Triad's and the Subsidiary's respective items of income and expense and all of their respective assets, liabilities and stockholders' equity. The minute books of Triad and the Subsidiary accurately reflect in all material respects the corporate actions which their respective shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to UCB and its representatives.
2.09. TRIAD REPORTS. Since January 1, 1990, and where the failure to file has had or could have a material and adverse effect on Triad and the Subsidiary considered as one enterprise, Triad and the Subsidiary each has filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the Federal Deposit Insurance Corporation (the "FDIC"), (ii) the North Carolina Commissioner of Banks (the "Commissioner"), or (iii) any other governmental or regulatory authorities having jurisdiction over Triad or the Subsidiary. All such reports, registrations and statements filed by Triad with the FDIC, the Commissioner or other such regulatory authority are collectively referred to herein as the "Triad Reports." As of their respective dates, each Triad Report complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which it was filed and 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; and neither Triad nor the Subsidiary has been notified that any such Triad Report was deficient in any material respect as to form or content. Following the date of this Agreement, Triad shall deliver to Bancshares, simultaneous with the filing thereof, a copy of each report, registration, statement or other regulatory filing made by it or the Subsidiary with the FDIC, the Commissioner or any other such regulatory authority.
The Triad Stock is registered under the Securities Exchange Act of 1934 (the "Exchange Act"); Triad is subject to the periodic reporting requirements of the Exchange Act.
2.10. TRIAD FINANCIAL STATEMENTS. Triad has delivered to UCB a copy of (i) its balance sheets as of December 31, 1993 and December 31, 1994, and its statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1992, December 31, 1993 and December 31, 1994, together with notes thereto (the "Triad Financial Statements"), and (ii) a copy of its balance sheet as of June 30, 1995 and its statement of operations for the six months ended June 30, 1995 (the "Triad Interim Financial Statements"); and, following the date of this Agreement, Triad promptly will deliver to UCB all other annual or interim financial statements prepared by or for Triad. The Triad Financial Statements and Triad Interim Financial Statements (including any related notes and schedules thereto) (i) are in accordance with Triad's books and records, and (ii) were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods indicated and present fairly in all material respects Triad's financial condition, assets and liabilities, results of operations, changes in stockholders' equity and changes in cash flows as of the dates indicated and for the periods specified therein. The Triad Financial Statements have been audited and certified by Triad's independent certified public accountants, KPMG Peat Marwick, LLP.
2.11. TAX RETURNS AND OTHER TAX MATTERS. (i) Triad and the Subsidiary each has timely filed or caused to be filed all federal, state and local tax returns and reports which are required by law to have been filed, and, to the best knowledge and belief of management of Triad, all such returns and reports were true, correct and complete and contained all material information required to be contained therein; (ii) all federal, state and local income, profits, franchise, sales, use, occupation, property, excise and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against Triad or the Subsidiary or their property have been become fully paid, and, with respect to any such taxes to become due from Triad or the Subsidiary for any period or periods through and including June 30, 1995, adequate provision has been made for the payment of all such taxes and such provision is reflected in the Triad Interim Financial Statements; (iii) Triad's and the Subsidiary's tax returns and reports have been examined or closed by applicable statutes of limitations through the tax year ended December 31, 1991, and neither Triad nor the Subsidiary has received any indication of the pendency of any audit or examination in connection with any tax return or report and has no knowledge that any such return or report is subject to adjustment; and (iv) Triad has not executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitation) with respect to any tax year, the audit of any tax return or report or the assessment or collection of any tax. Any deferred taxes of Triad or the Subsidiary have been provided for in the Triad Financial Statements and Triad Interim Financial Statements in all material respects.
2.12. ABSENCE OF MATERIAL ADVERSE CHANGES OR CERTAIN OTHER EVENTS.
(i) Since December 31, 1994, Triad and the Subsidiary each has conducted its business only in the ordinary course, and there has been no material adverse change, and there has occurred no event or development and, to the best knowledge of management of Triad, there currently exists no condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in a material adverse change, in or affecting the financial condition of Triad or the Subsidiary or in its results of operations, prospects, business, assets, loan portfolio, investments, properties or operations.
(ii) Since December 31, 1994, and other than in the ordinary course of its business, neither Triad nor the Subsidiary has incurred any material liability or engaged in any material transaction or entered into any material agreement, increased the salaries, compensation or general benefits payable to its employees, suffered any loss, destruction or damage to any of its properties or assets, or made a material acquisition or disposition of any assets or entered into any material contract or lease.
2.13. ABSENCE OF UNDISCLOSED LIABILITIES. Neither Triad nor the Subsidiary has any liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent or otherwise, whether due or to become due (including without limitation tax liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in Triad Interim Financial Statements, or (ii) obligations or liabilities incurred in the ordinary course of their business since June 30, 1995 and which are not, individually or in the aggregate, material to Triad.
OBLIGATIONS. Triad and the Subsidiary each has performed in all material respects all obligations required to be performed by it under, and it is not in default in any respect under, or in violation in any respect of, the terms and conditions of its Articles of Incorporation or Bylaws, and/or any contract, agreement, lease, mortgage, note, bond, indenture, license, obligation, understanding or other undertaking (whether oral or written) to which Triad or the Subsidiary is bound or by which it, its business, capital stock or any of its properties or assets may be affected.
2.15. LITIGATION AND COMPLIANCE WITH LAW.
(i) There are no actions, suits, arbitrations, controversies or other proceedings or investigations (or, to the best knowledge and belief of management of Triad or the Subsidiary, any facts or circumstances which reasonably could result in such), including without limitation any such action by any governmental or regulatory authority, which currently exists or is ongoing, pending or, to the best knowledge and belief of management of Triad or the Subsidiary threatened, contemplated or probable of assertion, against, relating to or otherwise affecting Triad or the Subsidiary or any of their properties or assets which, if determined adversely, could result in liability on the part of Triad or the Subsidiary for, or subject it to, monetary damages, fines or penalties, or an injunction, and which could have a material adverse effect on Triad's financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations or on the ability of Triad to consummate the Merger;
(ii) Triad and the Subsidiary each has all licenses, permits, orders, authorizations or approvals ("Permits") of any federal, state, local or foreign governmental or regulatory body that are material to or necessary for the conduct of its business or to own, lease and operate its properties; all such Permits are in full force and effect; no violations are or have been recorded in respect of any such Permits; and no proceeding is pending or, to the best knowledge of management of Triad and the Subsidiary, threatened or probable of assertion to suspend, cancel, revoke or limit any Permit;
(iii) Neither Triad nor the Subsidiary is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding or other similar agreement, order, directive, memorandum or consent of, with or issued by any regulatory or other governmental authority (including without limitation the FDIC or the Commissioner) relating to its financial condition, directors or officers, operations, capital, regulatory compliance or otherwise; there are no judgments, orders, stipulations, injunctions, decrees or awards against Triad or the Subsidiary which in any manner limit, restrict, regulate, enjoin or prohibit any present or past business or practice of Triad or the Subsidiary; and neither Triad nor the Subsidiary has been advised or has no reason to believe that any regulatory or other governmental authority or any court is contemplating, threatening or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree or award; and,
(iv) Neither Triad nor the Subsidiary is in violation or default in any material respect under, and each has complied in all material respects with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees of any court or federal, state, municipal or other governmental or regulatory authority having jurisdiction or authority over it or its business operations, properties or assets (including without limitation all provisions of North Carolina law relating to usury, the Consumer Credit Protection Act, and all other laws and regulations applicable to extensions of credit by Triad) and there is no basis for any claim by any person or authority for compensation, reimbursement or damages or otherwise for any violation of any of the foregoing that would have any material adverse effect on the financial condition of Triad and the Subsidiary considered as one enterprise.
2.16. REAL PROPERTIES. Triad has Previously Disclosed to UCB a listing of all real property owned or leased by Triad or the Subsidiary (including Triad's banking facilities and all other real estate or foreclosed properties owned by Triad) (the "Real Property") and all leases, if any, pertaining to any such Real Property to which Triad or the Subsidiary is a party (the "Real Property Leases"). With respect to all Real Property owned by Triad, Triad has good and marketable fee simple title to such Real Property and owns the same free and clear of all mortgages, liens, leases, encumbrances, title defects and exceptions to title other than (i) the lien of current taxes not yet due and payable, and (ii) such imperfections of title and restrictions, covenants and easements (including utility easements) which do not affect materially the value of the Real Property and which do not and will not materially detract from, interfere with or restrict the present or future use of the properties subject thereto or affected thereby. With respect to each Real Property Lease (i) such lease is valid and enforceable in accordance with its terms, (ii) there currently exists no circumstance or condition which constitutes an event of default by Triad or its lessor or which, with the passage of time or the giving of required notices will or could constitute such an event of default, and (iii) subject to any required consent of Triad's lessor, each such Real Property Lease may be assigned to UCB and the execution and delivery of this Agreement does not constitute an event of default thereunder.
To the best of the knowledge and belief of management of Triad, the Real Property complies in all material respects with all applicable federal, state and local laws, regulations, ordinances or orders of any governmental authority, including those relating to zoning, building and use permits, and the Real Property may be used under applicable zoning ordinances for commercial banking facilities as a matter of right rather than as a conditional or nonconforming use.
All improvements and fixtures included in or on the Real Property are in good condition and repair, ordinary wear and tear excepted, and there does not exist any condition which interferes with Triad's (or will interfere with UCB's) use or affects the economic value thereof.
2.17. LOANS, ACCOUNTS, NOTES AND OTHER RECEIVABLES.
(i) All loans, accounts, notes and other receivables reflected as assets on Triad's books and records (A) have resulted from bona fide business transactions in the ordinary course of Triad's operations, (B) in all material respects were made in accordance with Triad's standard loan policies and procedures, and (C) are owned by Triad free and clear of all liens, encumbrances, assignments, participation or repurchase agreements or other exceptions to title or to the ownership or collection rights of any other person or entity.
(ii) All records of Triad regarding all outstanding loans, accounts, notes and other receivables, and all other real estate owned, are accurate in all material respects, and, with respect to each loan which Triad's loan documentation indicates is secured by any real or personal property or property rights ("Loan Collateral"), such loan is secured by valid, perfected and enforceable liens on all such Loan Collateral having the priority described in Triad's records of such loan.
(iii) To the best knowledge of management of Triad, each loan reflected as an asset on Triad's books, and each guaranty therefor, is the legal, valid and binding obligation of the obligor or guarantor thereon, and no defense, offset or counterclaim has been asserted with respect to any such loan or guaranty.
(iv) Triad has Previously Disclosed to UCB a listing of (A) each loan, extension of credit or other asset of Triad which, as of September 30, 1995, is classified by the FDIC, the Administrator or by Triad as "Loss", "Doubtful", "Substandard" or "Special Mention" (or otherwise by words of similar import), or which Triad has designated as a special asset or for special handling or placed on any "watch list" because of concerns regarding the ultimate collectibility or deteriorating condition of such asset or any obligor or Loan Collateral therefor, and (B) each loan or extension of credit of Triad which, as of September 30, 1995, was past due as to the payment of principal and/or interest, or as to which any obligor thereon (including the borrower or any guarantor) otherwise was in default, is the subject of a proceeding in bankruptcy or otherwise has indicated any inability or intention not to repay such loan or extension of credit. Each such listing is accurate and complete as of the date indicated.
(v) To the best knowledge and belief of Triad's management, each of Triad's loans and other extensions of credit (with the exception of those loans and extensions of credit specified in the written listings described in Subparagraph (iv) above) is collectible in the ordinary course of Triad's business in an amount which is not less than the amount at which it is carried on Triad's books and records.
(vi) Triad's reserve for possible loan losses (the "Loan Loss Reserve") shown in the Triad Interim Financial Statements has been established in conformity with GAAP, sound banking practices and all applicable requirements of the FDIC and rules and policies of the Commissioner and, in the best judgment of Triad's management, is reasonable in view of the size and character of Triad's loan portfolio, current economic conditions and other relevant factors, and is adequate to provide for losses relating to or the risk of loss inherent in Triad's loan portfolio and other real estate owned.
INVESTMENTS. All securities owned by Triad or the Subsidiary (whether owned of record or beneficially) are held free and clear of all mortgages, liens, pledges, encumbrances or any other restriction or rights of any other person or entity, whether contractual or statutory, which would materially impair the ability of Triad or the Subsidiary to dispose freely of any such security and/or otherwise to realize the benefits of ownership thereof at any time (other than pledges of securities in the ordinary course of Triad's business to secure public funds deposits). There are no voting trusts or other agreements or undertakings to which Triad or the Subsidiary is a party with respect to the voting of any such securities. With respect to all "repurchase agreements" to which Triad or the Subsidiary has "purchased" securities under agreement to resell (if any), Triad or the Subsidiary has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of the collateral securing each such repurchase agreement equals or exceeds the amount of the debt owed to Triad which is secured by such collateral.
Except for fluctuations in the market values of United States Treasury and agency or municipal securities, since June 30, 1995, there has been no significant deterioration or material adverse change in the quality, or any material decrease in the value, of Triad's or the Subsidiary's securities portfolio.
2.19. PERSONAL PROPERTY AND OTHER ASSETS. All assets of Triad and the Subsidiary (including without limitation all banking equipment, data processing equipment, vehicles, and all other personal property located in or used in the operation of each office of Triad or the Subsidiary or otherwise used by Triad or the Subsidiary in the operation of its business) are owned by Triad or the Subsidiary free and clear of all liens, leases, encumbrances, title defects or exceptions to title. All of Triad's banking equipment is in good operating condition and repair, ordinary wear and tear excepted.
2.20. PATENTS AND TRADEMARKS. Triad and the Subsidiary each owns, possesses or has the right to use any and all patents, licenses, trademarks, trade names, copyrights, trade secrets and proprietary and other confidential information necessary to conduct its business as now conducted; and neither Triad nor the Subsidiary has violated, and neither of them currently is in conflict with, any patent, license, trademark, trade name, copyright or proprietary right of any other person or entity.
2.21. ENVIRONMENTAL MATTERS. Triad has Previously Disclosed and provided to UCB copies of all written reports, correspondence, notices or other materials, if any, in its possession pertaining to environmental reports, surveys, assessments, notices of violation, notices of regulatory requirements, penalty assessments, claims, actions or proceedings, past or pending, of the Real Property or any of its Loan Collateral and any improvements thereon, or to any violation of Environmental Laws (as defined below) on, affecting or otherwise involving the Real Property, any Loan Collateral or otherwise involving Triad or the Subsidiary.
To the best of the knowledge and belief of management of Triad:
(i) there has been no presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control or clean-up, in a reportable or regulated quantity, of any hazardous, toxic or otherwise regulated materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, oil or other petroleum products or byproducts, asbestos or materials containing (or presumed to contain) asbestos, polychlorinated biphenyls, or radioactive materials, and/or any hazardous, toxic, regulated or dangerous waste, substance or material defined as such by the United States Environmental Protection Agency or any other federal, state or local government or agency or political subdivision thereof, or for the purpose of any Environmental Laws (as defined herein), as may now or hereafter (through the Effective Time) be defined or in effect ("Hazardous Substances") by any person on, from or relating to any parcel of the Real Property;
(ii) neither Triad nor the Subsidiary has violated any federal, state or local law, rule, regulation, order, permit or other requirement relating to health, safety or the environment or imposing liability, responsibility or standards of conduct applicable to environmental conditions (all such laws, rules, regulations, orders and other requirements being herein collectively referred to as "Environmental Laws"), and there has been no violation of any Environmental Laws (including any violation with respect to or relating to any Loan Collateral) by any other person or entity for whose liability or obligation with respect to any particular matter or violation Triad or the Subsidiary is or may be
(iii) neither Triad nor the Subsidiary is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control or clean-up of any Hazardous Substances on, from or relating to the Real Property or any Loan Collateral, by Triad or the Subsidiary or any other person or entity; and,
(iv) no facts, events or conditions relating to the Real Property or any Loan Collateral, or the operations of Triad or the Subsidiary at any of its office locations, will prevent, hinder or limit continued compliance with Environmental Laws, or give rise to any investigatory, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.
For purposes of this Agreement, "Environmental Laws" shall include:
(i) all federal, state and local statutes, regulations, ordinances, orders, decrees, and similar provisions having the force or effect of law,
(ii) all contractual agreements, and
concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all standards of conduct and bases of obligations relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, discharge, release, threatened release, control or clean-up of any Hazardous Substances (including without limitation the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, the Oil Pollutant Act, the Coastal Zone Management Act, any "Superfund" or "Superlien" law, the North Carolina Oil Pollution and Hazardous Substances Control Act, the North Carolina Water and Air Resources Act and the North Carolina Occupational Safety and Health Act, including any amendments thereto from time to time) as such may now or hereafter (through the Effective Time) be defined or in effect.
2.22. ABSENCE OF BROKERAGE OR FINDERS COMMISSIONS. (i) All negotiations relative to this Agreement and the transactions described herein have been carried on by Triad directly with UCB and Bancshares; (ii) no person or firm has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, Triad or its Board of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with the transactions described herein; and, (iii) Triad has not agreed to pay any brokerage fee or other commission to any person or entity in connection with the transactions described herein.
2.23. MATERIAL CONTRACTS. Except for leases on Triad's branch offices, neither Triad nor the Subsidiary is a party to or bound by any agreement involving money or other property in an amount or with a value in excess of $50,000 (i) which is not to be performed in full prior to December 31, 1995, (ii) which calls for the provision of goods or services to Triad or the Subsidiary and cannot be terminated without material penalty upon written notice to the other party thereto, (iii) which is material to Triad and was not entered into in the ordinary course of business, (iv) which involves hedging, options or any similar trading activity, or interest rate exchanges or swaps, (v) which commits Triad or the Subsidiary to extend any loan or credit (with the exception of letters of credit, lines of credit and loan commitments extended in the ordinary course of Triad's business), (vi) which involves the purchase or sale of any assets of Triad or the Subsidiary, or the purchase, sale, issuance, redemption or transfer of any capital stock or other securities of Triad or the Subsidiary, or (vii) with any director, officer or principal shareholder of Triad or the Subsidiary (including without limitation any employment or consulting agreement, but not including any agreement relating to loans or other banking services which were made in the ordinary course of Triad's business and on substantially the same terms and conditions as were prevailing at that time for similar agreements with unrelated persons).
Neither Triad nor the Subsidiary is in default in any material respect, and there has not occurred any event which with the lapse of time or giving of notice or both would constitute such a default, under any contract, lease, insurance policy, commitment or arrangement to which it is a party or by which it or its property is or may be bound or affected or under which it or its property receives benefits, where the consequences of such default would have a material adverse effect on the financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations of Triad.
2.24. EMPLOYMENT MATTERS; EMPLOYEE RELATIONS. Triad and the Subsidiary each (i) has paid in full to or accrued on behalf of all its directors, officers and employees all wages, salaries, commissions, bonuses, fees, sick pay, severance pay, all other amounts promised to the extent required by law or when Triad has a policy of making such payments and other direct compensation for all services performed by them to the date of this Agreement and (ii) is in compliance with all federal, state and local laws, statutes, rules and regulations with regard to employment and employment practices, terms and conditions, and wages and hours and other compensation matters; and, no person has, to the knowledge of management of Triad or the Subsidiary, asserted that Triad or the Subsidiary is liable in any amount for any arrearages in wages or employment taxes or for any penalties for failure to comply with any of the foregoing.
There is no action, suit or proceeding by any person pending or, to the best knowledge of management of Triad or the Subsidiary, threatened, against Triad or the Subsidiary (or any of its employees), involving employment discrimination, sexual harassment, wrongful discharge or similar claims.
Neither Triad nor the Subsidiary is a party to or bound by any collective bargaining agreement with any of its employees, any labor union or any other collective bargaining unit or organization. There is no pending or threatened labor dispute, work stoppage or strike involving Triad or the Subsidiary and any of its employees, or any pending or threatened proceeding in which it is asserted that Triad or the Subsidiary has committed an unfair labor practice; and neither Triad nor the Subsidiary is aware of any activity involving it or any of its employees seeking to certify a collective bargaining unit or engaging in any other labor organization activity.
(i) Neither Triad nor the Subsidiary is a party to or bound by any employment agreements with any of its directors, officers or employees.
(ii) Triad has Previously Disclosed to UCB a listing of all bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock and stock option plans; all employment and severance contracts; all medical, and life insurance plans; all vacation, sickness, disability and death benefit plans; and all other employee benefit plans, contracts, or arrangements maintained or contributed to by Triad or the Subsidiary for the benefit of any employees, former employees, directors, former directors or any of their beneficiaries (collectively, the "Plans"). True and complete copies of all Plans, including, but not limited to, any trust instruments and/or insurance contracts, if any, forming a part thereof, and all amendments thereto, previously have been supplied to UCB. Except as Previously Disclosed to UCB, neither Triad nor the Subsidiary maintains, sponsors, contributes to or otherwise participates in any "Employee Benefit Plan" within the meaning of (section mark) 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), any "Multiemployer Plan" within the meaning of (section mark) 3(37) of ERISA, or any "Multiple Employer Welfare Arrangement" within the meaning of (section mark)(section mark) 3(40) of ERISA. Each Plan which is an "employee pension benefit plan" within the meaning of (section mark) 3(2) of ERISA and which is intended to be qualified under (section mark) 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") has received a favorable determination letter from the Internal Revenue Service, and neither Triad nor the Subsidiary is aware of any circumstances reasonably likely to result in the revocation or denial of any such favorable determination letter. All reports and returns with respect to the Plans (and any Plans previously maintained by Triad or the Subsidiary) required to be filed with any governmental department, agency, service or other authority, including without limitation Internal Revenue Service Form 5500 (Annual Report), have been properly and timely filed.
(iii) All "Employee Benefit Plans" maintained by or otherwise covering employees or former employees of Triad or the Subsidiary, to the extent subject to ERISA, currently are, and at all times have been, in compliance with all material provisions and requirements of ERISA. There is no pending or threatened litigation relating to any Plan or any such Plan previously maintained by Triad or the Subsidiary. Neither Triad nor the Subsidiary has engaged in a transaction with respect to any Plan that could subject Triad or the Subsidiary to a tax or penalty imposed by either (section mark) 4975 of the Code, or (section mark) 502(i) of ERISA.
(iv) Triad has delivered to UCB a true, correct and complete copy (including copies of all amendments thereto) of the Triad Savings Plus Plan (the "Savings Plan") and the Triad Defined Benefit Pension Plan (the "Pension Plan"), together with true, correct and complete copies of the summary plan descriptions relating to the Savings Plan and the Pension Plan, the most recent determination letter received from the Internal Revenue Service (the "IRS") regarding the Savings Plan and the Pension Plan, and the most recent Annual Report (Form 5500 series) and related schedules, if any, for the Savings Plan and the Pension Plan.
The Savings Plan and the Pension Plan are qualified under the provisions of (section mark) 401(a) of the Code, the trusts under the Savings Plan and Pension Plan are exempt trusts under (section mark) 501(a) of the Code, and Triad has received a determination letter with respect to the Savings Plan and the Pension Plan to said effect, including a determination letter covering the current terms and provisions of the Savings Plan and the Pension Plan. There are no issues relating to said qualification or exemption of the Savings Plan and the Pension Plan currently pending before the IRS, the United States Department of Labor, the Pension Benefit Guaranty Corporation or any court. The Savings Plan and the Pension Plan and the administration thereof meet (and have met since the establishment of the Savings Plan and the Pension Plan) all of the applicable requirements of ERISA, the Code and all other laws, rules and regulations applicable to the Savings Plan and the Pension Plan and do not violate (and since the establishment of the Savings Plan and the Pension Plan have not violated) any of the applicable provisions of ERISA, the Code and such other laws, rules and regulations. Without limiting the generality of the foregoing, all reports and returns with respect to the Savings Plan and the Pension Plan required to be filed with any governmental department, agency, service or other authority have been properly and timely filed. There are no issues or disputes with respect to the Savings Plan and the Pension Plan or the administration thereof currently existing between Triad, or any trustee or other fiduciary thereunder, and any governmental agency, any current or former employee of Triad or beneficiary of any such employee or any other person or entity. No "reportable event" within the meaning of Section 4043(b) of ERISA has occurred at any time with respect to the Savings Plan or the Pension Plan.
(v) No liability under subtitle C or D of Title IV of ERISA has been or is expected to be incurred by Triad or the Subsidiary with respect to the Savings Plan or the Pension Plan or with respect to any other ongoing, frozen or terminated defined benefit pension plan currently or formerly maintained by Triad. Neither Triad nor the Subsidiary presently contribute to a "multiemployer plan" and has not contributed to such a plan within the five calendar years since December 31, 1990. All contributions required to be made under the terms of each of the Plans (including without limitation the Savings Plan and the Pension Plan have been timely made. Neither the Savings Plan nor the Pension Plan maintained by Triad or the Subsidiary has an "accumulated funding deficiency" (whether or not waived) within the meaning of (section mark) 412 of the Code or (section mark) 302 of ERISA. Neither Triad nor the Subsidiary has provided, nor is required to provide, security to any "pension plan" or to any "single employer plan" pursuant to (section mark) 401(a)(29) of the Code. Under the Savings Plan and the Pension Plan, as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all "benefit liabilities," within the meaning of (section mark) 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan's most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of any such plan since the last day of the most recent plan year.
(vi) There are no restrictions on the rights of Triad to amend or terminate any Plan without incurring any liability thereunder. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (except as otherwise specifically provided herein) (A) result in any payment to any person (including without limitation any severance compensation or payment, unemployment compensation, "golden parachute" or "change in control" payment, or otherwise) becoming due under any plan or agreement to any director, officer, employee or consultant, (B) increase any benefits otherwise payable under any plan or agreement, or (C) result in any acceleration of the time of payment or vesting of any such benefit.
2.26. INSURANCE. Triad and the Subsidiary have in effect a "banker's blanket bond" and such other policies of general liability, casualty, directors and officers liability, employee fidelity, errors and omissions and other property and liability insurance as have been Previously Disclosed to UCB (the "Policies"). The Policies provide coverage in such amounts and against such liabilities, casualties, losses or risks as is customary or reasonable for entities engaged in Triad's or the Subsidiary's businesses or as is required by applicable law or regulation; and, in the reasonable opinion of management of Triad and the Subsidiary, the insurance coverage provided under the Policies is considered reasonable and adequate in all respects for Triad and the Subsidiary. Each of the Policies is in full force and effect and is valid and enforceable in accordance with its terms, and is underwritten by an insurer of recognized financial responsibility and which is qualified to transact business in North Carolina; and Triad and the Subsidiary each has taken all requisite actions (including the giving of required notices) under each such Policy in order to preserve all rights thereunder with respect to all matters. Neither Triad nor the Subsidiary is in default under the provisions of, has not received notice of cancellation or nonrenewal of or any premium increase on, or has any knowledge of any failure to pay any premium on or any inaccuracy in any application for any Policy. There are no pending claims with respect to any Policy (and neither Triad nor the Subsidiary is aware of any facts which would form the basis of any such claim), and neither Triad nor the Subsidiary has any knowledge of any state of facts or of the occurrence of any event that is reasonably likely to form the basis for any such claim.
2.27. INSURANCE OF DEPOSITS. All deposits of Triad are insured by the Bank Insurance Fund of the FDIC to the maximum extent permitted by law, all deposit insurance premiums due from Triad to the FDIC have been paid in full in a timely fashion, and, to the best of the knowledge and belief of Triad's executive officers, no proceedings have been commenced or are contemplated by the FDIC or otherwise to terminate such insurance.
2.28. AFFILIATES. Triad has Previously Disclosed to UCB a listing of those persons deemed by Triad and its counsel as of the date of this Agreement to be "Affiliates" of Triad (as that term is defined in Rule 405 promulgated under the Securities Act of 1933), including persons, trusts, estates, corporations or other entities related to persons deemed to be Affiliates of Triad.
2.29. OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT OR TAX TREATMENT. To the best of the knowledge and belief of management of Triad and the Subsidiary, there exists no fact or condition (including Triad's record of compliance with the Community Reinvestment Act) relating to Triad or the Subsidiary that may reasonably be expected to (i) prevent or materially impede or delay Bancshares, UCB or Triad from obtaining the regulatory approvals required in order to consummate transactions described herein, (ii) prevent the Merger from being treated as a "pooling of interests" for accounting purposes, or (iii) prevent the Merger from qualifying to be a tax-free reorganization under Section 368(a)(1)(A) of the Code; and, if any such fact or condition becomes known to Triad, Triad shall promptly (and in any event within three days after obtaining such knowledge) communicate such fact or condition to the President of Bancshares.
2.30. DISCLOSURE. To the best of the knowledge and belief of Triad, no written statement, certificate, schedule, list or other written information furnished by or on behalf of Triad or the Subsidiary at any time to Bancshares or UCB in connection with this Agreement (including without limitation information "Previously Disclosed" by Triad), when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by Triad or the Subsidiary to Bancshares or UCB is or will be a true and complete copy of such document, unmodified except by another document delivered by Triad.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF
Except as otherwise specifically described herein or as "Previously Disclosed" (as defined in Paragraph 10.01. below) to Triad, UCB and Bancshares each hereby makes the following representations and warranties to Triad.
3.01. ORGANIZATION; STANDING; POWER. UCB and Bancshares each (i) is duly organized and incorporated, validly existing and in good standing (as a banking corporation and a business corporation, respectively) under the laws of North Carolina, (ii) has all requisite power and authority (corporate and other) to own its respective properties and conduct its respective businesses as now being conducted, (iii) is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its respective businesses makes such qualification necessary, except where failure so to qualify would not have a material adverse effect on Bancshares and its subsidiaries considered as one enterprise, and (iv) is not transacting business, or operating any properties owned or leased by it, in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a material adverse effect on Bancshares and its subsidiaries considered as one enterprise.
3.02. CAPITAL STOCK. Bancshares' authorized capital stock consists of 40,000,000 shares of Bancshares Stock and 2,000,000 shares of no par Preferred Stock. As of the date of this Agreement, an aggregate of 14,768,740 shares of Bancshares Stock were issued and outstanding, and no shares of Preferred Stock were issued or outstanding. Bancshares' outstanding capital stock has been duly authorized and validly issued, and is fully paid and nonassessable, and the shares of Bancshares Stock issued to Triad's shareholders pursuant to this Agreement, when issued as described herein, will be duly authorized, validly issued, fully paid and nonassessable.
All outstanding shares of UCB's common stock ("UCB Stock") have been validly issued and are owned by Bancshares.
3.03. AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has been duly and validly approved by BancShares' and UCB's Boards of Directors and executed and delivered on BancShares' and UCB's behalf. (i) Bancshares and UCB each has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described herein, (ii) all corporate proceedings required to be taken to authorize Bancshares and UCB to enter into this Agreement and to perform its obligations and agreements and carry out the transactions described herein have been duly and properly taken, and (iii) this Agreement constitutes the valid and binding agreement of Bancshares and UCB enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect which affect creditors' rights generally, (B) by legal and equitable limitations on the availability of injunctive relief, specific performance and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).
3.04. VALIDITY OF TRANSACTIONS; ABSENCE OF REQUIRED CONSENTS OR WAIVERS. Except where the same would not have a material adverse effect on Bancshares and its subsidiaries considered as one enterprise, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by Bancshares or UCB with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, Bancshares' or UCB's Articles of Incorporation or Bylaws, or any contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which Bancshares or UCB is bound or by which it, its business, capital stock or any of its properties or assets may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction or encumbrance upon any of Bancshares' or UCB's properties or assets; (iii) violate any applicable federal or state statute, law, rule or regulation, or any order, writ, injunction or decree of any court, administrative or regulatory agency or governmental body; (iv) result in the acceleration of any obligation or indebtedness of Bancshares or UCB; or (v) interfere with or otherwise adversely affect Bancshares' or UCB's ability to carry on its business as presently conducted.
No consents, approvals or waivers are required to be obtained from any person or entity in connection with Bancshares' or UCB's execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for the approval of the respective Boards of Directors of Bancshares and UCB as described in Paragraph 7.01.c. below and required approvals of governmental or regulatory authorities described in Paragraph 7.01.a. below.
3.05. BANCSHARES BOOKS AND RECORDS. Bancshares' and UCB's books of account and business records have been maintained in substantial compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books and records are complete and reflect accurately in all material respects Bancshares' and UCB's respective items of income and expense and all of their respective assets, liabilities and stockholders' equity. The minute books of Bancshares and UCB accurately reflect in all material respects the corporate actions which their respective shareholders and board of directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to Triad and its representatives.
3.06. BANCSHARES REPORTS. Since January 1, 1990, and where the failure to file has had or could have a material and adverse effect on Bancshares and its subsidiaries considered as one enterprise, Bancshares and its consolidated subsidiaries have filed all reports, registrations and statements, together with any amendments that were required to be made with respect thereto, that were required to be filed with (i) the Securities and Exchange Commission (the "SEC"), (ii) the Board of Governors of the Federal Reserve System (the "FRB"), (iii) the FDIC, (iv) the Commissioner, and (v) any other governmental or regulatory authorities having jurisdiction over Bancshares or its subsidiaries. All such reports and statements filed with the SEC, the FRB, the FDIC, the Commissioner or other such regulatory authority are collectively referred to herein as the "Bancshares Reports." As of their respective dates, the Bancshares Reports complied in all material respects with all the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; and Bancshares has not been notified that any such Bancshares Reports were deficient in any material respect as to form or content. Following the date of this Agreement, Bancshares shall deliver to Triad upon its request a copy of any report, registration, statement or other regulatory filing made by Bancshares or UCB with the SEC, the FRB, the FDIC, the Commissioner or any other such regulatory authority.
Bancshares has delivered to Triad (i) a copy of Bancshares' consolidated balance sheets as of December 31, 1993 and December 31, 1994, and its consolidated statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1992, December 31, 1993 and December 31, 1994 (the "Bancshares Financial Statements"), and (ii) a copy of Bancshares' balance sheet as of June 30, 1995 and its statement of operations for the six months ended June 30, 1995 (the "Bancshares Interim Financial Statements"). The Bancshares Financial Statements were prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated and have been audited and certified by Bancshares' independent accountants, KPMG Peat Marwick LLP, and both the Bancshares Financial Statements and the Bancshares Interim Financial Statements present fairly in all material respects Bancshares' consolidated financial condition, assets and liabilities, results of operations, changes in stockholders' equity and changes in cash flows as of the dates and for the periods specified therein.
3.08. ABSENCE OF MATERIAL ADVERSE CHANGES. Since June 30, 1995, there has been no material adverse change, and there has occurred no event or development and, to the best knowledge of management of Bancshares or UCB, there currently exists no condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in a material adverse change, in or affecting Bancshares' consolidated financial condition or results of operations, or in its prospects, business, assets, loan portfolio, investments, properties or operations.
3.09. LITIGATION AND COMPLIANCE WITH LAW.
(i) There are no actions, suits, arbitrations, controversies or other proceedings or investigations (or, to the best knowledge and belief of management of Bancshares or UCB, any facts or circumstances which reasonably could result in such), including without limitation any such action by any governmental or regulatory authority, which currently exists or is ongoing, pending or, to the best knowledge and belief of management of Bancshares or UCB, threatened, contemplated or probable of assertion, against, relating to or otherwise affecting Bancshares or UCB or any of their properties or assets which, if determined adversely, could result in liability on the part of Bancshares or UCB for, or subject it to, monetary damages, fines or penalties, an injunction, and which could have a material adverse change, in or affecting Bancshares' consolidated financial condition or results of operations, or in its prospects, business, assets, loan portfolio, investments, properties or operations or on the ability of Bancshares or UCB to consummate the
(ii) Bancshares and UCB each has all licenses, permits, orders, authorizations or approvals ("Permits") of any federal, state, local or foreign governmental or regulatory body that are material to or necessary for the conduct of its business or to own, lease and operate its properties; all such Permits are in full force and effect; no violations are or have been recorded in respect of any such Permits; and no proceeding is pending or, to the best knowledge of management of Bancshares or UCB, threatened or probable of assertion to suspend, cancel, revoke or limit
(iii) neither Bancshares nor UCB is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding or other similar agreement, order, directive, memorandum or consent of, with or issued by any regulatory or other governmental authority (including without limitation the FDIC, the FRB or the Commissioner) relating to its financial condition, directors or officers, operations, capital, regulatory compliance or otherwise; there are no judgments, orders, stipulations, injunctions, decrees or awards against Bancshares or UCB which in any manner limit, restrict, regulate, enjoin or prohibit any present or past business or practice of Bancshares or UCB; and, neither Bancshares nor UCB has been advised or has any reason to believe that any regulatory or other governmental authority or any court is contemplating, threatening or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree or award; and,
(iv) Neither Bancshares nor UCB is in violation or default in any material respect under, and each has complied in all material respects with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees of any court or federal, state, municipal or other governmental or regulatory authority having jurisdiction or authority over it or its business operations, properties or assets (including without limitation all provisions of North Carolina law relating to usury, the Consumer Credit Protection Act, and all other laws and regulations applicable to extensions of credit by UCB) and there is no basis for any claim by any person or authority for compensation, reimbursement or damages or otherwise for any violation of any of the foregoing that would have any material effect on the consolidated financial condition of Bancshares.
To the best of the knowledge and belief of management of Bancshares:
(i) there has been no presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control or clean-up in a reportable or regulated quantity of any Hazardous Substances by any person on, from or relating to any of its real
(ii) neither Bancshares nor UCB has violated any Environmental Laws, and there has been no violation of any Environmental Laws (including any violation with respect to or relating to any loan collateral) by any other person or entity for whose liability or obligation with respect to any particular matter or violation Bancshares or UCB is or may be responsible or liable;
(iii) neither Bancshares nor UCB is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control or clean-up of any Hazardous Substances on, from or relating to its real property or any loan collateral, by Bancshares or UCB or any other person or entity; and,
(iv) no facts, events or conditions relating to its real property or any loan collateral, or the operations of Bancshares or UCB at any of its office locations, will prevent, hinder or limit continued compliance with Environmental Laws, or give rise to any investigatory, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.
3.11. ABSENCE OF BROKERAGE OR FINDERS COMMISSIONS.
(i) All negotiations relative to this Agreement and the transactions described herein have been carried on by Bancshares and UCB directly with Triad; (ii) no person or firm has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, Bancshares or UCB or their respective Boards of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with the transactions described herein; and, (iii) neither Bancshares nor UCB has agreed to pay any brokerage fee or other commission to any person or entity in connection with the transactions described herein.
(i) Each plan of Bancshares or UCB which is an "employee pension benefit plan" within the meaning of (section mark) 3(2) of ERISA and which is intended to be qualified under (section mark) 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") has received a favorable determination letter from the Internal Revenue Service, and neither Bancshares nor UCB is aware of any circumstances reasonably likely to result in the revocation or denial of any such favorable determination letter. All reports and returns with respect to the Plans required to be filed with any governmental department, agency, service or other authority, including without limitation Internal Revenue Service Form 5500 (Annual Report), have been properly and timely filed.
(ii) All "Employee Benefit Plans" maintained by or otherwise covering employees or former employees of Bancshares or UCB, to the extent subject to ERISA, currently are, and at all times have been, in compliance with all material provisions and requirements of ERISA. There is no pending or threatened litigation relating to any plan maintained by Bancshares or UCB. Neither Bancshares nor UCB has engaged in a transaction with respect to any plan that could subject Bancshares or UCB to a tax or penalty imposed by either (section mark) 4975 of the Code, or (section mark) 502(i) of ERISA.
(iii) Any 401(k) savings plan maintained by Bancshares or UCB (a "UCB Savings Plan") is qualified under the provisions of (section mark)(section mark) 401(a) of the Code, the trust under the UCB Savings Plan is an exempt trust under (section mark) 501(a) of the Code, and Bancshares or UCB has received a determination letter with respect to the UCB Savings Plan to said effect, including a determination letter covering the current terms and provisions of the UCB Savings Plan. There are no issues relating to said qualification or exemption of the UCB Savings Plan currently pending before the IRS, the United States Department of Labor, the Pension Benefit Guaranty Corporation or any court. The UCB Savings Plan and the administration thereof meet (and have met since the establishment of the UCB Savings Plan) all of the applicable requirements of ERISA, the Code and all other laws, rules and regulations applicable to the UCB Savings Plan and do not violate (and since the establishment of the UCB Savings Plan have not violated) any of the applicable provisions of ERISA, the Code and such other laws, rules and regulations. Without limiting the generality of the foregoing, all reports and returns with respect to the UCB Savings Plan required to be filed with any governmental department, agency, service or other authority have been properly and timely filed. There are no issues or disputes with respect to the UCB Savings Plan or the administration thereof currently existing between Triad, or any trustee or other fiduciary thereunder, and any governmental agency, any current or former employee of Bancshares or UCB or beneficiary of any such employee or any other person or entity. No "reportable event" within the meaning of Section 4043(b) of ERISA has occurred at any time with respect to the UCB Savings Plan.
(iv) All contributions required to be made under the terms of each of any plans (including without limitation the UCB Savings Plan and any "pension plan" (as defined in (section mark) 3(2) of ERISA) maintained by Bancshares or UCB) have been timely made. Neither the Savings Plan nor any "pension plan" maintained by Bancshares or UCB or has an "accumulated funding deficiency" (whether or not waived) within the meaning of (section mark) 412 of the Code or (section mark)(section mark) 302 of ERISA. Under the UCB Savings Plan and any "pension plan" maintained by Bancshares or UCB, as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all "benefit liabilities," within the meaning of (section mark) 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan's most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of any such plan since the last day of the most recent plan year.
3.13. INSURANCE. Bancshares and UCB have in effect a "banker's blanket bond" and such other policies of general liability, casualty, directors and officers liability, employee fidelity, errors and omissions and other property and liability insurance as have been Previously Disclosed to Triad (the "UCB Policies"). The UCB Policies provide coverage in such amounts and against such liabilities, casualties, losses or risks as is customary or reasonable for entities engaged in Bancshares' and UCB's businesses or as is required by applicable law or regulation; and, in the reasonable opinion of management of Bancshares and UCB, the insurance coverage provided under the UCB Policies is considered reasonable and adequate for Bancshares and UCB.
3.14. OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT OR TAX TREATMENT. To the best of the knowledge and belief of the executive officers of Bancshares and UCB, no fact or condition (including UCB's record of compliance with the Community Reinvestment Act) relating to Bancshares or UCB exists that may reasonably be expected to (i) prevent or materially impede or delay Bancshares, UCB or Triad from obtaining the regulatory approvals required in order to consummate the transactions described herein, (ii) prevent the Merger from being treated as a "pooling of interests" for accounting purposes, or (iii) prevent the Merger from qualifying to be a tax-free reorganization under Section 368(a)(1)(A) of the Code; and, if any such fact or condition becomes known to the executive officers of Bancshares or UCB, it promptly (and in any event within three days after obtaining such knowledge) shall communicate such fact or condition to the Chairman of Triad.
3.15. DISCLOSURE. To the best of the knowledge and belief of Bancshares and UCB, no written statement, certificate, schedule, list or other written information furnished by or on behalf of Bancshares or UCB at any time to Triad in connection with this Agreement (including without limitation information "Previously Disclosed" by Bancshares and UCB), when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. Each document delivered or to be delivered by Bancshares or UCB to Triad is or will be a true and complete copy of such document, unmodified except by another document delivered by Bancshares or UCB.
ARTICLE IV. COVENANTS OF TRIAD
4.01. AFFIRMATIVE COVENANTS OF TRIAD. Triad hereby covenants and agrees as follows with Bancshares and UCB.
a. "AFFILIATES" OF TRIAD. Triad will use its best efforts to cause each person who shall be deemed by Bancshares or its counsel, in their sole discretion, to be an Affiliate of Triad (as defined in Paragraph 2.28 above), to execute and deliver to Bancshares prior to the Closing a written agreement (the "Affiliates' Agreement") relating to restrictions on shares of Bancshares Stock to be received by such Affiliates pursuant to this Agreement and which Affiliates' Agreement shall be in form and content reasonably satisfactory to Bancshares and substantially in the form attached as Schedule B to this Agreement. Certificates for the shares of Bancshares Stock issued to Affiliates of Triad shall bear a restrictive legend (substantially in the form as shall be set forth in the Affiliates' Agreement) with respect to the restrictions applicable to such shares.
b. CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME. While the parties recognize that the operation of Triad and the Subsidiary until the Effective Time is the responsibility of Triad and the Subsidiary and their respective Boards of Directors and officers, Triad agrees that, between the date of this Agreement and the Effective Time, Triad will carry on its business, and it will cause the Subsidiary to carry on its business, in and only in the regular and usual course in substantially the same manner as such business heretofore was conducted, and, to the extent consistent with such business and within its ability to do so, Triad agrees that it will:
(i) preserve intact its present business organization, keep available its present officers and employees, and preserve its relationships with customers, depositors, creditors, correspondents, suppliers, and others having business relationships with
(ii) maintain all its properties and equipment in customary repair, order and condition, ordinary wear and
(iii) maintain its books of account and records in the usual, regular and ordinary manner in accordance with sound business practices applied on a consistent basis;
(iv) comply with all laws, rules and regulations applicable to it, its properties and to the conduct of its
(v) continue to maintain in force insurance such as is described in Paragraph 2.26. above; will not modify any bonds or policies of insurance in effect as of the date hereof unless the same, as modified, provides substantially equivalent coverage; and, will not cancel, allow to be terminated or, to the extent available, fail to renew, any such bond or policy of insurance unless the same is replaced with a bond or policy providing substantially
(vi) promptly provide to Bancshares and UCB such information about Triad and the Subsidiary and their financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations, as they reasonably shall request.
c. PERIODIC INFORMATION REGARDING LOANS. All new extensions of credit in excess of $800,000 will be submitted by Triad to UCB on an after-the-fact basis for UCB's review within 10 business days of the date of the extension of credit.
Additionally, Triad agrees to make available and provide to Bancshares and UCB the following information with respect to Triad's loans and other extensions of credit (such assets herein referred to as "Loans") as of September 30, 1995 and each month thereafter until the Effective Time, such information for each month to be in form and substance as is usual and customary in the conduct of Triad's business and to be furnished within twenty (20) days of the end of each month ending after the date hereof:
(i) a list of Loans past due for sixty (60) days or more as to principal or
(ii) an analysis of the Loan Loss Reserve and management's assessment of the adequacy of the Loan Loss Reserve, which analysis and assessment shall include a list of all classified or "watch list" Loans, along with the specifically allocated to the Loan Loss Reserve for each such classified or "watch list" Loan;
(iii) a list of Loans in nonaccrual
(iv) a list of all Loans over $50,000 without principal reduction for a period of longer than one year;
(v) a list of all foreclosed real property or other real estate owned
(vi) a list of reworked or restructured Loans over $50,000 and still
(vii) a list of any actual or threatened litigation by or against Triad pertaining to any Loans or credits, which list shall contain evaluation of such litigation.
d. NOTICE OF CERTAIN CHANGES OR EVENTS. Following the execution of this Agreement and up to the Effective Time, Triad promptly will notify UCB in writing of and provide to it such information as it shall request regarding (i) any material adverse change in its financial condition, results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change, or of (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation or warranty of Triad herein, or any information that has been Previously Disclosed by Triad to UCB, to be or become materially inaccurate, misleading or incomplete, or which has resulted or may or could cause, create or result in the material breach or violation of any of Triad's covenants or agreements contained herein or in the failure of any of the conditions described in Paragraphs 7.01. or 7.03. below.
e. CONSENTS TO ASSIGNMENT OF LEASES. Triad will use its best efforts to obtain all required consents of its landlords to the assignment to UCB of Triad's rights and obligations under the Real Property Leases, each of which consents shall be in such form as shall be specified by UCB.
f. FURTHER ACTION; INSTRUMENTS OF TRANSFER, ETC. Triad covenants and agrees with Bancshares and UCB that it (i) will use its best efforts in good faith to take or cause to be taken all action required of it hereunder as promptly as practicable so as to permit the consummation of the transactions described herein at the earliest possible date, (ii) shall perform all acts and execute and deliver to Bancshares and UCB all documents or instruments required herein or as otherwise shall be reasonably necessary or useful to or requested by either of them in consummating such transactions, and, (iii) will cooperate with Bancshares and UCB in every way in carrying out, and will pursue diligently the expeditious completion of, such transactions.
4.02. NEGATIVE COVENANTS OF TRIAD. Triad hereby covenants and agrees that, between the date hereof and the Effective Time, Triad will not do any of the following things or take any of the following actions without the prior written consent and authorization of the President of Bancshares.
a. AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS. Neither Triad nor the Subsidiary will amend its Articles of Incorporation or Bylaws.
b. CHANGE IN CAPITAL STOCK. Except for Triad Stock to be issued under Triad's Stock Options Policy for Non-Employee Directors and Triad's Employees' Stock Option Plan and Triad's Directors Deferred Compensation Plan, neither Triad nor the Subsidiary will (i) make any change in its authorized capital stock, or create any other or additional authorized capital stock or other securities, or (ii) issue, sell, purchase, redeem, retire, reclassify, combine or split any shares of its capital stock or other securities, other than the issuance of shares upon the exercise of stock options which are outstanding as of the date of this Agreement (including securities convertible into capital stock), or enter into any agreement or understanding with respect to any such action. The members of Triad's Board of Directors shall be allowed to elect deferral of their directors' fees pursuant to Triad's Directors Deferred Compensation Plan until December 31, 1995. Any fees earned thereafter until the Effective Time shall be paid in cash.
c. OPTIONS, WARRANTS AND RIGHTS. Except for options to be granted pursuant to the terms of the Non-Employee Director Stock Option Plan dated February 16, 1993, neither Triad nor the Subsidiary will grant or issue any options, warrants, calls, puts or other rights of any kind relating to the purchase, redemption or conversion of shares of its capital stock or any other securities (including securities convertible into capital stock) or enter into any agreement or understanding with respect to any such action.
d. DIVIDENDS. Except as provided in Paragraph 8.02.c. hereof, Triad will not declare or pay any dividends or make any other distributions on or in respect of any shares of its capital stock or otherwise to its shareholders.
e. EMPLOYMENT, BENEFIT OR RETIREMENT AGREEMENTS OR PLANS. Except as required by law, neither Triad nor the Subsidiary will (i) enter into or become bound by any contract, agreement or commitment for the employment or compensation of any officer, employee or consultant which is not immediately terminable by Triad or the Subsidiary without cost or other liability on no more than thirty (30) days notice; (ii) adopt, enter into or become bound by any new or additional profit-sharing, bonus, incentive, change in control or "golden parachute", stock option, stock purchase, pension, retirement, insurance (hospitalization, life or other) or similar contract, agreement, commitment, understanding, plan or arrangement (whether formal or informal) with respect to or which provides for benefits for any of its current or former directors, officers, employees or consultants; or (iii) enter into or become bound by any contract with or commitment to any labor or trade union or association or any collective bargaining group.
f. INCREASE IN COMPENSATION; ADDITIONAL COMPENSATION. Except as otherwise provided herein, neither Triad nor the Subsidiary will increase the compensation or benefits of, or pay any bonus or other special or additional compensation to, any of its directors, officers, employees or consultants. Notwithstanding anything contained herein to the contrary, this Paragraph 4.02.f. shall not prohibit annual merit increases in the salaries of its employees or other payments made to employees or directors in connection with existing compensation or benefit plans including the Short-Term Management Incentive Plan, the Long-Term Management Incentive Plan, the Sales Incentive Plan and the Bonus Plan so long as such increases or payments are effected at such times and in such manner and amounts as shall be consistent with Triad's past compensation policies and practices and, in the case of payments made pursuant to compensation or benefit plans, consistent with the terms of those plans and provided that if the Merger occurs prior to such compensation or benefit plans' normal anniversary date, payments made pursuant to those compensation or benefit plans shall be made on a pro rata basis for the appropriate portion of the fiscal year prior to the Merger.
g. ACCOUNTING PRACTICES. Neither Triad nor the Subsidiary will make any changes in its accounting methods, practices or procedures or in depreciation or amortization policies, schedules or rates heretofore applied (except as required by generally accepted accounting principles or governmental regulations).
h. ACQUISITIONS; ADDITIONAL BRANCH OFFICES. Neither Triad nor the Subsidiary will directly or indirectly (i) acquire or merge with, or acquire any branch or all or any significant part of the assets of, any other person or entity, (ii) open any new branch office, or (iii) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction or the opening of a new branch office; provided that Triad shall be allowed to open a branch at 127 North Greene Street, Greensboro, North Carolina and open a branch at another location to replace its existing Irving Park branch.
i. CHANGES IN BUSINESS PRACTICES. Except as may be required by the FDIC, the Commissioner or any other governmental or other regulatory agency or as shall be required by applicable law, regulation or this Agreement, neither Triad nor the Subsidiary will
(i) change in any material respect the nature of its business or the manner in which it conducts its business, (ii) discontinue any material portion or line of its business, or (iii) change in any material respect its lending, investment, asset-liability management or other material banking or business policies (except to the extent required by Paragraph 4.01.b. above).
j. EXCLUSIVE MERGER AGREEMENT. Neither Triad nor the Subsidiary will, directly or indirectly, through any person (i) encourage, solicit or attempt to initiate or procure discussions, negotiations or offers with or from any person or entity (other than Bancshares or UCB) relating to a merger or other acquisition of Triad or the Subsidiary, or the purchase or acquisition of any Triad Stock or Subsidiary Stock, any branch office of Triad or all or any significant part of Triad's or the Subsidiary's assets; or provide assistance to any person in connection with any such offer; (ii) disclose to any person or entity any information not customarily disclosed to the public concerning Triad or the Subsidiary or their businesses, or afford to any other person or entity access to its properties, facilities, books or records; (iii) sell or transfer any branch office of Triad or all or any significant part of its or the Subsidiary's assets to any other person or entity, or (iv) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction.
k. ACQUISITION OR DISPOSITION OF ASSETS. Neither Triad nor the Subsidiary will, without the prior written consent of UCB, which consent shall not be unreasonably withheld:
(i) sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any real estate; or sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of any equipment or any other fixed or capital asset (other than real estate) having a value on Triad's or the Subsidiary's books or a fair market value, whichever is greater, of more than $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or
(ii) except for renegotiation of existing leases, the reduction of the size of the Northpoint branch and the possible transfer of operations from the Irving Park branch to another location, purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of any real property; or purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of any equipment or any other fixed assets (other than real estate) having a purchase price, or involving aggregate lease payments, in excess of $25,000 for any individual item or asset, or more than $50,000 in the aggregate for all such items or assets;
(iii) enter into any purchase commitment for supplies or services which calls for prices of goods or fees for services materially higher than current market prices or fees or which obligates Triad or the Subsidiary for a period longer than 12
(iv) sell, purchase or repurchase, or enter into or become bound by any contract, agreement, option or commitment to sell, purchase or repurchase, any loan or other receivable or any participation in any loan or other receivable (with the exception of investment securities and residential mortgage loans sold in the ordinary course of Triad's business); or
(v) sell or dispose of, or enter into or become bound by any contract, agreement, option or commitment relating to the sale or other disposition of, any other asset of Triad or the Subsidiary (whether tangible or intangible, and including without limitation any trade name, copyright, service mark or intellectual property right or license); or assign its right to or otherwise give any other person its permission or consent to use or do business under Triad's or the Subsidiary's corporate name or any name similar thereto; or release, transfer or waive any license or right granted to it by any other person to use any trademark, trade name, copyright or intellectual property right.
l. DEBT; LIABILITIES. Except in the ordinary course of its business consistent with its past practices (including routine borrowings for liquidity purposes from the Federal Home Loan Bank of Atlanta and other correspondent banks), neither Triad nor the Subsidiary will (i) enter into or become bound by any promissory note, loan agreement or other agreement or arrangement pertaining to its borrowing of money, (ii) assume, guarantee, endorse or otherwise become responsible or liable for any obligation of any other person or entity, or (iii) incur any other liability or obligation (absolute or contingent).
m. LIENS; ENCUMBRANCES. Neither Triad nor the Subsidiary will mortgage, pledge or subject any of its assets to, or permit any of its assets to become or (except as Previously Disclosed) remain subject to, any lien or any other encumbrance (other than in the ordinary course of business consistent with its past practices in connection with securing of public funds deposits, securities repurchase agreements or other similar operating matters).
n. WAIVER OF RIGHTS. Neither Triad nor the Subsidiary will waive, release or compromise any material rights in its favor (except in the ordinary course of business) except in good faith for fair value in money or money's worth, nor waive, release or compromise any rights against or with respect to any of its officers, directors or shareholders or members of families of officers, directors or shareholders.
o. OTHER CONTRACTS. Neither Triad nor the Subsidiary will enter into or become bound by any contracts, agreements, commitments or understandings (other than those described elsewhere in this Paragraph 4.02.) (i) for or with respect to any charitable contributions; (ii) with any governmental or regulatory agency or authority; (iii) pursuant to which Triad or the Subsidiary would assume, guarantee, endorse or otherwise become liable for the debt, liability or obligation of any other person; (iv) which is entered into other than in the ordinary course of its business; and (v) which, in the case of any one contract, agreement, commitment or understanding and whether or not in the ordinary course of its business, would obligate or commit Triad or the Subsidiary to make expenditures of more than $25,000 (other than contracts, agreements, commitments or understandings entered into in the ordinary course of Triad's lending operations).
ARTICLE V. COVENANTS OF UCB AND BANCSHARES
UCB and Bancshares each hereby covenants and agrees as follows with Triad.
a. APPOINTMENT OF DIRECTOR. Following the Effective Time, Bancshares' Board of Directors will appoint one member of Triad's Board of Directors (who will be selected by mutual agreement of Bancshares and Triad) to serve as a director of UCB until the next meeting of shareholders at which members of UCB's Board of Directors are elected. Thereafter, such person shall be nominated and recommended as a director of UCB for a one-year term at such meeting of UCB's shareholders. Such person's continued service as a director of UCB shall be subject to customary regulatory approvals, his or her qualification to serve as a director under applicable banking regulations and to Bancshares' and UCB's bylaws. For his services as a director of UCB, the person as appointed as described above, provided he remains a director of UCB, shall be compensated until the end of such person's full one-year term as a director of UCB in accordance with UCB's then current fee schedule.
b. LOCAL ADVISORY BOARD. Each of the members of Triad's Board of Directors and Triad's advisory boards at the Effective Time (other than directors who also are employees of Triad or who do not desire to serve as such) shall be appointed to serve at UCB's pleasure as members of a local advisory board for one of UCB's branch offices in Triad's former geographic market. Each former Triad director who serves as an advisory board member for UCB for a period of one year following the Effective Time (and who during that period discharges his duties in that capacity and promotes in good faith UCB's best interests) will be paid a retainer of $1,500 and fees equal to $300 per meeting attended and each former Triad advisory board member who serves as an advisory board member for UCB for a period of one year following the Effective Time (and who during that period discharges his duties in that capacity and promotes in good faith UCB's best interest) will be paid a retainer of $200 and fees equal to $50 per meeting attended provided that such compensation shall be paid at the end of such one-year period and that such compensation will be paid only if such individual remains a member of UCB's advisory board for the one-year period. Following the one-year transition period, each such director who continues to serve as an advisory director will receive fees for such service in accordance with UCB's then current schedule of advisory board fees. Each such director's service as an advisory director will be at UCB's pleasure and will be subject to UCB's normal policies and procedures regarding the appointment and service of advisory directors, including retirement policies. However, for a period of one year following the Effective Time, UCB's normal policy of retirement at age 70 will be waived.
5.02. NASDAQ NOTIFICATION OF LISTING OF ADDITIONAL SHARES OF BANCSHARES STOCK. On or before the fifteenth day prior to the Effective Time, Bancshares shall file with Nasdaq such notifications and other materials (and shall pay such fees) as shall be required for the listing on the Nasdaq National Market of the shares of Bancshares Stock to be issued to Triad's shareholders at the Effective Time.
5.03. INTERIM FINANCIAL RESULTS. After the close of the first calendar quarter for which it is possible, Bancshares shall publish and distribute publicly interim consolidated financial statements of Bancshares reflecting at least thirty (30) days of the combined results of operations of Bancshares, UCB and Triad by filing a Form 8-K to which is attached the statement of earnings for such calendar quarter in such form as Bancshares normally releases to the public and such Form 8-K shall be filed at the same time as such statement of earnings is released to the public.
a. MEETING OF SHAREHOLDERS. Triad shall cause a meeting of its shareholders (the "Shareholder Meeting", which may be a regular annual meeting or a specially called meeting) to be held as soon as reasonably possible (but in no event less than 20 days following the mailing to Triad's shareholders of the "Proxy Statement/Prospectus" described below or, without Bancshares' approval, later than April 30, 1996) for the purpose of Triad's shareholders voting on the approval of the Agreement and the Merger. In connection with the call and conduct of and all other matters relating to the Shareholder Meeting solicitation of proxies), Triad shall fully comply with all provisions of applicable law and regulations and with Triad's Articles of Incorporation and By-laws.
b. PREPARATION AND DISTRIBUTION OF PROXY STATEMENT/PROSPECTUS. Bancshares and Triad jointly will prepare a "Proxy Statement/Prospectus" for distribution to Triad's shareholders as Triad's proxy statement relating to Triad's solicitation of proxies for use at the Shareholder Meeting and as Bancshares' prospectus relating to the offer and distribution of Bancshares Stock as described herein. The Proxy Statement/ Prospectus shall be in such form and shall contain or be accompanied by such information regarding the Shareholder Meeting, this Agreement, the parties hereto, the Merger and other transactions described herein as is required by applicable law and regulations and otherwise as shall be agreed upon by Bancshares and Triad. Bancshares shall include the Proxy Statement/Prospectus as the prospectus in its "Registration Statement" described below; and, each party hereto will cooperate with the other in good faith and will use their best efforts to cause the Proxy Statement/Prospectus to comply with any comments of the SEC thereon.
Bancshares and Triad will mail the Proxy Statement/Prospectus to Triad's shareholders not less than 20 days prior to the scheduled date of the Shareholder Meeting; provided, however, that no such materials shall be mailed to Triad's shareholders unless and until Bancshares shall have determined to its own satisfaction that the conditions specified in Paragraph 7.03.d. below have been satisfied and shall have approved such mailing.
c. REGISTRATION STATEMENT AND "BLUE SKY" APPROVALS. As soon as practicable following the execution of this Agreement, Bancshares will prepare and file with the SEC a registration statement on Form S-4 (or on such other form as Bancshares shall determine to be appropriate) (the "Registration Statement") covering the Bancshares Stock to be issued to shareholders of Triad pursuant to this Agreement. Additionally, Bancshares shall take all such other actions, if any, as shall be required by applicable state securities or "blue sky" laws (i) to cause the Bancshares Stock to be issued upon consummation of the Merger, at the time of the issuance thereof, to be duly qualified or registered (unless exempt) under such laws, (ii) to cause all conditions to any exemptions from qualification or registration under such laws to have been satisfied, and (iii) to obtain any and all required approvals or consents to the issuance of such stock.
d. RECOMMENDATION OF TRIAD'S BOARD OF DIRECTORS. Unless, due to a material change in circumstances or for any other reason Triad's Board of Directors reasonably believes that such a recommendation would violate the directors' duties or obligations as such to Triad or to its shareholders, Triad's Board of Directors will recommend to and actively encourage Triad's shareholders that they vote their shares of Triad Stock at the Shareholder Meeting to ratify and approve this Agreement and the Merger, and the Proxy Statement/Prospectus mailed to Triad's shareholders will so indicate and state that Triad's Board of Directors considers the Merger to be advisable and in the best interests of Triad and its shareholders.
e. INFORMATION FOR PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT. Bancshares, UCB and Triad each agrees to respond promptly, and to use its best efforts to cause its directors, officers, accountants and affiliates to respond promptly, to requests by any other such party and its counsel for information for inclusion in the various applications for regulatory approvals and in the Proxy Statement/Prospectus. Bancshares, UCB and Triad each hereby covenants with the others that none of the information provided by it for inclusion in the Proxy Statement/Prospectus will, at the time of its mailing to Triad's shareholders, contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading; and, at all times following such mailing up to and including the Effective Time, none of such information contained in the Proxy Statement/Prospectus, as it may be amended or supplemented, will contain an untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.
Promptly following the date of this Agreement, UCB, Bancshares and Triad each shall use their respective best efforts in good faith to (i) prepare and file, or cause to be prepared and filed, all applications for regulatory approvals and actions as may be required of them, respectively, by applicable law and regulations with respect to the transactions described herein (including applications to the FDIC, the Commissioner and the North Carolina State Banking Commission, and to any other applicable federal or state banking, securities or other regulatory authority), and (ii) obtain all necessary regulatory approvals required for consummation of the transactions described herein. Each such party shall cooperate with each other party in the preparation of all applications to regulatory authorities and, upon request, promptly shall furnish all documents, information, financial statements or other material that may be required by any other party to complete any such application; and, before the filing therefore, each party to this Agreement shall have the right to review and comment on the form and content of any such application to be filed by any other party. Should the appearance of any of the officers, directors, employees or counsel of any of the parties hereto be requested by any other party or by any governmental agency at any hearing in connection with any such application, such party shall promptly use its best efforts to arrange for such appearance.
6.03. ACCESS. Following the date of this Agreement and to and including the Effective Time, Triad shall provide Bancshares and UCB and their employees, accountants and counsel, access to all its books, records, files and other information (whether maintained electronically or otherwise), to all its properties and facilities, and to all its employees, accountants, counsel and consultants, for purposes of the conduct of such reasonable investigation and review as they shall, in their sole discretion, consider to be necessary or appropriate; provided, however, that any such review conducted by Bancshares and UCB shall be performed in such a manner as will not interfere unreasonably with Triad's normal operations, or with Triad's relationship with its customers or employees, and shall be conducted in accordance with procedures established by the parties having due regard for the foregoing.
6.04. COSTS. Subject to the provisions of Paragraph 8.03. below, and whether or not this Agreement shall be terminated or the Merger shall be consummated, Triad, Bancshares and UCB each shall pay its own legal, accounting and financial advisory fees and all its other costs and expenses incurred or to be incurred in connection with the execution and performance of its obligations under this Agreement or otherwise in connection with this Agreement and the transactions described herein (including without limitation all accounting fees, legal fees, filing fees, printing costs, travel expenses, and, in the case of Triad, all fees owed to The Carson Medlin Company ("Carson Medlin") and the cost of Triad's "Fairness Opinion" described in Paragraph 7.01.d. below, and, in the case of Bancshares and UCB, the cost of the "Environmental Survey" described in Paragraph 6.06. below). However, subject to the provisions of Paragraph 8.03. below, all costs incurred in connection with the printing and mailing of the Proxy Statement/Prospectus shall be deemed to be incurred and shall be paid fifty percent (50%) by Triad and fifty percent (50%) by Bancshares; provided, however, that if the Merger is not consummated on or before July 31, 1996 by reason of the failure of Bancshares or UCB to receive any regulatory approval as described in Paragraph 7.01.a. hereof and such event is a consequence of the failure of Bancshares or any Bancshares subsidiary to satisfy its obligations under the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Equal Credit Opportunity Act, the Fair Housing Act and/or the regulations promulgated thereunder, Bancshares and UCB shall reimburse Triad for one-half of Triad's costs and expenses up to a total reimbursement amount of $87,500; provided further, however, that if Triad is acquired by any entity or individual other than Bancshares or UCB within twelve (12) months after the termination of this Agreement by Triad pursuant to Paragraph 8.02.b.iv hereof, all such reimbursed costs and expenses shall be repaid by Triad to Bancshares.
6.05. ANNOUNCEMENTS. Triad, Bancshares and UCB each agrees that no person other than the parties to this Agreement is authorized to make any public announcements or statements about this Agreement or any of the transactions described herein, and that, without the prior review and consent of the others (which consent shall not unreasonably be denied or delayed), no party hereto may make any public announcement, statement or disclosure as to the terms and conditions of this Agreement or the transactions described herein, except for such disclosures as may be required incidental to obtaining the prior approval of any regulatory agency or official to the consummation of the transactions described herein. However, notwithstanding anything contained herein to the contrary, prior review and consent shall not be required if in the good faith opinion of counsel to Bancshares any such disclosure by Bancshares or UCB is required by law or otherwise is prudent.
At its option UCB may cause to be conducted Phase I environmental assessments of the Real Property, the real estate subject to any Real Property Lease, or the Loan Collateral, or any portion thereof, together with such other studies, testing and intrusive sampling and analyses as Bancshares or UCB shall deem necessary or desirable (collectively, the "Environmental Survey"). UCB shall complete all such Phase I environmental assessments within forty-five (45) days following the date of this Agreement and thereafter to conduct and complete any such additional studies, testing, sampling and analyses within one hundred twenty (120) days following completion of all Phase I environmental assessments. Subject to the provisions of Paragraph 8.03. below, the costs of the Environmental Survey shall be paid by Bancshares and UCB. If (i) the final results of any Environmental Survey (or any related analytical data) reflect that there likely has been any discharge, disposal, release or emission by any person of any Hazardous Substance on, from or relating to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral at any time prior to the Effective Time, or that any action has been taken or not taken, or a condition or event likely has occurred or exists, with respect to any of the Real Property, real estate subject to a Real Property Lease or Loan Collateral which constitutes or would or may constitute a violation of any Environmental Laws, and if, (ii) based on the advice of their legal counsel or other consultants, Bancshares or UCB believes that Triad, the Subsidiary or either of them could become responsible for the remediation of such discharge, disposal, release or emission or for other corrective action with respect to any such violation, or that Triad, the Subsidiary or either of them could become liable for monetary damages (including without limitation any civil or criminal penalties or assessments) resulting therefrom (or that, in the case of any of the Loan Collateral, Triad could incur any such liability if it acquired title to such Loan Collateral), and if, (iii) based on the advice of their legal counsel or other consultants, Bancshares or UCB believes the amount of expenses or liability which Triad, the Subsidiary or either of them could incur or for which Triad, the Subsidiary or either of them could become responsible or liable on account of any and all such remediation, corrective action or monetary damages at any time or over any period of time could equal or exceed an aggregate of $350,000, then Bancshares or UCB shall give Triad prompt written notice thereof (together with all information in its possession relating thereto) and, at Bancshares' or UCB's sole discretion, at any time thereafter and up to the Effective Time, Bancshares or UCB may terminate this Agreement without further obligation or liability to Triad or its shareholders.
6.07. EMPLOYEES; SEVERANCE PAYMENTS; EMPLOYEE BENEFITS.
a. EMPLOYMENT AGREEMENTS. Provided he remains employed by Triad at the Effective Time in his current position, then UCB shall enter into an employment agreement with James E. Mims as of the Effective Time which shall contain substantially the same terms and conditions and be in substantially the same forms as are attached as Schedule C to this Agreement.
Bancshares and UCB acknowledge the existence of an Employment Agreement dated December 14, 1993 between Bankers Trust of North Carolina (predecessor in interest to Triad) and Carl I. Carlson, III and an Employment Agreement dated December 15, 1993 between Bankers Trust of North Carolina (predecessor in interest to Triad) and Ted Y. Matney, and Bancshares and UCB further acknowledge that Bancshares and UCB will be bound by the terms of such employment agreements upon the Effective Time. Notwithstanding the existence of Mr. Carlson's employment agreement, at the Effective Time, UCB shall enter into an employment agreement with Mr. Carlson, provided he remains employed by Triad at the Effective Time, which shall contain substantially the same terms and conditions and be in substantially the same form as is attached as Schedule D to this Agreement.
b. EMPLOYMENT OF OTHER TRIAD EMPLOYEES. Provided they remain employed by Triad at the Effective Time, UCB will attempt in good faith, but shall have no obligation, to locate suitable positions for and to offer employment (at an office of UCB located within a reasonable commuting distance from their respective job locations at the Effective Time) to, all other employees of Triad. Any employment so offered by UCB to an employee of Triad shall be in such a position, at such location within UCB's state-wide branch system, and for such rate of compensation as UCB shall determine in its sole discretion. Each such person's employment with UCB shall be on an "at-will" basis, and nothing in this Agreement shall be deemed to constitute an employment agreement with any such person or to obligate UCB to employ any such person for any specific period of time or in any specific position or to restrict UCB's right to terminate the employment of any such person at any time and for any reason satisfactory to it.
Triad will be permitted to pay severance compensation to any employee of Triad at the Effective Time who is not offered employment by UCB, which offer must be at a comparable salary, in the same market area as that in which the employee is serving at the Effective Time and in the employee's same area of expertise or, if outside the employee's area of expertise, with the promise of sufficient job training in the new area of expertise requested by UCB (other than any employee who is party to an employment agreement with Triad). The amount of such compensation paid to any employee shall not exceed the total of (i) two (2) months' salary or normal wages (at the person's then current salary or wage rate as an employee of Triad) plus (ii) one (1) week's salary or wages (at the person's then current salary or wage rate as an employee of Triad) multiplied by a number (which in no event shall be less than three (3) or more than fourteen (14)) equal to the person's number of complete years of service (from date of hire) as an employee of Triad. In the case of any employee of Triad at the Effective Time who is offered employment by and becomes an employee of UCB (a "New Employee"), UCB agrees that, if such New Employee's employment is terminated by UCB within ninety (90) days following the Effective Time without cause, then UCB will pay to such terminated New Employee severance compensation in an amount equal to the amount of severance compensation such person would have received from Triad as provided above if he or she had not accepted employment with UCB; and provided further that if such New Employees' employment is terminated by UCB after ninety (90) days following the Effective Time without cause, then UCB will pay to such terminated New Employees severance compensation in an equal to the amount of severance compensation such person would have received from Triad as provided above if he or she had not accepted employment with UCB, less any salary or wages paid to such employee by UCB between the Effective Time and the date of such employee's termination. The determination of whether there exists cause for UCB's termination of any New Employee's employment shall be made by and solely within the discretion of UCB's Director of Human Resources.
In the cases of Richard M. Cobb and James C. Edwards, in the event either of them is employed by Triad at the Effective Time and either of them is not offered employment by UCB or refuses to accept an offer of employment from UCB, then Triad will be permitted to pay severance compensation to such employee in an amount equal to the total of twelve (12) month's salary (at the person's then current salary rate as an employee of Triad). In the event either Mr. Cobb or Mr. Edwards becomes a New Employee, UCB agrees that, if such New Employee voluntarily elects to terminate employment with UCB at any time within twelve (12) months following the Effective Time, then UCB will pay to such terminated New Employee severance compensation in an amount equal to the amount of severance compensation such person would have received from Triad as provided above as if he had not accepted employment with UCB, less any salary or wages paid to such employee by UCB between the Effective Time and the date of such employee's termination; and provided further that in the event Mr. Cobb or Mr. Edwards becomes a New Employee, UCB agrees that, if such New Employee's employment is terminated by UCB within twelve (12) months following the Effective Time without cause (determined in the manner described above), then UCB will pay to such terminated New Employee severance compensation in an amount equal to the amount of severance compensation such person would have received from Triad as provided above.
In addition, in the case of certain employees of Triad who will not be offered employment with UCB following the Effective Time or who will be offered employment with UCB but at salary or wage rates that are lower than their rates as employees at Triad, UCB may specifically request in writing that such employees remain employed by Triad until the Effective Time and, in the case of each such employee who does remain so employed until the Effective Time, then (whether or not such person becomes a New Employee) UCB will pay to such employee as a bonus an amount equal to 10% of the employee's then current annual salary or wage rate as an employee of Triad. No such bonus shall be payable to any employee unless UCB shall have specifically requested in writing that such employee remain until the Effective Time (and which written request shall specifically refer to such bonus). Employees of Triad who receive such a written request but who terminate their employment prior to the Effective Time shall not be entitled to receive such bonus payment.
UCB shall determine which of Triad's employees will and will not be offered employment with UCB following the Effective Time and, within ninety (90) days following the date of this Agreement, to notify each of Triad's employees of its determination with respect to that employee and to issue the written requests described above to certain of Triad's employees. Notwithstanding anything contained herein to the contrary, no payment of severance compensation shall be made to any person who does not remain an employee of Triad at the Effective Time.
d. EMPLOYEE BENEFITS. Except as otherwise provided herein, any New Employee shall become entitled to receive all employee benefits and to participate in all benefit plans provided by UCB on the same basis (including costs) and subject to the same eligibility and vesting requirements, and to the same conditions, restrictions and limitations, as generally are in effect and applicable to other newly hired employees of UCB. However, each New Employee shall be given credit for his or her past service with Triad for purposes of (i) entitlement to vacation and sick leave and all other employee benefits, and (ii) eligibility for participation and vesting in Bancshares' Section 401(k) savings plan and in its defined benefit pension plan (the "UCB Pension Plan"). At the Effective Time, or as soon as administratively possible thereafter, the Savings Plan will be merged with Bancshares' and UCB's 401(k) Plan and the Pension Plan will be merged with the UCB Pension Plan, and each New Employee shall be given credit for past service with Triad (but not for past service with Triad's predecessor banks, Bankers Trust of North Carolina and Piedmont State Bank) for purposes of the calculation or determination of benefits under the UCB Pension Plan. Bancshares further agrees to assume or to cause UCB and/or its employees to assume as of the Effective Time any and all administrative and fiduciary duties with respect to the day-to-day operation of such plans, including the duties of trustee.
At the Effective Time all New Employees will have the option of participating in UCB's health program (regardless of pre-existing conditions) and the cost of such health insurance shall be equal to the cost for any UCB employee. All New Employees on the date hereof who are participating in Triad's dental program will have the option of participating in UCB's dental program with any pre-existing dental conditions not covered by UCB's dental insurance paid for by UCB up to the limits of UCB's dental insurance.
The number of days of vacation and sick leave, respectively, which shall be available to any New Employee during 1996 as an employee of UCB shall be reduced by the number of days of vacation or sick leave used by such New Employee during 1996 prior to the Effective Time as an employee of Triad, and, except as provided below, the New Employee shall not be entitled to any credit with UCB for unused vacation leave, sick leave or other paid leave from Triad for 1995 or years prior thereto; provided, however, that no New Employee shall receive in any year less vacation than he or she was receiving from Triad at the Effective Time.
e. OTHER AGREEMENTS. At the Effective Time, UCB will assume Triad's obligations under those existing life insurance policies for James E. Mims maintained by Triad. In addition, UCB hereby agrees that, immediately prior to the Effective Time, Triad shall transfer title to the automobiles owned by Triad on the date of this Agreement and being used respectively by James E. Mims and Carl I. Carlson, III to such individuals.
Bancshares, UCB and Triad each agrees that it will treat as confidential and not disclose to any unauthorized person any documents or other information obtained from or learned about the others during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (including any information obtained during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other parties; and, that it will not use any such documents or other information for any purpose except for the purposes for which such documents and information were provided to it and in furtherance of the transactions described herein. However, the above obligations of confidentiality shall not prohibit the disclosure of any such document or information by any party to this Agreement to the extent (i) such document or information is then available generally to the public is already known to the person or entity to whom disclosure is proposed to be made (other than through the previous actions of such party in violation of this Paragraph 6.08), (ii) such document or information was available to the disclosing party on a nonconfidential basis prior to the same being obtained pursuant to this Agreement, (iii) disclosure is required by subpoena or order of a court or jurisdiction, or by the SEC or regulatory authorities in connection with the transactions described herein, or (iv) to the extent that, in the reasonable opinion of legal counsel to such party, disclosure otherwise is required by law.
In the event this Agreement is terminated for any reason, then each of the parties hereto immediately shall return to the other parties all copies of any and all documents or other written materials or information of or relating to such other parties which were obtained from them during the course of the negotiation of this Agreement and the carrying out of the events and transactions described herein (whether during the course of any due diligence investigation or review provided for herein or otherwise) and which documents or other information relates in any way to the business, operations, personnel, customers or financial condition of such other parties.
The parties' obligations of confidentiality under this Paragraph 6.08 shall survive and remain in effect following any termination of this Agreement
6.09. TAX-FREE REORGANIZATION. Bancshares, UCB and Triad each undertakes and agrees to use its best efforts to cause the Merger to qualify as a tax-free "reorganization" within the meaning of Section 368(a)(1)(A) of the Code, and that it will not intentionally take any action that would cause the Merger to fail to so qualify.
6.10. ACCOUNTING TREATMENT. Bancshares, UCB and Triad each undertakes and agrees to use its best efforts to cause the Merger to qualify to be treated as a pooling-of-interests for accounting purposes and that it will not intentionally take any action that would cause the Merger to fail to so qualify.
6.11. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. Bancshares, UCB and Triad agree that, to the extent the same can be purchased at a reasonable cost, then immediately prior to the Closing Date Triad shall purchase "tail" coverage under and in the same amount of coverage as is provided by its then current directors' and officers' liability insurance policy, effective as of the Effective Time.
6.12. OTHER PERMISSIBLE TRANSACTIONS. Bancshares, UCB and Triad agree that Bancshares and UCB may offer to acquire, enter into agreements to acquire and acquire financial institution holding companies and their subsidiaries, financial institutions and their subsidiaries, and/or the assets and liabilities of such entities (each a "Proposed Acquisition") prior to the Effective Time; provided, however, that in the event a Proposed Acquisition shall cause a condition set forth in Article VII hereof to fail to be satisfied on or before July 31, 1996, any such failure shall be deemed a termination of this Agreement by Bancshares and UCB as described and with the effects set forth in Section 8.04 hereof.
ARTICLE VII. CONDITIONS PRECEDENT TO MERGER
7.01. CONDITIONS TO ALL PARTIES' OBLIGATIONS. Notwithstanding any other provision of this Agreement to the contrary, the obligations of each of the parties to this Agreement to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date.
a. APPROVAL BY GOVERNMENTAL OR REGULATORY AUTHORITIES; NO DISADVANTAGEOUS CONDITIONS. (i) The Merger and other transactions described herein shall have been approved, to the extent required by law, by the FDIC, the Commissioner and the North Carolina State Banking Commission, and by all other governmental or regulatory agencies or authorities having jurisdiction over such transactions, (ii) no governmental or regulatory agency or authority shall have withdrawn its approval of such transactions or imposed any condition on such transactions or conditioned its approval thereof, which condition is reasonably deemed by Bancshares or UCB to be materially disadvantageous or burdensome or to impact so adversely the economic or business benefits of this Agreement to Bancshares and UCB as to render it inadvisable for them to consummate the Merger; (iii) all waiting periods required following necessary approvals by governmental or regulatory agencies or authorities shall have expired, and, in the case of the waiting period following approval by the FDIC, no unwithdrawn objection to the Merger shall have been raised by the U.S. Department of Justice; and (iv) all other consents, approvals and permissions, and the satisfaction of all of the requirements prescribed by law or regulation, necessary to the carrying out of the transactions contemplated herein shall have been procured.
b. ADVERSE PROCEEDINGS, INJUNCTION, ETC. There shall not be (i) any order, decree or injunction of any court or agency of competent jurisdiction which enjoins or prohibits the Merger or any of the other transactions described herein or any of the parties hereto from consummating any such transaction, (ii) any pending or threatened investigation of the Merger or any of such other transactions by the U.S. Department of Justice, or any actual or threatened litigation under federal antitrust laws relating to the Merger or any other such transaction; or (iii) any suit, action or proceeding by any person (including any governmental, administrative or regulatory agency), pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit Triad, Bancshares or UCB from consummating the Merger or carrying out any of the terms or provisions of this Agreement, or (iv) any other suit, claim, action or proceeding pending or threatened against Triad, Bancshares or UCB or any of their officers or directors which shall reasonably be considered by Triad, Bancshares or UCB to be materially burdensome in relation to the proposed Merger or materially adverse in relation to the financial condition of either such corporation, and which has not been dismissed, terminated or resolved to the satisfaction parties hereto within ninety (90) days of the institution or threat thereof.
c. APPROVAL BY BOARDS OF DIRECTORS AND SHAREHOLDERS. The Boards of Directors of Triad, Bancshares and UCB shall have duly approved and adopted this Agreement by appropriate resolutions, and the shareholders of Triad and UCB shall have duly approved, ratified and confirmed this Agreement, all to the extent required by and in accordance with the provisions of this Agreement, applicable law, and applicable provisions of their respective Articles of Incorporation and By-Laws.
d. FAIRNESS OPINION. Triad shall have received from Carson Medlin a written opinion (the "Fairness Opinion"), dated as of a date preceding the mailing of the Proxy Statement/Prospectus to Triad's shareholders in connection with the Shareholder Meeting, to the effect that the terms of the Merger are fair, from a financial point of view, to Triad and its shareholders; and, Carson Medlin shall have delivered a letter to Triad, dated as of a date within five days preceding the Closing Date, to the effect that it remains its opinion that the terms of the Merger are fair, from a financial point of view, to Triad and its shareholders.
e. TAX OPINION. Bancshares and Triad shall have received, in form and substance satisfactory to them, an opinion of KPMG Peat Marwick LLP substantially to the effect that: (i) for federal income tax purposes, consummation of the Merger will constitute a "reorganization" as defined in (section mark) 368(a)(1)(A) of the Code; (ii) that no taxable gain will be recognized by a shareholder of Triad upon such shareholder's receipt of Bancshares Stock in exchange for his or her Triad Stock; (iii) that the basis of the Bancshares Stock received by the shareholder in the Merger will be the same as his or her Triad Stock surrendered in exchange therefor; (iv) that, if Triad Stock is a capital asset in the hands of the shareholder at the Effective Time, then the holding period of the Bancshares Stock received by the shareholder in the Merger will include the holding period of Triad Stock surrendered in exchange therefor; and (v) a shareholder who receives cash in lieu of a fractional share of Bancshares Stock will recognize gain or loss equal to any difference between the amount of cash received and the shareholder's basis in the fractional share interest. In rendering its opinion, KPMG Peat Marwick LLP may rely on representations contained in certificates of officers of Bancshares, UCB and Triad.
f. NO TERMINATION OR ABANDONMENT. This Agreement shall not have been terminated by any party hereto.
g. NASDAQ LISTING. Bancshares shall have satisfied all requirements for the shares of Bancshares Stock to be issued to the shareholders of Triad in connection with the Merger to be listed on the Nasdaq National Market as of the Effective Time.
7.02. ADDITIONAL CONDITIONS TO TRIAD'S OBLIGATIONS. Notwithstanding any other provision of this Agreement to the contrary, Triad's separate obligation to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date.
a. MATERIAL ADVERSE CHANGE. There shall not have been any material adverse change in the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Bancshares and its consolidated subsidiaries considered as one enterprise, and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change.
b. COMPLIANCE WITH LAWS. Bancshares and UCB shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation could or may have a material adverse effect on the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Bancshares and its consolidated subsidiaries considered as one enterprise.
c. BANCSHARES' AND UCB'S REPRESENTATIONS AND WARRANTIES AND PERFORMANCE OF AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing by Triad as provided in Paragraph 10.03. below, each of the respective representations and warranties of Bancshares and UCB contained in this Agreement shall have been true and correct as of the date hereof and shall remain true and correct on and as of the Effective Time with the same force and effect as though made on and as of such date, except (i) for changes which are not, in the aggregate, material and adverse to the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Bancshares and its consolidated subsidiaries considered as one enterprise, and (ii) as otherwise contemplated by this Agreement; and Bancshares and UCB each shall have performed in all material respects all its respective obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date.
Triad shall have received a certificate dated as of the Closing Date and executed by Bancshares and UCB and their respective Presidents and Chief Financial Officers to the foregoing effect.
d. LEGAL OPINION OF BANCSHARES AND UCB COUNSEL. Triad shall have received from Howard V. Hudson, Esq., General Counsel of Bancshares and UCB, a written opinion dated as of the Closing Date and substantially in the form of Schedule E attached hereto or otherwise in form and substance reasonably satisfactory to Triad.
e. OTHER DOCUMENTS AND INFORMATION FROM BANCSHARES AND UCB. Bancshares and UCB shall have provided to Triad correct and complete copies of their respective Bylaws, Articles of Incorporation and board resolutions (all certified by their respective Secretaries), together with certificates of the incumbency of their respective officers and such other closing documents and information as may be reasonably requested by Triad or its counsel.
f. ARTICLES OF MERGER; OTHER ACTIONS. Articles of Merger in the form described in Paragraph 1.07. above shall have been duly executed and delivered by UCB as provided in that Paragraph.
g. ACCEPTANCE BY TRIAD'S COUNSEL. The form and substance of all legal matters described herein or related to the transactions contemplated herein shall be reasonably acceptable to Triad's legal counsel.
7.03. ADDITIONAL CONDITIONS TO BANCSHARES' AND UCB'S OBLIGATIONS. Notwithstanding any other provision of this Agreement to the contrary, Bancshares' and UCB's separate obligations to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date.
a. MATERIAL ADVERSE CHANGE. There shall not have occurred any material adverse change in the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Triad and the Subsidiary considered as one enterprise, and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, may or could cause, create or result in any such material adverse change.
b. COMPLIANCE WITH LAWS; ADVERSE PROCEEDINGS, INJUNCTION, ETC. Triad shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation could or may have a material adverse effect on the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Triad and the Subsidiary considered as one enterprise.
c. TRIAD'S REPRESENTATIONS AND WARRANTIES AND PERFORMANCE OF AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing by Bancshares or UCB as provided in Paragraph 10.03. below, each of the representations and warranties of Triad contained in this Agreement shall have been true and correct as of the date hereof and shall remain true and correct on and as of the Effective Time with the same force and effect as though made on and as of such date, except (i) for changes which are not, in the aggregate, material and adverse to the financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations of Triad and the Subsidiary considered as one enterprise, and (ii) as otherwise contemplated by this Agreement; and Triad shall have performed in all material respects all its obligations, covenants and agreements hereunder to be performed by it on or before the Closing Date.
Bancshares and UCB shall have received a certificate dated as of the Closing Date and executed by Triad and its Chairman and Chief Financial Officer to the foregoing effect and as to such other matters as may be reasonably requested by Bancshares and UCB.
d. EFFECTIVENESS OF REGISTRATION STATEMENT; COMPLIANCE WITH SECURITIES AND OTHER "BLUE SKY" REQUIREMENTS. The Registration Statement shall be effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. Bancshares shall have taken all such other actions, if any, as it shall consider to be required by applicable state securities laws (i) to cause the Bancshares Stock to be issued upon consummation of the Merger, at the time of the issuance thereof, to be duly qualified or registered (unless exempt) under such laws, (ii) to cause all conditions to any exemptions from qualification or registration under such laws to have been satisfied, and (iii) to obtain any and all required approvals or consents with respect to the issuance of such stock, and any such required approvals or consents shall have been obtained and shall remain in effect.
e. AGREEMENTS FROM TRIAD AFFILIATES. Bancshares shall have received the written Affiliates' Agreements in form and content satisfactory to Bancshares and signed by all persons who are deemed by Bancshares or its counsel to be Affiliates of Triad as provided in Paragraph 4.01.a. above.
f. ACCOUNTING TREATMENT. (i) Bancshares shall have received assurances from KPMG Peat Marwick LLP, in form and content satisfactory to it, to the effect that the Merger will qualify to be treated as a "pooling-of-interests" for accounting purposes; (ii) if requested by Bancshares, Triad's independent public accountants shall have delivered to Bancshares a letter in form and content satisfactory to it to the effect that such accountants are not aware of any facts or circumstances that might cause the Merger not to qualify for such treatment; and (iii) it shall not have come to the attention of management of Bancshares that any event has occurred or that any condition or circumstance exists that makes it likely that the Merger may not so qualify.
g. LEGAL OPINION OF TRIAD COUNSEL. Bancshares and UCB shall have received from Triad's special counsel, Ward and Smith, P.A. a written opinion, dated as of the Closing Date and substantially in the form of Schedule F attached hereto or otherwise in form and substance reasonably satisfactory to Bancshares and UCB. In rendering such opinion, Ward and Smith,
P.A. may rely upon or provide instead the opinion of local counsel for Triad as to certain matters more appropriately opined on by local counsel.
h. OTHER DOCUMENTS AND INFORMATION FROM TRIAD. Triad shall have provided to Bancshares and UCB correct and complete copies of Triad's Articles of Incorporation, Bylaws and board and shareholder resolutions (all certified by Triad's Secretary), together with certificates of the incumbency of Triad's officers and such other closing documents and information as may be reasonably requested by the Bancshares or UCB or its counsel.
i. CONSENTS TO ASSIGNMENT OF REAL PROPERTY LEASES. Triad shall have obtained all required consents to the assignment to UCB of its rights and obligations under the Real Property Leases, under the terms, rates and conditions of such Real Property Leases in effect as of the date of this Agreement, and such consents shall be in such form and substance as shall be satisfactory to Bancshares and UCB; and, each of Triad's lessors shall have confirmed in writing that Triad is not in default under the terms and conditions of the Real Property Lease between such lessor and Triad.
j. ACCEPTANCE BY BANCSHARES' AND UCB'S COUNSEL. The form and substance of all legal matters described herein or related to the transactions contemplated herein shall be reasonably acceptable to Bancshares' and UCB's legal counsel.
k. CERTAIN MERGER EXPENSES. The aggregate of amounts paid or payable by Triad for legal and accounting fees (including amounts payable for the Fairness Opinion described in Paragraph 7.01.d. above) shall not exceed $175,000.
ARTICLE VIII. TERMINATION; BREACH; REMEDIES
8.01. MUTUAL TERMINATION. At any time prior to the Effective Time (and whether before or after approval hereof by the shareholders of Triad), this Agreement may be terminated by the mutual agreement of Bancshares, UCB and Triad. Upon any such mutual termination, all obligations of Triad, Bancshares and UCB hereunder shall terminate and each party shall pay costs and expenses as provided in Paragraph 6.04. above.
This Agreement may be terminated by either Bancshares, UCB or Triad (whether before or after approval hereof by Triad's shareholders) upon written notice to the other parties and under the circumstances described below.
a. TERMINATION BY BANCSHARES OR UCB. This Agreement may be terminated by Bancshares or UCB by action of its respective Board of Directors or Executive Committee:
(i) if Triad shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Article IV or Article VI herein in any material
(ii) if Bancshares or UCB determines at any time that any of Triad's representations or warranties contained in Article II or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect;
Bancshares' satisfaction of its obligations under Paragraphs 6.01.b., 6.01.c. and 6.01.e. above, Triad's shareholders do not ratify and approve this Agreement and approve the Merger at the Shareholder Meeting, or if the Shareholder Meeting is not held on or before April
described in Paragraph 6.06. above;
(v) if any of the conditions of the obligations of Bancshares or UCB (as set forth in Paragraph 7.01. or 7.03. above) shall not have been satisfied or effectively waived in writing by Bancshares and UCB, or if the Merger shall not have become effective, on or before July 31, 1996, unless such date is extended as evidenced by the written mutual agreement of the
(vi) if the 30-Day Average is greater than $43.20 unless Bancshares or UCB has become a party to and agreement in principle or a binding agreement that contemplates a merger of Bancshares or UCB into or with any other entity (other than with the other or with any affiliated corporation) and in which Bancshares or UCB will not be the surviving corporation, or a sale of substantially all of Bancshares' or UCB's assets to any other such entity in which event Bancshares shall not be able to terminate this Agreement on account of the 30-Day Average exceeding $43.20.
However, before Bancshares or UCB may terminate this Agreement for any of the reasons specified above in (i) or (ii) of this Paragraph 8.02.a., it shall give written notice to Triad as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by Bancshares or UCB shall not become effective if, within thirty (30) days following the giving of such notice, Triad shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of Bancshares and UCB.
This Agreement may be terminated by Triad by action of its Board of Directors:
(i) if Bancshares or UCB shall have violated or failed to fully perform any of their respective obligations, covenants or agreements contained in Article V or VI herein in any material respect;
(ii) if Triad determines that any of Bancshares' or UCB's respective representations and warranties contained in Article III herein or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect;
(iii) if, subject to Triad's satisfaction of its obligations contained in Paragraphs 6.01.a., 6.01.b., 6.01.d. and 6.01.e above, its shareholders do not ratify and approve this Agreement and approve the Merger at the Shareholder Meeting, or if the Shareholder Meeting is not held on or before April
(iv) if any of the conditions of the obligations of Triad (as set forth in Paragraph 7.01. or 7.02. above) shall not have been satisfied or effectively waived in writing by Triad, or if the Merger shall not have become effective, on or before July 31, 1996, unless such date is extended as evidenced by the written mutual agreement of the parties hereto; or,
(v) if the 30-Day Average is less than $28.80.
However, before Triad may terminate this Agreement for any of the reasons specified above in clause (i) or (ii) of this Paragraph 8.02.b., it shall give written notice to Bancshares and UCB as provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by Triad shall not become effective if, within thirty (30) days following the giving of such notice, Bancshares or UCB shall cure such breach, default or violation or satisfy such condition the reasonable satisfaction of Triad.
c. EXTENSION OF EXPIRATION DATE. Except as otherwise shall be agreed among the parties, in the event Bancshares, UCB and Triad mutually shall agree to extend the July 31, 1996 expiration date described in Paragraphs 8.02.a.v and 8.02.b.iv above, then, notwithstanding anything contained in this Agreement to the contrary and to the extent permitted by applicable law and regulations, during the period beginning August 1, 1996, and ending at the Effective Time, in the event Bancshares declares and pays a quarterly dividend, the Exchange Rate will be increased to include the cash dividend declared and paid by Bancshares multiplied by the Exchange Rate.
8.03. BREACH; REMEDIES. Except as otherwise provided below, (i) in the event of a breach by Triad of any of its representations or warranties contained in Article II of this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in Articles IV or VI of this Agreement, then Bancshares' and UCB's sole right and remedy shall be to terminate this Agreement prior to the Effective Time as provided in Paragraph 8.02. above, or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof; and (ii) in the event of any such termination of this Agreement by Bancshares or UCB, then Triad shall be obligated to reimburse Bancshares and UCB for up to (but not more than) $100,000 in expenses described in Paragraph 6.04. which actually have been incurred by them.
Likewise, and except as otherwise provided below, (i) in the event of a breach by Bancshares or UCB of any of its representations or warranties contained in Article III of this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in Articles V or VI of this Agreement, then Triad's sole right and remedy shall be to terminate this Agreement prior to the Effective Time as provided in Paragraph 8.02. above, or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof; and (ii) in the event of any such termination of this Agreement by Triad, then Bancshares and UCB shall be obligated to reimburse Triad for up to (but not more than) $175,000 in expenses described in Paragraph 6.04. which actually have been incurred by Triad.
Except as provided in Paragraph 8.04., notwithstanding anything contained herein to the contrary, if any party to this Agreement breaches this Agreement by wilfully or intentionally failing to perform or violating any of its obligations, agreements or covenants contained in Articles IV, V or VI of this Agreement, such party shall be obligated to pay all expenses of the other party(ies) described in Paragraph 6.04., together with other damages recoverable at law or in equity.
8.04. TERMINATION FEE. If (A) this Agreement is terminated because Bancshares or UCB has entered theretofore, or terminates this Agreement in anticipation of entering, into a letter of intent or an agreement with any individual or entity that provides for such individual or entity to acquire Bancshares or UCB, merge with Bancshares or UCB where Bancshares or UCB is not the surviving entity, or purchase all or substantially all of the assets of Bancshares or UCB, (B) prior to termination of this Agreement, Bancshares or UCB engages in negotiations relating to any such transaction and a letter of intent or agreement with respect thereto is entered into within twelve (12) months following the termination of this Agreement, or (C) Bancshares or UCB engages in a Proposed Acquisition and the result of engaging in such Proposed Acquisition is that any of the conditions set forth in Article VII shall fail to be satisfied on or before July 31, 1996 or the Effective Time shall otherwise not occur on or before July 31, 1996, then Bancshares and UCB shall pay to Triad a termination fee of $500,000 and reimburse Triad its expenses incurred as a result of this Agreement. If (X) this Agreement is terminated because Triad has entered theretofore, or terminates this Agreement in anticipation of entering, into a letter of intent or an agreement with any individual or entity that provides for such individual or entity to acquire Triad, merge with or into Triad, or purchase all or substantially all of the assets of Triad, or (Y) prior to the termination of this Agreement, Triad engages in negotiations relating to any such transaction and a letter of intent or agreement with respect thereto is entered into within twelve (12) months following the termination of this Agreement, then Triad shall pay to Bancshares, or at the election of Bancshares to UCB, a termination fee of $500,000 and reimburse Bancshares and UCB their expenses incurred as a result of this Agreement. Payments of the termination fee and expenses under this Paragraph 8.04. shall not in any way affect Triad's or Bancshares' rights to any other remedy or relief at law or in equity.
9.01. INDEMNIFICATION FOLLOWING TERMINATION OF AGREEMENT. Triad, Bancshares and UCB each hereby agree that in event this Agreement is terminated for any reason and the Merger is not consummated, then they will indemnify each other as provided below.
a. BY TRIAD. Triad shall indemnify, hold harmless and defend Bancshares and UCB from and against any and all claims, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature, together with reasonable attorneys' fees and legal costs in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which Bancshares or UCB may receive, suffer, pay or incur:
(i) in connection with or which arise out of or result from or are based upon (A) Triad's or the Subsidiary's operations or business transactions or its relationship with any of its employees, or (B) Triad's or the Subsidiary's failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement;
(ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes a breach by Triad of, or any inaccuracy in, any of its representations or warranties under or in connection with this Agreement, or any failure of Triad to perform any of it covenants, agreements or obligations under or in connection with
(iii) in connection with or which arise out of or result from or are based upon any information about or provided by Triad which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus at the time of its mailing to Triad's shareholders to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading; and,
(iv) in connection with or which arise out of or result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control or clean-up on, from or relating to the Real Property by Triad or any other person of any Hazardous Substances, or any action taken or any event or condition occurring or existing with respect to the Real Property which constitutes a violation of any Environmental Laws by Triad or the Subsidiary or any other person.
b. BY BANCSHARES AND UCB. UCB shall indemnify, hold harmless and defend Triad from and against any and all claims, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature, together with reasonable attorneys' fees and legal costs in connection therewith, whether known or unknown, and whether now existing or hereafter arising, which Triad may receive, suffer, pay or incur:
(i) in connection with or which arise out of or result from or are based upon (A) Bancshares' or UCB's operations or business transactions or their relationship with any of their employees, or (B) Bancshares' or UCB's failure to comply with any statute or regulation of any federal , state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement;
(ii) in connection with or which arise out of or result from or are based upon any fact, condition or circumstance that constitutes a breach by Bancshares or UCB of any of their respective representations or warranties under or in connection with this Agreement, or any failure of Bancshares or UCB to perform any of their respective covenants, agreements or obligations under or in connection with this Agreement; and,
(iii) in connection with or which arise out of or result from or are based upon any information about or provided by them which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus at the time of its mailing to Triad's shareholders to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.
9.02. INDEMNIFICATION FOLLOWING EFFECTIVE TIME. Following the Effective Time, UCB agrees that, to the extent they would have had a right to indemnification from Triad or the Subsidiary, then UCB will indemnify Triad's and the Subsidiary's former officers and directors against liabilities arising from actions in their official capacities as officers and directors of Triad or the Subsidiary.
9.03. PROCEDURE FOR CLAIMING INDEMNIFICATION. Any party seeking to be indemnified hereunder promptly shall give written notice and furnish adequate documentation to the other party of any claims in respect of which indemnity is sought. The indemnifying party, through its own counsel and at its own expense, shall defend any such claim and shall have exclusive control over the investigation, preparation, and defense of such claim and all negotiations relating to its settlement or compromise. The obligations of either party to indemnify the other hereunder apply only if the party seeking to be indemnified cooperates with and assists the indemnifying party in all reasonably necessary respects in the conduct of the suit.
"Previously Disclosed" shall mean, as to Triad or as to Bancshares and UCB, the disclosure of information in a letter delivered by such party to the other prior to the date of this Agreement and which specifically refers to this Agreement and is arranged in paragraphs corresponding to the Paragraphs, subparagraphs and items of this Agreement applicable thereto, all of which documents are incorporated herein by reference.
Information disclosed in either party's letter described above shall be deemed to have been Previously Disclosed by such party for the purpose of any given Paragraph, subparagraph or item of this Agreement only to the extent that information is expressly set forth in such party's letter described above and that, in connection with such disclosure, a specific reference is made in the letter to that Paragraph, subparagraph or item.
10.02. SURVIVAL OF REPRESENTATIONS, WARRANTIES, INDEMNIFICATION AND OTHER AGREEMENTS.
a. REPRESENTATIONS, WARRANTIES AND OTHER AGREEMENTS. None of the representations, warranties or agreements herein shall survive the effectiveness of the Merger, and no party shall have any right after the Effective Time to recover damages or any other relief from any other party to this Agreement by reason of any breach of representation or warranty, any nonfulfillment or nonperformance of any agreement contained herein, or otherwise; provided, however, that the parties agreements contained in Paragraphs 6.07. and 6.08. and Articles VIII and IX above, and Bancshares' representations and warranties contained in Paragraphs 3.02. and 3.12. above, shall survive the effectiveness of the Merger.
parties' indemnification agreements and obligations pursuant to Paragraph 9.1. above shall become effective only in the event this Agreement is terminated, and neither of the parties shall have any obligations under that Paragraph in the event of or following consummation of the Merger. UCB's indemnification agreements and obligations pursuant to Paragraph 9.2. above shall become effective only at the Effective Time, and UCB shall not have any obligation under that Paragraph prior to the Effective Time or in the event of or following termination of this Agreement.
10.03. WAIVER. Any term or condition of this Agreement may be waived (except as to matters of regulatory approvals and approvals required by law), either in whole or in part, at any time by the party which is, and whose shareholders are, entitled to the benefits thereof; provided, however, that any such waiver shall be effective only upon a determination by the waiving party (through action of its Board of Directors) that such waiver would not adversely affect the interests of the waiving party or its shareholders; and, provided further, that no waiver of any term or condition of this Agreement by any party shall be effective unless such waiver is in writing and signed by the waiving party, or be construed to be a waiver of any succeeding breach of the same term or condition. No failure or delay of any party to exercise any power, or to insist upon a strict compliance by any other party of any obligation, and no custom or practice at variance with any terms hereof, shall constitute a waiver of the right of any party to demand a full and complete compliance with such terms.
10.04. AMENDMENT. This Agreement may be amended, modified or supplemented at any time or from time to time prior to the Effective Time, and either before or after its approval by the shareholders of Triad, by an agreement in writing approved by a majority of the Board of Directors of Bancshares, UCB and Triad executed in the same manner as this Agreement; provided however, that, except with the further approval of Triad's shareholders of that change or as otherwise provided herein, following approval of this Agreement by the shareholders of Triad no change may be made in the number of shares of Bancshares Stock into which each share of Triad Stock will be converted.
10.05. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or by courier, or mailed by certified mail, postage prepaid, as follows:
a. If to Triad, to:
Attention: James E. Mims, Chairman
With copy to: Alexander M. Donaldson, Esq. Ward and Smith, P.A. Two Hannover Square, Suite 2400
b. If to either Bancshares or UCB, to:
Attention: David L. Thomas, Exec. Vice President
With copy to: Alfred E. Cleveland, Esq.
Bancshares and UCB each agree to furnish to the others such further assurances with respect to the matters contemplated herein and their respective agreements, covenants, representations and warranties contained herein, including the opinion of legal counsel, as such other parties may reasonably request.
Headings and captions of the sections and paragraphs of this Agreement have been inserted for convenience of reference only and do not constitute a part hereof.
10.08. ENTIRE AGREEMENT. This Agreement (including all schedules and exhibits attached hereto and all documents incorporated herein by reference) contains the entire agreement of the parties with respect to the transactions described herein and supersedes any and all other oral or written agreement(s) heretofore made, and there are no representations or inducements by or to, or and agreements between, any of the parties hereto other than those contained herein in writing.
The invalidity or unenforceability of any term, phrase, clause, paragraph, restriction, covenant, agreement or other provision hereof shall in no way affect the validity or enforceability of any other provision or part hereof.
10.10. ASSIGNMENT. This Agreement may not be assigned by any party hereto except with the prior written consent of the other parties hereto.
10.11. COUNTERPARTS. Any number of counterparts of this Agreement may be signed and delivered, each of which shall be considered an original and which together shall constitute one agreement.
10.12. GOVERNING LAW. This Agreement is made in and shall be construed and enforced in accordance with the laws of North Carolina.
10.13. INSPECTION. Any right of Bancshares, UCB or Triad hereunder to investigate or inspect the assets, books, records, files and other information of the other in no way shall establish any presumption that Bancshares, UCB or Triad should have conducted any investigation or that such right has been exercised by Bancshares, UCB, Triad, their respective agents, representatives or others. Any investigations or inspections that have been made by Bancshares, UCB or Triad or their respective agents, representatives or others prior to the Closing Date shall not be deemed in any way in derogation or limitation of the covenants, representations and warranties made by or on behalf of Bancshares, UCB or Triad in this Agreement.
IN WITNESS WHEREOF, Triad, Bancshares and UCB each has caused this Agreement to be executed in its name by its duly authorized officers as of the date first above written.
SCHEDULE TO AGREEMENT AND PLAN OF
Triad Bank agrees to furnish supplementally a copy of any omitted schedule upon request.
EXCERPT FROM NORTH CAROLINA BUSINESS CORPORATION ACT
Part 1. Right to Dissent and Obtain Payment for Shares.
(1) "Corporation" means the issuer of the shares held by a dissenter before the corporate action, or the surviving or acquiring corporation by merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate action under G.S. 55-13-02 and who exercises that right when and in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate action until the date of payment, at a rate that is fair and equitable under all the circumstances, giving due consideration to the rate currently paid by the corporation on its principal bank loans, if any, but not less than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
ss. 55-13-02. Right to dissent.
(a) In addition to any rights granted under Article 9, a shareholder is entitled to dissent from, and obtain payment of the fair value of his shares in the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other than a parent corporation in a merger under G.S. 55-11-04) is a party unless (i) approval by the shareholders of that corporation is not required under G.S. 55-11-03(g) or (ii) such shares are then redeemable by the corporation at a price not greater than the cash to be received in exchange for
(2) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, unless such shares are then redeemable by the corporation at a price not greater than the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than as permitted by G.S. 55-12-01, including a sale in dissolution, but not including a sale pursuant to court order or a sale pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed in cash to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it (i) alters or abolishes a preferential right of the shares; (ii) creates, alters, or abolishes a right in respect of redemption, including a provision respecting a sinking fund for the redemption or repurchase, of the shares; (iii) alters or abolishes a preemptive right of the holder of the shares to acquire shares or other securities; (iv) excludes or limits the right of the shares to vote on any matter, or to cumulate votes; (v) reduces the number of shares owned by the shareholder to a fraction of a share if the fractional share so created is to be acquired for cash under G.S. 55-6-04; or (vi) changes the corporation into a nonprofit
(5) Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares under this Article may not challenge the corporate action creating his entitlement, including without limitation a merger solely or partly in exchange for cash or other property, unless the action is unlawful or fraudulent with respect to the shareholder or the corporation.
ss. 55-13-03. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all the shares registered in his name only if he dissents with respect to all shares beneficially owned by any one person and notifies the corporation in writing of the name and address of each person on whose behalf he asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which he dissents and his other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held on his behalf only if:
(1) He submits to the corporation the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the beneficial shareholder.
Part 2. Procedure for Exercise of Dissenters' Rights.
ss. 55-13-20. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters' rights under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is taken without a vote of shareholders, the corporation shall no later than 10 days thereafter notify in writing all shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section, such failure shall not invalidate any corporate action taken; but any shareholder may recover from the corporation any damage which he suffered from such failure in a civil action brought in his own name within three years after corporate action creating dissenters' rights under G.S. 55-13-02 unless he voted for such corporate action.
ss. 55-13-21. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually receive, before the vote is taken written notice of his intent to demand payment for his shares if the proposed
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is not entitled to payment for his shares under this Article.
(a) If proposed corporate action creating dissenters' rights under G.S. 55-13-02 is authorized at a shareholders' meeting, the corporation shall mail by registered or certified mail, return receipt requested, a written dissenters' notice to all shareholders who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after the corporate action was taken, and must:
(1) State where the payment demand must be sent and where and when certificates for certificated shares must be
(2) Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment demand, which date may not be fewer than 30 nor more than 60 days after the date the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
ss. 55-13-23. Duty to demand payment.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must demand payment and deposit his share certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates under subsection (a) retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for his share under this Article.
(a) The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action.
ss. 55-13-25. Offer of payment.
(a) As soon as the proposed corporate action is taken, or upon receipt of a payment demand, the corporation shall offer to pay each dissenter who complied with G.S. 55-13-23 the amount the corporation estimates to be the fair value of his shares, plus interest accrued to the date of payment, and shall pay this amount to each dissenter who agrees in writing to accept it in full satisfaction of his demand.
(b) The offer of payment must be accompanied by:
(1) The corporation's most recent available balance sheet as of the end of a fiscal year ending not more than 16 months before the date of offer of payment, an income statement for that year, a statement of cash flows for that year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment
(5) A copy of this Article.
ss. 55-13-26. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer restrictions, the corporation takes the proposed action, it must sent a new dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
ss. 55-13-28. Procedure if shareholder dissatisfied with corporation's offer or failure to perform.
(a) A dissenter may notify the corporation in writing of his own estimate of the fair value of his shares and amount of interest due, and demand payment of his estimate or reject the corporation's offer under G.S. 55-13-25 and demand payment of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under G.S. 55-13-25 is less than the fair value of his shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment to a dissenter who accepts the corporation's offer under G.S. 55-13-25 within 30 days after the dissenter's acceptance; or
(3) The corporation, having failed to take the proposed action, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within 60 days after the date set for demanding payment.
(b) A dissenter waives his right to demand payment under this section unless he notifies the corporation of his demand in writing (i) under subdivision (a)(1) within 30 days after the corporation offered payment for his shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days after the corporation has failed to perform timely. A dissenter who fails to notify the corporation of his demand under subsection (a) within such 30-day period shall be deemed to have withdrawn his dissent and demand for payment.
Part 3. Judicial Appraisal of Shares.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the dissenter may commence a proceeding within 60 days after the date of his payment demand under G.S. 55-13-28 and petition the court to determine the fair value of the shares and accrued interest. Upon service upon it of the petition filed with the court, the corporation shall pay to the dissenter the amount offered by the corporation under G.S. 55-13-25.
(a1) If the dissenter does not commence the proceeding within the 60-day period, the dissenter shall have an additional 30 days to either (i) accept in writing the amount offered by the corporation under G.S. 55-13-25, upon which the corporation shall pay such amount to the dissenter in full satisfaction of his demand, or (ii) withdraw his demand for payment and resume the status of a nondissenting shareholder. A dissenter who takes no action within such 30-day period shall be deemed to have withdrawn his dissent and demand for payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or not residents of this State) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under subsection (b) is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order appointing them, or in any amendment to it. The parties are entitled to the same discovery rights as parties in other civil proceedings. However, in a proceeding by a dissenter in a public corporation, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment for the amount, if any, by which the court finds the fair value of his shares, plus interest, exceeds the amount paid by the corporation.
ss. 55-13-31. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court, and shall assess the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either or any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the corporation, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited.
You have requested our opinion as to the fairness, from a financial point of view, of the consideration to be received by the unaffiliated shareholders of Triad Bank under the terms of a merger of Triad Bank with and into United Carolina Bank, a wholly-owned subsidiary of United Carolina Bancshares Corporation, pursuant to the terms of an Agreement and Plan of Reorganization and Merger (collectively, the "Agreements") by and among Triad Bank, United Carolina Bank and United Carolina Bancshares Corporation (the "Merger"). Upon the effective date of the Merger, each of the approximately 1,818,623 outstanding shares of Triad Bank's common stock will be converted into the right to receive .569444 shares of United Carolina Bancshares Corporation common stock (subject to adjustment as provided in the Agreements). The foregoing summary of the Merger is qualified in its entirety by reference to the Agreements.
The Carson Medlin Company ("Carson Medlin") is a National Association of Securities Dealers, Inc. member investment banking firm which specializes in the securities of United States financial institutions. As a part of our investment banking activities, we are regularly engaged in the valuation of United States financial institutions and transactions relating to their securities. We regularly publish our research on independent community banks regarding their financial and stock price performance. We are familiar with the commercial banking industry in the Southeast and the major commercial banks operating in the region. We have been retained by Triad Bank in a financial advisory capacity to render our opinion hereunder, for which we will receive compensation.
In reaching our opinion, we have analyzed the respective financial positions, both current and historical, of Triad Bank, United Carolina Bank and United Carolina Bancshares Corporation. We have reviewed (i) the Agreements; (ii) the Annual Reports to shareholders of Triad Bank, including the audited financial statements, for the five years ended December 31, 1994; (iii) the reports to its primary regulator (Call Reports) of Triad Bank for the five years ended December 31, 1994 and the nine months ended September 30, 1995; (iv) the Annual and Quarterly Reports on Forms 10-K and 10-Q of United Carolina Bancshares Corporation for the five years ended
December 31, 1994 and the nine months ended September 30, 1995; (v) a draft of the joint Prospectus/Proxy Statement of United Carolina Bancshares Corporation and Triad Bank dated November 21, 1995 for the special meeting of the shareholders of Triad Bank to be held in order to approve the Merger, and (vi) certain other financial and operating information with respect to the business, operations and prospects of Triad Bank, United Carolina Bank and United Carolina Bancshares Corporation.
Carson Medlin also (a) held discussions with members of the senior management of Triad Bank, United Carolina Bank and United Carolina Bancshares Corporation regarding the historical and current business operations, financial condition and future prospects of their respective companies; (b) reviewed the historical market prices and trading activity for the common stocks of Triad Bank and United Carolina Bancshares Corporation and compared them with those of certain publicly-traded companies which it deemed to be relevant; (c) compared the results of operations of Triad Bank, United Carolina Bank and United Carolina Bancshares Corporation with those of certain banking companies which it deemed to be relevant; (d) compared the proposed financial terms of the Merger with the financial terms, to the extent publicly available, of certain other recent business combinations of commercial banking organizations; (e) analyzed the pro forma financial impact of the Merger on United Carolina Bancshares Corporation; and (f) conducted such other studies, analyses, inquiries and examinations as Carson Medlin deemed appropriate.
We have relied upon and assumed without independent verification the accuracy and completeness of all information provided to us. We have not performed or considered any independent appraisal or evaluation of the assets of Triad Bank, United Carolina Bank or United Carolina Bancshares Corporation. The opinion we express herein is necessarily based upon market, economic and other relevant considerations as they exist and can be evaluated as of the date of this letter.
Based upon the foregoing, it is our opinion that the consideration to be received by the unaffiliated shareholders of Triad Bank pursuant to the Merger is fair, from a financial point of view, to the unaffiliated shareholders of Triad Bank.
(Signature of The Carson Medlin Company) | 424B3 | 424B3 | 1996-01-16T00:00:00 | 1996-01-16T17:16:44 |
0000919574-96-000017 | 0000919574-96-000017_0000.txt | Name of Issuer: Cupertino National Bancorp Title of Class of Securities: Common Stock CUSIP Number: 231 260 100
(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)
Bennett Lindenbaum c/o Basswood Partners, 52 Forest Avenue, Paramus, NJ 07652; (201) 843-3644
(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 [X]. (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).
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(e)
6. Citizen or Place of Organization
Number of Shares Beneficially Owned by Each Reporting Person With:
11. Aggregate Amount Beneficially Owned by Each Reporting Person
12. Check Box if the Aggregate Amount in Row (11) Excludes
13. Percent of Class Represented by Amount in Row (11)
14. Type of Reporting Person*
1. Name of Reporting Person S.S. OR I.R.S. Identification No. of Above Person
2. Check the Appropriate Box if a Member of a Group
5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e)
6. Citizen or Place of Organization
Number of Shares Beneficially Owned by Each Reporting Person With:
11. Aggregate Amount Beneficially Owned by Each Reporting Person
12. Check Box if the Aggregate Amount in Row (11) Excludes
13. Percent of Class Represented by Amount in Row (11)
14. Type of Reporting Person*
1. Name of Reporting Person S.S. OR I.R.S. Identification No. of Above Person
2. Check the Appropriate Box if a Member of a Group
5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e)
6. Citizen or Place of Organization
Number of Shares Beneficially Owned by Each Reporting Person With:
11. Aggregate Amount Beneficially Owned by Each Reporting Person
12. Check Box if the Aggregate Amount in Row (11) Excludes
13. Percent of Class Represented by Amount in Row (11)
14. Type of Reporting Person*
Item 1. Security and Issuer
This statement relates to shares of voting common stock
(the "Common Stock") of Cupertino National Bankcorp.
("Cupertino"). Cupertino's principal executive office is located
at 20230 Stevens Creek Boulevard, Cupertino, California 95014.
Item 2. Identity and Background
This statement is being filed on behalf of Basswood
Partners, L.P. ("Basswood"), a Delaware limited partnership, and
Matthew and Bennett Lindenbaum, the principals of Basswood's
general partner. Basswood's principal office is at 52 Forest
Avenue, Paramus, NJ 07652. Basswood currently is the general
partner of Basswood Financial Partners, L.P. ("the Partnership"),
and advises several accounts including Basswood International
Matthew Lindenbaum and Bennett Lindenbaum are the sole
principals of Basswood Management, Inc., the general partner of
Basswood. Matthew Lindenbaum and Bennett Lindenbaum have not,
during the last five years, been convicted in a criminal
proceeding (excluding traffic violations or similar
misdemeanors). Matthew Lindenbaum and Bennett Lindenbaum have
not, during the last five years, been a party to a civil
proceeding of a judicial or administrative body of competent
jurisdiction which resulted in 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 violations with respect to such laws.
Matthew Lindenbaum and Bennett Lindenbaum are citizens
of the United States of America.
Item 3. Source and Amount of Funds or Other Consideration
As of the date hereof, Basswood, Matthew Lindenbaum and
Bennett Lindenbaum are deemed to beneficially own 100,596 shares
of Cupertino's Common Stock. All 100,596 shares are held by the
Partnership or by the Account over which Basswood, Matthew
Lindenbaum and Bennett Lindenbaum have investment discretion.
The shares were purchased in open market transactions for an
aggregate cost of $1,122,647. The funds for the purchase of the
Common Stock held in the Partnership and the Account over which
Basswood, Matthew Lindenbaum and Bennett Lindenbaum have
investment discretion have come from the Partnership or each
account's own funds. Leverage was used to purchase shares of
Item 4. Purpose of Transaction
The shares of Common Stock beneficially owned by
Basswood, Matthew Lindenbaum and Bennett Lindenbaum were acquired
for, and are being held for, investment purposes.
Basswood, Matthew Lindenbaum and Bennett Lindenbaum have
no plan or proposal which relates to, or would result in, any of
the actions enumerated in Item 4 of the instructions to Schedule
Item 5. Interest in Securities of the Issuer
As of the date hereof, Basswood, Matthew Lindenbaum and
Bennett Lindenbaum are deemed to be the beneficial owners of
100,596 shares of Cupertino's Common Stock. Based on information
received from Cupertino's employees there are believed to be
1,808,585 shares of Cupertino's voting Common Stock outstanding.
Therefore, Basswood, Matthew Lindenbaum and Bennett Lindenbaum
beneficially own 5.5% of Cupertino's outstanding shares of Common
Stock. Basswood, Matthew Lindenbaum and Bennett Lindenbaum have
the power to vote, direct the vote, dispose of or direct the
disposition of all the shares of Cupertino's Common Stock that
Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of
Basswood, Matthew Lindenbaum and Bennett Lindenbaum have
no contract, arrangement, understanding or relationship with any
person with respect to the Common Stock of Cupertino.
Item 7. Material to be Filed as Exhibits
Attached hereto as Exhibit A is a description of the
transactions in the Common Stock of Cupertino that were effected
by the reporting persons during the past 60 days.
The undersigned, after reasonable inquiry and to the
best of its knowledge and belief, certifies that the information set forth in this statement is true, complete and correct.
The undersigned agree that this Schedule 13D dated
January 12, 1996 relating to the Common Stock of Cupertino
National Bancorp shall be filed on behalf of the undersigned.
Trade Date Number of Shares Price Per Share | SC 13D | SC 13D | 1996-01-16T00:00:00 | 1996-01-16T13:07:58 |
0000315066-96-000099 | 0000315066-96-000099_0000.txt | <DESCRIPTION>EFFECTIVE DATE - SEPTEMBER 14, 1995 - PHYSICIANS
Item 1: Reporting Person - FMR Corp. - (Tax ID: 04-2507163) Item 6: Commonwealth of Massachusetts
The filing of this Schedule 13D is not, and should not be deemed to be, an admission that such Schedule 13D is required to be filed. See the discussion under Item 2.
Item 1. Security and Issuer.
This statement relates to shares of the common stock, $0.01 par value (the "Shares") of Physicians Clinical Laboratory Incorporated, a Delaware corporation (the "Company"). The principal executive offices of the Company are located at 2495 Natomas Park Drive, Sacramento, CA 95833.
Item 2. Identity and Background.
This statement is being filed by FMR Corp., a Massachusetts Corporation ("FMR"). FMR is a holding company one of whose principal assets is the capital stock of a wholly-owned subsidiary, Fidelity Management & Research Company ("Fidelity"), which is also a Massachusetts corporation. Fidelity is an investment advisor which is registered under Section 203 of the Investment Advisors Act of 1940 and which provides investment advisory services to more than 30 investment companies which are registered under Section 8 of the Investment Company Act of 1940 and serves as investment advisor to certain other funds which are generally offered to limited groups of investors (the "Fidelity Funds"). Fidelity Management Trust Company ("FMTC"), a wholly- owned subsidiary of FMR Corp. and a bank as defined in Section 3(a)(6) of the Securities Exchange Act of 1934, serves as trustee or managing agent for various private investment accounts, primarily employee benefit plans and serves as investment adviser to certain other funds which are generally offered to limited groups of investors (the "Accounts"). Various directly or indirectly held subsidiaries of FMR are also engaged in investment management, venture capital asset management, securities brokerage, transfer and shareholder servicing and real estate development. The principal offices of FMR, Fidelity, and FMTC are located at 82 Devonshire Street, Boston, Massachusetts 02109.
Members of the Edward C. Johnson 3d family are the predominant owners of Class B shares of common stock of FMR representing approximately 49% of the voting power of FMR. Mr. Johnson 3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding voting stock of FMR, and Mr. Johnson 3d is the Chairman of FMR. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the Investment Comany Act of 1940, to form a controlling group with respect to FMR. The business address and principal occupation of Mr. Johnson 3d is set forth in Schedule A hereto.
The Shares to which this statement relates are owned directly by one of the Fidelity Funds, and three of the Accounts.
The name, residence or business address, principal occupation or employment and citizenship of each of the executive officers and directors of FMR are set forth in Schedule A hereto.
Within the past five years, none of the persons named in this Item 2 or listed on Schedule A has been convicted in any criminal proceeding (excluding traffic violations or similar misdemeanors) or has been a party to any civil proceeding and as a result thereof was or is subject to any judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to federal or state securities laws or finding any violations with respect to such laws.
Item 3. Source and Amount of Funds or Other Consideration.
The Fidelity Funds which own or owned Shares purchased in the aggregate 334,836 Shares for cash in the amount of approximately $1,302,838, including brokerage commissions. The Fidelity Funds used their own assets in making such purchase and no part of the purchase price is represented by borrowed funds. Proceeds from 254,475 Shares sold aggregated approximately $830,481. The attached Schedule B sets forth Shares purchased and/or sold since July 15, 1995.
The Accounts of FMTC which own or owned Shares purchased in the aggregate 843,786 Shares for cash in the amount of approximately $2,857,810, including brokerage commissions. The Accounts used their own assets in making such purchase and no part of the purchase price is represented by borrowed funds. Proceeds from 254,475 Shares sold aggregated approximately $830,481. The attached Schedule B sets forth Shares purchased and/or sold since July 15, 1995.
Item 4. Purpose of Transaction.
The purpose of Fidelity and FMTC in having the Fidelity Funds and the Accounts purchase Shares is to acquire an equity interest in the Company in pursuit of specified investment objectives established by the Board of Trustees of the Fidelity Funds and by the investors in the Accounts.
Fidelity and FMTC, respectively, may continue to have the Fidelity Funds and the Accounts purchase Shares subject to a number of factors, including, among others, the availability of Shares of sale at what they consider to be reasonable prices and other investment opportunities that may be available to the Fidelity Funds and Accounts.
Fidelity and FMTC, respectively, intend to review continuously the equity position of the Fidelity Funds and Accounts in the Company. Depending upon future evaluations of the business prospects of the Company and upon other developments, including, but not limited to, general economic and business conditions and money market and stock market conditions, Fidelity may determine to cease making additional purchases of Shares or to increase or decrease the equity interest in the Company by acquiring additional Shares, or by disposing of all or a portion of the Shares.
Other than described in Item 6, neither Fidelity nor FMTC has any present plan or proposal which relates to or would result in (i) an extraordinary corporate transaction, such as a merger, reorganization, liquidation, or sale of transfer of a material amount of assets involving the Company or any of its subsidiaries, (ii) any change in the Company's present Board of Directors or management, (iii) any material changes in the Company's present capitalization or dividend policy or any other material change in the Company's business or corporate structure, (iv) any change in the Company's charter or by-laws, or (v) the Company's common stock becoming eligible for termination of its registration pursuant to Section 12(g)(4) of the 1934 Act.
Item 5. Interest in Securities of Issuer.
FMR, Fidelity, and FMTC, beneficially own all 669,672 Shares.
(a) FMR beneficially owns, through Fidelity, as investment advisor to the Fidelity Funds, 80,360 Shares, or approximately 1.20% of the outstanding Shares of the Company, and through FMTC, the managing agent for the Accounts, 589,311 Shares, or approximately 8.80% of the outstanding Shares of the Company. FMR could also be deemed to beneficially own certain of such Shares through its ownership of the general partner of certain private investment funds. The number of Shares held by the Fidelity Funds includes 80,360 Shares of common stock resulting from the assumed conversion of $980,400 principal amount of the 7.5% Convertible Subordinated Debenture (81.9672 shares of common stock for each $1,000 principal amount of the debenture). The number of Shares held by the Accounts includes 589,311 Shares of common stock resulting from the conversion of $7,189,600 principal amount of the 7.5% Convertible Subordinated Debenture described above. Neither FMR, Fidelity, FMTC, nor any of its affiliates nor, to the best knowledge of FMR, any of the persons name in Schedule A hereto, beneficially owns any other Shares. The combined holdings of FMR, Fidelity, and FMTC, are 669,672 Shares, or approximately 9.9985% of the outstanding Shares of the Company.
(b) FMR, through its control of Fidelity, investment advisor to Fidelity Copernicus Fund, L.P. ("Copernicus") a private investment limited partnership and the Fidelity Fund that owns Shares, and Copernicus each has the sole power to dispose of and vote or direct the voting of 80,360 Shares owned directly by Copernicus. FMR, through its control of FMTC, investment manager to the Accounts, and the Accounts each has sole dispositive power over 589,311 Shares and sole power to vote or to direct the voting of 589,311 Shares, and no power to vote or to direct the voting of 0 Shares owned by the Accounts.
(c) Except as set forth in Schedule B, neither FMR, or any of its affiliates, nor, to the best knowledge of FMR, any of the persons named in Schedule A hereto has effected any transaction in Shares during the past sixty (60) days.
Item 6. Contract, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.
Except as described below, neither FMR nor any of its affiliates nor, to the best knowledge of FMR, any of the persons named in Schedule A hereto has any joint venture, finder's fee, or other contract or arrangement with any person with respect to any securities of the Company.
The Funds and Accounts may from time to time own debt securities issued by the Company or its direct or indirect subsidiaries, and may from time to time purchase and/or sell such debt securitites.
One the date of this report, one Fidelity Fund and three Accounts hold interests under a Credit Agreement entered into as of April 1, 1994, as amended, by and among the Company and certain financial institutions. As previously reported by the Company, certain events of default have occurred under this credit facility; accordingly, the Company is presently discussing with the holders of such debt (including the Fidelity Fund and Accounts who hold such debt) the resolution of these defaults, including possibly a restructuring of the credit facility. The Fidelity Fund and Accounts who hold such debt have not, as of the date of this report, entered into any agreement with the Company with respect to any security of the Company.
Item 7. Material to be Filed as Exhibits.
This statement speaks as of its date, and no inference should be drawn that no change has occurred in the facts set forth herein after the date hereof.
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.
DATE: January 16, 1996 By: /s/Arthur
The name and present principal occupation or employment of each executive officer and director of FMR Corp. are set forth below. The business address of each person is 82 Devonshire Street, Boston, Massachusetts 02109, and the address of the corporation or organization in which such employment is conducted is the same as his business address. All of the persons listed below are U.S. citizens.
Edward C. Johnson 3d President, Director, CEO Board and CEO, FMR
J. Gary Burkhead Director President-Fidelity
Caleb Loring, Jr. Director, Director, FMR
James C. Curvey Director, Sr. V.P., FMR Sr. V.P.
William L. Byrnes Vice Chairman Vice Chairman, FIL Director & Mng.
Abigail P. Johnson Director Portfolio Mgr -
Robert C. Pozen Sr. V.P. & Gen'l Sr. V.P. & Gen'l
David C. Weinstein Sr. Vice President Sr. Vice President
Gerald M. Lieberman Sr. Vice Pres. - Sr. Vice Pres. -
One Fidelity Fund(s) purchased the 7.5% Convertible Subordinated Debenture since July 15, 1995 at the dates and at the prices set forth below. The transactions were made for cash in open market transactions or with other investment companies with the same or an affiliated investment advisor.
One Fidelity Fund(s) sold the 7.5% Convertible Subordinated Debenture since July 15, 1995 at the dates and at the prices set forth below. The transactions were made for cash in open market transactions or with other investment companies with the same or an affiliated investment advisor.
Three Accounts(s) purchased the 7.5% Convertible Subrdinated Debenture since July 15, 1995 at the dates and at the prices set forth below. The transactions were made for cash in open market transactions or with other investment companies with the same or an affiliated investment advisor.
One Account(s) sold the 7.5% Convertible Subordinated Debenture since July 15, 1995 at the dates and at the prices set forth below. The transactions were made for cash in open market transactions or with other investment companies with the same or an affiliated investment advisor. | SC 13D | SC 13D | 1996-01-16T00:00:00 | 1996-01-16T17:17:36 |
0000950114-96-000004 | 0000950114-96-000004_0000.txt | <DESCRIPTION>K-V PHARMACEUTICAL COMPANY FORM S-8
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 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.)
(Address of Principal Executive Offices) (Zip Code)
(Full title of the Plan)
(Name and address of agent for service)
code, of agent for service)
Copies of all correspondence to: DOUGLAS J. BATES, ESQ. GALLOP, JOHNSON & NEUMAN, L.C. 101 SOUTH HANLEY ROAD, SUITE 1600
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE
The Registrant hereby incorporates by reference the following documents previously filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Securities Act of 1933, as amended (the "Securities Act"):
(a) The Registrant's Annual Report on Form 10-K for the year
(b) The Registrant's definitive proxy statement on Schedule 14A for the 1995 Annual Meeting of Shareholders;
(c) The Registrant's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1995 and September 30, 1995; and
(d) The description of the Registrant's Class A and Class B common stock, which is contained in a registration statement on Form S-1 (No. 33-39423) filed by the Registrant under the Securities Act.
All documents subsequently filed by the Registrant pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective amendment that indicates that all securities offered hereby have been sold or that deregisters all such securities then remaining unsold, shall be deemed to be incorporated by reference in this registration statement and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated by reference herein and filed prior to the filing hereof shall be deemed to be modified or superseded for purposes of this registration statement to the extent that a statement contained herein modifies or supersedes such statement, and any statement contained herein or in any other document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this registration statement to the extent that a statement contained 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 registration statement.
ITEM 4. DESCRIPTION OF SECURITIES
ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL
The validity of the securities offered hereby is being passed upon by Gallop, Johnson & Neuman, L.C. Members of such firm are the beneficial owners of 144,500 shares of the Registrant's Class A common stock and 144,500 shares of the Registrant's Class B common stock. Mr. Alan G. Johnson, a member of the firm, serves as a director and secretary of the Registrant.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware permits indemnification by a corporation of certain officers, directors, employees and agents. Consistent therewith, Article IX of the Registrant's Bylaws requires that the Registrant indemnify all persons whom it may indemnify pursuant thereto to the fullest extent permitted by Section 145. In addition, Article IX states that the Registrant shall indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding whether civil, criminal, administrative or investigative by reason of the fact that he or she is an officer, director, employee or agent of the Registrant, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorney's fees), judgements, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if the person acted in good faith and in a manner that the person believed was not opposed to the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. If a person is a party to or threatened to made a party to any threatened, pending action or suit by or in the right of the Registrant to procure a judgment in the Registrant's favor by reason of the fact that the person is a director, officer, employee or agent of the Registrant, the person is entitled to indemnification on the same terms set forth above except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Registrant in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such officer, director, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Registrant as authorized. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.
The Registrant has procured and intends to maintain a policy of insurance under which the directors and officers of the Registrant will be insured, subject to the limits of the policy, against certain losses arising from claims made against such directors and officers by reason of any acts or omissions covered under such policy in their respective capacities as directors or officers, including liabilities under the Securities Act attributable to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise.
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED
The following exhibits are filed as part of this registration statement or incorporated by reference herein.
(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 prospectus required by Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration
(iii) To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this
provided, however, that the information required to be included in a post-effective amendment by paragraphs (a)(1)(i) and (a)(1)(ii) may be contained in periodic reports filed by the Registrant pursuant to Section 13 or 15(d) of the Exchange Act and incorporated by reference herein.
(2) That, for the purpose of determining any liability under the Securities Act, 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, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by reference in this 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.
(h) Insofar as indemnification for liabilities arising under the Securities Act 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.
The Registrant. Pursuant to the requirements of the Securities Act of 1933, as amended, 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 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri, on January 16, 1996.
Date: January 16, 1996 By: /s/ Gerald R. Mitchell
We, the undersigned officers and directors of K-V Pharmaceutical Company hereby severally and individually constitute and appoint Alan G. Johnson and Gerald R. Mitchell, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this registration statement on Form S-8 and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the other and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents and each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated. | S-8 | S-8 | 1996-01-16T00:00:00 | 1996-01-16T12:05:32 |
0000948028-96-000002 | 0000948028-96-000002_0000.txt | 2440 Pershing Road, Suite G-15
The Scout Balanced Fund seeks both long-term capital growth and high current income. Long-term capital growth is intended to be achieved primarily by the Fund's investment in a diversified portfolio of equity securities (common stocks and securities convertible into common stocks). High current income is intended to be achieved by the Fund's investment in a diversified portfolio of fixed-income obligations. The shares offered by this prospectus are not deposits or obligations of, nor guaranteed by, UMB Bank, n.a. or any other banking institution, nor are they federally insured by the Federal Deposit Insurance Corporation or any other federal agency. These shares involve investment risks, including the possible loss of the principal amount invested.
Initial IRA and Uniform Transfers (Gifts) to Minors Purchases $ 250 Subsequent Purchase: By Telephone or Wire $ 500 All Automatic Purchases $ 100
Shares are purchased and redeemed at net asset value. There are no sales, redemption or Rule 12b-1 distribution charges. If you need further information, please call the Fund at the telephone number indicated.
This prospectus should be read and retained for future reference. It contains the information that you should know before you invest. A "Statement of Additional Information" of the same date as this prospectus has been filed with the Securities and Exchange Commission and is incorporated by reference. Investors desiring additional information about the Fund may obtain a copy without charge by writing or calling the Fund.
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.
Investment Objective and Portfolio Management Policy 4 How to Purchase Shares 7 Investments Subsequent to Initial Investment 8 Automatic Monthly Investment Plan 8 How to Redeem Shares 9 How to Exchange Shares Between Scout Funds 11 How Share Price is Determined 11 General Information and History 13 Dividends, Distributions and Their Taxation 14
Maximum sales load imposed on purchases None Maximum sales load imposed on reinvested dividends
(as a percentage of average net assets)
Total Fund operating expenses .93%
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2) redemption at the end of each time period:
The above information is provided in order to assist you in understanding the various costs and expenses that a shareholder of the Fund will bear directly or indirectly. The expenses set forth above are an estimate only. "Other Expenses" is based on estimated amounts for the current fiscal year. The example should not be considered a representation of past or future expenses. Actual expenses may be greater or less than those shown.
INVESTMENT OBJECTIVE and PORTFOLIO MANAGEMENT POLICY
The Scout Balanced Fund seeks both long-term capital growth and high current income. Long-term capital growth is intended to be achieved primarily by the Fund's investment in a diversified portfolio of equity securities (common stocks and securities convertible into common stocks). High current income is intended to be achieved by the Fund's investment in a diversified portfolio of fixed-income obligations.
The Scout Balanced Fund will normally invest in a diversified portfolio of securities. The Fund has the flexibility to pursue its objective through any type or quality of domestic or foreign security. The manager will shift the proportions of each type of investment based on interpretation of economic conditions and underlying security valuations. Normally the Fund will invest at least 25% of its total assets in equity securities and a minimum of 25% of its total assets in fixed income senior obligations. When, in the manager's judgment, market conditions warrant, the Fund, for defensive purposes, may make substantial temporary investments in high quality money market securities. The Fund will normally invest in the following fixed income securities:
1. Direct obligations of the U.S. government, such as bills, notes, bonds and other debt securities issued by the U.S. treasury.
2. Obligations of U.S. government agencies and instrumentalities which are secured by the full faith and credit of the U.S. treasury; such as securities of the Government National Mortgage Association, the Export-Import Bank, or the Student Loan Marketing Association; or which are secured by the right of the issuer to borrow from the Treasury, such as securities issued by the Federal Financing Bank or the U.S. Postal Service; or are supported by the credit of the government agency or instrumentality itself, such as securities of Federal Home Loan Banks, Federal Farm Credit Banks, or the Federal National Mortgage Association.
3. Securities issued by corporations or other business organizations. The Fund will generally invest in securities that, at the time of purchase, are classified as investment grade by Moody's Investors Service, Inc. or by Standard & Poor's Corporation. Securities that are subsequently downgraded to non-investment grade may continue to be held by the Fund, as long as such securities do not exceed 5% of the portfolio, and will be sold only if the manager believes it would be advantageous to do so.
It is anticipated that the average maturity of the fixed income obligations in the Fund's portfolio will be between five and seven years.
The Fund will normally invest in the following equity securities, securities convertible into equity securities, preferred stocks and warrants:
1. Domestic companies listed on an exchange or over-the-counter.
2. Foreign companies with shares listed on U.S. Exchanges or in the over-the-counter market, or foreign companies with American Depository Receipts (ADR's) which represent foreign securities and are traded on U.S. Exchanges or in the over-the-counter market. The Fund may also invest directly in foreign securities.
The Fund will not be restricted as to market capitalization. However, under normal circumstances, the Fund will not invest more than 25% of its assets in a single industry. Also the Fund may not own more than 10% of the outstanding voting securities of a single issuer. The Fund may not invest more than 5% of its equity assets in any one issuer.
Investments in money market securities shall include government securities, government agency securities, commercial paper, bankers' acceptances, bank certificates of deposit and repurchase agreements. Investment in commercial paper is restricted to companies rated P-2 or higher by Moody's or A-2 or higher by Standard & Poor's.
The Fund cannot guarantee that its investment objectives will be achieved because there are inherent risks in the ownership of the investments made by the Fund. The value of the Fund's shares will reflect changes in the market value of its investments, and dividends paid by the Fund will vary with the income it receives from these investments.
Through careful management and diversification, the Fund will seek to reduce risk and enhance the opportunities for long-term growth of capital and income. The flexibility to realize relative value between asset classes, markets and individual securities offers investors the opportunity to access undervalued securities
around the globe. The total return approach employed by the Fund is ideal for investors seeking to diversify assets and move money to areas of attractive valuation.
Securities rated Baa or higher by Moody's or BBB by Standard & Poor's or higher are classified as investment grade securities. Although securities rated Baa by Moody's and BBB by Standard & Poor's have speculative characteristics, they are considered to be investment grade. Such securities carry a lower degree of risk than lower rated securities.
Securities that are subsequently downgraded in quality below Baa by Moody's or BBB by Standard & Poor's may continue to be held by the Fund, and will be sold only if the Fund's adviser believes it would be advantageous to do so. In addition, the credit quality of unrated securities purchased by the Fund must be, in the opinion of the Fund's adviser, at least equivalent to a Baa rating by Moody's or a BBB rating by Standard & Poor's.
A repurchase agreement involves the sale of securities to the Fund with the concurrent agreement by the seller to repurchase the securities at the Fund's cost plus interest at an agreed rate upon demand or within a specified time, thereby determining the yield during the purchaser's period of ownership. The result is a fixed rate of return insulated from market fluctuations during such period. Under the Investment Company Act of 1940, repurchase agreements are considered loans by the Fund.
The Fund will enter into such repurchase agreements only with United States banks (including affiliates of the UMB Financial Corporation) having assets in excess of $1 billion which are members of the Federal Deposit Insurance Corporation, and with certain securities dealers who meet the qualifications set from time to time by the Board of Directors. In those cases where securities issued by affiliate banks of UMB Financial Corporation are purchased, no preference will be given to such issuers over other issuers. The term to maturity of a repurchase agreement normally will be no longer than a few days. Repurchase agreements maturing in more than seven days, and other illiquid securities, will not exceed 10% of the total assets of the Fund.
During the initial month of operations, it is anticipated that the Fund may be invested up to 100% in repurchase agreements. However, under normal circumstances, the Fund may invest up to 25% of its assets in repurchase agreements. See "Risk Factors Applicable to Repurchase Agreements."
RISK FACTORS APPLICABLE TO REPURCHASE AGREEMENTS
The use of repurchase agreements involves certain risks. For example, if the seller of the agreement defaults on its obligation to repurchase the underlying securities at a time when the value of these securities has declined, the Fund may incur a loss upon disposition of them. If the seller of the agreement becomes insolvent and subject to liquidation or reorganization under the Bankruptcy Code or other laws, disposition of the
underlying securities may be delayed pending court proceedings. Finally, it is possible that the Fund may not be able to perfect its interest in the underlying securities. While the Fund's management acknowledges these risks, it is expected that they can be controlled through stringent security selection criteria and careful monitoring procedures.
In addition to the policies set forth under the caption "Investment Objective and Portfolio Management Policy" the Fund is subject to certain other restrictions which may not be changed without approval of the lesser of: (1) at least 67% of the voting securities present at a meeting if the holders of more than 50% of the outstanding securities of the Fund are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Fund. Among these restrictions, the more important ones are that the Fund will not purchase the securities of any issuer if more than 5% of the Fund's total assets would be invested in the securities of such issuer, or the Fund would hold more than 10% of any class of securities of such issuer; the Fund will not make any loan (the purchase of a security subject to a repurchase agreement or the purchase of a portion of an issue of publicly distributed debt securities is not considered the making of a loan); and the Fund will not borrow or pledge its credit under normal circumstances, except up to 10% of its total assets (computed at the lower of fair market value or cost) for temporary or emergency purposes, and not for the purpose of leveraging its investments; and provided further that any borrowings shall have asset coverage of at least 3 to 1. The Fund will not buy securities while such borrowings are outstanding. The full text of these restrictions are set forth in the "Statement of Additional Information."
From time to time, the Fund may advertise its performance in various ways, as summarized below. Further discussion of these matters also appears in the "Statement of Additional Information." A discussion of Fund performance will be included in the Fund's Annual Report to Shareholders which will be available from the Fund upon request at no charge.
The Fund may advertise "average annual total return" over various periods of time. Such total return figures show the average percentage change in value of an investment in the Fund from the beginning date of the measuring period to the end of the measuring period. These figures reflect changes in the price of the Fund's shares and assume that any income dividends and/or capital gains distributions made by the Fund during the period were reinvested in shares of the Fund. Figures will be given for recent one-, five- and ten-year periods (if applicable), and may be given for other periods as well (such as from commencement of the Fund's operations, or on a year-by-year basis). When considering "average" total return figures for periods longer
than one year, it is important to note that a Fund's annual total return for any one year in the period might have been greater or less than the average for the entire period.
In advertisements or in reports to shareholders, the Fund may compare its performance to that of other mutual funds with similar investment objectives and to stock or other relevant indices. For example, it may compare its performance to rankings prepared by Lipper Analytical Services, Inc. (Lipper), a widely recognized independent service which monitors the performance of mutual funds. The Fund may compare its performance to the Standard & Poor's 500 Stock Index (S&P 500), an index of unmanaged groups of common stocks, the Dow Jones Industrial Average, a recognized unmanaged index of common stocks of 30 industrial companies listed on the NYSE, or the Consumer Price Index. Performance information, rankings, ratings, published editorial comments and listings as reported in national financial publications such as Kiplinger's Personal Finance Magazine, Business Week, Morningstar Mutual Funds, Investor's Business Daily, Institutional Investor, The Wall Street Journal, Mutual Fund Forecaster, No-Load Investor, Money, Forbes, Fortune and Barron's may also be used in comparing performance of the Fund. Performance comparisons should not be considered as representative of the future performance of any Fund. Further information regarding the performance of the Fund is contained in the "Statement of Additional Information."
Performance rankings, recommendations, published editorial comments and listings reported in Money, Barron's, Kiplinger's Personal Finance Magazine, Financial World, Forbes, U.S. News & World Report, Business Week, The Wall Street Journal, Investors Business Daily, USA Today, Fortune and Stanger's may also be cited (if the Fund is listed in any such publication) or used for comparison, as well as performance listings and rankings from Morningstar Mutual Funds, Personal Finance, Income and Safety, The Mutual Fund Letter, No-Load Fund Investor, United Mutual Fund Selector, No-Load Fund Analyst, No-Load Fund X, Louis Rukeyser's Wall Street newsletter, Donoghue's Money Letter, CDA Investment Technologies, Inc., Wiesenberger Investment Companies Service and Donoghue's Mutual Fund Almanac.
Shares are purchased at net asset value (no sales charge) next computed after a purchase order has become effective from the Fund through its agent, Jones & Babson, Inc., P.O. Box 410498, Kansas City, MO 64141-0498. For information call toll free 1-800-996-2862. If an investor wishes to engage the services of any other broker to purchase (or redeem) shares of the Fund, a fee may be charged by such broker. The Fund will not be responsible for the consequences of delays including delays in the banking or Federal Reserve wire systems.
You do not pay a sales commission when you buy shares of the Fund. Shares are purchased at the Fund's net asset value (price) per share next effective after a purchase order and payment have
been received by the Fund. In the case of certain institutions which have made satisfactory payment arrangements with the Fund, orders may be processed at the net asset value per share next effective after a purchase order has been received by the Fund.
The Fund reserves the right in its sole discretion to withdraw all or any part of the offering made by this prospectus or to reject purchase orders when, in the judgment of management, such withdrawal or rejection is in the best interest of the Fund and its shareholders. The Fund also reserves the right at any time to waive or increase the minimum requirements applicable to initial or subsequent investments with respect to any person or class of persons, which include shareholders of the Fund's special investment programs. The Fund reserves the right to refuse to accept orders for Fund shares unless accompanied by payment, except when a responsible person has indemnified the Fund against losses resulting from the failure of investors to make payment. In the event that the Fund sustains a loss as the result of failure by a purchaser to make payment, the Fund's underwriter, Jones & Babson, Inc. will cover the loss.
Initial investments - By mail. You may open an account and make an investment by completing and signing the application which accompanies this prospectus. Make your check ($1,000 minimum unless your purchase is pursuant to an IRA or the Uniform Transfers (Gifts) to Minors Act in which case the minimum initial purchase is $250) payable to UMB Bank, n.a. Mail your application and check to:
Initial investments - By wire. You may purchase shares of the Fund by wiring the purchase price ($1,000 minimum) through the Federal Reserve Bank to the custodian, UMB Bank, n.a. Prior to sending your money, you must call the Fund toll free 1-800-996-2862 and provide it with the identity of the registered account owner, the registered address, the Social Security or Taxpayer Identification Number of the registered owner, the amount being wired, the name and telephone number of the wiring bank and the person to be contacted in connection with the order. You will then be provided a Fund account number, after which you should instruct your bank to wire the specified amount, along with the account number and the account registration to:
Kansas City, Missouri, ABA #101000695 For: Scout Balanced Fund, Inc./ OBI=(assigned Fund number and name in
A completed application must be sent to the Fund as soon as possible so the necessary remaining information can be recorded in your account. Payment of redemption proceeds will be delayed until the completed application is received by the Fund.
INVESTMENTS SUBSEQUENT TO INITIAL INVESTMENT
You may add to your Fund account at any time in amounts of $100 or more if purchases are made by mail, or $500 or more if purchases are made by wire or telephone. Automatic monthly investments must be in amounts of $100 or more.
Checks should be mailed to the Fund at its address, but make them payable to UMB Bank, n.a. Always identify your account number or include the detachable reminder stub which accompanies each confirmation.
Wire share purchases should include your account registration and your account number. It also is advisable to notify the Fund by telephone that you have sent a wire purchase order to the bank.
To use the Telephone Investment Service, you must first establish your Fund account and authorize telephone orders in the application form, or, subsequently, on a special authorization form provided upon request. If you elect the Telephone Investment Service, you may purchase Fund shares by telephone and authorize the Fund to draft your checking account for the cost of the shares so purchased. You will receive the next available price after the Fund has received your telephone call. Availability and continuance of this privilege is subject to acceptance and approval by the Fund and all participating banks. During periods of increased market activity, you may have difficulty reaching the Fund by telephone, in which case you should contact the Fund by mail or telegraph. The Fund will not be responsible for the consequences of delays, including delays in the banking or Federal Reserve wire systems.
The Fund will employ reasonable procedures to confirm that instructions communicated by telephone are genuine, and if such procedures are not followed, the Fund may be liable for losses due to unauthorized or fraudulent instructions. Such procedures may include, but are not limited to, requiring personal identification prior to acting upon instructions received by telephone, providing written confirmations of such transactions, and/or tape recording of telephone instructions.
The Fund reserves the right to initiate a charge for this service and to terminate or modify any or all of the privileges in connection with this service at any time upon 15 days written notice to shareholders, and to terminate or modify the privileges without prior notice in any circumstances where such termination or modification is in the best interest of the Fund and its investors.
You may elect to make monthly investments in a constant dollar amount from your checking account ($100 minimum). The Fund will draft your checking account on the same day each month in the amount you authorize in your application, or, subsequently, on a special authorization form provided upon request. Availability and continuance of this privilege is subject to acceptance and approval by the Fund and all participating banks. If the date selected falls on a day upon which the Fund shares are not priced, investment will be made on the first date thereafter upon which Fund shares are priced. The Fund will not be responsible for the consequences of delays, including delays in the banking or Federal Reserve wire systems.
The Fund reserves the right to initiate a charge for this service and to terminate or modify any or all of the privileges in connection with this service at any time upon 15 days written notice to shareholders, and to terminate or modify the privileges without prior notice in any circumstances where such termination or modification is in the best interest of the Fund and its investors.
The Fund will redeem shares at the price (net asset value per share) next computed after receipt of a redemption request in "good order." (See "How Share Price is Determined."
A written request for redemption, together with an endorsed share certificate where a certificate has been issued, must be received by the Fund in order to constitute a valid tender for redemption. For authorization of redemptions by a corporation, it will also be necessary to have an appropriate certified copy of resolutions on file with the Fund before a redemption request will be considered in "good order." In the case of certain institutions which have made satisfactory redemption arrangements with the Fund, redemption orders may be processed by facsimile or telephone transmission at net asset value per share next effective after receipt by the Fund. If an investor wishes to engage the services of any other broker to redeem (or purchase) shares of the Fund, a fee may be charged by such broker.
To be in "good order" the request must include the following:
(1) A written redemption request or stock assignment (stock power) containing the genuine signature of each registered owner exactly as the shares are registered, with clear identification of the account by registered name(s) and account number and the number of shares or the dollar amount to be redeemed;
(2) any outstanding stock certificates representing shares
(3) signature guarantees as required
(4) any additional documentation which the Fund may deem necessary to insure a genuine redemption.
Where additional documentation is normally required to support redemptions as in the case of corporations, fiduciaries, and others who hold shares in a representative or nominee capacity, such as certified copies of corporate resolutions, or certificates of incumbency, or such other documentation as may be required under the Uniform Commercial Code or other applicable laws or regulations, it is the responsibility of the shareholder to maintain such documentation on file and in a current status. A failure to do so will delay the redemption. If you have questions concerning redemption requirements, please write or telephone the Fund well ahead of an anticipated redemption in order to avoid any possible delay.
Requests which are subject to special conditions or which specify an effective date other than as provided herein cannot be accepted. All redemption requests must be transmitted to the Fund at P.O. Box 410498, Kansas City, Missouri 64141-0498. The Fund will redeem shares at the price (net asset value per share) next computed after receipt of a redemption request in "good order." (See "How Share Price is Determined.")
The Fund will endeavor to transmit redemption proceeds to the proper party, as instructed, as soon as practicable after a redemption request has been received in "good order" and accepted, but in no event later than the fifth day thereafter. Transmissions are made by mail unless an expedited method has been authorized and specified in the redemption request. The Fund will not be responsible for the consequences of delays, including delays in the banking or Federal Reserve wire systems.
Redemptions will not become effective until all documents in the form required have been received. In the case of redemption requests made within 15 days of the date of purchase, the Fund will delay transmission of proceeds until such time as it is certain that unconditional payment in federal funds has been collected for the purchase of shares being redeemed or 15 days from the date of purchase. You can avoid the possibility of delay by paying for all of your purchases with a transfer of federal funds.
Signature Guarantees are required in connection with all redemptions by mail, or changes in share registration, except as hereinafter provided. These requirements may be waived by the Fund in certain instances where it appears reasonable to do so and will not unduly affect the interests of other shareholders. Signature(s) must be guaranteed by an "eligible guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934. Eligible guarantor institutions include: (1) national or state banks, savings associations, savings and loan associations, trust companies, savings banks, industrial loan companies and credit unions; (2) national securities exchanges, registered securities associations and clearing agencies; or (3) securities broker/dealers which are members of a national securities exchange or clearing agency or which have a minimum net capital of $100,000. A notarized signature will not be sufficient for the request to be in proper form.
Signature guarantees will be waived for mail redemptions of $10,000 or less, but they will be required if the checks are to be payable to someone other than the registered owner(s), or are to be mailed to an address different from the registered address of the shareholder(s), or where there appears to be a pattern of redemptions designed to circumvent the signature guarantee requirement, or where the Fund has other reason to believe that this requirement would be in the best interests of the Fund and its shareholders.
The right of redemption may be suspended or the date of payment postponed beyond the normal five-day period when the New York Stock Exchange is closed or under emergency circumstances as determined by the Securities and Exchange Commission. Further, the Fund reserves the right to redeem its shares in kind under certain circumstances. If shares are redeemed in kind, the shareholder may incur brokerage costs when converting into cash. Additional details are set forth in the "Statement of Additional Information."
Due to the high cost of maintaining smaller accounts, the Board of Directors has authorized the Fund to close shareholder accounts where their value falls below the current minimum initial investment requirement at the time of initial purchase as a result of redemptions and not as the result of market action, and remains below this level for 60 days after each such shareholder account is mailed a notice of: (1) the Fund's intention to close the account, (2) the minimum account size requirement, and (3) the date on which the account will be closed if the minimum size requirement is not met. Since the minimum investment amount and the minimum account size are the same, any redemption from an account containing only the minimum investment amount may result in redemption of that account.
If you own shares in an open account valued at $10,000 or more, and desire to make regular monthly or quarterly withdrawals without the necessity and inconvenience of executing a separate redemption request to initiate each withdrawal, you may enter into a Systematic Withdrawal Plan by completing forms obtainable from the Fund. For this service, the manager may charge you a fee not to exceed $1.50 for each withdrawal. Currently the manager assumes the additional expenses arising out of this type of plan, but it reserves the right to initiate such a charge at any time in the future when it deems it necessary. If such a charge is imposed, participants will be provided 30 days notice.
Subject to a $50 minimum, you may withdraw each period a specified dollar amount. Shares also may be redeemed at a rate calculated to exhaust the account at the end of a specified period of time.
Dividends and capital gains distributions must be reinvested in additional shares. Under all withdrawal programs, liquidation of shares in excess of dividends and distributions reinvested will diminish and may exhaust your account, particularly during a period of declining share values.
You may revoke or change your plan or redeem all of your remaining shares at any time. Withdrawal payments will be continued until the shares are exhausted or until the Fund or you terminate the plan by written notice to the other.
HOW TO EXCHANGE SHARES BETWEEN SCOUT FUNDS
Shareholders may exchange their Fund shares, which have been held in open account for 15 days or more, and for which good payment has been received, for identically registered shares of any other Fund in the Scout Fund Group, which is legally registered for sale in the state of residence of the investor, provided that the minimum amount exchanged has a value of $1,000 or more and meets the minimum investment requirement of the Fund or Portfolio into which it is exchanged. An exchange between two Scout Funds is treated as a sale of the shares from which the exchange occurs and a purchase of shares of the fund into which the exchange occurs. Exchanging shareholders will receive the next quoted prices for their shares after the request is received in "good order" (See "How Share Price is Determined.")
To authorize the Telephone/Telegraph Exchange Privilege, all registered owners must sign the appropriate section on the original application, or the Fund must receive a special authorization form, provided upon request. During periods of increased market activity, you may have difficulty reaching the Fund by telephone, in which case you should contact the Fund by mail or telegraph. The Fund reserves the right to initiate a charge for this service and to terminate or modify any or all of the privileges in connection with this service at any time and without prior notice under any circumstances where continuance of these privileges would be detrimental to the Fund or its shareholders, or under any other circumstances, upon 60 days written notice to shareholders. The Fund will not be responsible for the consequences of delays including delays in the banking or Federal Reserve wire systems.
The Fund will employ reasonable procedures to confirm that instructions communicated by telephone are genuine, and if such procedures are not followed, the Fund may be liable for losses due to unauthorized or fraudulent instructions. Such procedures may include, but are not limited to requiring personal identification prior to acting upon instructions received by telephone, providing written confirmations of such transactions, and/or tape recording of telephone instructions.
Exchanges by mail may be accomplished by a written request properly signed by all registered owners identifying the account, the number of shares or dollar amount to be redeemed for exchange, and the Scout Fund into which the account is being transferred.
If you wish to exchange part or all of your shares in the Fund for shares of another Fund or Portfolio in the Scout Fund Group, you should review the prospectus of the Fund to be purchased, which can be obtained from Jones & Babson, Inc. Any such exchange will be based on the respective net asset values of the shares
involved. Any exchange between Funds involves the sale of an asset. Unless the shareholder account is tax-deferred, this is a taxable event.
HOW SHARE PRICE IS DETERMINED
In order to determine the price at which new shares will be sold and at which issued shares presented for redemption will be liquidated, the net asset value per share is computed once daily, Monday through Friday, at the specific time during the day that the Board of Directors sets at least annually, except on days on which changes in the value of portfolio securities will not materially affect the net asset value, or days during which no security is tendered for redemption and no order to purchase or sell such security is received by the Fund, or customary holidays. For a list of the holidays during which the Fund is not open for business, see "How Share Price is Determined" in the "Statement of Additional Information."
The price at which new shares of the Fund will be sold and at which issued shares presented for redemption will be liquidated is computed once daily at 4:00 P.M. (Eastern Time), except on those days when the Fund is not open for business.
The per share calculation is made by subtracting from the Fund's total assets any liabilities and then dividing into this amount the total outstanding shares as of the date of the calculation.
Each security listed on an exchange is valued at its last sale price on that exchange on the date as of which assets are valued. Where the security is listed on more than one exchange, the Fund will use the price of that exchange which it generally considers to be the principal Exchange on which the security is traded. Lacking sales, the security is valued at the mean between the current closing bid and asked prices. An unlisted security for which over-the-counter market quotations are readily available is valued at the mean between the last current bid and asked prices. When market quotations are not readily available, any security or other asset is valued at its fair value as determined in good faith by the Board of Directors.
The officers of the Fund manage its day-to-day operations. The Fund's manager and its officers are subject to the supervision and control of the Board of Directors. A list of the officers and directors of the Fund and a brief statement of their present positions and principal occupations during the past five years is set forth in the "Statement of Additional Information."
Jones & Babson, Inc. organized the Fund in 1995, and acts as its principal underwriter at no cost to the Fund. UMB Bank, n.a. is the Fund's manager and investment adviser and provides or pays the cost of all management, supervisory and administrative
services required in the normal operation of the Fund. This includes investment management and supervision; fees of the custodian, independent public accountants and legal counsel; remuneration of officers, directors and other personnel; rent; shareholder services, including the maintenance of the shareholder accounting system and transfer agency; and such other items as are incidental to corporate administration.
Not considered normal operating expenses, and therefore payable by the Fund, are taxes, interest, governmental charges and fees, including registration of the Fund and its shares with the Securities and Exchange Commission and the Securities Departments of the various States, brokerage costs, dues, and all extraordinary costs and expenses including but not limited to legal and accounting fees incurred in anticipation of or arising out of litigation or administrative proceedings to which the Fund, its officers or directors may be subject or a party thereto.
As compensation for all the foregoing services, the Fund pays UMB Bank, n.a. a fee at the annual rate of 85/100 of one percent (.85%) of total net assets, which is computed daily and paid semimonthly.
Jones & Babson, Inc. acts as principal underwriter for the Fund at no cost to the Fund. UMB Bank, n.a. employs at its own expense Jones & Babson, Inc. to provide services to the Fund, including the maintenance of the shareholder accounting system and transfer agency; and such other items as are incidental to corporate administration. The cost of the services of Jones & Babson, Inc. is included in the fee of UMB Bank, n.a.
The annual fee charged by UMB Bank, n.a. is higher than the fees of most other investment advisers whose charges cover only investment advisory services with all remaining operational expenses absorbed directly by the Fund; however, it is anticipated that the total expenses of the Fund will compare favorably with those of other mutual funds whose advisers' fees cover only investment advisory services with all remaining operational expenses absorbed by the Funds.
The Bank serves a broad variety of individual, corporate and other institutional clients by maintaining an extensive research and analytical staff. It has an experienced investment analysis and research staff which eliminates the need for the Fund to maintain an extensive duplicate staff, with the consequent increase in the cost of investment advisory service.
The Management Agreement limits the liability of the manager, as well as its officers, directors and personnel, to acts or omissions involving willful malfeasance, bad faith, gross negligence, or reckless disregard of their duties.
Christopher Bloomstran has been the portfolio manager of Scout Balanced Fund since its inception. He is a Chartered Financial Analyst with over six years of experience. Certain officers and directors of the Fund are also officers or directors or both of other Scout Funds or Jones & Babson, Inc.
Jones & Babson, Inc. is a wholly-owned subsidiary of Business Men's Assurance Company of America, which is considered to be a controlling person under the Investment Company Act of 1940. Assicurazioni Generali S.p.A., an insurance organization founded in 1831 based in Trieste, Italy, is considered to be a controlling person and is the ultimate parent of Business Men's Assurance Company of America. Mediobanca is a 5% owner of Generali.
The current Management Agreement between the Fund and UMB Bank, n.a. will continue in effect until October 31, 1997, and will continue automatically for successive annual periods ending each October 31 so long as such continuance is specifically approved at least annually by the Board of Directors of the Fund or by the vote of a majority of the outstanding voting securities of the Fund, and, provided also that such continuance is approved by the vote of a majority of the directors who are not parties to the Agreements or interested persons of any such party at a meeting held in person and called specifically for the purpose of evaluating and voting on such approval. Both Agreements provide that either party may terminate by giving the other 60 days written notice. The Agreements terminate automatically if assigned by either party.
The Fund, incorporated in Maryland on July 13, 1995, has a present authorized capitalization of 10,000,000 shares of $1 par value common stock. It is a diversified open-end management investment company. All shares are of the same class with like rights and privileges. Each full and fractional share, when issued and outstanding, has: (1) equal voting rights with respect to matters which affect the Fund; and (2) equal dividend, distribution and redemption rights to the assets of the Fund. Shares when issued are fully paid and non-assessable. The Fund may create other series of stock but will not issue any senior securities. Shareholders do not have pre-emptive or conversion rights.
Non-cumulative voting - These shares have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of directors can elect 100% of the directors, if they choose to do so, and in such event, the holders of the remaining less than 50% of the shares voting will not be able to elect any directors.
The Maryland Statutes permit registered investment companies, such as the Fund, to operate without an annual meeting of shareholders under specified circumstances if an annual meeting is not required by the Investment Company Act of 1940. There are procedures whereby the shareholders may remove directors. These
procedures are described in the "Statement of Additional Information" under the caption "Officers and Directors." The Fund has adopted the appropriate provisions in its By-Laws and may not, at its discretion, hold annual meetings of shareholders for the following purposes unless required to do so: (1) election of directors; (2) approval of any investment advisory agreement; (3) ratification of the selection of independent public accountants; and (4) approval of a distribution plan. As a result, the Fund does not intend to hold annual meetings.
Federal Banking Laws - The Glass-Steagall Act is a federal law that prohibits national banks from sponsoring, distributing or controlling a registered open-end investment company. It is possible that certain activities of UMB Bank, n.a. relating to the Fund may be claimed to be comparable to the matters covered by such provisions. It is not expected that any conclusions regarding such activities of UMB Bank, n.a. would have any material effect on the assets of the Fund or its shareholders, because the Fund's distribution is under the control of Jones & Babson, Inc., the Funds' distributor, which is not subject to the Glass-Steagall Act. Although it is not anticipated that decisions under the Glass-Steagall Act adverse to UMB Bank, n.a. would have any material effect on the conduct of the Fund's operations, if any unanticipated changes affecting the Fund's operations were deemed appropriate, the Board of Directors would promptly consider suitable adjustments.
The Fund may use the name "Scout" in its name so long as UMB Bank, n.a. is continued as its manager. Complete details with respect to the use of the name are set out in a licensing agreement between the Fund and UMB Bank, n.a. This prospectus omits certain of the information contained in the registration statement filed with the Securities and Exchange Commission, Washington, D.C. These items may be inspected at the offices of the Commission or obtained from the Commission upon payment of the fee prescribed.
DIVIDENDS, DISTRIBUTIONS AND THEIR TAXATION
The Fund pays dividends from net investment income semiannually, usually in June and December. Distribution from capital gains realized on the sale of securities, if any, will be declared annually on or before December 31. Dividend and capital gains distributions will be reinvested automatically in additional shares at the net asset value per share computed and effective at the close of business on the day after the record date, unless the shareholder has elected on the original application, or by written instructions filed with the Fund, to have them paid in cash.
The Fund intends to qualify for taxation as a "regulated investment company" under the Internal Revenue Code so that the Fund will not be subject to federal income tax to the extent that it distributes its income to its shareholders. Dividends, either
in cash or reinvested in shares, paid by the Fund from net investment income will be taxable to shareholders as ordinary income, and will generally qualify in part for the 70% dividends-received deduction for corporations. The portion of the dividends so qualified depends on the aggregate taxable qualifying dividend income received by the Fund from domestic (U.S.) sources. The Fund will send to shareholders a statement each year advising the amount of the dividend income which qualifies for such treatment.
Whether paid in cash or additional shares of the Fund, and regardless of the length of time Fund shares have been owned by the shareholder, distributions from long-term capital gains are taxable to shareholders as such, but are not eligible for the dividends-received deduction for corporations. Shareholders are notified annually by the Fund as to federal tax status of dividends and distributions paid by the Fund. Such dividends and distributions may also be subject to state and local taxes.
Exchange and redemption of Fund shares are taxable events for federal income tax purposes. Shareholders may also be subject to state and municipal taxes on such exchanges and redemptions. You should consult your tax adviser with respect to the tax status of distributions from the Fund in your state and locality.
The Fund intends to declare and pay dividends and capital gains distributions so as to avoid imposition of the federal excise tax. To do so, the Fund expects to distribute during each calendar year an amount equal to: (1) 98% of its calendar year ordinary income; (2) 98% of its capital gains net income (the excess of short- and long-term capital gain over short- and long-term capital loss) for the one-year period ending each October 31; and (3) 100% of any undistributed ordinary or capital gain net income from the prior calendar year. Dividends declared in October, November or December and made payable to shareholders of record in such a month are deemed to have been paid by the Fund and received by shareholders on December 31 of such year, so long as the dividends are actually paid before February 1 of the following year.
To comply with IRS regulations, the Fund is required by federal law to withhold 31% of reportable payments (which may include dividends, capital gains distributions, and redemptions) paid to shareholders who have not complied with IRS regulations. In order to avoid this withholding requirement, shareholders must certify on their Application, or on a separate form supplied by the Fund, that their Social Security or Taxpayer Identification Number provided is correct and that they are not currently subject to backup withholding, or that they are exempt from backup withholding.
The federal income tax status of all distributions will be reported to shareholders each January as a part of the annual statement of shareholder transactions. Shareholders not subject to tax on their income will not be required to pay tax on amounts distributed to them.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE FUND.
The Fund and its manager offer shareholders a broad variety of services described throughout this prospectus. In addition, the following services are available:
Prototype Retirement Plans - The UMB Bank, n.a. has drafted several IRS-approved-as-to-form prototype retirement plans to assist individuals, sole proprietors, partnerships and corporations in meeting their tax qualified retirement plan needs. Individual Retirement Account (IRA) - The Bank also makes available IRA accounts for individuals.
For further information about these services, please contact UMB Bank, n.a.
Telephone inquiries may be made toll free to the Fund, 1-800-996-2862.
Shareholders may address written inquiries to the Fund at:
The Scout Balanced Fund, Inc. 2440 Pershing Road, Suite G-15
STRADLEY, RONON, STEVENS & YOUNG
This Statement is not a prospectus but should be read in conjunction with the Fund's current Prospectus dated December 6, 1995. To obtain the Prospectus please call the Fund toll-free 1-800-996-2862.
Investment Objective and Policies 2 How the Fund's Shares are Distributed 4 How Share Purchases are Handled 4 How Share Price is Determined 6 Fixed Income Securities Described and Ratings 8
The following policies supplement the Fund's investment objective and policies set forth in the Prospectus.
Decisions to buy and sell securities for the Fund are made by UMB Bank, n.a. Officers of the Fund and UMB Bank, n.a.. are generally responsible for implementing or supervising these decisions, including allocation of portfolio brokerage and principal business as well as the negotiation of commissions and/or the price of the securities. In instances where securities are purchased on a commission basis, the Fund will seek competitive and reasonable commission rates based on circumstances of the trade involved and to the extent that they do not detract from the quality of the execution.
The Fund, in purchasing and selling portfolio securities, will seek the best available combination of execution and overall price (which shall include the cost of the transaction) consistent with the circumstances which exist at the time. The Fund does not intend to solicit competitive bids on each transaction.
The Fund believes it is in its best interest and that of its shareholders to have a stable and continuous relationship with a diverse group of financially strong and technically qualified broker-dealers who will provide quality executions at competitive rates. Broker-dealers meeting these qualifications also will be selected for their demonstrated loyalty to the Fund, when acting on its behalf, as well as for any research or other services provided to the Fund. Substantially all of the portfolio transactions are through brokerage firms which are members of the New York Stock Exchange because usually the most active market in the size of the Fund's transactions and for the types of securities predominant in the Fund's portfolio is to be found there. When buying securities in the over-the-counter market, the Fund will select a broker who maintains a primary market for the security unless it appears that a better combination of price and execution may be obtained elsewhere. The Fund normally will not pay a higher commission rate to broker-dealers providing benefits or services to it than it would pay to broker-dealers who do not provide it such benefits or services. However, the Fund reserves the right to do so within the principles set out in Section 28(e) of the Securities Exchange Act of 1934 when it appears that this would be in the best interests of the shareholders.
No commitment is made to any broker or dealer with regard to placing of orders for the purchase or sale of Fund portfolio securities, and no specific formula is used in placing such business. Allocation is reviewed regularly by both the Board of Directors of the Fund and UMB Bank, n.a.
Since the Fund does not market its shares through intermediary brokers or dealers, it is not the Fund's practice to allocate brokerage or principal business on the basis of sales of its shares which may be made through such firms. However, it may place portfolio orders with qualified broker-dealers who recommend the Fund to other clients, or who act as agent in the purchase of the Fund's shares for their clients.
Research services furnished by broker-dealers may be useful to the Fund manager and its investment counsel in serving other clients, as well as the Fund. Conversely, the Fund may benefit from research services obtained by the manager or its investment counsel from the placement of portfolio brokerage of other clients.
When it appears to be in the best interest of its shareholders, the Fund may join with other clients of the manager in acquiring or disposing of a portfolio holding. Securities acquired or proceeds obtained will be equitably distributed between the Fund and other clients participating in the transaction. In some instances, this investment procedure may affect the price paid or received by the Fund or the size of the position obtained by the Fund.
There are no fixed limitations regarding portfolio turnover for either the equity or fixed income portions of the Fund's portfolio. Although the Fund does not trade for short-term profits, securities may be sold without regard to the time they have been held in the Fund when, in the opinion of the Fund's management, investment considerations warrant such action. As a result, while it is anticipated that the portfolio turnover rates for the equity and fixed income portions of the Fund's portfolio generally will not exceed 100%, under certain market conditions, these portfolio turnover rates may exceed 100%. Increased portfolio turnover rates would cause the Fund to incur greater brokerage costs than would otherwise be the case and may result in the accelleration of capital gains which are taxable when distributed to shareholders.
In addition to the investment objective and portfolio management policies set forth in the Prospectus under the caption "Investment Objective and Portfolio Management Policy," the following restrictions also may not be changed without approval of the "holders of a majority of the outstanding shares" of the Fund.
The Fund will not: (1) purchase the securities of any one issuer, except the United States government, if immediately after and as a result of such purchase (a) the value of the holdings of the Fund in the securities of such issuer exceeds 5% of the value of the Fund's total assets, or (b) the Fund owns more than 10% of the outstanding voting securities, or any other class of securities, of such issuer; (2) engage in the purchase or sale of real estate, commodities or futures contracts; (3) underwrite the securities of other issuers; (4) make loans to any of its officers, directors, or employees, or to its manager, or general distributor, or officers or directors thereof; (5) make any loan (the purchase of a security subject to a repurchase agreement or the purchase of a portion of an issue of publicly distributed debt securities is not considered the making of a loan); (6) invest in companies for the purpose of exercising control of management; (7) purchase securities on margin, or sell securities short; (8) purchase shares of other investment companies except in the open market at ordinary broker's commission or pursuant to a plan of merger or consolidation; (9) invest in the aggregate more than 5% of the value of its gross assets in the securities of issuers (other than federal, state, territorial, or local governments, or corporations, or authorities established thereby), which, including predecessors, have not had at least three years' continuous operations; (10) except for transactions in its shares or other securities through brokerage practices which are considered normal and generally accepted under circumstances existing at the time, enter into dealings with its officers or directors, its manager or underwriter, or their officers or directors, or any organization in which such persons have a financial interest; (11) purchase or retain securities of any company in which any Fund officers or directors, or Fund manager, its partner, officer, or director beneficially owns more than 1/2 of 1% of said company's securities, if all such persons owning more than 1/2 of 1% of such company's securities, own in the aggregate more than 5% of the outstanding securities of such company; (12) borrow or pledge its credit under normal circumstances, except up to 10% of its gross assets (computed at the lower of fair market value or cost) for temporary or emergency purposes, and not for the purpose of leveraging its investments, and provided further that any borrowing in excess of 5% of the total assets of the Fund shall have asset coverage of at least 3 to 1; (13) make itself or its assets liable for the indebtedness of others; (14) invest in securities which are assessable or involve unlimited liability; or (15) purchase any securities which would cause 25% or more of the Fund's total assets at the time of such purchase to be invested in any one industry.
In addition to the fundamental investment restrictions set out above, in order to comply with the law or regulations of various States, the Fund will not engage in the following practices: (1) invest in securities which are not readily marketable or in securities of foreign issuers which are not listed on a recognized domestic or foreign securities exchange; (2) write put or call options; (3) invest in oil, gas and other mineral leases or arbitrage transactions; (4) purchase or sell real estate (including limited partnership interests, but excluding readily marketable interests in real estate investment trusts or readily marketable securities of companies which invest in real estate); or (5) purchase securities, including 144(a) securities, of issuers which the company is restricted from selling to the public without registration under the Securities Act of 1933.
Certain States also require that the Fund's investments in warrants, valued at the lower of cost or market, may not exceed 5% of the value of the Fund's net assets. Included within that amount, but not to exceed 2% of the value of the Fund's net assets, may be warrants which are not listed on the New York or American Stock Exchange. Warrants acquired by the Fund in units or attached to securities may be deemed to be without value for purposes of this limitation. In addition, the Fund has undertaken to the state of California to comply with the expense limitations set forth in Rule 260.140.84(a) of Title 10 of the California Administrative Code.
HOW THE FUND'S SHARES ARE DISTRIBUTED
Jones & Babson, Inc., as agent of the Fund, agrees to supply its best efforts as sole distributor of the Fund's shares and, at its own expense, pay all sales and distribution expenses in connection with their offering other than registration fees and other government charges.
Jones & Babson, Inc. does not receive any fee or other compensation under the distribution agreement which continues in effect until October 31, 1997, and which will continue automatically for successive annual periods ending each October 31, if continued at least annually by the Fund's Board of Directors, including a majority of those Directors who are not parties to such Agreements or interested persons of any such party. It terminates automatically if assigned by either party or upon 60 days written notice by either party to the other.
Jones & Babson, Inc. also acts as sole distributor of the shares of Scout Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide Fund, Inc., David L. Babson Growth Fund, Inc., D.L. Babson Bond Trust, D.L. Babson Money Market Fund, Inc., D.L. Babson Tax-Free Income Fund, Inc., Babson Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow Stock Fund, Inc., Babson-Stewart Ivory International Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc. and Buffalo USA Global Fund, Inc.
HOW SHARE PURCHASES ARE HANDLED
Each order accepted will be fully invested in whole and fractional shares, unless the purchase of a certain number of whole shares is specified, at the net asset value per share next effective after the order is accepted by the Fund.
Each investment is confirmed by a year-to- date statement which provides the details of the immediate transaction, plus all prior transactions in your account during the current year. This includes the dollar amount invested, the number of shares purchased or redeemed, the price per share, and the aggregate shares owned. A transcript of all activity in your account during the previous year will be furnished each January. By retaining each annual summary and the last year-to-date statement, you have a complete detailed history of your account which provides necessary tax information. A duplicate copy of a past annual statement is available from Jones & Babson, Inc. at its cost, subject to a minimum charge of $5 per account, per year requested.
Normally, the shares which you purchase are held by the Fund in open account, thereby relieving you of the responsibility of providing for the safekeeping of a negotiable share certificate. Should you have a special need for a certificate, one will be issued on request for all or a portion of the whole shares in your account. There is no charge for the first certificate issued. A charge of $3.50 will be made for any replacement certificates issued. In order to protect the interests of the other shareholders, share certificates will be sent to those shareholders who request them only after the Fund has determined that unconditional payment for the shares represented by the certificate has been received by its custodian, UMB Bank, n.a.
If an order to purchase shares must be canceled due to non-payment, the purchaser will be responsible for any loss incurred by the Fund arising out of such cancellation. To recover any such loss, the Fund reserves the right to redeem shares owned by any purchaser whose order is canceled, and such purchaser may be prohibited or restricted in the manner of placing further orders.
The Fund reserves the right in its sole discretion to withdraw all or any part of the offering made by the prospectus or to reject purchase orders when, in the judgment of management, such withdrawal or rejection is in the best interest of the Fund and its shareholders. The Fund also reserves the right at any time to waive or increase the minimum requirements applicable to initial or subsequent investments with respect to any person or class of persons, which include shareholders of the Fund's special investment programs.
The right of redemption may be suspended, or the date of payment postponed beyond the normal five-day period by the Fund's Board of Directors under the following conditions authorized by the Investment Company Act of 1940: (1) for any period (a) during which the New York Stock Exchange is closed, other than customary weekend and holiday closing, or (b) during which trading on the New York Stock Exchange is restricted; (2) for any period during which an emergency exists as a result of which (a) disposal by the Fund of securities owned by it is not reasonably practicable, or (b) it is not reasonably practicable for the Fund to determine the fair value of its net assets; or (3) for such other periods as the Securities and Exchange Commission may by order permit for the protection of the Fund's shareholders.
The Fund has elected to be governed by Rule 18f-1 under the Investment Company Act of 1940, pursuant to which the Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the Fund's net asset value during any 90-day period for any one shareholder. Should redemptions by any shareholder exceed such limitation, the Fund may redeem the excess in kind. If shares are redeemed in kind, the redeeming shareholder may incur brokerage costs in converting the assets to cash. The method of valuing securities used to make redemptions in kind will be the same as the method of valuing portfolio securities described under "How Share Price is Determined" in the Prospectus, and such valuation will be made as of the same time the redemption price is determined.
Signature guarantees normally reduce the possibility of forgery and are required in connection with each redemption method to protect shareholders from loss. Signature guarantees are required in connection with all redemptions by mail or changes in share registration, except as provided in the Prospectus.
Signature guarantees must appear together with the signature(s) of the registered owner(s), on:
(1) a written request for redemption,
(2) a separate instrument of assignment, which should specify the total number of shares to be redeemed (this "stock power" may be obtained from the Fund or from most banks or stock brokers), or
(3) all stock certificates tendered for redemption.
UMB Bank, n.a. acts as the Fund's manager and investment counsel. The .85% annual fee charged by UMB Bank, n.a. covers all normal operating costs of the Fund. Jones & Babson, Inc. serves as principal underwriter at no charge to the Fund.
The net asset value per share of the Fund portfolio is computed once daily, Monday through Friday, at the specific time during the day that the Board of Directors of the Fund sets at least annually, except on days on which changes in the value of a Fund's portfolio securities will not materially affect the net asset value, or days during which no security is tendered for redemption and no order to purchase or sell such security is received by the Fund, or the following holidays:
New Year's Day January 1 Good Friday Friday before Easter
The Fund is managed by UMB Bank, n.a., subject to the supervision and control of its Board of Directors. The following table lists the Officers and Directors of the Funds. Unless noted otherwise, the address of each Officer and Director is 2440 Pershing Road, Suite G-15, Kansas City, Missouri 64108. Except as indicated, each has been an employee of Jones & Babson, Inc. for more than five years.
* Larry D. Armel, President and Director, Jones & Babson, Inc., Scout Stock Fund, Inc., Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout WorldWide Fund, Inc., Shadow Stock Fund, Inc., David L. Babson Growth Fund, Inc., D.L. Babson Money Market Fund, Inc., D.L. Babson Tax-Free Income Fund, Inc., Babson Value Fund, Inc., Babson Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc.; Trustee and President of D. L. Babson Bond Trust.
William E. Hoffman, D.D.S., Director, Scout Stock Fund, Inc., Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout WorldWide Fund, Inc.; Orthodontist, 3700 West 83rd Street, Suite 206, Prairie Village, Kansas 66208.
* Directors who are interested persons as that term is defined in the Investment Company Act of 1940, as amended.
Eric T. Jager, Director, Scout Stock Fund, Inc., Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout WorldWide Fund, Inc.; President and Director, Director, Bartlett Futures, Inc., Nygaard Corporation, 4800 Main Street, Suite 600, Kansas City, Missouri 64112; formerly Senior Vice President, Eppler, Guerin & Turner, Dallas, Texas, a securities brokerage firm.
Stephen F. Rose, Director, Scout Stock Fund, Inc., Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout WorldWide Fund, Inc.; President, Sun Publications, Inc., 7373 W. 107th Street, Overland Park, Kansas 66212.
Stuart Wien, Director, Scout Stock Fund, Inc., Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout WorldWide Fund, Inc.; Retired, 4589 West 124th Place, Leawood, Kansas 66206, formerly Chairman of the Board, Milgram Food Stores, Inc.
P. Bradley Adams, Vice President and Treasurer, Jones & Babson, Inc., Scout Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide Fund, Inc., David L. Babson Growth Fund, Inc., D. L. Babson Money Market Fund, Inc., D. L. Babson Tax-Free Income Fund, Inc., Babson Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow Stock Fund, Inc., Babson- Stewart Ivory International Fund, Inc., D.L. Babson Bond Trust, Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc.
Michael A. Brummel, Vice President, Assistant Secretary and Assistant Treasurer, Jones & Babson, Inc., Scout Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide Fund, Inc., David L. Babson Growth Fund, Inc., D.L. Babson Money Market Fund, Inc., D.L. Babson Tax-Free Income Fund, Inc., Babson Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow Stock Fund, Inc., Babson-Stewart Ivory International Fund, Inc., D.L. Babson Bond Trust, Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc.
Martin A. Cramer, Vice President and Secretary, Jones & Babson, Inc., Scout Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout Regional Fund, Inc., Scout WorldWide Fund, Inc., David L. Babson Growth Fund, Inc., D.L. Babson Money Market Fund, Inc., D.L. Babson Tax-Free Income Fund, Inc., Babson Enterprise Fund, Inc., Babson Enterprise Fund II, Inc., Babson Value Fund, Inc., Shadow Stock Fund, Inc., Babson-Stewart Ivory International Fund, Inc., D.L. Babson Bond Trust, Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc.
John G. Dyer, Vice President and Legal Counsel, Scout Stock Fund, Inc., Scout Regional Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc. and Scout WorldWide Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo Equity Fund, Inc., Buffalo High Yield Fund, Inc., Buffalo USA Global Fund, Inc.
None of the officers or directors will be remunerated by the Fund for their normal duties and services. Their compensation and expenses arising out of normal operations will be paid by Jones & Babson, Inc.
Messrs. Hoffman, Jager, Rose and Wien have no financial interest in, nor are they affiliated with, either Jones & Babson, Inc. or UMB Bank, n.a.
The Audit Committee of the Board of Directors is composed of Messrs. Hoffman, Jager, Rose and Wien.
The Officers and Directors of the Fund as a group own less than 1% of the Fund.
The Fund will not hold annual meetings except as required by the Investment Company Act of 1940 and other applicable laws. The Fund is a Maryland corporation. Under Maryland law, a special meeting of stockholders of the Fund must be held if the Fund receives the written request for a meeting from the stockholders entitled to cast at least 25 percent of all the votes entitled to be cast at the meeting. The Fund has undertaken that its Directors will call a meeting of stockholders if such a meeting is requested in writing by the holders of not less than 10% of the outstanding shares of the Fund. To the extent required by the undertaking, the Fund will assist shareholder communications in such matters.
The Fund's assets are held for safekeeping by the custodian, UMB Bank, n.a. This means the bank, rather than the Fund, has possession of the Fund's cash and securities. As directed by the Fund's officers, the Bank delivers cash to those who have sold securities to the Fund in return for such securities, and to those who have purchased portfolio securities from the Fund, it delivers such securities in return for their cash purchase price. It also collects income directly from issuers of securities owned by the Fund and holds this for payment to shareholders after deduction of the Fund's expenses. The custodian is compensated for its services by the manager. There is no charge to the Fund.
The Fund's financial statements are examined annually by independent public accountants approved by the directors each year, and in years in which an annual meeting is held the directors may submit their selection of independent public accountants to the shareholders for ratification.
Reports to shareholders will be published at least semiannually.
Arthur Andersen LLP, P.O. Box 13406, Kansas City, Missouri 64199, is the present independent public accountant for the Fund.
UMB Bank, n.a., also manages six other mutual funds which especially seek to provide services to customers of affiliate banks of UMB Financial Corporation (UMB). They are the Scout Stock Fund, Inc., Scout Bond Fund, Inc., Scout Money Market Fund, Inc., Scout Tax-Free Money Market Fund, Inc., Scout Regional Fund, Inc. and Scout WorldWide Fund, Inc.
FIXED INCOME SECURITIES DESCRIBED AND RATINGS
Standard & Poor's Corporation (S&P).
AAA - Highest Grade. These securities possess the ultimate degree of protection as to principal and interest. Marketwise, they move with interest rates, and hence provide the maximum safety on all counts.
AA - High Grade. Generally, these bonds differ from AAA issues only in a small degree. Here too, prices move with the long-term money market.
A - Upper-medium Grade. They have considerable investment strength, but are not entirely free from adverse effects of changes in economic and trade conditions. Interest and principal are regarded as safe. They predominantly reflect money rates in their market behavior but, to some extent, also economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category.
BB, B, CCC, CC -.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 repay principal in accordance with the terms of the obligations. 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.
Moody's Investors Service, Inc. (Moody's).
Aaa - Best Quality. These securities 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 - High Quality by All Standards. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the greater.
A - Upper-medium Grade. 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 great length of time. Such bonds lack and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to 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. bonds in this class.
B - Bonds which are rated B generally lack investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small.
Caa - Bonds which are 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 which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's - Moody's commercial paper rating is an opinion of the ability of an issuer to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's has one rating - prime. Every such prime rating means Moody's believes that the commercial paper note will be redeemed as agreed. Within this single rating category are the following classifications:
Prime - 1 Highest Quality Prime - 2 Higher Quality Prime - 3 High Quality
The criteria used by Moody's for rating a commercial paper issuer under this graded system include, but are not limited to the following factors:
(1) evaluation of the management of the
(2) economic evaluation of the issuer's industry or industries and an appraisal of speculative type risks which may be
(3) evaluation of the issuer's products in relation to competition and customer
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten
(7) financial strength of a parent company and relationships which exist with the
(8) 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.
S&P - Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely repayment of debt having an original maturity of no more than 270 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. The four categories are as follows:
"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 designation indicates that the degree of safety regarding timely payment is very strong.
"A-2" - Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as overwhelming.
"A-3" - Issues carrying this designation have a somewhat more vulnerable to the adverse effects of changes in the higher designations.
"B" - Issues rated "B" are regarded as having only an adequate capacity for timely may be damaged by changing conditions or short-term adversities.
"C" - This rating is assigned to short-term debt obligations with a doubtful capacity for payment.
"D" - This rating indicates that the issuer is either in default or is expected to be in default upon maturity.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying statement of assets and liabilities of the Scout Balanced Fund, Inc. (a Maryland corporation), as of October 2, 1995 (inception). This financial statement is the responsibility of the Fund's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. Our procedures included confirmation of securities owned as of October 2,1995, by correspondence with the custodian. 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 Scout Balanced Fund, Inc., as of October 2,1995, in conformity with generally accepted accounting principles.
STATEMENT OF ASSETS AND LIABILITIES
Repurchase agreement, 5.38%, due October 3,1995 (Note 2) $ 100,000
NET ASSETS APPLICABLE TO OUTSTANDING SHARES CONSIST OF: Capital (capital stock and paid-in capital) $ 100,000
Capital shares, $1.00 par value:
NET ASSET VALUE PER SHARE $ 10.00
See accompanying notes to this financial statement.
Scout Balanced Fund, Inc. (the Fund), was registered on July 3, 1995, under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company and capitalized on October 2, 1995, by Jones & Babson, Inc., underwriter.
Securities purchased under agreements to resell are held by the Fund's custodian, UMB Bank, n.a. The Fund's adviser monitors the market values of the underlying securities which they have purchased on behalf of the Fund to ensure they are sufficient to protect the Fund in the event of default by the seller. In the event of bankruptcy or other default of the seller, the Fund could experience delays in liquidating the underlying securities and possible loss to the extent the repurchase agreement and accrued interest is more than proceeds received upon liquidation of the underlying securities. | 497 | 497 | 1996-01-16T00:00:00 | 1996-01-16T15:21:12 |
0000950130-96-000128 | 0000950130-96-000128_0004.txt | PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Agreement made this day of , 1996 between Prudential Distressed Securities Fund, Inc., a Maryland corporation (the Fund), and Prudential Mutual Fund Management, Inc., a Delaware corporation (the Manager).
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended (the
WHEREAS, the Fund desires to retain the Manager to render or contract to obtain as hereinafter provided investment advisory services to the Fund and the Fund also desires to avail itself of the facilities available to the Manager with respect to the administration of its day to day corporate affairs, and the Manager is willing to render such investment advisory and administrative
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund and administrator of its corporate affairs for the period and on the terms set forth in this Agreement. The Manager accepts such appointment and agrees to render the services herein described, for the compensation herein provided. The Manager is authorized to enter into an agreement with The Prudential
Investment Corporation (PIC) pursuant to which PIC shall furnish to the Fund the investment advisory services in connection with the management of the Fund (the Subadvisory Agreement). The Manager will continue to have responsibility for all investment advisory services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund, the Manager shall administer the Fund's corporate affairs and, in connection therewith, shall furnish the Fund with office facilities and with clerical, bookkeeping and recordkeeping services at such office facilities and, subject to Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the investment operations of the Fund and the composition of the Fund's portfolio, including the purchase, retention and disposition thereof, in accordance with the Fund's investment objectives, policies and restrictions as stated in the Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments and determine from time to time what investments or securities will be purchased, retained, sold or loaned by the Fund, and what portion of the assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations under this Agreement, shall act in conformity with the Articles of Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund and
directions of the Board of Directors of the Fund and will conform to and comply with the requirements of the 1940 Act and all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts to be purchased or sold by the Fund and will place orders pursuant to its determinations with or through such persons, brokers, dealers or futures commission merchants (including but not limited to Prudential Securities Incorporated) in conformity with the policy with respect to brokerage as set forth in the Fund's Registration Statement and Prospectus (hereinafter defined) or as the Board of Directors may direct from time to time. In providing the Fund with investment supervision, it is recognized that the Manager will give primary consideration to securing the most favorable price and efficient execution. Consistent with this policy, the Manager may consider the financial responsibility, research and investment information and other services provided by brokers, dealers or futures commission merchants who may effect or be a party to any such transaction or other transactions to which other clients of the Manager may be a party. It is understood that Prudential Securities Incorporated may be used as principal broker for securities transactions but that no formula has been adopted for allocation of the Fund's investment transaction business. It is also understood that it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and economic analysis provided by brokers or futures commission merchants and that such brokers may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers or futures commission merchants on the basis of seeking the most favorable price and efficient execution. Therefore, the Manager is authorized to pay higher brokerage commissions for the purchase and sale of securities and futures contracts for the Fund to brokers or futures commission merchants who provide such research and analysis, subject to review by the Fund's Board of Directors from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such broker or futures commission merchant may be useful to the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security or a futures contract to be in the best interest of the Fund as well as other clients of the Manager or the Subadviser, the Manager, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities or futures contracts to be so sold or purchased in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities or futures contracts so purchased or sold, as well as the expenses incurred in the transaction,
will be made by the Manager in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to the Fund's portfolio transactions and shall render to the Fund's Board of Directors such periodic and special reports as the Board may reasonably request.
(e) The Manager shall be responsible for the financial and accounting records to be maintained by the Fund (including those being maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business day with information relating to all transactions concerning the Fund's assets.
(g) The investment management services of the Manager to the Fund under this Agreement are not to be deemed exclusive, and the Manager shall be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the following documents and will deliver to it all future amendments and supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary of State of Maryland (such Articles of Incorporation, as in effect on the date hereof and as amended from time to time, are herein called the
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund authorizing the appointment of the Manager and approving the form of this
(d) Registration Statement under the 1940 Act and the Securities Act of 1933, as amended, on Form N-1A (the Registration Statement), as filed with the Securities and Exchange Commission (the Commission) relating to the Fund and shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of Additional Information, as currently in effect and as amended or supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors, officers and employees who may be elected as directors or officers of the Fund to serve in the capacities in which they are elected. All services to be furnished by the Manager under this Agreement may be furnished through the medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all records which it maintains for the Fund are the property of the Fund and it will surrender promptly to the Fund any such records upon the Fund's request, provided however that the Manager may retain a copy of such records. The Manager further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records as are required to be maintained by the Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the following expenses:
(i) the salaries and expenses of all personnel of the Fund and the Manager except the fees and expenses of directors who are not affiliated persons of the Manager or the Fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in connection with managing the ordinary course of the Fund's business other than those assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not affiliated persons of the Manager or the Fund's investment
(c) the fees and expenses of the Custodian that relate to (i) the custodial function and the recordkeeping connected therewith, (ii) preparing and maintaining the general accounting records of the Fund and the providing of any such records to the Manager useful to the Manager in connection with the Manager's responsibility for the accounting records of the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated thereunder, (iii) the pricing of the shares of the Fund, including the cost of any pricing service or services which may be retained pursuant to the authorization of the Board of Directors of the Fund, and (iv) for both mail and wire orders, the cashiering function in connection with the issuance and redemption of the Fund's
(d) the fees and expenses of the Fund's Transfer and Dividend Disbursing Agent, which may be the Custodian, that relate to the maintenance of each
(e) the charges and expenses of legal counsel and independent accountants
(f) brokers' commissions and any issue or transfer taxes chargeable to the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state or
(h) the fees of any trade associations of which the Fund
(i) the cost of stock certificates representing, and/or non-negotiable share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and omissions
(k) the fees and expenses involved in registering and maintaining registration of the Fund and of its shares with the Securities and Exchange Commission, registering the Fund as a broker or dealer and qualifying its shares under state securities laws, including the preparation and printing of the Fund's registration statements, prospectuses and statements of additional information for filing under federal and state securities laws for such
(l) allocable communications expenses with respect to investor services and all expenses of shareholders' and directors' meetings and of preparing, printing and mailing reports to shareholders in the amount necessary for distribution to
(m) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year (including the fees payable to the Manager but excluding interest, taxes, brokerage commissions, distribution fees and litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business) exceed the lowest applicable annual expense limitation established and enforced pursuant to the statute or regulations of any jurisdictions in which shares of the Fund are then qualified for offer and sale, the compensation due the Manager will be reduced by the amount of such excess, or, if such reduction exceeds the compensation payable to the Manager, the Manager will pay to the Fund the amount of such reduction which exceeds the amount of such compensation.
8. For the services provided and the expenses assumed pursuant to this Agreement, the Fund will pay to the Manager as full compensation therefor a fee at an annual rate of .75 of 1% of the Fund's average daily net assets. This fee will be computed daily and will be paid to the Manager monthly. Any reduction in the fee payable and any payment by the Manager to the Fund pursuant to paragraph 7 shall be made monthly. Any such reductions or payments are subject to readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, except a loss resulting from a breach of fiduciary duty with respect to receipt of compensation for services (in which case any award of damages shall be limited to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than two years from the date hereof only so long as such continuance is specifically approved at least annually in conformity with the requirements of the 1940 Act; provided, however, that this Agreement may be terminated by the Fund at any time, without the payment of any penalty, by the Board of Directors of the Fund or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, or by the Manager at any time, without the payment of any penalty, on not more than 60 days' nor less than 30 days' written notice to the other party. This Agreement shall terminate automatically in the event of its assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of any director, officer or employee of the Manager who may also be a director, officer or employee of the Fund to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any business, whether of a similar or dissimilar nature, nor limit or restrict the right of the Manager to engage in any other business or to render services of any kind to any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of Directors of the Fund from time to time, the Manager shall for all purposes herein be deemed to be an independent contractor and shall have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund.
13. During the term of this Agreement, the Fund agrees to furnish the Manager at its principal office all prospectuses, proxy statements, reports to shareholders, sales literature, or other material prepared for distribution to shareholders of the Fund or the public, which refer in any way to the Manager, prior to use thereof and not to use such material if the Manager reasonably objects in writing within five business days (or such other time as may be mutually agreed) after receipt thereof. In the event of termination of this Agreement, the Fund will continue to furnish to the Manager copies of any of the above mentioned materials which refer in any way to the Manager. Sales literature may be furnished to the Manager hereunder by first-class or overnight mail, facsimile transmission equipment or hand delivery. The Fund shall furnish or otherwise make available to the Manager such other information relating to the business affairs of the Fund as the Manager at any time, or from time to time, reasonably requests in order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent of the Fund must be obtained in conformity with the requirements of the 1940 Act.
15. Any notice or other communication required to be given pursuant to this Agreement shall be deemed duly given if delivered or mailed by registered mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y. 10292, Attention: Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y. 10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
17. The Fund may use the name "Prudential Distressed Securities Fund, Inc." or any name including the word "Prudential" only for so long as this Agreement or any extension, renewal or amendment hereof remains in effect, including any similar agreement with any organization which shall have succeeded to the Manager's business as Manager or any extension, renewal or amendment thereof remain in effect. At such time as such an agreement shall no longer be in effect, the Fund will (to the extent that it lawfully can) cease to use such a name or any other name indicating that it is advised by, managed by or otherwise connected with the Manager, or any organization which shall have so succeeded to such businesses. In no event shall the Fund use the name "Prudential Distressed Securities Fund, Inc." or any name including the word "Prudential" if the Manager's function is transferred or assigned to a company of which The Prudential Insurance Company of America
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written.
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. | N-1A EL | EX-99.5(A) | 1996-01-16T00:00:00 | 1996-01-16T12:24:57 |
0000950130-96-000111 | 0000950130-96-000111_0011.txt | <DESCRIPTION>AMENDMENT NO. 1 TO RIGHTS AGREEMENT DTD 1/10/96
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
Amendment, dated as of January 10, 1996 (this "Amendment"), to the Rights Agreement dated as of January 10, 1996 (the "Rights Agreement") between Loral Corporation, a New York corporation (the "Company"), and The Bank of New York, a New York banking corporation, as Rights Agent (the "Rights Agent"). Capitalized terms which are not defined herein shall, unless the context otherwise requires, have the meanings assigned to such terms in the Rights Agreement.
W I T N E S S E T H:
WHEREAS, the Company has entered into an Agreement and Plan of Merger dated as of January 7, 1996 (as may be amended or supplemented from time to time, the "Merger Agreement") with Lockheed Martin Corporation, a Maryland corporation ("Parent"), and LAC Acquisition Corporation, a New York corporation and a wholly-owned subsidiary of Parent ("Purchaser");
WHEREAS, the Board of Directors of the Company has determined that the Merger Agreement and the transactions contemplated thereby are in the best interests of the stockholders of the Company;
WHEREAS, the Merger Agreement requires the Company and the Rights Agent to enter into this Amendment;
WHEREAS, as provided in Section 26 of the Rights Agreement, the interests of the holders of Rights thereunder are currently deemed to be coincident with the interests of the Company's stockholders;
WHEREAS, in order to further clarify the provisions of the Rights Agreement and the relationship between the Parent, Purchaser and the Company and to further facilitate the transactions contemplated by the Merger Agreement, the Company (x) has determined that it is necessary and desirable to amend the Rights Agreement in the manner provided herein, and (y) shall execute and deliver to the Rights Agent the officer's certificate with respect to this Amendment provided for in Section 26 of the Rights Agreement; and
WHEREAS, in connection with such proposed amendment to the Rights Agreement, the Company and the Rights Agent have agreed to amend the Rights Agreement in accordance with Section 26 thereof in the manner provided herein.
NOW, THEREFORE, in consideration of the premises and the agreements herein set forth, the parties hereby agree as follows:
1. Section 1(a) of the Rights Agreement is hereby modified and amended to insert the following sentence at the end of such Section:
"Notwithstanding anything to the contrary contained in this Agreement, for so long as the Merger Agreement (as defined below) shall remain in full force and effect, neither the execution, delivery nor performance of the Agreement and Plan of Merger dated as of January 7, 1996 (as may be amended or supplemented from time to time, the "Merger Agreement"), by and among the Company, Lockheed Martin Corporation, a Maryland corporation ("Parent"), and LAC Acquisition Corporation, a New York corporation and a wholly-owned subsidiary of Parent ("Purchaser"), nor the execution, delivery nor performance of the Distribution Agreement (as defined in the Merger Agreement), nor the consummation of the transactions contemplated pursuant to (x) the Merger Agreement (including, without limitation, the publication or other commencement of the Offer and the consummation of the Offer and the Merger (such capitalized terms, as defined in the Merger Agreement)) or (y) the Distribution Agreement (including, without limitation, the consummation of the Restructuring and the Distribution (such capitalized terms, as defined in the Distribution Agreement)), shall cause either the Parent or Purchaser or any of their respective Affiliates or Associates to become or to be deemed Acquiring Persons."
2. Section 1(r) of the Rights Agreement is hereby modified and amended to insert the following sentence at the end of such Section:
"Notwithstanding anything to the contrary contained in this Agreement, for so long as the Merger Agreement shall remain in full force and effect, the term "Exempted Person" shall include Parent, Purchaser and each of their respective Affiliates and Associates, and neither the Parent, Purchaser nor any of their respective Affiliates or Associates shall be deemed Acquiring Persons."
3. Sections 1(gg), 1(ii) and 1(qq) of the Rights Agreement are each hereby modified and amended to insert the following sentence at the end of each such Section:
"Notwithstanding anything to the contrary contained in this Agreement, for so long as the Merger Agreement shall remain in full force and effect, neither the execution, delivery nor performance of the Merger Agreement (as defined in Section 1(a) hereof (as
amended)), nor the execution, delivery nor performance of the Distribution Agreement (as defined in the Merger Agreement), nor the consummation of the transactions contemplated pursuant to (x) the Merger Agreement (including, without limitation, the publication or other commencement of the Offer and the consummation of the Offer and the Merger (such capitalized terms, as defined in the Merger Agreement)) or (y) the Distribution Agreement (including, without limitation, the consummation of the Restructuring and the Distribution (such capitalized terms, as defined in the Distribution Agreement)), shall result in a Section 11(a)(ii) Event, a Section 13 Event or a Triggering Event. In addition, notwithstanding anything to the contrary contained in this Agreement, no acquisition of shares of Common Stock nor of any other securities of the Company (nor the acquisition of any rights to any of the foregoing) by the Parent, Purchaser or any of their respective Affiliates or Associates as contemplated by the terms of the Merger Agreement or the Distribution Agreement, shall result in a Section 11(a)(ii) Event, a Section 13 Event or a Triggering Event."
4. Section 3(a) of the Rights Agreement is hereby modified and amended to insert the following sentence at the end of such Section:
"Notwithstanding anything to the contrary contained in this Agreement, for so long as the Merger Agreement shall remain in full force and effect, neither the execution, delivery nor performance of the Merger Agreement (as defined in Section l(a) hereof (as amended)), nor the execution, delivery nor performance of the Distribution Agreement (as defined in the Merger Agreement), nor the consummation of the transactions contemplated pursuant to (x) the Merger Agreement (including, without limitation, the publication or other commencement of the Offer and the consummation of the Offer and the Merger (such capitalized terms, as defined in the Merger Agreement)) or (y) the Distribution Agreement (including, without limitation, the consummation of the Restructuring and the Distribution (such capitalized terms, as defined in the Distribution Agreement)), shall cause either the occurrence of a Distribution Date or a Stock Acquisition Date or cause or require the distribution of any Rights Certificates to the record holders of shares of Common Stock. In addition, notwithstanding anything to the contrary contained in this Agreement, no acquisition of shares of Common Stock nor of any other securities of the Company (nor the acquisition of any rights to any of the foregoing) by the Parent, Purchaser or any of
their respective Affiliates or Associates as contemplated by the terms of the Merger Agreement or the Distribution Agreement, shall cause either the occurrence of a Distribution Date or a Stock Acquisition Date or cause or require the distribution of any Rights Certificates to the record holders of shares of Common Stock."
5. This Amendment is irrevocable and shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State.
6. Parent, Purchaser and their respective Affiliates and Associates shall be third party beneficiaries of this Amendment.
7. This Amendment may be executed in counterparts, each of which shall be deemed an original, but such counterparts shall together constitute one and the same instrument.
8. In executing and delivering this Amendment, the Rights Agent shall be entitled to all the privileges and immunities afforded to the Rights Agent under the terms and conditions of the Rights Agreement. This Amendment shall be effective as of the date first above stated, and for so long as the Merger Agreement shall remain in full force and effect, and except as set forth herein, the Rights Agreement, as amended hereby and as heretofore amended, shall remain in full force and effect and shall be otherwise unaffected hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date and year first above written.
Title: Vice President & General
THE BANK OF NEW YORK,
By: /s/Vincent J. Cahill Jr. Name: Vincent J. Cahill Jr.
Reference is hereby made to the Rights Agreement dated as of January 10, 1996 (the "Rights Agreement") between Loral Corporation, a New York corporation (the "Company") and The Bank of New York, a New York banking corporation, as Rights Agent (the "Rights Agent"). The undersigned, in his capacity as an authorized officer of the Company, hereby certifies to the Rights Agent that the form of proposed amendment to the Rights Agreement, a copy of which is attached hereto, is in compliance with the terms of Section 26 of the Rights Agreement.
Title: Vice President & General | SC 14D9 | EX-99.11 | 1996-01-16T00:00:00 | 1996-01-16T08:16:34 |
0000891020-96-000024 | 0000891020-96-000024_0000.txt | <DESCRIPTION>FORM 10-Q FOR THE PERIOD ENDING 11/30/95
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended November 30, 1995 Commission File No. 0-11488
/ / 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 of Incorporation) (I.R.S. Employer
777-108th Avenue N.E., Suite 2390, Bellevue, WA 98004-5193 (Address of principal executive offices) (Zip Code)
Registrant's telephone number (206) 462-6000
Indicate by a 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 December 31, 1995.
PART I - FINANCIAL INFORMATION
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. 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 for the interim period presented have been included. Operating results for the three month period ended November 30, 1995 are not necessarily indicative of the results that may be expected for the year ending August 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in PENWEST's annual report on Form 10-K for the fiscal year ended August 31, 1995.
On December 22, 1995, the Company completed an unsecured $35 million revolving line of credit agreement with four banks expiring on December 30, 1998. Borrowing rates available to the Company under the agreement are based on prime rate or the interbank offered rate depending on the selection of borrowing options. The agreement replaces an unsecured term agreement which at December 22, 1995, had $15.25 million of borrowings outstanding with four banks. It also replaces an unsecured $15 million revolving line of credit of which there were no outstanding borrowings at quarter-end.
The new debt agreement includes, among other terms, certain restrictions related to limitations on indebtedness and minimum net worth, which are similar to restrictions on previously existing debt. In addition, the Company is required to maintain a minimum fixed charge coverage ratio.
The effective tax rate for the first quarter of fiscal 1996 was 31% compared to the statutory rate of 34%. The effective rate is lower than the statutory rate due to state tax refunds received by the Company.
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PENWEST used operating cash flow and short-term borrowings to finance capital expenditures and operations during the quarter. The Company maintains a highly liquid position. Liquidity at November 30, 1995 consisted of the following: cash and cash equivalents of $5.5 million, working capital of approximately $31.5 million, several uncommitted lines with various banks that may be used for overnight borrowings under which there was $1.3 million outstanding, and a $15 million revolving credit agreement under which there were no borrowings outstanding. On December 22, 1995, the Company completed a new $35 million credit agreement with four banks, replacing both the $15 million revolving credit agreement and a $16 million unsecured term agreement.
Cash flow from operations for the three months ended November 30, 1995 was $3.1 million compared to $6.1 million in the corresponding period a year ago. The decrease is primarily due to an increase in inventories.
The Board of Directors declared a $0.05 per share dividend which was paid on December 1, 1995, to shareholders of record as of November 17, 1995.
Additions to property, plant and equipment during the three months ended November 30, 1995 were $2.8 million. The additions were primarily for various capital projects at the Penford facility in Cedar Rapids, Iowa.
Net income was $1.7 million, or $0.25 per share for the first quarter, compared to net income of $1.8 million, or $0.25 per share for the corresponding period a year ago. The first quarter of fiscal year 1995 included the operations of Pacific Cogeneration, Inc., a PENWEST subsidiary whose assets were sold in the second quarter of fiscal year 1995. These operations generated approximately $240,000 of earnings net of tax effect, or $0.03 per share in the first quarter of fiscal year 1995.
Sales increased in the first quarter of fiscal year 1996 to $45.6 million, representing a 6.7% increase from the corresponding period a year ago. The increase is attributed to all three of PENWEST's basic businesses. Recent new business and alkaline-based conversions for Penford allayed the impact of the current weakness in the overall paper industry resulting in customer downtime during the quarter. Higher revenues at Penford are also partly due to higher corn costs, a key component used in pricing Penford's paper chemicals products. Penwest Foods' revenues increased significantly over the same period a year ago primarily due to increased volume of food grade potato starches. Penwest Pharmaceuticals Group grew volumes through continued success of its microcrystalline cellulose family of products.
The gross margin for the three month period ended November 30, 1995 was 26.7% compared to 26.3% for the corresponding period a year ago. Gross margin in the first quarter of fiscal 1996 was negatively impacted by rising corn costs and a less favorable product mix at Penford. Gross margin in the same period a year ago was down from historical levels as a result of higher chemicals and transportation costs at Penford. Net corn costs have continued to rise in the second quarter and are expected to negatively impact second quarter gross margin.
Operating expenses in the first quarter rose $1.0 million, or 13.8%. The increase was primarily due to increased investment in research and development, especially in the Penwest Pharmaceuticals Group, and to a lesser extent higher human resource expenses.
Net interest expense for the first quarter of fiscal 1996 was $1,054,000 compared to $1,042,000 for the corresponding period a year ago. This increase results from higher debt levels offset by overall lower interest rates.
The effective tax rate for the first quarter of fiscal 1996 was 31.4% compared to 34.3% in the corresponding period a year ago. The effective tax rate in the current quarter is lower than the statutory rate primarily due to state tax refunds received by the Company. The effective tax rate for the remainder of fiscal year 1996 is expected to approximate the statutory rate.
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibit 11 - Statement re: Computation of earnings per share. Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this report is filed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T14:29:15 |
0000873084-96-000001 | 0000873084-96-000001_0001.txt | SEARS CREDIT ACCOUNT TRUST 1991 A
Under the Pooling and Servicing Agreement dated as of March 1, 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........... $10,577,457.57
(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..... $8,005,679.45
(d)The aggregate amount of Collections of Principal Receivables processed during the related Due Period which were allocated in respect of the Investor Certificates.... $23,163,142.69
(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..... $2,571,778.12
(f)The aggregate amount of Collections of Principal Receivables processed during the related Due Period which were allocated in respect of the Seller Certificate.............. $8,873,822.16
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)..... $669,921,043.26
(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 ................. $41,666,666.52
(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............................ $2,144,367.18
(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.. $3,687,500.00
(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").............. $246,291.86
(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.................... $104,166.67
(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) $10,150,046.63 24.36%
Certificate Interest (3) $3,687,500.00 8.85% Servicing Fees (4) $104,166.67 0.25% Allocated Charge-Offs (5) $246,291.86 0.59%
(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: 6.35%
The aging of delinquent receivables is summarized as follows (1): Delinquencies as a % of balances 60 - 89 days past due........... 1.44% 90 - 119 days past due.......... 0.89% 120 days or more past due....... 1.67%
(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 | 1996-01-16T10:22:24 |
0000875626-96-000022 | 0000875626-96-000022_0000.txt | <DESCRIPTION>1/16 24F-2NT FOR MINT 6
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: Mint Group 6; Municipal Insured National Trust Series 39
3. Investment Company Act File Number: 811-4190
Securities Act File Number: 33-44926
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
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): $-0-
(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): -$754,890.84
(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): $(754,890.84)
(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). : :
Date of mailing or wire transfer of filing fees to the Commission's lockbox depository:
This report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. | 24F-2NT | 24F-2NT | 1996-01-16T00:00:00 | 1996-01-16T17:08:28 |
0000873084-96-000007 | 0000873084-96-000007_0000.txt | <DESCRIPTION>SCAT 1991B PROSPECTUS DATED 1/16/96
PROSPECTUS SUPPLEMENT This Prospectus Supplement, DATED JANUARY 16, 1996 filed pursuant to Rule 424(b)(3), TO PROSPECTUS DATED relates to Registration Statement MAY 16, 1991, AS No. 33-40436 and Prospectus SUPPLEMENTED THROUGH dated May 16, 1991
Pursuant to Section 13 of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 16, 1996
Sears Credit Account Trust 1991 B (Exact name of registrant as specified in charter)
(State of (Commission (IRS Employer Organization) File Number) Identification No.)
c/o Sears Receivables Financing Group, Inc. (Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (302) 888-3176
Former name, former address and former fiscal year, if changed since last report: Not Applicable
On January 16, 1996, Registrant made available the Monthly Investor Certificateholders' Statement set forth as Exhibit 21.
Item 7. Financial Statements and Exhibits
21. Monthly Investor Certificateholders' Statement related to the distribution of January 16, 1996 and reflecting the performance of the Trust during the Due Period ended in December 1995, which will accompany the distribution on January 16, 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 thereunto duly authorized.
Sears Credit Account Trust 1991 B
By: Sears Receivables Financing Group, Inc.
21. Monthly Investor Certificateholders' Statement - (January 16, 1996). | 424B3 | 424B3 | 1996-01-16T00:00:00 | 1996-01-16T10:46:20 |
0000950112-96-000064 | 0000950112-96-000064_0000.txt | Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 16, 1996
(Exact name of registrant as specified in its charter)
(State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.)
300 Saint Paul Place, Baltimore, Maryland 21202 (Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
Current Report on Form 8-K
The net income of Commercial Credit Company (the "Company") for the three months and year ended December 31, 1995 was $57.7 million and $219.9 million, respectively, compared to $55.3 million and $221.9 million, respectively, in the corresponding 1994 periods. The Company's income before income taxes and minority interest for the three months and year ended December 31, 1995 was $85.9 million and $334.0 million, respectively, compared to $90.1 million and $363.9 million, respectively, in the corresponding 1994 periods. The Company's revenues for the three months and year ended December 31, 1995 were $356.2 million and $1,392.4 million, respectively, compared to $416.1 million and $1,598.0 million, respectively, in the corresponding 1994 periods.
On December 30, 1994 the Company sold its remaining 50% interest in Commercial Insurance Resources, Inc., the parent of Gulf Insurance Company (Gulf), to an affiliate, The Travelers Indemnity Company, for $150 million and accordingly results of operations for 1995 do not include Gulf's results.
At December 31, 1995 the Company had total debt consisting of certificates of deposit of $98.3 million, short-term borrowings of $1,394.2 million and long-term debt of $5,200.0 million. In addition the Company's total stockholder's equity at December 31, 1995 was $1,162.9 million.
Ratio of Earnings to Fixed Charges
The Company's ratio of earnings to fixed charges for the year ended December 31, 1995 was 1.70. This ratio has been computed by dividing earnings available for fixed charges by fixed charges. For the purpose of this ratio earnings available for fixed charges consist of pre-tax income from continuing operations adjusted for undistributed earnings of investees carried on the equity basis of accounting and minority interest and fixed charges; and fixed charges consist of interest expense and that portion of rentals deemed representative of the appropriate interest factor.
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.
Dated: January 16, 1996 COMMERCIAL CREDIT COMPANY
By /s/ William T. Bozarth | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T15:19:51 |
0000893877-96-000008 | 0000893877-96-000008_0003.txt | THIS PATENT PURCHASE AGREEMENT (this "Agreement") is entered into as of this 27th day of October, 1995 (the "Effective Date"), by and between PCT HOLDINGS, INC., a Washington corporation ("PCTH"), SEISMIC SAFETY PRODUCTS, INC., a Washington corporation (the "Subsidiary"), and JAMES C. McGILL, of Whites Creek, TN ("McGill"), in his individual capacity.
WHEREAS, McGill is the holder of two United States Letters Patent, U.S. Patent No. 4,903,720, granted on February 27, 1990, and U.S. Patent No. 5,119,841, granted on June 9, 1992 (collectively, the
WHEREAS, PCTH has offered to cause the Subsidiary to purchase from McGill the Patents (including but not limited to the right to sue for past infringements), so as to acquire full and unencumbered title and interest in the Patents, for an aggregate consideration of $120,000 and otherwise based upon the terms and subject to the conditions hereinafter
WHEREAS, McGill desires to sell the Patents (including but not limited to the right to sue for past infringements) to the Subsidiary, based upon the terms and subject to the conditions hereinafter set forth;
WHEREAS, to induce PCTH to enter into this agreement, McGill has agreed to enter into a noncompetition agreement and to grant other rights to PCTH and the Subsidiary;
NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto covenant and agree as follows:
1.1 Agreement to Sell and Purchase. Upon the basis of the representations and warranties, for the consideration, and subject to the terms and conditions set forth in this Agreement, McGill hereby agrees to sell, transfer, assign and convey, and the Subsidiary hereby agrees to purchase, the Patents, including but not limited to the right to sue for past infringements, free and clear of all liens, encumbrances and rights of others.
1.2 Purchase Price. The total purchase price for the Patents (the "Purchase Price") shall be $120,000, as provided in Section 1.3 hereof.
1.3 Payment of Purchase Price. The Purchase Price shall be payable to McGill by the Subsidiary or PCTH as follows:
(a) $5,000 to be paid by company check on the Closing Date;
(b) Equal installments of $5,000 each to be paid by company check on the 15th day of each month for 24 consecutive months thereafter.
1.4 Transfer Documents. Provided that all conditions precedent have been fulfilled or waived, McGill shall deliver to the Subsidiary, upon payment of the $5,000 due on the Closing Date (as defined in Section 1.5), patent assignments and such other instruments of transfer (in form and substance satisfactory to PCTH and the Subsidiary) as may be necessary to transfer to the Subsidiary all of the right, title and interest in and to the Patents, free and clear of any liens, claims or encumbrances of any kind.
1.5 Closing. The closing of the transaction contemplated in the Agreement (the "Closing") shall take place on November 30, 1995 (the "Closing Date"), at the offices of Stoel Rives, 3600 One Union Square, Seattle, Washington, or at such other time and place as the parties may agree.
2.1 Right to Terminate. Notwithstanding anything to the contrary in this Agreement, this Agreement may be terminated and the transactions contemplated herein abandoned at any time prior to the Closing:
(a) Mutual Consent. By mutual consent of PCTH and McGill.
(b) Delay. By either PCTH or McGill, if the Closing shall not have occurred by December 31, 1995; provided, however, that the right to terminate this Agreement under this Section 2.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date.
(c) Breach by PCTH. By McGill, if PCTH breaches any of PCTH's representations and warranties in any material respect or fails to comply in any material respect with any of its agreements contained here.
(d) Breach by McGill. By PCTH, if McGill breaches any of his representations and warranties in any material respect or fails to comply in any material respect with any of his agreements contained herein.
2.2 Obligations to Cease. If this Agreement is terminated pursuant to Section 2.1, all obligations of the parties to this Agreement shall terminate and there shall be no liability of any party hereto to any other party except (i) as set forth in Sections 6.4 and 8.6; and (ii) that nothing herein will relieve any party from liability for any willful breach of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF McGILL.
McGill represents and warrants to PCTH and the Subsidiary that:
3.1 Due Authorization. McGill has full power and authority to execute and deliver this Agreement and to perform and to carry out his obligations under this Agreement. This Agreement has been duly and validly executed and delivered by McGill and is binding upon and enforceable against him in accordance with its terms, except as such enforcement may be limited by equitable principles or by applicable bankruptcy, insolvency, reorganization or other laws affecting creditor's rights generally. The execution and delivery of this Agreement (as well as all other instruments, agreements, certificates, or other documents contemplated hereby) by McGill, and the performance of his obligations thereunder, will not (a) violate any federal, state, county, or local law, rule, or regulation or any applicable decree or judgment of any court or governmental authority or (b) violate or conflict with, or permit the cancellation of, or constitute a default under, any agreement to which McGill is a party or by which he or his property is bound.
3.2 Title to Patents. McGill has good and marketable full and unencumbered legal and equitable title to U.S. Patent No. 4,903,720 and U.S. Patent No. 5,119,841, including without limitation the exclusive right to bring actions for infringement thereof, free and clear of all security interests, liens, encumbrances, claims, or rights of any kind. McGill has not licensed to others, or agreed to license, any of the Patents, or entered into any contracts with respect thereto.
3.3 No Infringement. There has been no assertion or claim that any manufacture, use or sale of any product by any third party infringes any of the claims of the Patents, and McGill does not believe and has no reason to believe that any manufacture, use or sale of any product by any third party infringes any of the claims of the Patents. There is no claim, dispute, action, proceeding or lawsuit asserting infringement of the rights of any third party by the products and methodologies claimed in the Patents, no threat of such action, and no basis exists for any such action.
3.4 Validity of Patents. All materials and information of which disclosure to the United States Patent and Trademark Office is required pursuant to United States Patent Law and Regulations during the prosecution of the Patents have been submitted thereto. There has been no misrepresentation and, to the best knowledge and belief of McGill, there is no information or prior art reference that would render the Patents invalid or raise any material questions regarding their validity.
3.5 Consents and Approvals. No consent, approval or authorization of, or filing or registration with, any court, regulatory authority, governmental body, or any other third party is required for the consummation of the transaction of this Agreement.
3.6 Brokers. McGill has not entered into any arrangement with any broker, finder or investment banker and will not incur a fee or any liability for any brokerage or investment banking fee, commission, or finder's fee in connection with the transactions contemplated by this Agreement.
3.7 Reliance. McGill recognizes and agrees that, notwithstanding any investigation by PCTH, PCTH is relying upon the representations and warranties made by McGill in this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF PCTH.
PCTH and the Subsidiary represent and warrant to McGill as follows:
4.1 Due Organization. PCTH is a corporation duly organized, validly existing, and in good standing under the laws of the State of Washington and has full corporate power and authority to enter into and perform this Agreement. The Subsidiary is a corporation duly organized, validly existing, and in good standing under the laws of the State of Washington and has full corporate power and authority to enter into and perform this Agreement.
4.2 Due Authorization. PCTH and the Subsidiary each have full corporate power and authority to execute and deliver this Agreement and to perform and carry out their obligations under this Agreement. The execution and delivery of this Agreement and performance of PCTH's obligations and the obligations of the Subsidiary contemplated hereby have been duly and validly authorized by all necessary corporate action of PCTH and the Subsidiary. This Agreement has been duly and validly executed and delivered by PCTH and the Subsidiary and constitutes the valid and binding obligation of PCTH and the Subsidiary, enforceable in accordance with its terms, except as such enforcement may be limited by equitable principles or by applicable bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally. The execution and delivery of this Agreement (as well as all instruments, agreements, certificates or other documents contemplated hereby) by PCTH and the Subsidiary and their performance of their obligations thereunder, will not (a) violate any federal, state, county, or local law, rule, or regulation or any decree or judgment of any court or governmental authority applicable to PCTH or the Subsidiary or their property or (b) violate or conflict with, or permit the cancellation of, or constitute a default under, any agreement to which PCTH or the Subsidiary is a party or by which they or their property is bound.
5.1 Indemnification. McGill agrees to indemnify and hold harmless PCTH and the Subsidiary, and any of the affiliates, officers, directors, employees, successors, assigns or agents of PCTH and the Subsidiary, from and against any losses, damages, liabilities, costs and expenses, including without limitation, any attorney's fees, technical expert fees and any other expenditures for defense, and damages and settlement disbursements that may be incurred as a result of any claim, dispute, proceeding or lawsuit out of or related to any breach of, misrepresentation or inaccuracy in, or intentional or reckless omission from, any representation or warranty made by McGill in the Agreement or related agreements or documents.
(a) Claim Notice. In the event that an indemnified person reasonably determines that it is entitled to indemnification pursuant to indemnified person shall provide written notice to McGill, specifying in reasonable detail the nature and estimated amount of the claim.
(b) Third-Party Claims. If the claim specified in the claim notice relates to a third-party claim, McGill shall have 15 days after his receipt of the claim notice to notify the indemnified person whether McGill agrees that the claim is subject to indemnification pursuant to this Section 5 and whether McGill elects to defend such third-party claim at his own expense. If the claim relates to a third-party claim that McGill elects to defend, the indemnified person shall reasonably cooperate with such defense. The indemnified person shall, however, be entitled to participate in the defense or settlement of such a third-party claim through its own counsel and at its own expense and shall be entitled to approve or disapprove any proposed settlement that would impose a duty or obligation on the indemnified person. If McGill does not timely elect to defend a third-party claim, or if McGill fails to conduct such defense with reasonable diligence, the indemnified party may conduct the defense of, or settle, such claim at the risk and expense of McGill.
(c) Claims Other Than Third-Party Claims. If the claim does not relate to a third-party claim, McGill shall have 30 days after receipt of the claim notice to notify the indemnified party in writing whether McGill accepts liability for all or any part of the claim and the method and timing of any proposed payment. If McGill does not so notify the indemnified party, McGill shall be deemed to have accepted liability for all damages described in the claim notice.
5.3 Set-Off During First Twenty-Nine Months. Notwithstanding anything to the contrary in Section 5.2, in the event that PCTH or the Subsidiary reasonably determines at any time prior to completion of payments for the twenty-nine months following Closing that PCTH or the Subsidiary is entitled to indemnification pursuant to Section 5.1, PCTH shall be entitled to pay the amount of any such claim to an escrow agent as payment to McGill would otherwise become due, instead of to McGill as part of the remaining payments due McGill. In the event that PCTH pays any such disputed amount to an escrow agent and the parties are not able to mutually resolve the dispute within 10 business days after the last payment due, the parties shall submit the dispute to arbitration. Arbitration under this section shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association, in King County, Washington, by one attorney arbitrator selected by mutual agreement, or by three arbitrators if the parties are unable to agree on a single arbitrator within 20 days of the first demand for arbitration. All arbitrators are to be selected from a panel provided by the American Arbitration Association. The arbitrators shall have the authority to permit discovery, to the extent deemed appropriate by the arbitrators, upon request of a party. The arbitrators shall have no power or authority to add to or detract from the agreements of the parties. The cost of the arbitration shall be borne equally pending the arbitrator's award. The arbitrators shall have no authority to award punitive or consequential damages. The resulting arbitration award may be enforced by all lawful remedies, including without limitation injunctive or other equitable relief obtained in any applicable court located in King County, Washington.
6.1 Noncompetition Covenant. McGill agrees that, for five years following the Closing Date, he will not directly or indirectly engage in or perform any services to, or provide individuals to perform such services to, whether on an employment, a consulting or an advisory basis, or own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation or control of any business or undertaking that directly or indirectly competes with the business of PCTH or the Subsidiary or any affiliate thereof in an area of technology that is related to earthquake gas and electricity shutoff and actuator apparatus that are activated by seismic activity, this area of technology specifically excluding, without limitation, technology related to leak-detecting shutoff systems, earthquake alarms and P wave alarms.
6.2 Right of First Refusal. For five years following the Closing Date, PCTH and the Subsidiary shall have the right of first refusal to purchase any technology, product, prototype or concept which McGill develops, or helps develop, related to the subject matter of the Patents ("Subsequent Technology"), which right may be exercised on an exclusive basis within three months after PCTH or the Subsidiary receives written notice from McGill of the existence of the Subsequent Technology. The terms of any such exercise shall be agreed upon by PCTH or the Subsidiary and McGill. Prior to and during the three-month exclusive period, McGill will not entertain offers from any third party for the Subsequent Technology. PCTH and the Subsidiary shall have the further right, after expiration of any such three-month exclusive period, to match any other offer made for the Subsequent Technology, within one month of receiving notice of such offer, by giving written notice of its intention to match such offer. McGill agrees to notify PCTH and the Subsidiary promptly upon determining that any Subsequent Technology is available and to notify PCTH and the Subsidiary promptly in the event that any offer for Subsequent Technology is received from a third party. If no terms are agreed upon by PCTH or the Subsidiary and McGill, or no matching offer is made by PCTH or the Subsidiary within the applicable time periods, McGill will be free to manufacture, market, sell, distribute, license or otherwise dispose of the Subsequent Technology at his discretion and notwithstanding any other provisions of this Agreement. In the event that a person other than McGill has rights to Subsequent Technology because such person is a co-inventor or co-developer thereof, McGill will use his best efforts to provide to PCTH and the Subsidiary the rights described in this Section with respect to such person's interest.
6.3 Further Assurances. McGill agrees that, from time to time and after execution of this Agreement, he will, upon the request of PCTH or the Subsidiary and without further consideration, take all steps reasonably necessary to place the Subsidiary in possession of full record and actual title to the Patents and full operating control of all rights to make, use and sell the products embodying the Patents, and full operating control of all rights to make, use and sell the products embodying the patents, and he will do or have done, execute or have executed, and deliver or have delivered, all further acts, assignments, powers of attorney, and acknowledgements or assurances as reasonably required to assign to and vest in the Subsidiary all his right, title, and interest in the Patents.
6.4 Confidentiality. The terms and conditions of this Agreement and all information and materials, including all financial statements and business information, know-how, techniques and other proprietary materials and intellectual property used in the conduct of the respective businesses of the parties hereto as now conducted or as proposed to be conducted, that have been divulged or provided during the negotiation of this Agreement are the confidential information of the party owning such information and materials (the "Confidential Information"). Unless the owner of the relevant Confidential Information consents in writing to the contrary, no Confidential Information shall be divulged, except on a need to know basis to directors, officers or key employees involved in the transactions contemplated hereby and such third party consultants as need the Confidential Information for tax, accounting, or similar purposes or as required by applicable law; provided that this obligation will not apply to PCTH or the Subsidiary after the Closing Date.
6.5 Disclosure. Any press release or public disclosure regarding the execution of this Agreement or the terms hereof will be made at the sole discretion of PCTH or the Subsidiary.
6.6 Maintenance After Closing. PCTH and the Subsidiary shall be responsible for all costs, services and fees involved with prosecution, allowance, registration and maintenance of the Patents and Related Intellectual Property that arise after Closing.
6.7 Performance of Subsidiary Obligations. Subject to the consummation of the Closing, PCTH agrees to carry out the obligations of the Subsidiary in the event that the Subsidiary fails to carry out any of its obligations to Sellers under this Agreement, including any obligations pursuant to Sections 1.2 or 1.3, above.
7. CONDITIONS PRECEDENT TO CLOSING.
7.1 Conditions to the Obligations of PCTH and the Subsidiary. The obligations of PCTH and the Subsidiary to close the transaction contemplated in this Agreement are subject to the fulfillment, at or prior to Closing (unless waived in writing by PCTH):
(a) Representations and Warranties. The representations and warranties of McGill contained herein shall be true and correct in all material respects as of Closing as if made at Closing;
(b) Closing Documents. McGill shall have executed and delivered to PCTH and the Subsidiary all documents required to be delivered by McGill pursuant to this Agreement, in form reasonably satisfactory to PCTH and its counsel.
7.2 Conditions Precedent to the Obligations of McGill. The obligations of McGill to close the transaction contemplated in this Agreement are subject to the fulfillment, at or prior to Closing, of the following conditions (unless waived in writing by McGill):
(a) Representation and Warranties. The representations and warranties of PCTH and the Subsidiary contained herein shall be true and correct in all material respects as of Closing as if made at Closing; and
(b) Purchase Price. PCTH shall have delivered the first $5,000 payment of the Purchase Price.
7.3 Condition Precedent to the Obligations of All Parties. The obligations of all parties to close the transaction contemplated in this Agreement are subject to the Closing, prior to or simultaneously with the Closing, of the purchase by PCTH or the Subsidiary of (i) substantially all of the assets of Seismic Safety Products, Inc., a Florida corporation, and (ii) certain intellectual property owned by McGill and Antonio F. Fernandez.
8.1 Waiver or Modification of Agreement. No modification or waiver of any provision of this Agreement, nor any consent to any departure by either party herefrom, shall in any event be effective unless the same shall be in writing and signed by the party against which enforcement of such modification or waiver is sought, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
8.2 Amendment of Agreement. This Agreement may be amended with respect to any provision contained herein by a written instrument duly executed on behalf of each party hereto.
8.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when personally delivered, or three days after deposited in the United States mail, first-class, postage prepaid, or by facsimile addressed to the respective parties hereto as follows:
If to PCTH or the Subsidiary:
36th Floor, One Union Square
or to such other address as to any party hereto as such party shall designate by like notice to the other parties hereto.
8.4 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which counterparts collectively shall constitute one instrument, and in making proof of this Agreement, it shall never be necessary to produce or account for more than one such counterpart.
8.5 Survival of Representations and Warranties. The representations and warranties of the parties contained in this Agreement shall survive the Closing.
8.6 Expenses. Each of the parties hereto will bear all costs, charges and expenses incurred by such party in connection with this Agreement and the consummation of the transactions contemplated herein.
8.7 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of PCTH, the Subsidiary and McGill, and their representatives, successors, and permitted assigns, in accordance with the terms hereof. PCTH and the Subsidiary agree that any sale, transfer, assignment or conveyance of the Patents to another party shall be made expressly subject to the terms, conditions and provisions of this Agreement.
8.8 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, representations, warranties, statements, promises, information, arrangements and understandings, whether oral or written, express or implied, with respect to the subject matter hereof.
8.9 Governing Law. This Agreement and its validity, construction, enforcement, and interpretation shall be governed by the substantive laws of the State of Washington.
8.10 Attorneys' Fees. If suit, action or appeal is filed by any party to enforce the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and expenses.
8.11 Invalid Provisions. If any provision of this Agreement is deemed or held to be illegal, invalid or unenforceable, this Agreement shall be considered divisible and inoperative as to such provision to the extent it is deemed to be illegal, invalid or unenforceable, and in all other respects this Agreement shall remain in full force and effect; provided, however, that if any provision of this Agreement is deemed or held to be illegal, invalid or unenforceable there shall be added hereto automatically a provision as similar as possible to such illegal, invalid or unenforceable provision and be legal, valid and enforceable. Further, should any provision contained in this Agreement ever be reformed or rewritten by any judicial body of competent jurisdiction, such provision as so reformed or rewritten shall be binding upon all parties hereto.
8.12 Remedies Cumulative. The remedies of the parties under this Agreement are cumulative and shall not exclude any other remedies to which any party may be lawfully entitled.
8.13 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 further exercise thereof or the exercise of any other right, power, or privilege.
8.14 Headings. The descriptive section headings are for convenience of reference only and shall not control or affect the meaning or construction of any provision of this Agreement.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly executed as of the date and year first above written.
PCT HOLDINGS, INC., a Washington
By /s/ DONALD A. WRIGHT
SEISMIC SAFETY PRODUCTS, INC., a | 10QSB | EX-10.3 | 1996-01-16T00:00:00 | 1996-01-16T17:17:04 |
0000912057-96-000503 | 0000912057-96-000503_0003.txt | AMONG SIGNET PAGING OF RALEIGH, 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
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
2.1 Due Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.4 Purchaser Information . . . . . . . . . . . . . . . . . . . . . . . . 5 2.5 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
OF THE SELLER AND THE SHAREHOLDERS
3.1 Due Organization; Ownership . . . . . . . . . . . . . . . . . . . . . 6 3.2 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.3 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.4 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.5 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 7 3.6 Conduct of Business; Certain Actions. . . . . . . . . . . . . . . . . 7 3.7 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.8 Pagers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.9 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . . . . . 9 3.10 Intellectual Rights . . . . . . . . . . . . . . . . . . . . . . . . . 10 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 . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.22 Customers and Suppliers . . . . . . . . . . . . . . . . . . . . . . . 14 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 Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.28 Sophisticated Investor Status . . . . . . . . . . . . . . . . . . . . 15 3.29 Investment Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.30 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.31 Purchaser Information . . . . . . . . . . . . . . . . . . . . . . . . 16
COVENANTS OF THE SELLER AND THE SHAREHOLDER
4.1 Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.2 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.3 Satisfaction of All Conditions Precedent. . . . . . . . . . . . . . . 17 4.4 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.5 Notice of Developments. . . . . . . . . . . . . . . . . . . . . . . . 17 4.6 Notice of Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.7 Notice of Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 17 4.8 Continuation of Insurance Coverage. . . . . . . . . . . . . . . . . . 18 4.9 Maintenance of Credit Terms . . . . . . . . . . . . . . . . . . . . . 18 4.10 Updating Information. . . . . . . . . . . . . . . . . . . . . . . . . 18 4.11 Interim Operations of the Seller. . . . . . . . . . . . . . . . . . . 18 4.12 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 19 4.13 Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.14 Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
REGULATORY APPROVALS . . . . . . . . . . . . . .20
6.1 Conditions to Obligations of the Purchaser. . . . . . . . . . . . . . 21 6.2 Conditions to Obligations of the Seller . . . . . . . . . . . . . . . 23
TERMINATION . . . . . . . . . . . . . . . .24
8.1 Indemnification of the Purchaser. . . . . . . . . . . . . . . . . . . 24 8.2 Indemnification of the Seller and the Shareholder . . . . . . . . . . 24 8.3 Defense of Third-Party Claims . . . . . . . . . . . . . . . . . . . . 25 8.4 Direct Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.5 Right of Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.1 Collateral Agreements, Amendments, and Waivers. . . . . . . . . . . . 27 9.2 Restriction on Transfer of Common Stock . . . . . . . . . . . . . . . 27 9.3 Bulk Sales Compliance . . . . . . . . . . . . . . . . . . . . . . . . 27 9.4 Risk of Loss - Damage to Transferred Assets . . . . . . . . . . . . . 28 9.5 Prorations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.6 Allocation of Purchase Price. . . . . . . . . . . . . . . . . . . . . 28 9.7 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.8 Seller's Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 29 9.9 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . 29 9.10 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.11 Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.12 Invalid Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.13 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.14 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.15 Survival of Representations, Warranties, and Covenants. . . . . . . . 31
9.16 Public Announcement . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.17 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.18 No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . . . . . 31 9.19 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.20 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.21 Sections; Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.22 Number and Gender of Words. . . . . . . . . . . . . . . . . . . . . . 32 9.23 Specific Performance. . . . . . . . . . . . . . . . . . . . . . . . . 32
A - Bill of Sale C - Form of Opinion of Counsel to the Seller and the Shareholders D - Form of Opinion of FCC Counsel to the Seller and the E - Noncompetition Agreement - W. David Sweatt F - Noncompetition Agreement - Sam A. Miles G - Noncompetition Agreement - Lee Miles H - Noncompetition Agreement - Seller J - Registration Rights Agreement L - Form of Opinion of Counsel to the Purchaser M - Allocation of Purchase Price
This Asset Purchase Agreement (this "Agreement") is made and entered into as of September 27, 1995, by and among SigNet Paging of Raleigh, Inc., a North Carolina corporation (the "Seller"), W. David Sweatt (the "Shareholder"), and Contact Communications Inc., a Delaware corporation (the "Purchaser").
R E C I T A L S
A. The Shareholder owns all the outstanding capital stock 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 (such property, assets, and business, including all 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.
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 ANNEX 8 TO SCHEDULE 1.1 hereto and transferred to the Purchaser at the Closing (as hereinafter defined) (such deposits and the Assumed Contracts collectively referred to herein as the "Assumed Liabilities").
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 with respect to (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 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, 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 by the Seller to the Purchaser under Section 1.1 hereof and the assumption of liabilities under this Section 1.3 by the Purchaser, 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 this 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 occurring after the Closing Date, (i) any liability of the Seller to its shareholder, 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 Shareholder or distributions in liquidation, or (j) any other liability or obligation of the Seller other than the Assumed Contracts. Any liabilities of Seller not expressly assumed by the Purchaser pursuant to this Section 1.3 shall be Indemnified Costs (as hereinafter defined) and, as such, shall be subject to offset by the Purchaser pursuant to Section 8.4 hereof.
1.4 PURCHASE PRICE. The aggregate purchase price payable by the Purchaser in consideration for the sale of the Transferred Assets shall be an amount equal to the remainder of (a) the sum of (i) $[3.4] million, payable on the Closing Date in cash, (ii) $2.4 million, payable on the Closing Date in shares of common stock, par value $.01 per share ("Common Stock"), of ProNet Inc., a Delaware corporation and the parent corporation of the Purchaser ("ProNet"), valued at the Average Closing Price (hereinafter defined) as of the Closing Date, and payable in cash as provided in the last sentence of this paragraph if the Common Stock is not then registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and quoted on The Nasdaq Stock Market (or other quotation system or securities exchange), (iii) $800,000 (the "Deferred Amount"), to be paid at any time on or before the first anniversary of the Closing Date (such date being referred to herein as the "Deferred Payment Date"), and payable in shares of Common Stock valued at the Average Closing Price as of the Deferred Payment Date, or cash, in the discretion of the Purchaser, plus (iv) an amount calculated in accordance with the provisions of APPENDIX A, provided that the number of pagers in service in the System exceeds 13,000 pagers (the "Pager Adjustment Amount"), minus (b) the sum of (i) an amount equal to the product of (A) $615 multiplied by the remainder of (B) 12,800 minus the number of pagers in service in the System as of the Closing Date (if the number of pagers in service in the System is less than 12,800), provided that the number of pagers in service in the System exceeds 12,000 pagers, plus (ii) the amount of any revenues collected by the Seller prior to the Closing Date in respect of services or merchandise to be provided to customers of the System after the Closing Date (collectively, the "Purchase Price"). As used herein, "Average Closing Price" means the average closing price of the Common Stock on The Nasdaq Stock Market (or such other quotation system or securities exchange on which the Common Stock is then quoted or listed) as reported by the Wall Street Journal for the 20 consecutive trading days beginning 25 trading days prior to the Closing Date or the Deferred Payment Date, as applicable; provided, however, that if the Average Closing Price on the Closing Date or the Deferred Payment Date, as applicable, exceeds $22.00, then the number of shares of Common Stock to be delivered to the Seller on such date shall be calculated by dividing the portion of the Purchase Price to be paid in Common Stock on such date by $22.00; and provided further that if the Average Closing Price on the Closing
Date or the Deferred Payment Date, as applicable, is less than $18.00, then the number of shares of Common Stock to be delivered to the Seller on such date shall be calculated by dividing the portion of the Purchase Price to be paid in Common Stock on such date by $18.00. Notwithstanding clause (a)(ii) of this Section 1.4, if the Common Stock is not registered pursuant to Section 12 of the Exchange Act and quoted on The Nasdaq Stock Market (or other quotation system or securities exchange) then the portion of the Purchase Price described in clause (a)(ii) above to be paid in cash rather than in shares of Common Stock shall not be $2.4 million but shall be an amount equal to the cash value (calculated on the basis of the closing price of the Common Stock on the last day on which it is so registered and traded) of that number of shares of Common Stock that would have been payable to the Seller as provided in the preceding sentence had the Closing occurred on the last day on which the Common Stock was so registered and traded.
The cash portion of the Purchase Price shall be paid by certified bank check or wire transfer of immediately available funds. As additional consideration for the sale of the Transferred Assets, the Purchaser shall assume certain of the Seller's obligations under or with respect to the Assumed Contracts in accordance with Section 1.3 hereof.
(a) CLOSING DATE. The closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of Vinson & Elkins L.L.P., 2001 Ross Avenue, Suite 3700, Dallas, Texas, 75201, 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 on such other date as the parties may agree, provided that the Closing shall not occur between December 15 and December 31, 1995. 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, (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"), and (B) deliver to the Seller a certified bank check or wire transfer for the amount of the cash portion of the Purchase Price, certificates representing the shares of Common Stock to be paid on the Closing Date as provided in Section 1.4 hereof, and a promissory note in the form of EXHIBIT K hereto. At the Closing, ProNet shall execute and deliver to the Seller the Registration Rights Agreement in the form of EXHIBIT J hereto. Any Common Stock issued in respect of the Deferred Amount shall be delivered to the Seller at its address set forth in Section 9.14 hereof.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller and the Shareholder as follows (with the understanding that the Seller and the Shareholder 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 each 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 respective properties and to carry on their respective businesses as, and in the places where, such properties are owned or leased and such business is conducted. The Purchaser is a wholly owned subsidiary of ProNet.
2.2 DUE AUTHORIZATION. The Purchaser and ProNet each have full corporate power and corporate authority to enter into and perform their respective obligations under this Agreement and each agreement, document, and instrument required to be executed by either of them in accordance herewith. This Agreement and any the other agreements, documents, and instruments required to be executed and delivered by the Purchaser or ProNet in accordance herewith have been, or by the Closing shall have been, duly and validly executed and delivered by the Purchaser or ProNet, as applicable, and shall, upon their execution, constitute valid and binding obligations of the Purchaser or ProNet, as applicable, enforceable in accordance with their respective terms.
2.3 COMMON STOCK. The Common Stock to be issued by ProNet to the Seller in partial payment of the Purchase Price, when issued and delivered in accordance with the terms of this Agreement, will be duly authorized, validly issued, fully paid, and non-assessable.
2.4 PURCHASER INFORMATION. The Purchaser has delivered to the Seller true and correct copies of the ProNet's most recent Proxy Statement, Annual Report on Form 10-K, and Quarterly Report on Form 10-Q (the "ProNet Filings").
2.5 BROKERS. Except for a fee to Daniels & Associates, the obligation for payment of which is and shall remain the sole responsibility of the Purchaser, the Purchaser has not 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.
OF THE SELLER AND THE SHAREHOLDERS
The Seller and the Shareholder each hereby jointly and severally represent and warrant to the Purchaser as follows (with the understanding that the Purchaser is relying materially on each such representation and warranty in entering into and performing this Agreement):
3.1 DUE ORGANIZATION; OWNERSHIP. The Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of North Carolina and has full corporate power and corporate 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 and is in good standing 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 equity securities of the Seller are owned of record and beneficially as set forth on SCHEDULE 3.1 attached hereto. Except 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 any Shareholder 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 corporate power and corporate 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 Board of Directors of the Seller and the Shareholder. This Agreement and the agreements, documents, and instruments required to be executed and delivered by the Seller or the Shareholder in accordance herewith have been duly and validly executed and delivered by the Seller and/or the Shareholder and constitute valid and binding obligations of the Seller and/or the Shareholder 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 Shareholder in connection herewith shall (a) violate any Federal, state, county, or local law, rule, or regulation applicable to the Seller or the Shareholder, or its or his properties, (b) violate or conflict with, or permit the cancellation of, any agreement to which the Seller or the Shareholder is a party, or by which it or he or any of its or his 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 Shareholder, or (d) violate or conflict with any provision of the certificate of incorporation or by-laws 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 Shareholders or the Seller.
3.5 FINANCIAL STATEMENTS. The Seller has delivered to the Purchaser (a) a complete and correct copy of the audited statement of financial condition of the Seller as of December 31, 1994, and the related statements of operations and retained earnings for the period then ended (the "Audited Financial Statements"), (b) a complete and correct copy of the statement of financial condition of the Seller as of June 30, 1995, and the related statements of operations and retained earnings for the period then ended, each of which have been prepared by Ernst & Young LLP (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements"), (c) a complete and correct copy of the Seller's monthly internal management financial reports for the month ended July 31, 1995, (the "Financial Reports"), and (d) a complete and correct list of the Transferred Assets together with the book value of each such Transferred Asset as of June 30, 1995, which list is set forth on ANNEX 1 to SCHEDULE 1.1 attached hereto (the "June 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 year-end adjustments) and fairly present the financial position, results of operations, and changes in financial position of the Seller as of the indicated dates and for the indicated periods. The June 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. Since June 30, 1995, there has been no material adverse change in the financial position, assets, results of operations, business, or prospects of the System. To the best knowledge of the Seller and the Shareholder, there are no pending or proposed statutes, rules, or regulations, nor any current or pending developments or circumstances, which would have a material adverse effect on the business, properties, assets, or prospects of the System.
3.6 CONDUCT OF BUSINESS; CERTAIN ACTIONS. Except as set forth on SCHEDULE 3.6 attached hereto, since June 30, 1995, the Seller has conducted its business 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) made any capital expenditures exceeding $5,000 individually or $15,000 in the aggregate (other than purchases of pagers consistent with past practices and purchases of equipment necessary for the operation of the System), (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 $3,000, (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) cancelled, 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) 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 contract, agreement, lease, franchise, or license related to the conduct of the System to which the Seller is a party, except in the ordinary course of business, (l) entered into any other material transactions relating to the System except in the ordinary course of business, (m) entered into any contract, commitment, agreement, or understanding to do any acts described in the foregoing clauses (a)-(l) of this Section 3.6, (o) suffered any material damage, destruction, or loss (whether or not covered by insurance) to any of the Transferred Assets, (p) 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 (q) 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 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 zoning ordinances, municipal regulations, or other rules, regulations, or laws. 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 June 30, 1995. All of such pagers in service are operating pursuant to valid and binding rental and/or service agreements with the Seller or agents or resellers, no single subscriber or related group of subscribers accounts for more than five percent of the paging revenues attributable to the System, and the Seller and the Shareholder do not know of any current subscribers 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, "rental" means, with respect to any pager, provision of communications private carriage pursuant to Part 90 of the Communications Act of 1934, as amended, 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 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. Except as set forth on SCHEDULE 3.9, the Seller has complied and is in compliance with the terms and conditions of all licenses, authorizations, certificates, permits, and orders, and no violation of any such licenses, authorizations, certificates, permits, or orders, or the laws or rules governing the issuance or continued validity thereof, has occurred. 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. 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. The Seller is not infringing any patent, trademark, servicemark, tradename, or copyright of others, and neither the Seller nor the Shareholder is aware of any infringement by others of any such rights owned by the Seller.
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 Shareholder represent and warrant that they have complied 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. To the knowledge of the Seller and the Shareholder, none of the owners of any of the towers on which the Seller leases tower space has failed to comply in any material respect with any of the aforesaid rules, regulations, policies, precedents, and orders of the FCC or the FAA applicable to such owner in its capacity as a tower owner. No claim has been made by any governmental authority (and, to the best knowledge of the Seller and the Shareholder, 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. Without limiting the foregoing, the Seller has complied with all judicial and governmental requirements relating to pollution and environmental control and regulation and employee health and safety including, but not limited to, 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 policies of fire, liability, business interruption, and other forms of insurance and all or applicable to the Seller at any time within the past three years, 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. 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 in such 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 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 could reasonably be expected to have a value in excess of $5,000 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 Shareholder have 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. Except as set forth on SCHEDULE 3.14 attached hereto, the Seller is not and, to the best knowledge of the Seller and the Shareholder, 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 Shareholder 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.
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 Shareholder, 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 Shareholder, 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. To the best knowledge of the Seller and the Shareholder, 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. 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. 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 Shareholder, there is no basis for any Seller Tax Actions. There are no liens for Taxes, penalties, interest, or additions to Taxes on any of the assets of the Seller. 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 directors, officers, shareholders, and 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
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, plans, and 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 Shareholder, 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 Shareholder, threatened against or involving the Seller.
3.18 BUSINESS RELATIONS. Neither the Seller nor the Shareholder knows or has any reason to believe that any customer or supplier of 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 and, except as previously disclosed in writing to the Purchaser by the Seller, neither the Seller nor the Shareholder is aware of any facts which could lead any of them to believe that the operation of the System will be subject to any such material disruption.
3.19 BROKERS. Neither the Seller nor the Shareholder 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. Attached hereto as SCHEDULE 3.20 is a list and brief description of all warranties and guarantees made by the Seller to third parties with respect to any products sold or leased or services rendered by the Seller in connection with the operation of the System. Except as set forth on SCHEDULE 3.20 attached hereto, no claims for breach of product or service warranties to customers have been made against the Seller since January 1, 1992. To the best knowledge of the Seller and the Shareholder, 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 and payable. The weighted average age of the Seller's accounts receivable does not exceed 15 days. 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 (a) the ten largest customers (measured in dollar volume of revenue) of the System during the years ended December 31, 1993, and December 31, 1994, (b) the ten largest suppliers (measured in dollar volume of purchases) of the System during the years ended December 31, 1993, and December 31, 1994, and (c) with respect to each such customer and supplier, the name and address thereof, dollar volume involved, and nature of the relationship (including the principal categories of products bought, sold, and leased).
3.23 INTEREST IN COMPETITORS, SUPPLIERS, AND CUSTOMERS. Except as set forth in SCHEDULE 3.23, neither the Seller, the Shareholder, nor any officer or director 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 the June Asset List consist of (and the inventories of the Seller at the Closing will consist of) items of a quality and quantity usable and readily saleable in the ordinary course of business by the Seller.
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. Neither the Seller nor the Shareholder is aware of any information 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 INVESTMENT. The Seller is acquiring the Common Stock, if any, from the Purchaser pursuant hereto for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof (including, without limitation, any sale, transfer, distribution, or other conveyance to the Shareholder), nor with any present intention of distributing or selling the same; and, other than pursuant to the provisions of the Registration Rights Agreement attached as EXHIBIT I hereto, the Seller has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness, or commitment providing for the disposition thereof.
3.28 SOPHISTICATED INVESTOR STATUS. The Seller is an Accredited Investor, as such term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended (the "Securities Act").
3.29 INVESTMENT RISK. The Seller acknowledges and agrees that the acquisition by the Seller of Common Stock, if any, from the Purchaser pursuant to this Agreement carries a certain degree of risk and it has taken full cognizance of and understands all of the risks related to the acquisition of Common Stock.
3.30 LEGENDS. The Seller understands, acknowledges, and agrees that a legend will be placed on all certificates evidencing the Common Stock in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE STATE SECURITIES LAWS OF ANY STATE. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED AT ANY TIME WHATSOEVER, EXCEPT UPON DELIVERY TO PRONET INC., A DELAWARE CORPORATION (THE "COMPANY"), OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER AND/OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE COMPANY THAT ANY SUCH TRANSFER WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, AND/OR APPLICABLE STATE SECURITIES LAWS, AND/OR ANY RULE OR REGULATION PROMULGATED THEREUNDER.
In addition, the Seller acknowledges and agrees that a legend evidencing the restrictions on transfer set forth in Section 9.2 hereof will be placed on all certificates evidencing Common Stock delivered at the Closing.
3.31 PURCHASER INFORMATION. The Seller has received from the Purchaser copies of the ProNet Filings. The Seller has carefully read or reviewed and is familiar with the ProNet Filings. The Seller and the Seller's representatives all have had an opportunity to ask questions of persons acting on behalf of the Purchaser and ProNet regarding ProNet and the Common Stock, and answers have been provided to all such questions to the Seller's satisfaction.
3.32 INFORMATION FURNISHED. The Seller and the Shareholder have made available to the Purchaser and its officers, attorneys, accountants, lenders, and representatives true and correct copies of all agreements, documents, and other items listed on the schedules to this Agreement and all books and records of the Seller, and neither this Agreement, 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 SHAREHOLDER
4.1 INSPECTION. From the date hereof to the Closing, the Seller and the Shareholder shall provide the Purchaser and the Purchaser's officers, attorneys, accountants, representatives, and lenders free, full, and 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 information and material pertaining to the business and affairs of the Seller as the Purchaser may deem necessary or appropriate; and use their best efforts to afford the Purchaser and its officers, attorneys, accountants, and representatives the opportunity to meet with the customers and suppliers of the Seller to discuss the business, condition (financial or otherwise), operations, and prospects of the Seller. 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 Shareholder contained herein.
4.2 COMPLIANCE. From the date hereof to the Closing, neither the Seller nor the Shareholder 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 Shareholder 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 Shareholder 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 5:00 p.m., Dallas time, on January 31, 1996, the Seller and the Shareholder 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 5:00 p.m. Dallas time on January 31, 1996, the Seller and the Shareholder agree that neither the Seller nor the Shareholder 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 Shareholder 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 Shareholder shall, immediately upon the Seller or the Shareholder 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 Shareholder shall, immediately upon the Seller or the Shareholder 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 Shareholder 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 Shareholder shall, immediately upon the Seller or the Shareholder 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 Shareholder 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 Shareholder shall cause the Seller to continue) to effect sales and leases of its products only on the terms that have historically been offered by the Seller or on such other terms which are no less favorable to the Seller.
4.10 UPDATING INFORMATION. As of the Closing, the Seller and the Shareholder 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 Shareholder 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) issue or sell, or authorize for issuance or sale, additional shares of any class of capital stock, or issue, grant, or enter into any subscription, option, warrant, right, convertible security, or other agreement or commitment of any character obligating the Seller to issue securities, (ii) declare, set aside, make, or pay any dividend or other distribution with respect to its capital stock (other than dividends (A) paid to the Shareholder in respect of Federal income tax liability resulting from the operations of the Seller, (B) consistent with past practice, or (C) that could not reasonably be expected to adversely affect the operating cash flow of the Seller), (iii) redeem, purchase, or otherwise acquire, directly or indirectly, any of its capital stock, (iv) 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 $5,000 (other than sales out of inventory, sales and dispositions consistent with past practices, and dispositions of obsolete equipment with notice thereof to the Purchaser), (v) 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, (vi) incur any indebtedness for borrowed money, issue
or enter into or modify any contract, agreement, commitment, or arrangement with respect thereto, (vii) 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, (viii) enter into, extend, or renew any lease for office space used in connection with the operation of the System, or (ix) 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, (x) grant any increase in compensation to any director, officer, consultant, or key employee of the System, or (xi) 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. In addition, the Seller shall continue to write off accounts receivable balances in accordance with its historical practices.
(b) From the date hereof to the Closing, the Seller shall use (and the Shareholder shall cause the Seller to use) their 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 30 days after the end of each calendar month beginning with August 1995, the Seller shall furnish to the Purchaser a balance sheet, statement of income and retained earnings, and statement of changes in financial position of the System for such month prepared by the Seller as an internal management control in accordance with the generally accepted accounting principles 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, results of operations, and changes in financial position as of the indicated dates and for the indicated periods.
4.13 ASSIGNMENTS. From the date hereof until the Closing, the Seller and the Shareholder shall use their best efforts to obtain all necessary consents to 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 Shareholder 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 all licenses, authorizations, certificates, permits, and orders listed on ANNEX 7 to SCHEDULE 1.1 hereto.
With the full cooperation and assistance of the Seller and the Shareholder as contemplated in Section 4.14 hereof, within 30 days after the date hereof, the Purchaser shall file with the FCC, the FAA, and with all state regulatory agencies, commissions, or other entities having jurisdiction over the System, applications for consent to transfer to the Purchaser of Radio Station Authorizations ("Authorizations") for the System, 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, 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. The obligations of the Purchaser 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 Shareholder 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 Shareholder 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 Shareholder at or prior to the Closing; and the Purchaser shall have received a certificate, dated as of the Closing Date, signed by the President of the Seller and by the Shareholder 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 Bailey & Dixon, L.L.P., counsel for the Seller, dated as of the Closing Date, in the form attached hereto as EXHIBIT D.
(d) The Purchaser shall have received an opinion of Joyce & Jacobs, FCC counsel for the Seller and the Shareholder, dated as of the Closing Date, in the form attached hereto as EXHIBIT E.
(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; there shall have been no material adverse change in the financial condition, business, properties, operations, or prospects of the System since June 30, 1995; 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.
(g) As of the Closing Date, the System shall include at least 12,000 pagers in service, and the Purchaser shall have received a certificate, dated as of the Closing Date, signed by the President of the Seller to the foregoing effect.
(h) As of the Closing Date, the inventory of the System shall include at least 400 current model, marketable pagers, and the Purchaser shall have received a certificate dated as of the Closing Date signed by the President of the Seller to the foregoing effect.
(i) All consents and approvals (i) listed on SCHEDULE 3.4 hereto and (ii) otherwise required in connection with the execution, delivery, and performance of this Agreement shall have been obtained or waived and all such consents and approvals shall be in form and content reasonably satisfactory to the Purchaser.
(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 President of the Seller to the foregoing effect.
(k) The Purchaser shall have received from the Seller a duly executed Bill of Sale and all such other instruments as shall be necessary or desirable in the reasonable opinion of the Purchaser's counsel to vest in or confirm in the Purchaser good and indefeasible title to the Transferred Assets in accordance herewith.
(l) The Shareholder, Sam Miles, Lee Miles, and the Seller shall each have entered into a Noncompetition Agreement (a "Noncompetition Agreement") with the Purchaser substantially in the forms attached hereto as EXHIBITS E, F, G, and H, respectively.
(m) The Seller shall have duly executed and delivered to the Purchaser the License Agreement substantially in the form attached hereto as EXHIBIT I granting the Purchaser the right to the use of the name "SigNet Paging" in the area presently served by the System.
(n) The Seller and ProNet shall have entered into a Registration Rights Agreement substantially in the form of EXHIBIT J hereto providing that ProNet shall prepare and file with the Securities and Exchange Commission (the "SEC") a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 (or any appropriate similar rule that may be adopted by the SEC) under the Securities Act (the "Shelf Registration") covering all of the Common Stock issued to the Seller pursuant to this Agreement, if any.
(o) The Seller shall have delivered to the Purchaser assignments of the Real Estate Leases.
(p) The Seller and the Shareholder shall have delivered such good standing certificates, officer's certificates, and similar documents and certificates as counsel for the Purchaser shall have reasonably requested prior to the Closing Date.
The decision of the Purchaser 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 Shareholder's respective representations, warranties, covenants, or indemnities herein.
6.2 CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligations of the Seller to consummate the transactions contemplated hereby are subject to the fulfillment of the following conditions:
(a) The representations and warranties of the Purchaser 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 at or prior to the Closing shall have been performed in all material respects; and the Seller and the Shareholder shall have received a certificate, dated as of the Closing Date, signed by the President of the Purchaser to the foregoing effects.
(b) The Purchaser shall have delivered to the Seller (i) a certified bank check or wire transfer in the amount of the cash portion of the Purchase Price to be paid on the Closing Date and (ii) certificates evidencing the shares of Common Stock in the amount of the balance of the Purchase Price to be paid on the Closing Date in accordance with and as specified in Section 1.4 hereof.
(c) The Purchaser shall have delivered to the Seller an Assumption Agreement substantially in the form attached hereto as EXHIBIT C with respect to the Assumed Liabilities.
(d) The Purchaser shall have entered into the Noncompetition Agreements with the Seller, the Shareholder and Sam Miles.
(e) The Seller and ProNet shall have entered into the Registration Rights Agreement.
(f) The Purchaser shall have executed and delivered to the Seller a promissory note substantially in the form of EXHIBIT K attached hereto.
(g) The Seller shall have received an opinion of Vinson & Elkins L.L.P., counsel to the Purchaser, substantially in the form of EXHIBIT L attached hereto.
This Agreement may be terminated prior to the Closing by (a) the mutual consent of the Purchaser and the Seller, (b) the Seller upon the failure of the Purchaser 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 hereunder shall not have been true and correct as of the time at which such representation or warranty was made, (c) the Purchaser upon the failure of the Seller or the Shareholder 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 Shareholder hereunder shall not have been true and correct as of the time at which such representation or warranty was made, (d) the Purchaser in accordance with the provisions of Article 5 hereof, and (e) the Seller or the Purchaser if the Closing does not occur by January 31, 1996; provided, that no party may terminate this Agreement pursuant to (b), (c), or (e) 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. The Seller and the Shareholder jointly and severally agree to indemnify and hold harmless the Purchaser and each officer, director, employee, attorney, accountant, stockholder, and affiliate of the Purchaser (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 9.3 hereof), demands, charges, suits, penalties, costs, and expenses (including court costs and 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 Purchaser Indemnified Parties may be subjected, arising out of any breach or default by the Seller or the Shareholder 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 SHAREHOLDER. The Purchaser agrees to indemnify and hold harmless the Seller, the Shareholder, and each officer, director, employee, attorney, and accountant of the Seller
Parties" and together 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 attorneys' fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, the "Seller Indemnified Costs" and together 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 or relating to any breach or default by the Purchaser 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.
8.3 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. 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. 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 to have common counsel);
(b) The Indemnifying Parties shall obtain the prior written approval of the Indemnified Party before entering into or making any settlement, compromise, admission, or acknowledgement 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 acknowledgement, 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 acknowledgement
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
(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 acknowledgement 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 acknowledgement 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 8.3 hereof because no third-party action is involved, the Indemnified Party shall notify the Indemnifying Parties in writing of any Indemnified Costs which such Indemnified Party claims are subject to indemnification under the terms hereof. 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.
8.5 RIGHT OF OFFSET. The Seller and the Purchaser agree that the Purchaser shall have the right to offset the amounts of any Purchaser Indemnified Costs by reducing the Deferred Amount in an amount equal to the amount of any such Purchaser 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 other than the confidentiality provisions set forth in paragraph 2 of that certain letter of intent dated July 10, 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 RESTRICTION ON TRANSFER OF COMMON STOCK. The Seller hereby agrees and acknowledges that the shares of Common Stock to be received by the Seller on the Closing Date (the "Transferred Shares") shall be subject to the following restrictions on transfer. The Seller shall only be permitted to sell, assign, transfer, or otherwise dispose of that number of Transferred Shares equal to 8.33 percent of the total number of Transferred Shares delivered to the Seller at Closing in each calendar month beginning on the six month anniversary of the Closing Date, for a period of 12 calendar months following such date, provided that any shares of Common Stock so released may be transferred at any time and from time to time after such release; PROVIDED, HOWEVER, that the Seller shall be permitted (a) to make a bona fide pledge of the Transferred Shares as security for indebtedness incurred contemporaneously with the making of such pledge, so long as the pledgee agrees with the Purchaser in writing to be bound by foregoing restrictions on transfer in the event of a foreclosure or other manner of realizing upon any of the Transferred Shares so pledged, and (b) a transfer or disposition in compliance with applicable law to (i) the Shareholder, (ii) the Shareholder's spouse or descendants, or (iii) a trust solely for the benefit of the Shareholder, the Shareholder's spouse or any of the Shareholder's descendants. The Seller shall not be obligated to transfer any of the Transferred Shares and upon the expiration of 18 months following the Closing Date, the Transferred Shares shall be released from the foregoing restriction. There shall be no contractual restriction on the timing of the sale, assignment, transfer, or other disposition of the shares of Common Stock, if any, delivered to the Seller in payment of the Deferred Amount.
9.3 BULK SALES COMPLIANCE. The Purchaser hereby waives compliance by the Seller with any laws governing bulk sales (to the extent such laws are applicable to the transactions contemplated by this Agreement). The Seller and the Shareholder hereby jointly and severally agree to indemnify the Purchaser for any liabilities incurred by the Purchaser as a result of such non-compliance or claims asserted against the Purchaser or any of the Transferred Assets in respect of debts, obligations, or liabilities of the Seller which were not assumed by the Purchaser pursuant to the Assumption Agreements. Any such liabilities shall be Indemnified Costs and, as such, shall be subject to offset by the Purchaser as provided in Section 8.5 hereof.
9.4 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.
9.5 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 under this Section 9.5, the same shall be determined by a nationally recognized accounting firm selected by the Purchaser in its sole and absolute discretion and any such determination shall be binding and conclusive on the parties hereto. The charges of such firm shall be shared equally by the Purchaser and the Seller.
9.6 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 M hereto.
9.7 RECORDS. At the Closing, the Seller and the Shareholder will turn over and deliver to the Purchaser all files of the Seller and the Shareholder 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 Shareholder's 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.
9.8 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.
9.9 SUCCESSORS AND ASSIGNS. No rights or obligations of any party hereto under this Agreement may be assigned (except that the Purchaser 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 to any successor entity to the Purchaser whether pursuant to a sale of all or substantially all of the Purchaser's assets, the merger, consolidation, liquidation, or dissolution of the Purchaser, or otherwise. If the Purchaser's rights under this Agreement are assigned to a successor entity, any portion of the Purchase Price that was required to be paid, or was payable, in Common Stock shall be payable in cash in accordance with Section 1.4 hereof. Any assignment, dissolution, or liquidation in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section 9.9, 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.
9.10 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.
9.11 SALES TAXES. The parties hereto expressly agree that the Seller shall be responsible for and shall pay all federal, state, county, or local taxes of the Seller and the Purchaser arising by reason of, or resulting from, the sale of the Transferred Assets and the assumption of liabilities contemplated hereby.
9.12 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.
9.13 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.
9.14 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: Vinson & Elkins L.L.P. 2001 Ross Avenue, Suite 3700
If to the Seller SigNet Paging of Raleigh, Inc. or the Shareholder: 2411-116E Millbrook Road
With a copy to: Bailey & Dixon, L.L.P.
Each party may change its or his address for purposes of this Section 9.14 by proper notice to the other parties.
9.15 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.
9.16 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.
9.17 FURTHER ASSURANCES. From time to time hereafter, (a) at the request of the Purchaser, but without further consideration, the Seller and the Shareholder 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 Shareholder, 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 Shareholder may reasonably request in order to more effectively consummate the transactions contemplated hereby.
9.18 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.
9.19 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina.
9.20 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.
9.21 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.
9.22 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.
9.23 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.
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.
[Seal] By: /s/ MARK A. SOLLS Mark A. Solls, Vice President and
SIGNET PAGING OF RALEIGH, INC.
[Seal] By: /s/ W. DAVID SWEATT
As an inducement to SigNet Paging of Raleigh, Inc., a North Carolina corporation (the "Seller"), and W. David Sweatt (the "Shareholder") entering into the Asset Purchase Agreement, dated today, with Contact Communications Inc., a Delaware corporation (the "Purchaser"), ProNet Inc. ("ProNet"), a Delaware corporation and the owner of all of the issued and outstanding capital stock of the Purchaser, hereby guarantees the full and prompt performance by the Purchaser of all obligations of the Purchaser under the Agreement, including the payment, when due, of all sums owing by the Purchaser to the Seller or the Shareholder under the Agreement. This Guarantee shall be governed by the laws of the State of North Carolina.
By: /s/ MARK A. SOLLS Title: Vice President and General Counsel
The Pager Adjustment Amount shall be equal to the sum of
(a) the sum of (i) product of (A) $65 times (B) the remainder of (1) the Closing Date Amount of pagers in service in the System pursuant to rental agreements with end users minus (2) 7,930 plus (ii) an amount equal to the Seller's cost with respect to any such additional pagers, plus
(b) the product of (i) $65 times (ii) the remainder of (A) the Closing Date Amount (as hereinafter defined) of co-am pagers in service in the System minus (B) 2,340, plus
(c) the product of (i) $25 times (ii) the remainder of (A) the Closing Date Amount of pagers in service in the System pursuant to agreements with resellers minus (B) 2,730.
With respect to any of the three categories of pagers described herein, "Closing Date Amount" shall mean the number of such pagers in service in the System as of 5:00 p.m. on the day immediately preceding the Closing Date as set forth in the officer's certificate to be delivered at Closing pursuant to Section 6.1(g) hereof.
BILL OF SALE AND ASSIGNMENT
) KNOW ALL MEN BY THESE PRESENTS:
THAT SigNet Paging of Raleigh, Inc., a North Carolina corporation ("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 September ___, 1995, by and among Grantor, W. David Sweatt, 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 the 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 North Carolina.
IN WITNESS WHEREOF, the undersigned has executed this Bill of Sale as of this __ day of _________, 1995.
SIGNET PAGING OF RALEIGH, INC.
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 SigNet Paging of Raleigh, Inc., a North Carolina corporation (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 radio paging system pursuant to that certain Asset Purchase Agreement dated as of September __, 1995, by and among the Purchaser, the Seller, and W. David Sweatt (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 (the "Assumed Contracts"), 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 shareholders, 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 Shareholder 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.
IN WITNESS WHEREOF, the Purchaser and the Seller have executed this Agreement as of the date first written above.
Vice President and General Counsel
SIGNET PAGING OF RALEIGH, INC.
1. The Seller is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of North Carolina.
2. The Seller has full corporate power and corporate 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 corporate 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 Shareholder has duly executed and delivered the Purchase Agreement and the Shareholder Noncompetition Agreement. The Purchase Agreement and the Shareholder Noncompetition Agreement constitute the legal, valid, and binding obligation of the Shareholder 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 Certificate of Incorporation or Bylaws, 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 Shareholder of the Purchase Agreement and the Shareholder Noncompetition Agreement, nor the performance by the Shareholder of his 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 his or its property, or any material agreement known to this firm to which the Shareholder or the Seller is a party, or by which his 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 delivery, and performance of the Purchase Agreement or any other agreements or documents executed and delivered pursuant thereto by the Seller and/or the Shareholder, 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 Shareholder 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 the 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 Shareholder 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 6 to Schedule 1.1 of the Agreement (the "Licenses"), except as listed in SCHEDULE 3.9 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 Shareholder or any subsequent holder with respect to their operation of the System. The Seller and the Shareholder 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 Shareholder 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 Shareholder 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 Shareholder 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 Shareholder 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 Shareholder 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 Shareholders, 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 W. David Sweatt (the "Shareholder").
W I T N E S S E T H
WHEREAS, concurrently herewith, SigNet Paging of Raleigh, Inc., a North Carolina corporation ("SigNet"), is selling, transferring, and conveying to the Company, pursuant to that certain Asset Purchase Agreement dated as of September, 1995, by and among the Company, SigNet, and the Shareholder (the "Purchase Agreement"), substantially all of the property and assets of SigNet that are used in the conduct of SigNet's radio paging system business (such property, assets, and business, including all affiliated networks, being hereinafter collectively called the "System");
WHEREAS, the Shareholder has been affiliated with SigNet for a number of years and, as the sole shareholder and as an officer of SigNet, possesses valuable knowledge about the business and operations of SigNet; and
WHEREAS, the Company has requested that the Shareholder 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 Shareholder 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 Shareholder 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 Shareholder. Therefore, the Shareholder 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 Shareholder's act or omission to act. The Shareholder 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 he may then possess or have under his control.
3. NONCOMPETITION. The Shareholder agrees that he shall not, until 11:59 p.m. on the fifth 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 Raleigh-Durham Area (as hereinafter defined); PROVIDED, HOWEVER, that the Shareholder 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 Shareholder 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 such entity; and, provided further, that this covenant shall not apply to any investment by the Shareholder in Voicetel of Central North Carolina ("Voicetel");
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 System or 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 System or the Company; or
(2) any names of past, present, or future employees or other knowledge of or relating to the System or 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 "Raleigh-Durham" area means the counties listed on Schedule 1 attached hereto.
The Shareholder hereby agrees, if he makes an investment in Voicetel, to use his best efforts to insure that subsequent to such investment, Voicetel shall provide paging services to its new customers after such investment solely pursuant to a reseller agreement to be entered into between Voicetel and the Company. The Company agrees to provide paging services to Voicetel pursuant to such agreement, if any, at a rate equal to the lowest rate charged to any of its resellers in the Raleigh-Durham Area.
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 Shareholder may not assign any of his 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 North Carolina (regardless of the laws that might otherwise govern under applicable North Carolina 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 Shareholder agrees that a violation on his part of any covenant contained herein shall cause irreparable damage to the Company and, consequently, the Shareholder 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 Shareholder. 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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
Address: c/o Bank of Lafayette
This Noncompetition Agreement (the "Agreement") is entered into as of __________, 1995, between Contact Communications Inc., a Delaware corporation (the "Company"), and Sam A. Miles (the "Executive").
W I T N E S S E T H
WHEREAS, concurrently herewith, SigNet Paging of Raleigh, Inc., a North Carolina corporation ("SigNet"), is selling, transferring, and conveying to the Company, pursuant to that certain Asset Purchase Agreement dated as of September, 1995, by and among the Company, SigNet, and W. David Sweatt (the "Purchase Agreement"), substantially all of the property and assets of SigNet that are used in the conduct of SigNet's radio paging system business (such property, assets, and business, including all affiliated networks, being hereinafter collectively called the "System");
WHEREAS, the Executive has been affiliated with SigNet for a number of years and as an officer and a director of SigNet, possesses valuable knowledge about the business and operations of SigNet; and
WHEREAS, the Company has requested that the Executive 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 Executive 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. As additional consideration for the Executive's covenants contained herein, concurrently with the execution of this Agreement the Company is paying the Executive the sum of [$1.4 MILLION] in cash.
2. CONFIDENTIAL INFORMATION. The Executive 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 Executive. Therefore, the Executive 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 Executive's act or omission to act. The Executive 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 he may then possess or have under his control.
3. NONCOMPETITION. The Executive agrees that he shall not, until 11:59 p.m. on the fifth 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 State of North Carolina; PROVIDED, HOWEVER, that the Executive 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 Executive 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 in the State of North Carolina;
c. directly or indirectly request or advise any present or future customers of the System or 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 System or the Company; or
(2) any names of past, present, or future employees or other knowledge of or relating to the System or the Company; or
f. directly or indirectly induce or attempt to influence any employee of the Company to terminate his or her employment.
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 Executive may not assign any of his 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 North Carolina (regardless of the laws that might otherwise govern under applicable North Carolina 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 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 Executive agrees that a violation on his part of any covenant contained herein shall cause irreparable damage to the Company and, consequently, the Executive 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 Executive. 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.
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 Lee Miles (the "Executive").
W I T N E S S E T H
WHEREAS, concurrently herewith, SigNet Paging of Raleigh, Inc., a North Carolina corporation ("SigNet"), is selling, transferring, and conveying to the Company, pursuant to that certain Asset Purchase Agreement dated as of September, 1995, by and among the Company, SigNet, and W. David Sweatt (the "Purchase Agreement"), substantially all of the property and assets of SigNet that are used in the conduct of SigNet's radio paging system business (such property, assets, and business, including all affiliated networks, being hereinafter collectively called the "System");
WHEREAS, the Executive has been affiliated with SigNet for a number of years and as an officer of SigNet possesses valuable knowledge about the business and operations of SigNet; and
WHEREAS, the Company has requested that the Executive 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 Executive 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 Executive acknowledges that the information, observations, and data obtained or possessed by her concerning the business affairs of the System will be the property of the Company and not the Executive. Therefore, the Executive agrees that she will not disclose to any person or use for her 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 Executive's act or omission to act. The Executive 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 she may then possess or have under her control.
3. NONCOMPETITION. The Executive agrees that she shall not, until 11:59 p.m. on the fifth 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 State of North Carolina; PROVIDED, HOWEVER, that the Executive 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 Executive 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 in the State of North Carolina;
c. directly or indirectly request or advise any present or future customers of the System or 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 System or the Company; or
(2) any names of past, present, or future employees or other knowledge of or relating to the System or the Company; or
f. directly or indirectly induce or attempt to influence any employee of the Company to terminate his or her employment.
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 her address set forth below its or her signature to this Agreement, or at such other address as it or she 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 Executive may not assign any of her 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 North Carolina (regardless of the laws that might otherwise govern under applicable North Carolina 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 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 Executive agrees that a violation on her part of any covenant contained herein shall cause irreparable damage to the Company and, consequently, the Executive 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 Executive. 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.
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 SigNet Paging of Raleigh, Inc., a North Carolina corporation ("SigNet").
W I T N E S S E T H
WHEREAS, concurrently herewith SigNet is selling, transferring, and conveying to the Company, pursuant to that certain Asset Purchase Agreement dated as of September, 1995, by and among the Company, SigNet, and W. David Sweatt (the "Purchase Agreement"), substantially all of the property and assets that are used in the conduct of SigNet'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 SigNet 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. SigNet 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. SigNet 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 SigNet. Therefore, SigNet 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 SigNet'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 SigNet becomes legally compelled to disclose any of the Confidential Information, SigNet 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, SigNet will furnish only that portion of the Confidential Information which it is legally required to disclose. SigNet 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. SigNet agrees that it shall not, until 11:59 p.m. on the fifth 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 State of North Carolina; PROVIDED, HOWEVER, that SigNet 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 SigNet 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 such entity;
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 State of North Carolina
c. directly or indirectly request or advise any present or future customers of the System or 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 System or the Company; or
(2) any names of past, present, or future employees or other knowledge of or relating to the System or the Company; or
f. directly or indirectly induce or attempt to influence any employee of the Company to terminate his or her employment.
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. SigNet 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 North Carolina (regardless of the laws that might otherwise govern under applicable North Carolina 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 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. SigNet agrees that a violation on its part of any covenant contained herein shall cause irreparable damage to the Company and, consequently, SigNet further agrees that the Company shall be entitled, as a matter of right, to an injunction restraining any further violation of such covenant by SigNet. 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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
SIGNET PAGING OF RALEIGH, INC.
This License Agreement ("License Agreement") is made on the ___ day of _____________, 1995, by and between SigNet Paging of Raleigh, Inc., a North Carolina corporation ("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 September ___, 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 marks "SigNet Paging."
2. "Licensed Territory" shall mean the State of North Carolina, 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 540 days 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 "SigNet Paging."
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 obtain registration for the Marks, Licensee at its expense may take appropriate action to obtain 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 registration.
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 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.
IN WITNESS WHEREOF, the parties hereto have duly executed this License Agreement on the date first above written.
SIGNET PAGING OF RALEIGH, INC.
This Registration Rights Agreement (the "Agreement") is entered into as of ___________ __, 1995, by and among ProNet Inc., a Delaware corporation (the "Company"), and SigNet Paging of Raleigh, Inc., a North Carolina corporation ("SigNet").
A. Contact Communications Inc., a wholly owned subsidiary of the Company ("Contact"), SigNet, and W. David Sweatt, the sole shareholder of SigNet (the "Shareholder") have entered into that certain Asset Purchase Agreement dated as of September , 1995 (the "Purchase Agreement"), pursuant to which Contact is to acquire substantially all of SigNet's radio paging business (the "System").
B. Pursuant to the terms of the Purchase Agreement, Contact is paying a portion of the purchase price for the System by issuing shares of the Company's common stock, par value $.01 per share ("Common Stock"), pursuant to a private placement in compliance with Section 4(2) of the Securities Act (as hereinafter defined) and/or the provisions of Regulation D under the Securities Act.
C. Pursuant to the terms of the Purchase Agreement, the Company has agreed to register the shares of Common Stock received by SigNet thereunder pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the meanings indicated.
"COMMISSION" means the Securities and Exchange Commission.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"REGISTRABLE SECURITIES" means the shares of Common Stock received by SigNet pursuant to the Purchase Agreement and held of record by SigNet, or the Shareholder, any permitted transferee of Signet, or Sam A. Miles ("Miles") in the event of a permitted transfer thereof. Any Registrable Security will cease to be a Registrable Security when a registration statement under the Securities Act covering such Registrable Security has been declared effective by the Commission or when such Registrable Security is no longer held of record by SigNet, the Shareholder, or Miles, as applicable.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
2. REGISTRATION STATEMENT. Within 180 days after the date hereof, the Company shall file a "shelf" registration statement on an appropriate form pursuant to Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission (the "Registration Statement"), with respect to the sale of all of the Registrable Securities and any other shares of Common Stock or other securities of the Company that the Company, in its sole discretion, elects to include therein. The Company shall use all commercially reasonable efforts to have the Registration Statement declared effective by the Commission under the Securities Act as soon as practicable after such filing and to keep the Registration Statement effective for a period of 15 months following the date on which the Registration Statement is declared effective. The Company further agrees, if necessary, to supplement or make amendments to the Registration Statement, if required by the registration form used by the Company for the Registration Statement or by the instructions applicable to such registration form or by the Securities Act or the rules and regulations thereunder.
Following the issuance of Common Stock by the Company to SigNet pursuant to the terms of the Purchase Agreement, the Company will as expeditiously as reasonably possible:
(a) furnish to SigNet, prior to filing the Registration Statement, if requested in writing, copies of the Registration Statement as proposed to be filed, and thereafter furnish to SigNet such number of copies of the Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in the Registration Statement (including each preliminary prospectus) and such other documents as SigNet may reasonably request in writing in order to facilitate the disposition of the Registrable Securities owned by SigNet;
(b) use all commercially reasonable efforts to register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions as SigNet may reasonably request and do any and all other acts and things which may be reasonably necessary to enable SigNet to consummate the disposition in such jurisdictions of the Registrable Securities; PROVIDED that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in
(c) notify SigNet, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly make available to SigNet any such supplement or amendment; and
(d) make available for inspection by SigNet and any attorney, accountant or other professional retained thereby (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspectors in connection with the Registration Statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) in the judgment of counsel to the Company the disclosure of such Records is necessary to avoid or correct a misstatement or omission in the Registration Statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. SigNet agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company unless and until such is made generally available to the public. SigNet further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential.
The Company may require SigNet to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as it may from time to time reasonably request and such other information as may be legally required in connection with such registration.
SigNet agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in subsection 3(c) hereof, SigNet will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement until SigNet's receipt of the copies of the supplemented or amended prospectus contemplated by subsection 3(c) hereof, and, if so directed by the Company, SigNet will deliver to the Company all copies, other than permanent file copies then in SigNet's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. If the Company shall give such notice, the Company shall extend the period during which the Registration Statement shall be maintained effective by the number of days during the period from and including the date of the giving of notice pursuant to subsection 3(c) hereof to the date when the Company shall make available to SigNet a prospectus supplemented or amended to conform with the requirements of subsection 3(c) hereof.
In connection with the Registration Statement required to be filed hereunder, the Company shall pay the following registration expenses: (a) all registration and filing fees; (b) the fees and expenses of the Company's compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities); (c) printing expenses; (d) the reasonable fees and disbursements of counsel for the Company and the customary fees and expenses for independent certified public accountants retained by the Company; and (e) the reasonable fees and expenses of any special experts retained by the Company in connection with such registration. The Company shall not have any obligation to pay any legal fees of SigNet, any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities or any out-of-pocket expenses of SigNet (or its agents).
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless SigNet from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or prospectus contained therein or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of, or are based upon, any such untrue statement or omission or allegation thereof based upon information furnished in writing to the Company by SigNet or on SigNet's behalf expressly for use therein and; PROVIDED, FURTHER, that with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, the indemnity agreement contained in this subsection shall not apply to the extent that any such loss, claim, damage, liability or expense results from the fact that a current copy of the prospectus was not sent or given to the person asserting any such loss, claim, damage, liability or expense at or prior to the written confirmation of the sale of the Registrable Securities to such person if it is determined that it was the responsibility of SigNet to provide such person with a current copy of the prospectus and such current copy of the prospectus would have cured the defect giving rise to such loss, claim, damage, liability or expense.
(b) INDEMNIFICATION BY SIGNET. SigNet agrees to indemnify and hold harmless the Company, its directors and officers and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to SigNet, but only with respect to information furnished in writing by SigNet or on SigNet's behalf expressly for use in the Registration Statement or prospectus relating to the Registrable Securities, any amendment or supplement thereto or any preliminary prospectus. In case any action or proceeding shall be brought against the Company or its directors or officers, or any such controlling person, in respect of which indemnity may be sought against SigNet, SigNet shall have the rights and duties given to the Company, and the Company or its directors or officers or such controlling person shall have the rights and duties given to SigNet, by the preceding subsection hereof.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any action or proceeding (including any governmental investigation) shall be brought or asserted against any person entitled to indemnification under subsections (a) or (b) above (an "Indemnified Party") in respect of which indemnity may be sought from any party who has agreed to provide such indemnification (an "Indemnifying Party"), the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all expenses. Such Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the named parties to any such action or proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that there is a conflict of interest on the part of counsel employed by the Indemnifying Party to represent such Indemnified Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party; it being understood, however, that the Indemnifying Party shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all such Indemnified Parties, which firm shall be designated in writing by such Indemnified Parties). The Indemnifying Party shall not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment.
(d) CONTRIBUTION. If the indemnification provided for in this Section 5 is unavailable to the Indemnified Parties in respect of any losses, claims, damages, liabilities or judgments referred to herein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities and judgments in the following manner: as between the Company on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and each Selling Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of SigNet on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of subsection 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
(e) SURVIVAL. The indemnity and contribution agreements contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Indemnified Party or by or on behalf of the Company and (iii) the consummation of the sale or successive resale of the Registrable Securities.
(a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given other than as initially agreed upon in writing by the Company and SigNet.
(b) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first- class mail, telex, telecopier or air courier guaranteeing overnight delivery:
(i) if to SigNet, at the most current address given by SigNet to the Company, in accordance with the provisions of this subsection, which
is Mr. W. David Sweatt, c/o Bank of Lafayette, 2110 Pinhook Road, Lafayette, Louisiana 70505.
(ii) if to the Company, initially at 600 Data Drive, Suite 100, Plano, Texas 75075, attention: Mark A. Solls, and thereafter at such other address as may be designated from time to time by notice given in accordance with the provisions of this Section.
(c) SUCCESSORS AND ASSIGNS. SigNet shall not assign any rights or benefits under this Agreement without the prior written consent of the Company, other than an assignment to the Shareholder or Miles in connection with a transfer of any Registrable Securities, which assignment shall not relieve SigNet of any of its obligations hereunder. In the event of an assignment by the Company of its obligations under this Agreement in connection with an assignment of its right to pay the deferred portion of the Purchase Price (as defined in the Purchase Agreement) as provided in Section 9.8 of the Purchase Agreement, any references to "Common Stock" contained herein shall be deemed to be references to the "Common Stock" of such assignee as provided in Section 9.8 of the Purchase Agreement. This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of the Company and SigNet.
(d) COUNTERPARTS. This Agreement may be executed in a number of identical counterparts and it shall not be necessary for the Company and SigNet to execute each of such counterparts, but when each has executed and delivered one or more of such counterparts, the several parts, when taken together, shall be deemed to constitute one and the same instrument, enforceable against each in accordance with its terms. In making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart executed by the party against whom enforcement of this Agreement is sought.
(e) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
(f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OR CHOICE OF LAW.
(g) SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable; 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 each 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.
(h) ENTIRE AGREEMENT. This Agreement is intended by the Company and SigNet as a final expression of their agreement and is intended to be a complete and exclusive statement of their agreement and understanding in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the Company and SigNet with respect to such subject matter.
(i) THIRD PARTY BENEFICIARIES. Other than Indemnified Parties not a party hereto, this Agreement is intended for the benefit of the Company and SigNet and their respective successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person or entity.
(j) EFFECTIVENESS. This Agreement shall have no force or effect unless and until the Company issues Common Stock to SigNet pursuant to terms of the Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
SIGNET PAGING OF RALEIGH, INC.
FOR VALUE RECEIVED, CONTACT COMMUNICATIONS, INC. ("Maker"), a Delaware corporation and wholly owned subsidiary of ProNet Inc., a Delaware corporation (the "Company"), hereby promises to pay to the order of SIGNET PAGING OF RALEIGH, INC., a North Carolina corporation ("Payee"), the principal sum of EIGHT HUNDRED THOUSAND AND NO/100 DOLLARS ($800,000.00), together with interest thereon from the date hereof through and including the date of payment at a rate equal to 6.5% per annum.
The full principal amount of this Note together with interest accrued thereon shall be due and payable on ____________, 1996. The Maker shall have the ability at any time to prepay this Note without premium or penalty therefor.
The principal amount of this Note shall be payable in lawful money of the United States of America; PROVIDED, HOWEVER, that if (A) the Company's Common Stock, par value $.01 per share ("Common Stock"), is registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of May 1, 1996, and (B) the Common Stock is quoted on the National Association of Securities Dealers Automated Automation System ("NASDAQ") (or any other quotation system or securities exchange) as of such date, then Maker shall be entitled, at its option, to pay the principal amount of this Note in shares of Common Stock of the Company valued at the Average Closing Price; and PROVIDED, FURTHER, that if the Average Closing Price on the date the principal and interest, if any, of this Note (the "Outstanding Balance") is paid (the "Payment Date") exceeds $22.00, then the number of shares of Common Stock to be delivered to the Seller on such date shall be calculated by dividing the Outstanding Balance by $22.00; and if the Average Closing Price on the Payment Date is less than $18.00, then the number of shares of Common Stock to be delivered to the Seller on such date shall be calculated by dividing the Outstanding Balance by $18.00. As used herein, "Average Closing Price" means the average closing price of the Common Stock on NASDAQ (or such other quotation system or securities exchange on which the Common Stock is then quoted or listed) as reported by the WALL STREET JOURNAL for the 20 consecutive trading days beginning 25 trading days prior to the Payment Date.
This Note shall be binding upon Maker and its legal representatives, successors and assigns. This Note may not be assigned by the Payee, other than to Sam A. Miles, without the prior written consent of the Maker.
This Note is being issued pursuant to that certain Asset Purchase Agreement dated September __, 1995 (the "Purchaser Agreement"), among the Maker, Payee and the sole shareholder of Payee. Should there be any inconsistencies or conflicts between the Purchaser Agreement and this Note, this Note shall control and preempt the Purchase Agreement. The payment of this Note has been guaranteed by the Company pursuant to that certain Guarantee issued by the Company to Payee dated September ___, 1995.
Maker shall have the right to offset against this Note any Purchaser Indemnified Costs (as defined in the Purchase Agreement) for which maker is entitled to indemnification under the Purchase Agreement in accordance with the terms and conditions set forth in Section 8 of the Purchase Agreement.
The unpaid principal amount of this Note may be declared immediately due and payable by the holder hereof if Maker shall make a general assignment for the benefit of creditors or shall become the subject of an "order for relief" within the meaning of the United States Bankruptcy Code, or shall voluntarily file a petition in bankruptcy or for reorganization.
No delay or omission on the part of Payee or any holder hereof in exercising any right or option given herein to Payee or such holder shall impair such right or option or be considered as a waiver thereof or acquiescence in any default hereunder.
Maker hereby waives presentment, demand and notice of dishonor and protest.
Maker shall pay all costs and expenses of collection, including reasonable attorneys' fees, incurred or paid by the holder hereof in enforcing this Note.
This Note shall be governed by, and construed in accordance with, the internal laws of the State of North Carolina.
Vice President and General Counsel ATTEST:
FORM OF OPINION OF VINSON & ELKINS L.L.P. [Draft - Subject to Opinion Committee review]
Signet Paging of Raleigh, Inc.
This firm has acted as counsel for Contact Communications Inc. ("Contact") and ProNet Inc. ("ProNet"), each of which is a Delaware corporation, in connection with the acquisition (the "Acquisition") by Contact of the radio paging system business of SigNet Paging of Raleigh, Inc., a North Carolina corporation ("SigNet"), pursuant to that certain Asset Purchase Agreement dated as of September__, 1995, by and among SigNet, W. David Sweatt, and Contact (the "Purchase Agreement"). This opinion is being rendered pursuant to Section 6.2(g) of the Purchase Agreement. Unless otherwise defined herein, each term used herein with its initial letter capitalized that is defined in the Purchase Agreement has the meaning given such term in the Purchase Agreement.
In connection with the opinions rendered below, we have examined the following documents:
(iv) the Registration Rights Agreement;
(v) the Deferred Purchase Price Note;
(vi) the Certificate of Incorporation and bylaws of ProNet and Contact as in effect on the date hereof; and
Signet Paging of Raleigh, Inc.
(vii) resolutions of the Board of Directors of each of ProNet and Contact adopted in connection with the Acquisition.
The documents described in paragraphs (i) through (v) are herein collectively referred to as the "Transaction Documents."
We have also made such legal and factual examinations and inquiries as we have deemed advisable or necessary for the purpose of rendering this opinion. We have, except as set forth below, examined originals or copies of documents, corporate records, and other writings which we consider relevant for the purpose of this opinion, including, but not limited to, certificates of public officials. We have also discussed such matters as we have deemed relevant to this opinion with the officers of Contact and ProNet.
In rendering this opinion, we have assumed:
(i) that each natural person signing any document reviewed by this firm had the legal capacity to do so, both at the time of execution and as of the date hereof, and each person signing any document reviewed by this firm in a representative capacity (other than on behalf of ProNet or Contact) had authority to sign in such capacity, both at the time of execution and as of the
(ii) the genuineness of the signatures appearing on all documents;
(iii) the authenticity of all documents submitted to us as originals;
(iv) the conformity to authentic original documents of all documents submitted to us as certified, conformed, or photostatic copies;
(v) the due authorization, execution, and delivery of all of the Transaction Documents by the parties thereto other than ProNet or
(vi) the correctness and accuracy of all facts set forth in all certificates, reports, and discussions identified in this opinion.
Whenever a statement or opinion herein is qualified by "known to this firm," "to the knowledge of this firm," or similar phrase, such phrase means that, in the course of
Signet Paging of Raleigh, Inc.
rendering the legal services described in the introductory paragraph of this letter, no facts or circumstances have come to the attention of those attorneys in this firm who rendered such legal services that gave any of such attorneys reason to believe that any such information is incorrect in any respect that would affect the opinions of this firm expressed herein.
For purposes of this opinion, we are assuming that you have all requisite power and authority, and have taken any and all necessary action, to execute and deliver the Transaction Documents, and we are assuming that the representations and warranties made by you in the Purchase Agreement are true and correct.
Based upon the foregoing and subject to the limitations, qualifications, exceptions, and assumptions set forth herein, and having due regard for such legal considerations as we deem relevant, we are of the opinion that:
1. Contact and ProNet are each corporations validly existing and in good standing under the laws of the State of Delaware.
2. Contact and ProNet each have full corporate power and corporate authority to execute and deliver the applicable Transaction Documents and to perform the obligations contemplated thereby. The execution, delivery, and performance by Contact or ProNet, as the case may be, of the applicable Transaction Documents have been duly authorized by all necessary corporate action on the part of Contact or ProNet. Each of the Transaction Documents has been duly executed and delivered by Contact or ProNet, as the case may be, and constitutes the legal, valid, and binding obligation thereof.
3. Neither the execution and delivery by Contact or ProNet of, nor the performance by Contact or ProNet of their respective obligations under, the applicable Transaction Documents violates or conflicts with, results in a breach of, or constitutes a default under such entity's Certificate of Incorporation or bylaws, any law, or any judgment, decree, or order of any court or any other agency of government known to this firm that is applicable to such entity or such entity's property.
4. To the knowledge of this firm, other than (a) the approval or authorization of the Acquisition by the Federal Communications Commission, the Federal Aviation Administration and any similar state or local regulatory agencies, commissions or other entities, (b) the filing of the Shelf Registration with the Securities and Exchange
Signet Paging of Raleigh, Inc.
Commission, the filing of any required amendments thereto and the declaration of the effectiveness thereof as and in the manner and for the purpose contemplated by the Registration Rights Agreement, and (c) any approvals, authorizations, filings, or qualifications related to the offering contemplated by the Shelf Registration by or with such state securities or blue sky agencies, commissions, or other entities as are required by the Registration Rights Agreement, no approvals or authorizations by, or filings or qualifications with, any state, federal, or local agency, authority, or body are required to be obtained by either Contact or ProNet in connection with the execution and delivery by, or the performance of their respective obligations under, the Transaction Documents except such as have been duly obtained or made.
5. To the knowledge of this firm, there is no action, suit, investigation, or proceeding that is pending or threatened against or affecting Contact or ProNet in any court or before any governmental authority, arbitration board, or tribunal that involves any of the transactions contemplated by the Transaction Documents.
The foregoing opinions are limited by and subject to the following:
(a) The opinions expressed herein with respect to the validity, binding nature, and enforceability of the Transaction Documents are subject to (i) laws relating to bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, rearrangement, liquidation, conservatorship, moratorium, and other laws affecting the enforcement of creditors' rights or the collection of debtors' obligations generally, (ii) principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law), (iii) standards of commercial reasonableness and good faith, (iv) public policy, and (v) other applicable laws, regulations, and procedures, provided that any limitations imposed by such other applicable laws, regulations, and procedures will not, in the opinion of this firm, preclude the practical realization of the benefits intended to be conferred by such agreements (though they may result in delays thereof and we express no opinion as to the economic consequences, if any, of such delays).
(b) We express no opinion with respect to (i) the enforceability of provisions in the Transaction Documents relating to delay or omission of enforcement of rights or remedies, or waivers of defenses, waivers of jury trials, or waivers of benefits of appraisement, valuation, stay, extension, redemption, or other nonwaivable benefits bestowed by operation of law, (ii) the enforceability of the indemnification and contribution provisions set forth in the Transaction Documents to the extent they purport to relate to
Signet Paging of Raleigh, Inc.
liabilities resulting from or based upon negligence or any violation of federal or state securities or blue sky laws, (iii) the right of any person or entity to institute or maintain any action in any court or upon matters respecting the jurisdiction of any court, or (iv) the enforceability of any severability provisions set forth in the Transaction Documents.
(c) In rendering the opinions set forth in Paragraph 1 above with respect to the valid corporate existence and good standing of Contact and ProNet, we have relied solely on the certificates of authorities in the State of Delaware as of a date we deem sufficiently recent.
(d) In rendering the opinions set forth in Paragraph 3 above with respect to conflicts of the Transaction Documents with any laws, we express no opinion with respect to the Communications Act of 1934, as amended, and the rules and regulations promulgated thereunder, the Federal Aviation Act of 1958, as amended, and the rules and regulations promulgated thereunder, or the statutes, ordinances, rules, or regulations of any state or local regulatory agencies, commissions, or other entities having jurisdiction over the System, Contact, or ProNet.
(e) In rendering the portions of the foregoing opinions that involve a concept of materiality with respect to factual matters, we have relied exclusively on the officers of Contact and ProNet in determining materiality.
(f) We are members of the Bar of the State of Texas only. The opinions above are limited to the laws of the United States of America and the laws of the State of Texas. We note that the Transaction Documents provide that they are to be governed by the laws of states other than the State of Texas. While we express no opinion with respect to the laws of such other states, we have assumed that the internal laws of such other states are the same as the internal laws of the State of Texas. We have made no investigation to confirm whether such assumption is correct.
We express no opinion as to any matter other than as expressly set forth above, and no opinion on any other matter may be inferred herefrom. This opinion is given as of the date hereof, and we undertake no, and hereby disclaim any, obligation to advise you of any change in any matter set forth herein. This opinion is for the sole use and benefit of the
Signet Paging of Raleigh, Inc.
Seller and the Shareholders, and no other person may be furnished a copy of such opinion or may rely on such opinion without our prior written consent.
CLASS I ASSETS (Cash and similar items) $_______
CLASS II ASSETS (CD's and readily marketable securities) $_______
CLASS III ASSETS (Furniture and fixtures; land; buildings; accounts receivable; other tangible assets) $_______
CLASS IV ASSETS (Section 197 assets, including goodwill and
* Subject to adjustment in respect of the number of pagers in service in the System pursuant to Section 1.4 of the Purchase Agreement. | 8-K | EX-10.4 | 1996-01-16T00:00:00 | 1996-01-16T13:01:34 |
0000812073-96-000005 | 0000812073-96-000005_0003.txt | AMENDMENT TO THE AMENDED AND RESTATED FUND ACCOUNTING, DIVIDEND DISBURSING & TRANSFER AGENT AND ADMINISTRATION AGREEMENT
DIVIDEND DISBURSING & TRANSFER AGENT
THIS AMENDMENT, made and entered into effective as of the 23rd day of July, 1995, by and between THE NOTTINGHAM INVESTMENT TRUST, a Massachusetts business trust (the "Trust"), and THE NOTTINGHAM COMPANY, INC., a North Carolina corporation (the "Administrator").
WHEREAS, the parties have previously entered into that certain Amended and Restated Fund Accounting, Dividend Disbursing & Transfer Agent and Administration Agreement dated October 24, 1994 with respect to all series of the Trust (the "Agreement").
WHEREAS, the Agreement has been continued from time to time by the parties as provided therein, with amendments from time to time to Exhibit C thereof, reflecting the Administrator's Compensation Schedule.
WHEREAS, the parties desire to again amend Exhibit C thereof, all as provided herein.
NOW THEREFORE, the Trust and the Administrator do mutually promise and agree as follows:
1. Amendments. The Agreement is hereby amended by deleting Exhibit C thereof and substituting in lieu thereof a new Exhibit C in the form attached hereto.
2. Ratification. Except as continued and provided above, the Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their duly authorized officers on the date first above written.
ATTEST: THE NOTTINGHAM INVESTMENT TRUST
ATTEST: THE NOTTINGHAM COMPANY, INC.
For the services delineated in the FUND ACCOUNTING, DIVIDEND DISBURSING & TRANSFER AGENT AND ADMINISTRATION AGREEMENT, the Administrator shall be compensated monthly, as of the last day of each month, within five business days of the month end, a base fee plus a fee based upon net assets according to the following schedule. The fee is calculated based upon the average daily net assets of each Fund:
Base Fee: $2,000 per month
Class Fee: $750 per month for each additional
(For all Funds except ones specifically listed below)
On the first $50 million 0.20% On the next $50 million 0.175% On all assets over $100 million 0.15%
(For all Funds except ones specifically listed below)
Nottingham Short Term Income Fund
On the first $50 million 0.075% On the next $50 million 0.10% On all assets over $100 million 0.125%
Nottingham U.S. Government Money Fund
$9.00 per shareholder per year
$15 per year (billed directly to the shareholder)
$0.20 per equity security per pricing day $0.20 per corporate bond, government bond, medium-term bond or mortgage backed $0.40 per CMO or asset backed securities per pricing day $0.40 per municipal security per pricing day $2.00 per equity per month for corporate action coverage
$100 per Fund per state registration per year
Minimum fee of $3,000 per Fund of the Trust per month for all fees taken in the aggregate as outlined above, analyzed monthly. | 485BPOS | EX-99.B9.B | 1996-01-16T00:00:00 | 1996-01-16T16:43:37 |
0000835015-96-000005 | 0000835015-96-000005_0000.txt | X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
For the three month period ended November 30, 1995 or
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 of (I.R.S. Employer incorporation or organization) Identification No.) 3100 Sycamore Road, DeKalb, Illinois 60115
(Address of principal executive offices) (Zip Code)
Indicate 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.
Title of class Outstanding as of November 30, 1995
Class A Common, no par value 771,825 Class B Common, no par value 4,422,195
Exhibit index is located on page 2
Total number of pages 12
Part I - Financial Information (Unaudited except for the Condensed Consolidated Balance Sheet as of August 31, 1995):
Management's Discussion and Analysis of Financial Condition and Results of Operations 3-5
Condensed Consolidated Statements of Operations for the three months ended November 30, 1995 and 1994 6
Condensed Consolidated Balance Sheets, November 30, 1995 and 1994 and August 31, 1995 7
Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 1995 and 1994 8
Notes to Condensed Consolidated Financial Statements 9-10
Part II - Other Information 11
EXHIBIT 11 - Computation of Net Earnings per Common and Common Equivalent Share for the three months ended November 30, 1995 12
Management's Discussion and Analysis of Financial Condition and Results of Operations DEKALB Genetics Corporation incurred a net loss of $0.1 million ($.02 per share) in the first quarter of fiscal 1996 compared with a net loss of $1.2 million ($.23 per share) in the first quarter of fiscal 1995. Consolidated revenues were $4.9 million higher in fiscal 1996. A $2.7 million international seed revenue increase was largely attributable to higher corn and sunflower revenues in Argentina. The remainder was due to soybean sales in North America. Included in prior year net earnings was an after-tax loss of $0.3 million ($0.05 per share) for the operation of the discontinued poultry business.
The $0.8 million ($.16 per share) improvement in fiscal 1996 after-tax earnings from continuing operations, as compared to fiscal 1995, was largely due to a combination of higher market hog prices and lower swine unit production costs partially offset by lower swine breeding stock volume. North American seed earnings were lower in fiscal 1996 due to increased operating expenses.
North American seed sales and net earnings are primarily realized in the second and third fiscal quarters (December through May), and for that reason, first quarter results should not be viewed as indicative of full year results. Most expenses which are incurred in the first quarter and related to the North American seed business are deferred until later in the year when sales are recorded.
Quarterly Industry Segment Revenues and Earnings
North American seed $ 6.4 $ 4.3
Total revenues $ 50.1 $ 45.2
North American seed $ (0.5) $ (0.2)
General corporate expenses (1.1) (1.2) Net interest expense (2.3) (2.1)
before income taxes (0.2) (1.5) Income tax provision (0.1) (0.6)
Earnings from continuing operations (0.1) (0.9)
Net Earnings $ (0.1) $ (1.2)
Seed revenues and earnings in the first quarter were primarily the result of southern hemisphere operations because the North American seed business and other northern hemisphere operations do not report any material sales or earnings until the second quarter.
International seed segment earnings increased slightly over the prior year first quarter. Earnings from Argentina were $0.5 million higher partly offset by lower export earnings. Argentine revenues in fiscal 1996 were seven percent higher than those in fiscal 1995. The increase was due to higher average corn and sunflower selling prices and improved sunflower sales volume. Corn sales volume during this initial fiscal period was down slightly due to delayed planting; however, corn sales are expected to be higher for the full year.
Results from international seed operations outside of Latin America are largely in the northern hemisphere and will not generate any significant earnings until the second quarter.
Early soybean shipments were greater in the first quarter of fiscal 1996 and were primarily responsible for the $2.1 million revenue increase over the prior year. Earnings in fiscal 1996 were $0.3 million lower, however, primarily due to higher operating expenses.
First quarter North American seed results are not representative of annual results because significant seed shipment activity does not occur until the second and third quarters.
Swine segment earnings were $1.6 million higher than the prior year although revenues were nearly flat when compared to the first quarter of fiscal 1995. Market hog revenues increased 63 percent reflecting a 31 percent price increase from the fourteen-year low in market hog prices experienced during the prior year. Fiscal year 1996 first quarter average market hog prices were approximately $46.00 per hundred weight compared with $35.00 per hundred weight in fiscal year 1995. Offsetting the benefit from higher market hog prices were significantly lower breeding stock sales volumes. Breeding stock volumes decreased from prior year due to soft demand reflecting unfavorable industry economics.
Higher first quarter earnings in the swine segment were primarily achieved by lower cost of sales despite higher feed costs.
The effective tax rate increased from 35 percent in the first quarter of fiscal 1995 to 37 percent for the same period in fiscal 1996. Fluctuations in Mexican equity earnings was the principle factor causing the increase. For each interim period, the tax rate is determined from an estimate of full year earnings and the resultant tax.
The company sold its poultry business segment in the third quarter of fiscal year 1995 and prior year results have been restated to reflect that business as discontinued operations.
During the first quarter, the net cash outflow from operations of $18.7 million was $12.8 million less than the prior year. The receipt of foreign royalty payments earlier in fiscal year 1996 than in fiscal year 1995 contributed to the improvement.
Cash requirements for the first quarter were provided by earnings and existing short-term credit facilities. Committed credit lines include a $50 million revolving credit facility through December, 1998 and $15 million in facilities available through November, 1996. These agreements contain various restrictions on the activities of the Company as to maintenance of working capital and tangible net worth, amount and type of indebtedness, and the acquisition or disposition of capital shares or assets of the Company and its subsidiaries.
Management believes its operating cash flow, other potential sources of funds, and existing lines of credit are sufficient to cover normal and expected working capital needs, capital expenditures, dividends and debt maturities.
1. The consolidated financial statements included herein are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the Company's annual Form 10-K filing. In order to facilitate a better comparison of the highly seasonal seed operations of the Company, a Condensed Consolidated Balance Sheet at November 30, 1994 is included herein as part of the condensed consolidated financial statements.
The results presented are unaudited (other than the Condensed Consolidated Balance Sheet at August 31, 1995, which is derived from the Company's audited year-end balance sheet) but include, in the opinion of management, all adjustments of a normal recurring nature necessary for a fair statement of the results of operations and financial position for the respective interim periods.
Certain costs and expenses incurred in the North American and international seed businesses are charged against income as sales are recognized for interim reporting purposes. The Company believes this method more closely matches revenues with expenses and results in more comparability of reporting periods within the year. Since there are only minor North American seed sales recorded in the first and fourth quarters, this method defers first quarter expenses related to sales which will occur later in the year, primarily in the second quarter; it also anticipates expenses incurred in the fourth quarter, primarily in the third quarter. Southern hemisphere international seed sales occur largely in the first and second quarters and this same method anticipates future expenses from the third and fourth quarters and matches them against the first and second quarter revenues.
The seed operations of the Company comprise a substantial portion of the Company's business each year. The first quarter results as presented should not be considered indicative of the results to be expected for the entire year.
2. Inventories, valued at the lower of cost or market (in millions), were as follows:
Commercial seed $172.7 $157.7 $ 95.3 Supplies and other 6.0 4.1 3.1
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.Foreign-currency assets and liabilities are translated into their U.S. dollar equivalents based on rates of exchange prevailing at the end of the respective period. Translation adjustments resulting from translating foreign currency financial statements of consolidated subsidiaries into their U.S. dollar equivalents are reported separately and accumulated in a separate component of stockholders' equity. The following summarizes the activity in the translation adjustment account:
Balance at September 1 $(5.0) $(2.7) Translation gain (loss) (0.5) 0.2 Balance at end of November $(5.5) $(2.5)
Aggregate exchange gains and losses arising from the translation of foreign currency transactions in other than the functional currency of the particular entity are included in income.
4.The Company and its subsidiaries are defendants in various legal actions arising in the course of business activities. In the opinion of management, these actions will not result in a material adverse effect on the Company's consolidated operations or financial position.
Most potential property losses are self-insured.
5.On April 28, 1995, the Company sold its poultry operation to Central Farm of America, Inc., an affiliate of Toshoku, Ltd., for $12.5 million in cash. Accordingly, the poultry business is reported as a discontinued operation and the consolidated financial statements for the first quarter of fiscal year 1995 were reclassified to report separately the net assets and operating results of the business. The Company's operating results for the prior year have been restated to reflect continuing operations.
The Company and its subsidiaries are defendants in various legal actions arising in the course of business activities. In the opinion of management, these actions will not result in a material adverse effect on the Company's consolidated operations or financial position.
Item 6. Exhibits and Reports on Form 8-K Page
(a) Exhibit 11 - Earnings Per Share Computation 12
(b) Reports on Form 8-K -
No Form 8-K was filed during the three months ended November 30, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: January 16, 1996 Thomas R. Rauman
COMPUTATION OF NET EARNINGS PER COMMON For the three months ended November 30, 1995 and 1994
Average shares outstanding 5,189,265 5,148,324
Net average additional shares outstanding assuming dilutive stock options exercised and proceeds used to purchase treasury stock at average market price 137,767 79,610
Average number of common and common equivalent shares outstanding 5,327,032 5,227,934
Net earnings for primary earnings per share$ (96,000)$(1,183,000)
Primary Earnings Per Share $(0.02) $(0.23) | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T15:33:50 |
0000950135-96-000118 | 0000950135-96-000118_0000.txt | [JOHN HANCOCK FUNDS LOGO] JOHN HANCOCK FUNDS A Global Investment Management Firm John Hancock Advisers, Inc.
United States Securities and Exchange Commission
Re: Rule 24f-2 Notice for John Hancock Cash Management Fund
The purpose of this letter is to notify the Commission within two (2) months of the end of the Registrant's Fiscal Year of the number of Registrant's shares sold during the last fiscal year which are to be registered pursuant to Rule 24f-2 and to pay the appropriate registration fee.
John Hancock Advisers, Inc. - John Hancock Funds, Inc.* - John Hancock Investor Services Corporation - The Patriot Group, Inc. John Hancock Advisers International, Ltd. - NM Capital Management, Inc. - *Member of National Association Securities Dealers, Inc.
United States Securities and Exchange Commission John Hancock Cash Management Fund
Attached to this Rule 24f-2 Notice, and made part hereof, is an opinion of counsel indicating that the Securities, the Registration of which the notice makes definite in number, were legally issued, fully paid and non-assessable by the Registrant.
United States Securities and Exchange Commission John Hancock Cash Management Fund
Any questions regarding this matter should be addressed to William H. King, Associate Treasurer, John Hancock Advisers, Inc., 101 Huntington Avenue, 8th floor, Boston, MA 02199-7603, (617) 375-1668.
[JOHN HANCOCK FUNDS LOGO] JOHN HANCOCK FUNDS A Global Investment Management Firm
John Hancock Cash Management Fund John Hancock Advisers, Inc.
Re: Rule 24f-2 Notice for John Hancock Cash Management Fund (File Nos. 2-65330; 811-2953) (0000312904)
In connection with the filing of a Notice pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended, making definite the registration under the Securities Act of 1933 of 165,057,000 shares of John Hancock Cash Management Fund (the "Fund") sold in reliance upon said Rule 24f-2 during the fiscal year from October 1, 1995, to November 17, 1995 it is the opinion of the undersigned that such shares were legally issued, fully paid and nonassessable.
In connection with this opinion it should be noted that the Fund is an entity of the type generally known as a "Massachusetts business trust." Under Massachusetts law, shareholders of a Massachusetts business trust may be held personally liable for the obligations of the Fund. However, the Fund's Declaration of Trust disclaims shareholder liability for obligations of the Fund and indemnifies any shareholder of the Fund, with such indemnification to be paid solely out of the assets of the Fund. Therefore, the shareholder's risk is limited to circumstances in which the assets of the Fund are insufficient to meet the obligations asserted against such assets.
John Hancock Advisers, Inc. - John Hancock Funds, Inc.* - John Hancock Investor Services Corporation - The Patriot Group, Inc. John Hancock Advisers International, Ltd. - NM Capital Management, Inc. - *Member of National Association Securities Dealers, Inc. | 24F-2NT | 24F-2NT | 1996-01-16T00:00:00 | 1996-01-16T16:06:25 |
0000016590-96-000002 | 0000016590-96-000002_0000.txt | <DESCRIPTION>FORM 10-Q FOR Q1 FY 96
Quarterly Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For Quarter Ended: December 2, 1995 Commission File No:0-6933
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
360 Second Avenue, Waltham, Massachusetts
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 890-6000
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.
For Quarter Ended: December 2, 1995 Commission File No.0-6933
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
The Company has deferred revenue associated with the sale of certain products which have future performance obligations, principally relating to reinstallation of IBM memory.
The condensed 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 that the disclosures are adequate to make the information presented not misleading. The information furnished includes all adjustments and accruals consisting only of normal recurring accrual adjustments which are, in the opinion of management, necessary for a fair presentation of results for the interim period. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K.
Inventories, which include raw materials, labor and manufacturing overhead are stated at the lower of cost (first-in, first-out) or market and consist of the following:
Raw materials $ 2,708,854 $ 2,402,345
For Quarter Ended: December 2, 1995 Commission File No.0-6933
(2) Income and Dividends Per Share
Per share amounts are based on the weighted average number of shares outstanding during each year plus applicable common stock equivalents. There were no material differences for per share amounts assuming full dilution in either year.
(3) Management's Discussion and Analysis of Financial Condition
Revenues for the first quarter of fiscal 1996 decreased 25% from the first quarter of fiscal 1995 due principally to decreased sales of the Company's STOR/9000 memory products for the IBM ES/9000 computers.
Operating expenses for the first quarter of fiscal 1996 increased 9% from the first quarter of fiscal 1995. Selling and general and administrative expenses increased 22% due to expansion in Europe. Research and development expenses decreased 14% due to completion of major projects in fiscal 1995.
Other expense in the first quarter of fiscal 1996 and fiscal 1995 included approximately $425,000 in amortization expenses relating to the Company's technology license/marketing agreement.
Accounts receivable decreased due to a lower volume of sales.
The Company's present operating plans indicate that cash flow generated from operations will be adequate to meet its obligations.
As reported in the Company's latest annual report on Form 10-K for the fiscal year ended August 31, 1995, the Company is continuing to negotiate with the bank to receive a waiver for certain provisions of the Revolving Credit Agreement with which the Company was not in compliance as of August 31, 1995 and December 2, 1995.
For Quarter Ended: December 2, 1995 Commission File No.0-6933
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/ Joseph F. Kruy
By: /s/ Sheldon M. Schenkler | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T11:04:06 |
0000836974-96-000002 | 0000836974-96-000002_0000.txt | PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 31, 1995
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.)
Montgomery Ward Plaza, Chicago, Illinois 60671 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 467-2000
On December 31, 1995, Montgomery Ward & Co., Incorporated ("MW"), an Illinois corporation and a wholly-owned subsidiary of Montgomery Ward Holding Corp. (the "Company"), acquired all of the outstanding stock of Amoco Enterprises, Inc., a Delaware corporation ("Enterprises") from Amoco Oil Holding Company to complete the previously announced acquisition of Enterprises. Enterprises is engaged in the business of marketing and operating motor club programs, under the name "Amoco Motor Club". Signature Financial / Marketing, Inc. ("Signature"), a wholly-owned subsidiary of MW, and its subsidiaries offer life and health insurance, revolving credit insurance, club products (including motor clubs) and other consumer services.
On January 2, 1996, the Company issued a press release with respect to the transaction as described above. The press release is attached as Exhibit 1 hereto, and is incorporated herein by reference.
Exhibit 1 - Press release issued by the Company on January 2, 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 thereunto duly authorized.
Dated: January 16, 1996 By:/s/John L. Workman John L. Workman, Executive Vice
Exhibit No. Description Page No.
1. Press release issued by the Company on January 2, 1996. 5 | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T08:52:46 |
0000278001-96-000003 | 0000278001-96-000003_0000.txt | UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 40 [X] UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. _ [ ] (Exact Name of Registrant as Specified in Charter) 82 Devonshire St., Boston, Massachusetts 02109 (Address Of Principal Executive Offices) (Zip Code) (Name and Address of Agent for Service) It is proposed that this filing will become effective ( ) immediately upon filing pursuant to paragraph (b) (X) on January 19, 1996 pursuant to paragraph (b) ( ) 60 days after filing pursuant to paragraph (a)(i) ( ) on ( ) pursuant to paragraph (a)(i) ( ) 75 days after filing pursuant to paragraph (a)(ii) ( ) on ( ) pursuant to paragraph (a)(ii) of rule 485. If appropriate, check the following box: ( ) this post-effective amendment designates a new effective date for a post-effective amendment. Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940 and intends to file the Notice required by such Rule before January 31, 1996. FIDELITY PHILLIPS STREET TRUST:
Item Number Statement of Additional Information Section
Please read this prospectus before investing, and keep it on file for future reference. It contains important information, including how each fund invests and the services available to shareholders. To learn more about each fund and its investments, you can obtain a copy of each fund's most recent financial report and portfolio listing, or a copy of the Statement of Additional Information (SAI) dated January 19, 1996. The SAI has been filed with the Securities and Exchange Commission (SEC) and is incorporated herein by reference (legally forms a part of the prospectus). For a free copy of either document, call Fidelity at 1-800-544-8888. Investments in the funds are neither insured nor guaranteed by the U.S. government, and there can be no assurance that a fund will maintain a stable $1.00 share price. Mutual fund shares are not deposits or obligations of, or guaranteed by, any depository institution. Shares are not insured by the FDIC, Federal Reserve Board or any other agency, and are subject to investment risks, including possible loss of principal amount invested.
These money market funds seek high current income while maintaining a stable $1.00 share price by investing in high-quality, short-term money market securities. Cash Reserves invests in a broad range of money market securities. U.S. Government Reserves invests only in U.S. government securities or related instruments. JANUARY 19, 1996 (FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET,
KEY FACTS THE FUNDS AT A GLANCE
WHO MAY WANT TO INVEST
of each fund's financial data.
PERFORMANCE How each fund has done over time.
THE FUNDS IN DETAIL CHARTER How each fund is organized.
Each fund's overall approach to investing.
operating costs are calculated and what they include.
YOUR ACCOUNT DOING BUSINESS WITH FIDELITY
ways to set up your account, plans.
HOW TO BUY SHARES Opening an investments.
HOW TO SELL SHARES Taking money out and closing your account.
help you manage your account.
SHAREHOLDER AND DIVIDENDS, CAPITAL GAINS,
calculations and the timing of purchases and redemptions.
THE FUNDS AT A GLANCE GOAL: Income while maintaining a stable $1.00 share price. As with any mutual fund, there is no assurance that a fund will achieve its goal. MANAGEMENT: Fidelity Management & Research Company (FMR) is the management arm of Fidelity Investments, which was established in 1946 and is now America's largest mutual fund manager. FMR Texas Inc. (FTX), a subsidiary of FMR, chooses investments for the funds. STRATEGY: Invests in high-quality, short-term money market securities of all types. SIZE: As of November 30 , 1995, the fund had over $18.4 billion in assets. STRATEGY: Invests in high-quality, short-term money market securities issued or guaranteed by the U.S. government or government agencies. SIZE: As of November 30, 1995, the fund had over $1.1 billion in assets. WHO MAY WANT TO INVEST These funds may be appropriate for investors who would like to earn income at current money market rates while preserving the value of their investment. The funds are managed to keep their share price stable at $1.00. U.S. Government Reserves offers an added measure of credit safety with its focus on U.S. government securities. The rate of income will vary from day to day, generally reflecting short-term interest rates. These funds do not constitute a balanced investment plan. However, because they emphasize stability, they could be well-suited for a portion of your savings. Each fund offers free checkwriting to give you easy access to your money.
funds are presented here in order of ascending risk. funds in this prospectus are category. (right arrow) MONEY MARKET Seeks short-term investments. (solid bullet) INCOME Seeks income by investing in bonds. (solid bullet) GROWTH AND INCOME income by investing in stocks and bonds. (solid bullet) GROWTH Seeks long-term in stocks. SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy, sell or hold shares of a fund. See page for more information about these fees. Maximum sales charge on purchases and Deferred sales charge on redemptions None (for accounts under $2500) $12.00 ANNUAL FUND OPERATING EXPENSES are paid out of each fund's assets. Each fund pays a management fee to FMR. It also incurs other expenses for services such as maintaining shareholder records and furnishing shareholder statements and financial reports. A fund's expenses are factored into its share price or dividends and are not charged directly to shareholder accounts (see page ). The following are projections based on historical expenses and are calculated as a percentage of average net assets.
Total fund operating expenses .55%
Total fund operating expenses .55%
EXAMPLES: Let's say, hypothetically, that each fund's annual return is 5% and that its operating expenses are exactly as just described. For every $1,000 you invested, here's how much you would pay in total expenses if you close your account after the number of years indicated: After 1 year $ 6
After 3 years $ 18
After 5 years $ 31
After 10 years $ 69
After 1 year $ 6
After 3 years $ 18
After 5 years $ 31
After 10 years $ 69
These examples illustrate the effect of expenses, but are not meant to suggest actual or expected costs or returns, all of which may vary.
The tables that follow are included in each fund's Annual Report and have been audited by Coopers & Lybrand L.L.P. (Cash Reserves) and Price Waterhouse LLP (U.S. Government Reserves), independent accountants. Their reports on the financial statements and financial highlights are included in the Annual Reports. The financial statements and financial highlights are incorporated by reference into (are legally a part of) the funds' Statement of Additional Information.
A FOR THE FISCAL YEARS ENDED SEPTEMBER 30 B ON MARCH 17, 1994, THE TRUSTEES APPROVED A CHANGE IN THE FISCAL YEAR END OF THE FUND FROM SEPTEMBER 30 TO NOVEMBER 30; ACCORDINGLY, THE FINANCIAL HIGHLIGHTS ARE PRESENTED FOR THE TWO-MONTH PERIOD ENDED NOVEMBER 30, 1994. C TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD FMR NOT VOLUNTARILY REIMBURSED THE FUND. D ANNUALIZED; FMR VOLUNTARILY AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. Money market fund performance can be measured as TOTAL RETURN or YIELD. The total returns that follow are based on historical fund results and do not reflect the effect of taxes. Each fund's fiscal year runs from December 1 through November 30. The tables below show each fund's performance over past fiscal years compared to a measure of inflation. Fiscal periods Pas Past Past ended t 1 5 10 30, 1995 r s s
total return % % %
Fiscal periods Pas Past Past ended t 1 5 10 November 30, yea year year
total return % % %
TOTAL RETURN is the change in value of an investment in a fund over a given period, assuming reinvestment of any dividends and capital gains. A CUMULATIVE TOTAL RETURN reflects actual performance over a stated period of time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that, if achieved annually, would have produced the same cumulative total return if performance had been constant over the entire period. Average annual total returns smooth out variations in performance; they are not the same as actual year-by-year results. the income earned by a money market fund over a the change in a fund's share funds maintain a stable $1.00 yields are the most common fund performance. YIELD refers to the income generated by an investment in a fund over a given period of time, expressed as an annual percentage rate. When a yield assumes that income earned is reinvested, it is called an EFFECTIVE YIELD. THE CONSUMER PRICE INDEX is a widely recognized measure of inflation calculated by the U.S. government. The funds' recent strategies, performance, and holdings are detailed twice a year in financial reports, which are sent to all shareholders. For current performance call 1-800-544-8888. TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF FUTURE PERFORMANCE.
EACH FUND IS A MUTUAL FUND: an investment that pools shareholders' money and invests it toward a specified goal. In technical terms, each fund is currently a diversified fund of Fidelity Phillips Street Trust, an open-end management investment company organized as a Delaware business trust on September 17, 1992. EACH FUND IS GOVERNED BY A BOARD OF TRUSTEES, which is responsible for protecting the interests of shareholders. The trustees are experienced executives who meet throughout the year to oversee the funds' activities, review contractual arrangements with companies that provide services to the funds, and review performance. The majority of trustees are not otherwise affiliated with Fidelity. THE FUNDS MAY HOLD SPECIAL MEETINGS AND MAIL PROXY MATERIALS. These meetings may be called to elect or remove trustees, change fundamental policies, approve a management contract, or for other purposes. Shareholders not attending these meetings are encouraged to vote by proxy. Fidelity will mail proxy materials in advance, including a voting card and information about the proposals to be voted on. The number of votes you are entitled to is based upon the dollar value of your investment. The funds are managed by FMR, which handles their business affairs. FTX, located in Irving, Texas, has primary responsibility for providing investment management services. Fidelity 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. Fidelity Distributors Corporation (FDC) distributes and markets Fidelity's funds and services. Fidelity Service Co. (FSC) performs transfer agent servicing functions for the funds. FMR Corp. is the ultimate parent company of FMR and FTX. Members of the Edward C. Johnson 3d family are the predominant owners of a class of shares of common stock representing approximately 49% of the voting power of FMR Corp. Under the Investment Company Act of 1940 (the 1940 Act), control of a company is presumed where one individual or group of individuals owns more than 25% of the voting stock of that company; therefore, the Johnson family may be deemed under the 1940 Act to form a controlling group with respect to FMR Corp. To carry out the funds' transactions, FMR may use its broker-dealer affiliates and other firms that sell fund shares, provided that a fund receives services and commission rates comparable to those of other broker-dealers. Both CASH RESERVES and U.S. GOVERNMENT RESERVES seek to earn a high level of current income while maintaining a stable $1.00 share price by investing in high-quality, short-term money market securities. The funds invest in money market securities of different types. Cash Reserves buys U.S. dollar-denominated securities of domestic and foreign issuers, including banks and other financial institutions, governments and their agencies or instrumentalities, and corporations. U.S. Government Reserves invests only in obligations issued or guaranteed as to principal and interest by the United States government or by any of its agencies or instrumentalities; in repurchase agreements secured by these obligations; and in reverse repurchase agreements. Cash Reserves has the flexibility to invest more broadly in pursuit of a high level of current income, while U.S. Government Reserves offers the added credit safety of investments in U.S. government and agency securities. When you sell your shares, they should be worth the same amount as when you bought them. Of course, there is no guarantee that the funds will maintain a stable $1.00 share price. The funds follow industry-standard guidelines on the quality and maturity of their investments, which are designed to help maintain a stable $1.00 share price. The funds will purchase only high-quality securities that FMR believes present minimal credit risks and will observe maturity restrictions on securities they buy. In general, securities with longer maturities are more vulnerable to price changes, although they may provide higher yields. It is possible that a major change in interest rates or a default on the funds' investments could cause their share prices (and the value of your investment) to change. Each fund earns income at current money market rates. They stress preservation of capital, liquidity, and income, and do not seek the higher yields or capital appreciation that more aggressive investments may provide. Each fund's yield will vary from day to day and generally reflects current short-term interest rates and other market conditions. It is important to note that neither the funds nor their yields are insured or guaranteed by the U.S. government. The following pages contain more detailed information about types of instruments in which a fund may invest, strategies FMR may employ in pursuit of a fund's investment objective, and a summary of related risks. Any restrictions listed supplement those discussed earlier in this section. A complete listing of each fund's limitations and more detailed information about the funds' investments are contained in the funds' SAI. Policies and limitations are considered at the time of purchase; the sale of instruments is not required in the event of a subsequent change in circumstances. FMR may not buy all of these instruments or use all of these techniques unless it believes that they are consistent with a fund's investment objective and policies and that doing so will help a fund achieve its goal. Current holdings and recent investment strategies are described in each fund's financial reports which are sent to shareholders twice a year. For a free SAI or financial report, call 1-800-544-8888. MONEY MARKET SECURITIES are high-quality, short-term obligations issued by the U.S. Government, corporations, financial institutions, and other entities. These obligations may carry fixed, variable, or floating interest rates. Some money market securities employ a trust or other similar structure to modify the maturity, price characteristics, or quality of financial assets so that they are eligible investments for money market funds. If the structure does not perform as intended, adverse tax or investment consequences may result. U.S. GOVERNMENT MONEY MARKET SECURITIES are short-term debt obligations issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S. Government. Not all U.S. Government securities are backed by the full faith and credit of the United States. For example, securities issued by the Federal Farm Credit Bank or by the Federal National Mortgage Association are supported by the instrumentality's right to borrow money from the U.S. Treasury under certain circumstances. However, securities issued by the Financing Corporation are supported only by the credit of the entity that issued them. FOREIGN SECURITIES may involve different risks than domestic securities, including risks relating to the political and economic conditions of the foreign country involved, which could affect the payment of principal or interest. Issuers of foreign securities include foreign governments, corporations, and banks. CREDIT SUPPORT. Issuers may employ various forms of credit enhancement, including letters of credit, guarantees, or insurance from a bank, insurance company, or other entity. These arrangements expose the fund to the credit risk of the entity. In the case of foreign entities, extensive public information about the entity may not be available and the entity may be subject to unfavorable political, economic, or governmental developments which might affect its ability to honor its commitment. ASSET-BACKED SECURITIES include interests in pools of mortgages, loans, receivables, or other assets. Payment of principal and interest may be largely dependent upon the cash flows generated by the assets backing the securities. VARIABLE AND FLOATING RATE SECURITIES have interest rates that are periodically adjusted either at specific intervals or whenever a benchmark rate changes. These interest rate adjustments are designed to help stabilize the security's price. STRIPPED SECURITIES are the separate income or principal components of a debt security. Their risks are similar to those of other money market securities although they may be more volatile. REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security at one price and simultaneously agrees to sell it back at a higher price. Delays or losses could result if the other party to the agreement defaults or becomes insolvent. REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund temporarily transfers possession of a portfolio instrument to another party in return for cash. This could increase the risk of fluctuation in a fund's yield or in the market value of its assets. OTHER MONEY MARKET SECURITIES may include commercial paper, certificates of deposit, bankers' acceptances, and time deposits. PUT FEATURES entitle the holder to put (sell back) a security to the issuer or a financial intermediary. In exchange for this benefit, the funds may pay periodic fees or accept a lower interest rate. The credit quality of the investment may be affected by the creditworthiness of the put provider. Demand features, standby commitments, and tender options are types of put features. ILLIQUID AND RESTRICTED SECURITIES. Some investments may be determined by FMR, under the supervision of the Board of Trustees, to be illiquid, which means that they may be difficult to sell promptly at an acceptable price. The sale of some illiquid securities and some other securities may be subject to legal restrictions. Difficulty in selling securities may result in a loss or may be costly to a fund. RESTRICTIONS: A fund may not purchase a security if, as a result, more than 10% of its assets would be invested in illiquid securities. WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS are trading practices in which payment and delivery for the securities take place at a future date. The market value of a security could change during this period, which could affect the market value of its assets. DIVERSIFICATION. Diversifying a fund's investment portfolio can reduce the risks of investing. This may include limiting the amount of money invested in any one issuer or, on a broader scale, in any one industry. RESTRICTIONS: Neither fund may invest more than 5% of its total assets in the securities of any one issuer, except that Cash Reserves may invest up to 10% of its assets in the highest-quality securities of a single issuer for up to three days. A fund may not invest more than 25% of its total assets in any one industry (other than the financial services industry for Cash Reserves; see below). These limitations do not apply to U.S. government securities. FINANCIAL SERVICES INDUSTRY. Companies in the financial services industry are subject to various risks related to that industry, such as government regulation, changes in interest rates, and exposure on loans, including loans to foreign borrowers. If a fund invests substantially in this industry, its performance may be affected by conditions affecting the industry. RESTRICTIONS: Cash Reserves will invest more than 25% of its total assets in the financial services industry. BORROWING. A fund may borrow from banks or from other funds advised by FMR, or through reverse repurchase agreements, and may make additional investments while borrowings are outstanding. RESTRICTIONS: A fund may borrow only for temporary or emergency purposes, or engage in reverse repurchase agreements, but not in an amount exceeding 33% of its total assets. LENDING. Cash Reserves may lend money to other funds advised by FMR. RESTRICTIONS: Loans, in the aggregate, may not exceed 33% of a fund's total assets. FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS Some of the policies and restrictions discussed on the preceding pages are fundamental, that is, subject to change only by shareholder approval. The following paragraphs restate all those that are fundamental. All policies stated throughout this prospectus, other than those identified in the following paragraphs, can be changed without shareholder approval. CASH RESERVES seeks as a high a level of current income as is consistent with preservation of capital and liquidity by investing in money market instruments. The fund will not purchase a security if, as a result, more than 25% of its total assets would be invested in a particular industry; except that the fund will invest more than 25% of its total assets in the financial services industry. U.S. GOVERNMENT RESERVES seeks as high a level of current income as is consistent with the security of principal and liquidity. The fund may engage in repurchase agreements secured by obligations issued or guaranteed as to principal and interest by the United States government or by any of its agencies or instrumentalities. The fund will not purchase a security if, as a result, more than 5% of its total assets would be invested in the securities of a single issuer other than the U.S. government or its agencies and instrumentalities. The fund will not purchase a security if, as a result, more than 25% of its total assets would be invested in a particular industry. EACH FUND may borrow money only for temporary or emergency purposes or engage in reverse purchase agreements, but not in an amount exceeding 33% of its total assets. Loans, in the aggregate, may not exceed 33% of a fund's total assets. Like all mutual funds, the funds pay fees related to their daily operations. Expenses paid out of a fund's assets are reflected in its share price or dividends; they are neither billed directly to shareholders nor deducted from shareholder accounts. Each fund pays a MANAGEMENT FEE to FMR for managing its investments and business affairs. FMR in turn pays fees to an affiliate who provides assistance with these services. Each fund also pays OTHER EXPENSES, which are explained on page . FMR may, from time to time, agree to reimburse the funds for management fees and other expenses above a specified limit. FMR retains the ability to be repaid by a fund if expenses fall below the specified limit prior to the end of the fiscal year. Reimbursement arrangements, which may be terminated at any time without notice, can decrease a fund's expenses and boost its performance. The management fee is calculated and paid to FMR every month. EACH FUND'S management fee is calculated by multiplying the sum of two components by the fund's average net assets and adding an income-based fee. One component, the group fee rate, is based on the average net assets of all the mutual funds advised by FMR. It cannot rise above .37%, and it drops as total assets under management increase. The other component, the individual fund fee rate, is .03%. The income-based fee is 6% of the fund's gross income in excess of a 5% yield and cannot rise above .24% of the fund's average net assets. For November 1995, the group fee rate was .1487 %. The total management fee rate for fiscal 1995 was .25 % for Fidelity Cash Reserves and .24 % for Fidelity U.S. Government Reserves. FMR HAS SUB-ADVISORY AGREEMENTS with FTX, which has primary responsibility for providing investment management for the funds, while FMR retains responsibility for providing other management services. FMR pays FTX 50% of its management fee (before expense reimbursements) for these services. FMR paid FTX .12 % of each fund's average net assets for fiscal 1995. receives is designed to be pay a lower rate as FMR's increase. While the management fee is a significant component of the funds' annual operating costs, the funds have other expenses as well. The funds contract with FSC to perform many transaction and accounting functions. These services include processing shareholder transactions, valuing each fund's investments, and handling securities loans. In fiscal 1995, Fidelity Cash Reserves and Fidelity U.S. Government Reserves paid FSC fees equal to .29 % and .27 %, respectively, of average net assets. The funds also pay other expenses, such as legal, audit, and custodian fees; proxy solicitation costs; and the compensation of trustees who are not affiliated with Fidelity. Each fund has adopted a Distribution and Service Plan. These plans recognize that FMR may use its resources, including management fees, to pay expenses associated with the sale of fund shares. This may include payments to third parties, such as banks or broker-dealers, that provide shareholder support services or engage in the sale of the fund's shares. It is important to note, however, that the funds do not pay FMR any separate fees for this service.
Fidelity Investments was established in 1946 to manage one of America's first mutual funds. Today, Fidelity is the largest mutual fund company in the country, and is known as an innovative provider of high-quality financial services to individuals and institutions. In addition to its mutual fund business, the company operates one of America's leading discount brokerage firms, Fidelity Brokerage Services, Inc. (FBSI). Fidelity is also a leader in providing tax-sheltered retirement plans for individuals investing on their own or through their employer. Fidelity is committed to providing investors with practical information to make investment decisions. Based in Boston, Fidelity provides customers with complete service 24 hours a day, 365 days a year, through a network of telephone service centers around the country. To reach Fidelity for general information, call these numbers: (small solid bullet) For mutual funds, 1-800-544-8888 (small solid bullet) For brokerage, 1-800-544-7272 If you would prefer to speak with a representative in person, Fidelity has over 8 0 walk-in Investor Centers across the country. You may set up an account directly in a fund or, if you own or intend to purchase individual securities as part of your total investment portfolio, you may consider investing in a fund through a brokerage account. If you are investing through FBSI or another financial institution or investment professional, refer to its program materials for any special provisions regarding your investment in the fund. The different ways to set up (register) your account with Fidelity are listed in the following table. The account guidelines that follow may not apply to certain retirement accounts. If your employer offers a fund through a retirement program, contact your employer for more information. Otherwise, call Fidelity directly. in the world. (solid bullet) Number of Fidelity mutual (solid bullet) Assets in Fidelity mutual funds: over $ 348 billion (solid bullet) Number of shareholder (solid bullet) Number of investment WAYS TO SET UP YOUR ACCOUNT FOR YOUR GENERAL INVESTMENT NEEDS Individual accounts are owned by one person. Joint accounts can have two or more owners (tenants). TO SHELTER YOUR RETIREMENT SAVINGS FROM TAXES Retirement plans allow individuals to shelter investment income and capital gains from current taxes. In addition, contributions to these accounts may be tax deductible. Retirement accounts require special applications and typically have lower minimums. (solid bullet) INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow anyone of legal age and under 70 with earned income to invest up to $2,000 per tax year. Individuals can also invest in a spouse's IRA if the spouse has earned income of less than $250. (solid bullet) ROLLOVER IRAS retain special tax advantages for certain distributions from employer-sponsored retirement plans. (solid bullet) KEOGH OR CORPORATE PROFIT SHARING AND MONEY PURCHASE PENSION PLANS allow self-employed individuals or small business owners (and their employees) to make tax-deductible contributions for themselves and any eligible employees up to $30,000 per year. (solid bullet) SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide small business owners or those with self-employed income (and their eligible employees) with many of the same advantages as a Keogh, but with fewer administrative requirements. (solid bullet) 403(B) CUSTODIAL ACCOUNTS are available to employees of most tax-exempt institutions, including schools, hospitals, and other charitable organizations. (solid bullet) 401(K) PROGRAMS allow employees of corporations of all sizes to contribute a percentage of their wages on a tax-deferred basis. These accounts need to be established by the trustee of the plan. GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA) TO INVEST FOR A CHILD'S EDUCATION OR OTHER FUTURE NEEDS These custodial accounts provide a way to give money to a child and obtain tax benefits. An individual can give up to $10,000 a year per child without paying federal gift tax. Depending on state laws, you can set up a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). FOR MONEY BEING INVESTED BY A TRUST The trust must be established before an account can be opened. FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS, OR OTHER Requires a special application. EACH FUND'S SHARE PRICE, called net asset value (NAV), is calculated every business day. The funds are managed to keep share prices stable at $1.00. Each fund's shares are sold without a sales charge. Shares are purchased at the next share price calculated after your investment is received and accepted. Share price is normally calculated at 4 p.m. Eastern time. IF YOU ARE NEW TO FIDELITY, complete and sign an account application and mail it along with your check. You may also open your account in person or by wire as described on page . If there is no application accompanying this prospectus, call 1-800-544-8888. IF YOU ALREADY HAVE MONEY INVESTED IN A FIDELITY FUND, you can: (small solid bullet) Mail in an application with a check, or (small solid bullet) Open your account by exchanging from another Fidelity fund. IF YOU ARE INVESTING THROUGH A TAX-SHELTERED RETIREMENT PLAN, such as an IRA, for the first time, you will need a special application. Retirement investing also involves its own investment procedures. Call 1-800-544-8888 for more information and a retirement application. If you buy shares by check or Fidelity Money Line(registered trademark), and then sell those shares by any method other than by exchange to another Fidelity fund, the payment may be delayed for up to seven business days to ensure that your previous investment has cleared. TO OPEN AN ACCOUNT $2,500 For Fidelity retirement accounts $500 TO ADD TO AN ACCOUNT $250 For Fidelity retirement accounts $250 Through automatic investment plans $100 For Fidelity retirement accounts $500 These minimums may vary for investments through Fidelity Portfolio Advisory Services, a Fidelity College Savings Plan account, or a Fidelity Payroll Deduction Program account in Cash Reserves. Refer to the appropriate program materials for details.
You can arrange to take money out of your fund account at any time by selling (redeeming) some or all of your shares. Your shares will be sold at the next share price calculated after your order is received and accepted. Share price is normally calculated at 4 p.m. Eastern time. TO SELL SHARES IN A NON-RETIREMENT ACCOUNT, you may use any of the methods described on these two pages. TO SELL SHARES IN A FIDELITY RETIREMENT ACCOUNT, your request must be made in writing, except for exchanges to other Fidelity funds, which can be requested by phone or in writing. Call 1-800-544-6666 for a retirement distribution form. IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR SHARES, leave at least $1,000 worth of shares in the account to keep it open ($500 for retirement accounts). TO SELL SHARES BY BANK WIRE OR FIDELITY MONEY LINE, you will need to sign up for these services in advance. CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. It is designed to protect you and Fidelity from fraud. Your request must be made in writing and include a signature guarantee if any of the following situations apply: (small solid bullet) You wish to redeem more than $100,000 worth of shares, (small solid bullet) Your account registration has changed within the last (small solid bullet) The check is being mailed to a different address than the one on your account (record address), (small solid bullet) The check is being made payable to someone other than (small solid bullet) The redemption proceeds are being transferred to a Fidelity account with a different registration. You should be able to obtain a signature guarantee from a bank, broker (including Fidelity Investor Centers), dealer, credit union (if authorized under state law), securities exchange or association, clearing agency, or savings association. A notary public cannot provide a signature guarantee. Write a "letter of instruction" with: (small solid bullet) Your name, (small solid bullet) The fund's name, (small solid bullet) Your fund account number, (small solid bullet) The dollar amount or number of shares to be redeemed, (small solid bullet) Any other applicable requirements listed in the table at right. Unless otherwise instructed, Fidelity will send a check to the record address. Deliver your letter to a Fidelity Investor Center, or mail it to: If you have a checkbook for your account, you may write an unlimited number of checks. Do not, however, try to close out your account by check.
Fidelity provides a variety of services to help you manage your account. FIDELITY'S TELEPHONE REPRESENTATIVES are available 24 hours a day, 365 days a year. Whenever you call, you can speak with someone equipped to provide the information or service you need. STATEMENTS AND REPORTS that Fidelity sends to you include the following: (small solid bullet) Confirmation statements (after every transaction, except reinvestments, that affects your account balance or your account (small solid bullet) Account statements (quarterly) (small solid bullet) Financial reports (every six months) To reduce expenses, only one copy of most financial reports will be mailed to your household, even if you have more than one account in the fund. Call 1-800-544-6666 if you need copies of financial reports or historical account information. EXCHANGE PRIVILEGE. You may sell your fund shares and buy shares of other Fidelity funds by telephone or in writing. Exchanges may have tax consequences for you. For details on policies and restrictions governing exchanges, including circumstances under which a shareholder's exchange privilege may be suspended or revoked, see page . FIDELITY MONEY LINE(registered trademark) enables you to transfer money by phone between your bank account and your fund account. Most transfers are complete within three business days of your call. Fidelity offers services that let you transfer money into your fund account, or between fund accounts, automatically. Certain restrictions apply for retirement accounts. Call 1-800-544-6666 for more information. TO MOVE MONEY FROM YOUR BANK ACCOUNT TO A FIDELITY FUND
TO SEND ALL OR A PORTION OF YOUR PAYCHECK OR GOVERNMENT CHECK TO A FIDELITY
TO MOVE MONEY FROM A FIDELITY MONEY MARKET FUND TO ANOTHER FIDELITY FUND
SETTING UP To establish, call opened.
DIVIDENDS, CAPITAL GAINS, AND TAXES Each fund distributes substantially all of its net investment income and capital gains, if any, to shareholders each year. Income dividends are declared daily and paid monthly. When you open an account, specify on your application how you want to receive your distributions. If the option you prefer is not listed on the application, call 1-800-544-6666 for instructions. Each fund offers three options: 1. REINVESTMENT OPTION. Your dividend and capital gain distributions, if any, will be automatically reinvested in additional shares of the fund. If you do not indicate a choice on your application, you will be assigned this option. 2. CASH OPTION. You will be sent a check for your dividend and capital gain distributions, if any. 3. DIRECTED DIVIDENDS(registered trademark) OPTION. Your dividend and capital gain distributions, if any, will be automatically invested in another identically registered Fidelity fund. FOR RETIREMENT ACCOUNTS, all distributions are automatically reinvested. When you are over 59 years old, you can receive distributions in cash. Dividends will be reinvested at the fund's NAV on the last day of the month. Capital gain distributions, if any, will be reinvested at the NAV as of the record date of the distribution. The mailing of distribution checks will begin within seven days. As with any investment, you should consider how your investment in a fund will be taxed. If your account is not a tax-deferred retirement account, be aware of these tax implications. As a fund shareholder, you are entitled to your share of the fund's net income and gains on its investments. A along to its investors as DISTRIBUTIONS. Each fund earns interest from realize capital gains if it sells securities for a higher price than it paid for them. These are passed along as CAPITAL distributions. Distributions are subject to federal income tax, and may also be subject to state or local taxes. If you live outside the United States, your distributions could also be taxed by the country in which you reside. Your distributions are taxable when they are paid, whether you take them in cash or reinvest them. However, distributions declared in December and paid in January are taxable as if they were paid on December 31. For federal tax purposes, each fund's income and short-term capital gain distributions are taxed as dividends; long-term capital gain distributions, if any, are taxed as long-term capital gains. Every January, Fidelity will send you and the IRS a statement showing the taxable distributions paid to you in the previous year. Mutual fund dividends from U.S. government securities are generally free from state and local income taxes. However, particular states may limit this benefit, and some types of securities, such as repurchase agreements and some agency-backed securities, may not qualify for the benefit. In addition, some states may impose intangible property taxes. You should consult your own tax adviser for details and up-to-date information on the tax laws in your state. THE FUNDS ARE OPEN FOR BUSINESS each day the New York Stock Exchange (NYSE) is open. Fidelity normally calculates each fund's NAV as of the close of business of the NYSE, normally 4 p.m. Eastern time. EACH FUND'S NAV is the value of a single share. The NAV is computed by adding the value of the fund's investments, cash, and other assets, subtracting its liabilities, and then dividing the result by the number of shares outstanding. Like most money market funds, each fund values the securities it owns on the basis of amortized cost. This method minimizes the effect of changes in a security's market value and helps each fund to maintain a stable $1.00 share price. EACH FUND'S OFFERING PRICE (price to buy one share) and REDEMPTION PRICE (price to sell one share) are its NAV. WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you will be asked to certify that your Social Security or taxpayer identification number is correct and that you are not subject to 31% backup withholding for failing to report income to the IRS. If you violate IRS regulations, the IRS can require a fund to withhold 31% of your taxable distributions and redemptions. YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE. Fidelity may only be liable for losses resulting from unauthorized transactions if it does not follow reasonable procedures designed to verify the identity of the caller. Fidelity will request personalized security codes or other information, and may also record calls. You should verify the accuracy of your confirmation statements immediately after you receive them. If you do not want the ability to redeem and exchange by telephone, call Fidelity for instructions. IF YOU ARE UNABLE TO REACH FIDELITY BY PHONE (for example, during periods of unusual market activity), consider placing your order by mail or by visiting a Fidelity Investor Center. EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period of time. Each fund also reserves the right to reject any specific purchase order, including certain purchases by exchange. See "Exchange Restrictions" on page . Purchase orders may be refused if, in FMR's opinion, they would disrupt management of a fund. WHEN YOU PLACE AN ORDER TO BUY SHARES, your order will be processed at the next offering price calculated after your order is received and accepted. Note the following: (small solid bullet) All of your purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. (small solid bullet) Fidelity does not accept cash. (small solid bullet) When making a purchase with more than one check, each check must have a value of at least $50. (small solid bullet) Each fund reserves the right to limit the number of checks processed at one time. (small solid bullet) If your check does not clear, your purchase will be cancelled and you could be liable for any losses or fees a fund or its transfer agent has incurred. (small solid bullet) You begin to earn dividends as of the first business day following the day of your purchase. TO AVOID THE COLLECTION PERIOD associated with check and Money Line purchases, consider buying shares by bank wire, U.S. Postal money order, U.S. Treasury check, Federal Reserve check, or direct deposit instead. YOU MAY BUY OR SELL SHARES OF THE FUNDS THROUGH A BROKER, who may charge you a fee for this service. If you invest through a broker or other institution, read its program materials for any additional service features or fees that may apply. WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the next NAV calculated after your request is received and accepted. Note the following: (small solid bullet) Normally, redemption proceeds will be mailed to you on the next business day, but if making immediate payment could adversely affect a fund, it may take up to seven days to pay you. (small solid bullet) Shares will earn dividends through the date of redemption; however, shares redeemed on a Friday or prior to a holiday will continue to earn dividends until the next business day. (small solid bullet) Fidelity Money Line redemptions generally will be credited to your bank account on the second or third business day after your phone call. (small solid bullet) Each fund may hold payment on redemptions until it is reasonably satisfied that investments made by check or Fidelity Money Line have been collected, which can take up to seven business days. (small solid bullet) Redemptions may be suspended or payment dates postponed when the NYSE is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. (small solid bullet) If you sell shares by writing a check and the amount of the check is greater than the value of your account, your check will be returned to you and you may be subject to additional charges. FIDELITY RESERVES THE RIGHT TO DEDUCT AN ANNUAL MAINTENANCE FEE of $12.00 from accounts with a value of less than $2,500, subject to an annual maximum charge of $60.00 per shareholder. It is expected that accounts will be valued on the second Friday in November of each year. Accounts opened after September 30 will not be subject to the fee for that year. The fee, which is payable to the transfer agent, is designed to offset in part the relatively higher costs of servicing smaller accounts. The fee will not be deducted from retirement accounts (except non-prototype retirement accounts), accounts using regular investment plans, core accounts for a Fidelity Ultra Service Account or a FidelityPlus brokerage account, or if total assets in Fidelity funds exceed $50,000. Eligibility for the $50,000 waiver is determined by aggregating Fidelity mutual fund accounts maintained by FSC or FBSI which are registered under the same social security number or which list the same social security number for the custodian of a Uniform Gifts/Transfers to Minors Act account. IF YOUR ACCOUNT BALANCE FALLS BELOW $1,000, you will be given 30 days' notice to reestablish the minimum balance. If you do not increase your balance, Fidelity reserves the right to close your account and send the proceeds to you. Your shares will be redeemed at the NAV on the day your account is closed. FIDELITY MAY CHARGE A FEE FOR SPECIAL SERVICES, such as providing historical account documents, that are beyond the normal scope of its services. FDC may, at its own expense, provide promotional incentives to qualified recipients who support the sale of shares of the funds without reimbursement from the funds. Qualified recipients are securities dealers who have sold fund shares or others, including banks and other financial institutions, under special arrangements in connection with FDC's sales activities. In some instances, these incentives may be offered only to certain institutions whose representatives provide services in connection with the sale or expected sale of significant amounts of shares. As a shareholder, you have the privilege of exchanging shares of a fund for shares of other Fidelity funds. However, you should note the following: (small solid bullet) The fund you are exchanging into must be registered for sale in your state. (small solid bullet) You may only exchange between accounts that are registered in the same name, address, and taxpayer identification number. (small solid bullet) Before exchanging into a fund, read its prospectus. (small solid bullet) If you exchange into a fund with a sales charge, you pay the percentage-point difference between that fund's sales charge and any sales charge you have previously paid in connection with the shares you are exchanging. For example, if you had already paid a sales charge of 2% on your shares and you exchange them into a fund with a 3% sales charge, you would pay an additional 1% sales charge. (small solid bullet) Exchanges may have tax consequences for you. (small solid bullet) Each fund reserves the right to refuse exchange purchases by any person or group if, in FMR's judgment, the fund would be unable to invest the money effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. (small solid bullet) Your exchanges may be restricted or refused if a fund receives or anticipates simultaneous orders affecting significant portions of the fund's assets. In particular, a pattern of exchanges that coincides with a "market timing" strategy may be disruptive to a fund. Although the funds will attempt to give you prior notice whenever they are reasonably able to do so, they may impose these restrictions at any time. The funds reserve the right to terminate or modify the exchange privilege in the future. OTHER FUNDS MAY HAVE DIFFERENT EXCHANGE RESTRICTIONS, and may impose administrative fees of up to $7.50 and redemption fees of up to 1.50% on exchanges. Check each fund's prospectus for details.
This prospectus is printed on recycled paper using soy-based inks. FUNDS OF FIDELITY PHILLIPS STREET TRUST This Statement is not a prospectus but should be read in conjunction with the funds' current Prospectus (dated January 19, 1996). Please retain this document for future reference. The funds' financial statements and financial highlights, included in the Annual Reports for the fiscal year ended November 30, 1995, are incorporated herein by reference. To obtain an additional copy of the Prospectus or an Annual Report, please call Fidelity Distributors Corporation at 1-800-544-8888.
Additional Purchase and Redemption Information
Fidelity Management & Research Company (FMR) The following policies and limitations supplement those set forth in the Prospectus. Unless otherwise noted, whenever an investment policy or limitation states a maximum percentage of a fund's assets that may be invested in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will be determined immediately after and as a result of the fund's acquisition of such security or other asset. Accordingly, any subsequent change in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the fund's investment policies and limitations. Each fund's fundamental investment policies and limitations cannot be changed without approval by a "majority of the outstanding voting securities" (as defined in the Investment Company Act of 1940) of the fund. However, except for the fundamental investment limitations listed below, the investment policies and limitations described in this Statement of Additional Information are not fundamental and may be changed without shareholder approval. INVESTMENT LIMITATIONS OF FIDELITY CASH RESERVES THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT: (1) purchase the securities of any issuer (other than obligations issued or guaranteed as to principal and interest by the United States government, its agencies or instrumentalities) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, provided however, that with respect to 25% of its total assets, 10% of its total assets may be invested in the securities of any single issuer; (2) issue senior securities, except as permitted under the Investment (3) purchase securities on margin (but the fund may obtain such credits as may be necessary for the clearance of purchases and sales of securities); (4) borrow money, except that the fund may (i) borrow money for temporary or emergency purposes (not for leveraging or investment) and (ii) engage in reverse repurchase agreements for any purpose; provided that (i) and (ii) in combination do not exceed 33 1/3% of the fund's total assets (including the amount borrowed) less liabilities (other than borrowings). Any borrowings that come to exceed this amount will be reduced within three days (not including Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation; (5) act as an underwriter (except as it may be deemed such in a sale of (6) purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, more than 25% of the fund's total assets would be invested in the securities of companies whose principal business activities in the same industry, except that the fund will invest more than 25% of its total assets in the financial services industry; (7) purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business); (8) buy or sell commodities or commodity (futures) contracts; (9) lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties, but this limit does not apply to purchases of debt securities or to repurchase agreements; (10) invest in oil, gas, or other mineral exploration or development (11) invest in companies for the purpose of exercising control or management. (12) The fund may, notwithstanding any other fundamental investment policy or limitation, invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objectives, policies, and limitations as the fund. THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL. (i) The fund does not currently intend to purchase a security (other than a security issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, more than 5% of its total assets would be invested in the securities of a single issuer; provided that the fund may invest up to 10% of its total assets in the first tier securities of a single issuer for up to three business days. (ii) The fund does not currently intend to sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. (iii) The fund may borrow money only (a) from a bank or from a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) by engaging in reverse repurchase agreements with any party. The fund will not purchase any security while borrowings (excluding reverse repurchase agreements) representing more than 5% of its total assets are outstanding. The fund will not borrow from other funds advised by FMR or its affiliates if total outstanding borrowings immediately after such borrowing would exceed 15% of the fund's total assets. (iv) The fund does not currently intend to purchase any security if, as a result, more than 10% of its net assets would be invested in securities that are deemed to be illiquid because they are subject to legal or contractual restrictions on resale or because they cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. (v) The fund does not currently intend to purchase or sell futures contracts or call options. This limitation does not apply to options attached to, or acquired or traded together with, their underlying securities, and does not apply to securities that incorporate features similar to options or futures contracts. (vi) The fund does not currently intend to lend assets other than securities to other parties, except by lending money (up to 10% of the fund's net assets) to a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser. (This limitation does not apply to purchases of debt securities or to repurchase (vii) The fund does not currently intend to (a) purchase securities of other investment companies, except in the open market where no commission except the ordinary broker's commission is paid, or (b) purchase or retain securities issued by other open-end investment companies. Limitations (a) and (b) do not apply to securities received as dividends, through offers of exchange, or as a result of a reorganization, consolidation, or merger. (viii) The fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by domestic or foreign governments or political subdivisions thereof) if, as a result, more than 5% of its total assets would be invested in the securities of business enterprises that, including predecessors, have a record of less than three years of continuous operations. (ix) The fund does not currently intend to purchase the securities of any issuer if those officers and Trustees of the trust and those officers and directors of FMR who individually own more than 1/2 of 1% of the securities of such issuer together own more than 5% of such issuer's securities. (x) The fund does not currently intend to invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objectives, policies, and limitations as the fund. For purposes of limitation (viii), pass-through entities and other special purpose vehicles or pools of financial assets, such as issuers of asset-backed securities or investment companies, are not considered "business enterprises." For the fund's policies on quality and maturity, see the section entitled "Quality and Maturity" on page . INVESTMENT LIMITATIONS OF FIDELITY U.S. GOVERNMENT RESERVES THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT: (1) purchase the securities of any issuer (other than obligations issued or guaranteed as to principal and interest by the government of the United States, its agencies or instrumentalities) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer; (2) issue senior securities, except as permitted under the Investment (3) purchase securities on margin (but the fund may obtain such credits as may be necessary for the clearance of purchases and sales of securities); (4) borrow money, except that the fund may (i) borrow money for temporary or emergency purposes (not for leveraging or investment) and (ii) engage in reverse repurchase agreements for any purpose; provided that (i) and (ii) in combination do not exceed 33 1/3% of the fund's total assets (including the amount borrowed) less liabilities (other than borrowings). Any borrowings that come to exceed this amount will be reduced within three days (not including Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation; (5) act as an underwriter (except as it may be deemed such in a sale of (6) purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, more than 25% of the fund's total assets would be invested in the securities of companies whose principal business activities are in the same industry; (7) purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business); (8) buy or sell commodities or commodity (futures) contracts; (9) lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties, but this limitation does not apply to purchases of debt securities or to repurchase (10) invest in oil, gas, or other mineral exploration or developmental (11) invest in companies for the purpose of exercising control or management. (12) The fund may, notwithstanding any other fundamental investment policy or limitation, invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objective, policies, and limitations as the fund. THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL. (i) The fund does not currently intend to purchase the voting securities of any issuer. (ii) The fund does not currently intend to sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. (iii) The fund may borrow money only (a) from a bank or from a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) by engaging in reverse repurchase agreements with any party. The fund will not purchase any security while borrowings (excluding reverse repurchase agreements) representing more than 5% of its total assets are outstanding. The fund will not borrow from other funds advised by FMR or its affiliates if total outstanding borrowings immediately after such borrowing would exceed 15% of the fund's total assets. (iv) The fund does not currently intend to purchase any security if, as a result, more than 10% of its net assets would be invested in securities that are deemed to be illiquid because they are subject to legal or contractual restrictions on resale or because they cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. (v) The fund does not currently intend to purchase or sell futures contracts or call options. This limitation does not apply to options attached to, or acquired or traded together with, their underlying securities, and does not apply to securities that incorporate features similar to options or futures contracts. (vi) The fund does not currently intend to make loans, but this limitation does not apply to purchases of debt securities or to repurchase agreements. (vii) The fund does not currently intend to (a) purchase securities of other investment companies, except in the open market where no commission except the ordinary broker's commission is paid, or (b) purchase or retain securities issued by other open-end investment companies. Limitations (a) and (b) do not apply to securities received as dividends, through offers of exchange, or as a result of reorganization, consolidation, or merger. (viii) The fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by domestic or foreign governments or political subdivisions thereof) if, as a result, more than 5% of its total assets would be invested in the securities of business enterprises that, including predecessors, have a record of less than three years of continuous operation. (ix) The fund does not currently intend to purchase the securities of any issuer if those officers and Trustees of the trust and those officers and directors of FMR who individually own more than 1/2 of 1% of the securities of such issuer together own more than 5% of such issuer's securities. (x) The fund does not currently intend to invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objectives, policies, and limitations as the fund. For purposes of limitation (viii), pass-through entities and other special purpose vehicles or pools of financial assets, such as issuers of asset-backed securities or investment companies, are not considered "business enterprises." For the funds' policies on quality and maturity, see the section entitled "Quality and Maturity" on page . Each fund's investments must be consistent with its investment objective and policies. Accordingly, not all of the security types and investment techniques discussed below are eligible investments for each of the funds. INVESTMENT POLICIES OF CASH RESERVES ONLY: ASSET-BACKED SECURITIES include pools of mortgages, loans, receivables or other assets. Payment of principal and interest may be largely dependent upon the cash flows generated by the assets backing the securities and, in certain cases, supported by letters of credit, surety bonds, or other credit enhancements. The value of asset-backed securities may also be affected by the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities providing the credit support. DOMESTIC AND FOREIGN ISSUERS. Investments may be made in U.S. dollar-denominated time deposits, certificates of deposit, and bankers' acceptances of U.S. banks and their branches located outside of the United States, U.S. branches and agencies of foreign banks, and foreign branches of foreign banks. A fund may also invest in U.S. dollar-denominated securities issued or guaranteed by other U.S. or foreign issuers, including U.S. and foreign corporations or other business organizations, foreign governments, foreign government agencies or instrumentalities, and U.S. and foreign financial institutions, including savings and loan institutions, insurance companies, mortgage bankers, and real estate investment trusts, as well as banks. The obligations of foreign branches of U.S. banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and by governmental regulation. Payment of interest and principal on these obligations may also be affected by governmental action in the country of domicile of the branch (generally referred to as sovereign risk). In addition, evidence of ownership of portfolio securities may be held outside of the United States and a fund may be subject to the risks associated with the holding of such property overseas. Various provisions of federal law governing the establishment and operation of U.S. branches do not apply to foreign branches of U.S. banks. Obligations of U.S. branches and agencies of foreign banks may be general obligations of the parent bank in addition to the issuing branch, or may be limited by the terms of a specific obligation and by federal and state regulation, as well as by governmental action in the country in which the foreign bank has its head office. Obligations of foreign issuers involve certain additional risks. These risks may include future unfavorable political and economic developments, withholding taxes, seizures of foreign deposits, currency controls, interest limitations, or other governmental restrictions that might affect payment of principal or interest, or the ability to honor a credit commitment. Additionally, there may be less public information available about foreign entities. Foreign issuers may be subject to less governmental regulation and supervision than U.S. issuers. Foreign issuers also generally are not bound by uniform accounting, auditing, and financial reporting requirements comparable to those applicable to U.S. issuers. RESTRICTED SECURITIES generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, a fund may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a fund might obtain a less favorable price than prevailed when it decided to seek registration of the security. However, in general, each fund anticipates holding restricted securities to maturity or selling them in an exempt transaction. INVESTMENT POLICIES OF CASH RESERVES AND FIDELITY U.S. GOVERNMENT RESERVES: AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with financial institutions that are, or may be considered to be, "affiliated persons" of the fund under the Investment Company Act of 1940. These transactions may include repurchase agreements with custodian banks; short-term obligations of, and repurchase agreements with, the 50 largest U.S. banks (measured by deposits); municipal securities; U.S. government securities with affiliated financial institutions that are primary dealers in these securities; short-term currency transactions; and short-term borrowings. In accordance with exemptive orders issued by the Securities and Exchange Commission (SEC), the Board of Trustees has established and periodically reviews procedures applicable to transactions involving affiliated financial institutions. DELAYED-DELIVERY TRANSACTIONS. Each fund may buy and sell securities on a delayed-delivery or when-issued basis. These transactions involve a commitment by a fund to purchase or sell specific securities at a predetermined price or yield, with payment and delivery taking place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities on a delayed-delivery basis, each fund assumes the rights and risks of ownership, including the risk of price and yield fluctuations. Because a fund is not required to pay for securities until the delivery date, these risks are in addition to the risks associated with the fund's other investments. If a fund remains substantially fully invested at a time when delayed-delivery purchases are outstanding, the delayed-delivery purchases may result in a form of leverage. When delayed-delivery purchases are outstanding, the fund will set aside appropriate liquid assets in a segregated custodial account to cover its purchase obligations. When a fund has sold a security on a delayed-delivery basis, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity, or could suffer a loss. Each fund may renegotiate delayed-delivery transactions after they are entered into, and may sell underlying securities before they are delivered, which may result in capital gains or losses. ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. Under the supervision of the Board of Trustees, FMR determines the liquidity of a fund's investments and, through reports from FMR, the Board monitors investments in illiquid instruments. In determining the liquidity of a fund's investments, FMR may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the nature of the security (including any demand or tender features), and (5) the nature of the marketplace for trades (including the ability to assign or offset the fund's rights and obligations relating to the investment). Investments currently considered by the funds to be illiquid include repurchase agreements not entitling the holder to payment of principal and interest within seven days. Also, with regard to Cash Reserves, FMR may determine some restricted securities and time deposits to be illiquid. In the absence of market quotations, illiquid investments are valued for purposes of monitoring amortized cost valuation at fair value as determined in good faith by a committee appointed by the Board of Trustees. If through a change in values, net assets, or other circumstances, a fund were in a position where more than 10% of its net assets was invested in illiquid securities, it would seek to take appropriate steps to protect liquidity. INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive order issued by the SEC, each fund has received permission to lend money to, and borrow money from, other funds advised by FMR or its affiliates. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one day's notice. A fund will lend through the program only when the returns are higher than those available from other short-term instruments (such as repurchase agreements), and will borrow through the program only when the costs are equal to or lower than the cost of bank loans. A fund may have to borrow from a bank at a higher interest rate if an interfund loan is called or not renewed. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs. U.S. Government Reserves does not currently intend to participate in the program as a lender. MONEY MARKET SECURITIES are high-quality, short-term obligations. Some money market securities employ a trust or other similar structure to modify the maturity, price characteristics, or quality of financial assets. For example, put features can be used to modify the maturity of a security or interest rate adjustment features can be used to enhance price stability. If the structure does not perform as intended, adverse tax or investment consequences may result. Neither the Internal Revenue Service (IRS) nor any other regulatory authority has ruled definitively on certain legal issues presented by structured securities. Future tax or other regulatory determinations could adversely affect the value, liquidity, or tax treatment of the income received from these securities or the nature and timing of distributions made by the funds. MUNICIPAL SECURITIES are issued to raise money for a variety of public or private purposes, including general financing for state and local governments, or financing for specific projects or public facilities. They may be issued in anticipation of future revenues and may be backed by the full taxing power of a municipality, the revenues from a specific project, or the credit of a private organization. The value of some or all municipal securities may be affected by uncertainties in the municipal market related to legislation or litigation involving the taxation of municipal securities or the rights of municipal securities holders. A fund may own a municipal security directly or through a participation interest. PUT FEATURES entitle the holder to sell a security back to the issuer or a third party at any time or at specified intervals. They are subject to the risk that the put provider is unable to honor the put feature (purchase the security). With regard to Cash Reserves, put providers often support their ability to buy securities on demand by obtaining letters of credit or other guarantees from other entities. Demand features, standby commitments, and tender options are types of put features. QUALITY AND MATURITY. Pursuant to procedures adopted by the Board of Trustees, the funds may purchase only high-quality securities that FMR believes present minimal credit risks. To be considered high-quality, a security must be rated in accordance with applicable rules in one of the two highest categories for short-term securities by at least two nationally recognized rating services (or by one, if only one rating service has rated the security); or, if unrated, judged to be of equivalent quality by FMR. High-quality securities are divided into "first tier" and "second tier" securities. First tier securities are those deemed to be in the highest rating category (e.g., Standard & Poor's A-1), and second tier securities are those deemed to be in the second highest rating category (e.g., Standard & Poor's A-2). Split-rated securities may be determined to be either first tier or second tier based on applicable regulations. A fund may not invest more than 5% of its total assets in second tier securities. In addition, a fund may not invest more than 1% of its total assets or $1 million (whichever is greater) in the second tier securities of a single issuer. A fund currently intends to limit its investments to securities with remaining maturities of 397 days or less, and to maintain a dollar-weighted average maturity of 90 days or less. When determining the maturity of a security, a fund may look to an interest rate reset or demand feature. REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a security and simultaneously commits to sell that security back to the original seller at an agreed-upon price. The resale price reflects the purchase price plus an agreed-upon incremental amount which is unrelated to the coupon rate or maturity of the purchased security. To protect the fund from the risk that the original seller will not fulfill its obligation, the securities are held in an account of the fund at a bank, marked-to-market daily, and maintained at a value at least equal to the sale price plus the accrued incremental amount. While it does not presently appear possible to eliminate all risks from these transactions (particularly the possibility that the value of the underlying security will be less than the resale price, as well as delays and costs to a fund in connection with bankruptcy proceedings), it is each fund's current policy to engage in repurchase agreement transactions with parties whose creditworthiness has been reviewed and found satisfactory by FMR. REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells a portfolio instrument to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase the instrument at a particular price and time. While a reverse repurchase agreement is outstanding, the fund will maintain appropriate liquid assets in a segregated custodial account to cover its obligation under the agreement. A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been found satisfactory by FMR. Such transactions may increase fluctuations in the market value of the fund's assets and may be viewed as a form of leverage. SHORT SALES "AGAINST THE BOX." A fund may sell securities short when it owns or has the right to obtain securities equivalent in kind or amount to the securities sold short. Short sales could be used to protect the net asset value per share of the fund in anticipation of increased interest rates, without sacrificing the current yield of the securities sold short. If a fund enters into a short sale against the box, it will be required to set aside securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) and will be required to hold such securities while the short sale is outstanding. The fund will incur transaction costs, including interest expenses, in connection with opening, maintaining, and closing short sales against the box. SOURCES OF CREDIT OR LIQUIDITY SUPPORT. FMR may rely on its evaluation of the credit of a bank or another entity in determining whether to purchase a security supported by a letter of credit guarantee, insurance or other source of credit or liquidity. With respect to Cash Reserves, i n evaluating the credit of a foreign bank or other foreign entities, FMR will consider whether adequate public information about the entity is available and whether the entity may be subject to unfavorable political or economic developments, currency controls, or other government restrictions that might affect its ability to honor its commitment. STRIPPED GOVERNMENT SECURITIES. Stripped securities are created by separating the income and principal components of a debt instrument and selling them separately. U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are created when the coupon payments and the principal payment are stripped from an outstanding Treasury bond by the Federal Reserve Bank. Bonds issued by the government agencies also may be stripped in this fashion. Privately stripped government securities are created when a dealer deposits a Treasury security or federal agency security with a custodian for safekeeping and then sells the coupon payments and principal payment that will be generated by this security. Proprietary receipts, such as Certificates of Accrual on Treasury Securities (CATS), Treasury Investment Growth Receipts (TIGRS), and generic Treasury Receipts (TRs), are stripped U.S. Treasury securities that are separated into their component parts through trusts created by their broker sponsors. Bonds issued by the government agencies also may be stripped in this fashion. Because of the SEC's views on privately stripped government securities, a fund must evaluate them as it would non-government securities pursuant to regulatory guidelines applicable to all money market funds. A fund currently intends to purchase only those privately stripped government securities that have either received the highest rating from two nationally recognized rating services (or one, if only one has rated the security) or, if unrated, have been judged to be of equivalent quality by FMR pursuant to procedures adopted by the Board of Trustees. VARIABLE AND FLOATING RATE SECURITIES provide for periodic adjustments of the interest rate paid on the security. Variable rate securities provide for a specified periodic adjustment in the interest rate, while floating rate securities have interest rates that change whenever there is a change in a designated benchmark rate. Some variable or floating rate securities have put features. All orders for the purchase or sale of portfolio securities are placed on behalf of each fund by FMR pursuant to authority contained in the management contract. FMR has granted investment management authority to the sub-adviser (see the section entitled "Management Contracts"), and the sub-adviser is authorized to place orders for the purchase and sale of portfolio securities, and will do so in accordance with the policies described below. FMR is also responsible for the placement of transaction orders for other investment companies and accounts for which it or its affiliates act as investment adviser. Securities purchased and sold by a fund generally will be traded on a net basis (i.e., without commission). In selecting broker-dealers, subject to applicable limitations of the federal securities laws, FMR considers various relevant factors, including, but not limited to, the size and type of the transaction; the nature and character of the markets for the security to be purchased or sold; the execution efficiency, settlement capability, and financial condition of the broker-dealer firm; the broker-dealer's execution services rendered on a continuing basis; and the reasonableness of any commissions. The funds may execute portfolio transactions with broker-dealers who provide research and execution services to the funds or other accounts over which FMR or its affiliates exercise investment discretion. Such services may include advice concerning the value of securities; the advisability of investing in, purchasing, or selling securities; and the availability of securities or the purchasers or sellers of securities. In addition, such broker-dealers may furnish analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and performance of accounts; effect securities transactions, and perform functions incidental thereto (such as clearance and settlement). FMR maintains a listing of broker-dealers who provide such services on a regular basis. However, as many transactions on behalf of the funds are placed with broker-dealers (including broker-dealers on the list) without regard to the furnishing of such services, it is not possible to estimate the proportion of such transactions directed to such broker-dealers solely because such services were provided. The selection of such broker-dealers generally is made by FMR (to the extent possible consistent with execution considerations) based upon the quality of research and execution services provided. The receipt of research from broker-dealers that execute transactions on behalf of the funds may be useful to FMR in rendering investment management services to the funds or its other clients, and conversely, such research provided by broker-dealers who have executed transaction orders on behalf of other FMR clients may be useful to FMR in carrying out its obligations to the funds. The receipt of such research has not reduced FMR's normal independent research activities; however, it enables FMR to avoid the additional expenses that could be incurred if FMR tried to develop comparable information through its own efforts. Subject to applicable limitations of the federal securities laws, broker-dealers may receive commissions for agency transactions that are in excess of the amount of commissions charged by other broker-dealers in recognition of their research and execution services. In order to cause each fund to pay such higher commissions, FMR must determine in good faith that such commissions are reasonable in relation to the value of the brokerage and research services provided by such executing broker-dealers, viewed in terms of a particular transaction or FMR's overall responsibilities to the funds and its other clients. In reaching this determination, FMR will not attempt to place a specific dollar value on the brokerage and research services provided, or to determine what portion of the compensation should be related to those services. FMR is authorized to use research services provided by and to place portfolio transactions with brokerage firms that have provided assistance in the distribution of shares of the funds or shares of other Fidelity funds to the extent permitted by law. FMR may use research services provided by and place agency transactions with Fidelity Brokerage Services, Inc. (FBSI) and Fidelity Brokerage Services (FBS), subsidiaries of FMR Corp., if the commissions are fair, reasonable, and comparable to commissions charged by non-affiliated, qualified brokerage firms for similar services. From September 1992 through December 1994, FBS operated under the name Fidelity Brokerage Services Limited, Inc. (FBSL). As of January 1995, FBSL was converted to an unlimited liability company and assumed the name FBS. Prior to September 4, 1992, FBSL operated under the name Fidelity Portfolio Services, Ltd. (FPSL) as a wholly owned subsidiary of Fidelity International Limited (FIL). Edward C. Johnson 3d is Chairman of FIL. Mr. Johnson 3d, Johnson family members, and various trusts for the benefit of the Johnson family own, directly or indirectly, more than 25% of the voting common stock of FIL. Section 11(a) of the Securities Exchange Act of 1934 prohibits members of national securities exchanges from executing exchange transactions for accounts which they or their affiliates manage, unless certain requirements are satisfied. Pursuant to such requirements, the Board of Trustees has authorized FBSI to execute portfolio transactions on national securities exchanges in accordance with approved procedures and applicable SEC rules. Each fund's Trustees periodically review FMR's performance of its responsibilities in connection with the placement of portfolio transactions on behalf of the funds and review the commissions paid by each fund over representative periods of time to determine if they are reasonable in relation to the benefits to the fund. During fiscal 1995, the funds paid no fees to brokerage firms that provided research services. From time to time the Trustees will review whether the recapture for the benefit of the funds of some portion of the brokerage commissions or similar fees paid by the funds on portfolio transactions is legally permissible and advisable. Each fund seeks to recapture soliciting broker-dealer fees on the tender of portfolio securities, but at present no other recapture arrangements are in effect. The Trustees intend to continue to review whether recapture opportunities are available and are legally permissible and, if so, to determine in the exercise of their business judgment whether it would be advisable for each fund to seek such recapture. Although the Trustees and officers of each fund are substantially the same as those of other funds managed by FMR, investment decisions for each fund are made independently from those of other funds managed by FMR or accounts managed by FMR affiliates. It sometimes happens that the same security is held in the portfolio of more than one of these funds or accounts. Simultaneous transactions are inevitable when several funds and accounts are managed by the same investment adviser, particularly when the same security is suitable for the investment objective of more than one fund or account. When two or more funds are simultaneously engaged in the purchase or sale of the same security, the prices and amounts are allocated in accordance with procedures believed to be appropriate and equitable for each fund. In some cases this system could have a detrimental effect on the price or value of the security as far as each fund is concerned. In other cases, however, the ability of the funds to participate in volume transactions will produce better executions and prices for the funds. It is the current opinion of the Trustees that the desirability of retaining FMR as investment adviser to each fund outweighs any disadvantages that may be said to exist from exposure to simultaneous transactions. Each fund values its investments on the basis of amortized cost. This technique involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its value based on current market quotations or appropriate substitutes which reflect current market conditions. The amortized cost value of an instrument may be higher or lower than the price each fund would receive if it sold the instrument. Valuing a fund's instruments on the basis of amortized cost and use of the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act. Each fund must adhere to certain conditions under Rule 2a-7. The Board of Trustees of the trust oversees FMR's adherence to SEC rules concerning money market funds, and has established procedures designed to stabilize each fund's net asset value (NAV) at $1.00. At such intervals as they deem appropriate, the Trustees consider the extent to which NAV calculated by using market valuations would deviate from $1.00 per share. If the Trustees believe that a deviation from a fund's amortized cost per share may result in material dilution or other unfair results to shareholders, the Trustees have agreed to take such corrective action, if any, as they deem appropriate to eliminate or reduce, to the extent reasonably practicable, the dilution or unfair results. Such corrective action could include selling portfolio instruments prior to maturity to realize capital gains or losses or to shorten average portfolio maturity; withholding dividends; redeeming shares in kind; establishing NAV by using available market quotations; and such other measures as the Trustees may deem appropriate. During periods of declining interest rates, each fund's yield based on amortized cost may be higher than the yield based on market valuations. Under these circumstances, a shareholder in either fund would be able to obtain a somewhat higher yield than would result if each fund utilized market valuations to determine its NAV. The converse would apply in a period of rising interest rates. The funds may quote performance in various ways. All performance information supplied by the funds in advertising is historical and is not intended to indicate future returns. Each fund's yield and total return fluctuate in response to market conditions and other factors. YIELD CALCULATIONS. To compute a fund's yield for a period, the net change in value of a hypothetical account containing one share reflects the value of additional shares purchased with dividends from the one original share and dividends declared on both the original share and any additional shares. The net change is then divided by the value of the account at the beginning of the period to obtain a base period return. This base period return is annualized to obtain a current annualized yield. A fund also may calculate an effective yield by compounding the base period return over a one-year period. In addition to the current yield, the funds may quote yields in advertising based on any historical seven-day period. Yields for the funds are calculated on the same basis as other money market funds, as required by applicable regulations. Yield information may be useful in reviewing a fund's performance and in providing a basis for comparison with other investment alternatives. However, each fund's yield fluctuates, unlike investments that pay a fixed interest rate over a stated period of time. When comparing investment alternatives, investors should also note the quality and maturity of the portfolio securities of respective investment companies they have chosen to consider. Investors should recognize that in periods of declining interest rates a fund's yield will tend to be somewhat higher than prevailing market rates, and in periods of rising interest rates the fund's yield will tend to be somewhat lower. Also, when interest rates are falling, the inflow of net new money to a fund from the continuous sale of its shares will likely be invested in instruments producing lower yields than the balance of the fund's holdings, thereby reducing the fund's current yield. In periods of rising interest rates, the opposite can be expected to occur. TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all aspects of a fund's return, including the effect of reinvesting dividends and capital gain distributions, and any change in the fund's net asset value (NAV) over a stated period. Average annual total returns are calculated by determining the growth or decline in value of a hypothetical historical investment in a fund over a stated period, and then calculating the annually compounded percentage rate that would have produced the same result if the rate of growth or decline in value had been constant over the period. For example, a cumulative total return of 100% over ten years would produce an average annual total return of 7.18%, which is the steady annual rate of return that would equal 100% growth on a compounded basis in ten years. While average annual total returns are a convenient means of comparing investment alternatives, investors should realize that a fund's performance is not constant over time, but changes from year to year, and that average annual total returns represent averaged figures as opposed to the actual year-to-year performance of the fund. In addition to average annual total returns, a fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Average annual and cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, or a series of redemptions, over any time period. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship of these factors and their contributions to total return. Total returns may be quoted on a before-tax or after-tax basis. Total returns, yields, and other performance information may be quoted numerically or in a table, graph, or similar illustration. HISTORICAL FUND RESULTS. The following table shows each fund's 7-day yield and total returns for the period ended November 30, 1995.
The following table shows the income and capital elements of each fund's cumulative total return. The table compares each fund's return to the record of the Standard & Poor's Composite Index of 500 Stocks (S&P 500), the Dow Jones Industrial Average (DJIA), and the cost of living (measured by the Consumer Price Index, or CPI) over the same period. The CPI information is as of the month end closest to the initial investment date for each fund. The S&P 500 and DJIA comparisons are provided to show how each fund's total return compared to the record of a broad average of common stocks and a narrower set of stocks of major industrial companies, respectively, over the same period. Of course, since each fund invests in short-term fixed-income securities, common stocks represent a different type of investment from the fund. Common stocks generally offer greater growth potential than the funds, but generally experience greater price volatility, which means greater potential for loss. In addition, common stocks generally provide lower income than a fixed-income investment such as the funds. Figures for the S&P 500(registered trademark) and DJIA are based on the prices of unmanaged groups of stocks and, unlike the funds' returns, do not include the effect of paying brokerage commissions or other costs of investing. FIDELITY CASH RESERVES. During the ten year period ended November 30, 1995, a hypothetical $10,000 investment in Cash Reserves would have grown to $ 17,791 , assuming all distributions were reinvested. This was a period of fluctuating interest rates and the figures below should not be considered representative of the dividend income or capital gain or loss that could be realized from an investment in the fund today.
Explanatory Notes: With an initial investment of $10,000 made on November 30, 1985, the net amount invested in fund shares was $10,000. The cost of the initial investment ($10,000), together with the aggregate cost of reinvested dividends for the period covered (their cash value at the time they were reinvested), amounted to $ 17,791 . If distributions had not been reinvested, the amount of distributions earned from the fund over time would have been smaller, and cash payments (dividends) for the period would have amounted to $ 5,776 . The fund did not distribute any capital gains during the period. Tax consequences of different investments have not been factored into the above figures. FIDELITY U.S. GOVERNMENT RESERVES. During the ten year period ended November 30, 1995, a hypothetical $10,000 investment in U.S. Government Reserves would have grown to $ 17,416 , assuming all distributions were reinvested. This was a period of fluctuating interest rates and the figures below should not be considered representative of the dividend income or capital gain or loss that could be realized from an investment in the fund today. FIDELITY U.S. GOVERNMENT RESERVES INDICES
Explanatory Notes: With an initial investment of $10,000 made on November 30, 1985, the net amount invested in fund shares was $10,000. The cost of the initial investment ($10,000), together with the aggregate cost of reinvested dividends for the period covered (their cash value at the time they were reinvested), amounted to $ 17,416 . If distributions had not been reinvested, the amount of distributions earned from the fund over time would have been smaller, and cash payments (dividends) for the period would have amounted to $ 5,562 . The fund did not distribute any capital gains during the period. Tax consequences of different investments have not been factored into the above figures. PERFORMANCE COMPARISONS. A fund's performance may be compared to the performance of other mutual funds in general, or to the performance of particular types of mutual funds. These comparisons may be expressed as mutual fund rankings prepared by Lipper Analytical Services, Inc. (Lipper), an independent service located in Summit, New Jersey that monitors the performance of mutual funds. Lipper generally ranks funds on the basis of total return, assuming reinvestment of distributions, but does not take sales charges or redemption fees into consideration, and is prepared without regard to tax consequences. Lipper may also rank funds based on yield. In addition to the mutual fund rankings, a fund's performance may be compared to stock, bond, and money market mutual fund performance indices prepared by Lipper or other organizations. When comparing these indices, it is important to remember the risk and return characteristics of each type of investment. For example, while stock mutual funds may offer higher potential returns, they also carry the highest degree of share price volatility. Likewise, money market funds may offer greater stability of principal, but generally do not offer the higher potential returns available from stock mutual funds. From time to time, a fund's performance may also be compared to other mutual funds tracked by financial or business publications and periodicals. For example, the fund may quote Morningstar, Inc. in its advertising materials. Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the basis of risk-adjusted performance. Rankings that compare the performance of Fidelity funds to one another in appropriate categories over specific periods of time may also be quoted in advertising. A fund may be compared in advertising to Certificates of Deposit (CDs) or other investments issued by banks or other depository institutions. Mutual funds differ from bank investments in several respects. For example, a fund may offer greater liquidity or higher potential returns than CDs, a fund does not guarantee your principal or your return, and fund shares are not FDIC insured. Fidelity may provide information designed to help individuals understand their investment goals and explore various financial strategies. Such information may include information about current economic, market, and political conditions; materials that describe general principles of investing, such as asset allocation, diversification, risk tolerance, and goal setting; questionnaires designed to help create a personal financial profile; worksheets used to project savings needs based on assumed rates of inflation and hypothetical rates of return; and action plans offering investment alternatives. Materials may also include discussions of Fidelity's asset allocation funds and other Fidelity funds, products, and services. Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the CPI), and combinations of various capital markets. The performance of these capital markets is based on the returns of different indices. Fidelity funds may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. Performance comparisons may also include the value of a hypothetical investment in any of these capital markets. The risks associated with the security types in any capital market may or may not correspond directly to those of the funds. Ibbotson calculates total returns in the same method as the funds. The funds may also compare performance to that of other compilations or indices that may be developed and made available in the future. A fund may compare its performance or the performance of securities in which it may invest to averages published by IBC USA (Publications), Inc. of Ashland, Massachusetts. These averages assume reinvestment of distributions. The IBC/Donoghue's MONEY FUND AVERAGES(trademark)/All Taxable, which is reported in the MONEY FUND REPORT(registered trademark), covers over 766 taxable money market funds. In advertising materials, Fidelity may reference or discuss its products and services, which may include other Fidelity funds; retirement investing; brokerage products and services; model portfolios or allocations; saving for college or other goals; charitable giving; and the Fidelity credit card. In addition, Fidelity may quote or reprint financial or business publications and periodicals as they relate to current economic and political conditions, fund management, portfolio composition, investment philosophy, investment techniques, the desirability of owning a particular mutual fund, and Fidelity services and products. Fidelity may also reprint, and use as advertising and sales literature, articles from Fidelity Focus, a quarterly magazine provided free of charge to Fidelity fund shareholders. A fund may present its fund number, Quotron(trademark) number, and CUSIP number, and discuss or quote its current portfolio manager. A fund may be available for purchase through retirement plans or other programs offering deferral of, or exemption from, income taxes, which may produce superior after-tax returns over time. For example, a $1,000 investment earning a taxable return of 10% annually would have an after-tax value of $1,949 after ten years, assuming tax was deducted from the return each year at a 31% rate. An equivalent tax-deferred investment would have an after-tax value of $2,100 after ten years, assuming tax was deducted at a 31% rate from the tax-deferred earnings at the end of the ten-year period. As of November 30, 1995, FMR advised over $ 26 billion in tax-free fund assets, $ 81 billion in money market fund assets, $ 234 billion in equity fund assets, $ 48 billion in international fund assets, and $ 23 billion in Spartan fund assets. The funds may reference the growth and variety of money market mutual funds and the adviser's innovation and participation in the industry. The equity funds under management figure represents the largest amount of equity fund assets under management by a mutual fund investment adviser in the United States, making FMR America's leading equity (stock) fund manager. FMR, its subsidiaries, and affiliates maintain a worldwide information and communications network for the purpose of researching and managing investments abroad. Cash Reserves may be advertised as an investment choice under the Fidelity College Savings Plan or the Fidelity Investor Card mutual fund option. Advertising may contain illustrations of projected future college costs based on assumed rates of inflation and examples of hypothetical performance. Advertising for the Fidelity College Savings Plan mutual fund option may be used in conjunction with advertising for the Fidelity College Savings Plan brokerage option, a product offered through Fidelity Brokerage Services, Inc. The Fidelity Investor Card is a product offered through Fidelity Trust Company. In addition to performance rankings, each fund may compare its total expense ratio to the average total expense ratio of similar funds tracked by Lipper. A fund's total expense ratio is a significant factor in comparing bond and money market investments because of its effect on yield. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION Each fund is open for business and its net asset value per share (NAV) is calculated each day the New York Stock Exchange (NYSE) is open for trading. The NYSE has designated the following holiday closings for 1996: New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although FMR expects the same holiday schedule to be observed in the future, the NYSE may modify its holiday schedule at any time. In addition, the funds will not process wire purchases and redemptions on days when the Federal Reserve Wire System is closed. FSC normally determines each fund's NAV as of the close of the NYSE (normally 4:00 p.m. Eastern time). However, NAV may be calculated earlier if trading on the NYSE is restricted or as permitted by the Securities and Exchange Commission (SEC). To the extent that portfolio securities are traded in other markets on days when the NYSE is closed, a fund's NAV may be affected on days when investors do not have access to the fund to purchase or redeem shares. In addition, trading in some of a fund's portfolio securities may not occur on days when the fund is open for business. If the Trustees determine that existing conditions make cash payments undesirable, redemption payments may be made in whole or in part in securities or other property, valued for this purpose as they are valued in computing a fund's NAV. Shareholders receiving securities or other property on redemption may realize a gain or loss for tax purposes, and will incur any costs of sale, as well as the associated inconveniences. Pursuant to Rule 11a-3 under the Investment Company Act of 1940 (the 1940 Act), each fund is required to give shareholders at least 60 days' notice prior to terminating or modifying its exchange privilege. Under the Rule, the 60-day notification requirement may be waived if (i) the only effect of a modification would be to reduce or eliminate an administrative fee, redemption fee, or deferred sales charge ordinarily payable at the time of an exchange, or (ii) the fund suspends the redemption of the shares to be exchanged as permitted under the 1940 Act or the rules and regulations thereunder, or the fund to be acquired suspends the sale of its shares because it is unable to invest amounts effectively in accordance with its investment objective and policies. In the Prospectus, each fund has notified shareholders that it reserves the right at any time, without prior notice, to refuse exchange purchases by any person or group if, in FMR's judgment, the fund would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. DISTRIBUTIONS. If you request to have distributions mailed to you and the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, Fidelity may reinvest your distributions at the then-current NAV. All subsequent distributions will then be reinvested until you provide Fidelity with alternate instructions. DIVIDENDS. Because each fund's income is primarily derived from interest, dividends from a fund generally will not qualify for the dividends-received deduction available to corporate shareholders. Short-term capital gains are distributed as dividend income, but do not qualify for the dividends-received deduction. A portion of each fund's dividends derived from certain U.S. government obligations may be exempt from state and local taxation. Each fund will send each shareholder a notice in January describing the tax status of dividend and capital gain distributions (if any) for the prior year. CAPITAL GAIN DISTRIBUTIONS. Each fund may distribute any net realized short-term capital gains once a year or more often as necessary, to maintain its net asset value at $1.00 per share. As of November 30, 1995, Cash Reserves had a capital loss carryforward aggregating approximately $2,144,000. This loss carryforward of which $510,000 and $1,634,000 will expire on November 30, 2001 and 2002, respectively, is available to offset future capital gains. As of November 30, 1995, U.S. Government Reserves had a capital loss carryforward aggregating approximately $97,000. This loss carryforward of which $31,000 and $66,000 will expire on November 30, 2001 and 2003, respectively, is available to offset future capital gains. STATE AND LOCAL TAX ISSUES. For mutual funds organized as business trusts, state law provides for a pass-through of the state and local income tax exemption afforded to direct owners of U.S. government securities. Some states limit this to mutual funds that invest a certain amount in U.S. government securities, and some types of securities, such as repurchase agreements and some agency backed securities, may not qualify for this benefit. The tax treatment of your dividend distributions from a fund will be the same as if you directly owned your proportionate share of the U.S. government securities in each fund's portfolio. Because the income earned on most U.S. government securities in which each fund invests is exempt from state and local income taxes, the portion of your dividends from each fund attributable to these securities will also be free from income taxes. The exemption from state and local income taxation does not preclude states from assessing other taxes on the ownership of U.S. government securities. In a number of states, corporate franchise (income) tax laws do not exempt interest earned on U.S. government securities whether such securities are held directly or through a fund. FOREIGN TAXES. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund's total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid and thereby allow shareholders to take a credit or deduction on their individual tax returns. TAX STATUS OF THE FUNDS. Each fund intends to qualify each year as a "regulated investment company" for tax purposes so that it will not be liable for federal tax on income and capital gains distributed to shareholders. In order to qualify as a regulated investment company and avoid being subject to federal income or excise taxes at the fund level, each fund intends to distribute substantially all of its net investment income and net realized capital gains within each calendar year as well as on a fiscal year basis. Each fund is treated as a separate entity from the other funds of Fidelity Phillips Street Trust for tax purposes. OTHER TAX INFORMATION. The information above is only a summary of some of the tax consequences generally affecting each fund and its shareholders, and no attempt has been made to discuss individual tax consequences. In addition to federal income taxes, shareholders may be subject to state and local taxes on fund distributions, and shares may be subject to state and local personal property taxes. Investors should consult their tax advisers to determine whether a fund is suitable to their particular tax situation. All of the stock of FMR is owned by FMR Corp., its parent organized in 1972. The voting common stock of FMR Corp. is divided into two classes. Class B is held predominantly by members of the Edward C. Johnson 3d family and is entitled to 49% of the vote on any matter acted upon by the voting common stock. Class A is held predominantly by non-Johnson family member employees of FMR Corp. and its affiliates and is entitled to 51% of the vote on any such matter. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Under the Investment Company Act of 1940 (1940 Act), control of a company is presumed where one individual or group of individuals owns more than 25% of the voting stock of that company. Therefore, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the 1940 Act, to form a controlling group with respect to FMR Corp. At present, the principal operating activities of FMR Corp. are those conducted by three of its divisions as follows: FSC, which is the transfer and shareholder servicing agent for certain of the funds advised by FMR; Fidelity Investments Institutional Operations Company, which performs shareholder servicing functions for institutional customers and funds sold through intermediaries; and Fidelity Investments Retail Marketing Company, which provides marketing services to various companies within the Fidelity organization. Fidelity investment personnel may invest in securities for their own account pursuant to a code of ethics that sets forth all employees' fiduciary responsibilities regarding the funds, establishes procedures for personal investing and restricts certain transactions. For example, all personal trades in most securities require pre-clearance, and participation in initial public offerings is prohibited. In addition, restrictions on the timing of personal investing in relation to trades by Fidelity funds and on short-term trading have been adopted. The Trustees and executive officers of the trust are listed below. Except as indicated, each individual has held the office shown or other offices in the same company for the last five years. Trustees and officers elected or appointed to Fidelity Cash Reserves prior to the conversion from a series of that trust to a series of Fidelity Phillips Street Trust served Fidelity Cash Reserves in identical capacities. Trustees and officers elected or appointed to Fidelity U.S. Government Reserves prior to the fund's conversion from a fund of Fidelity Charles Street Trust to a fund of Fidelity Phillips Street Trust served Fidelity Charles Street Trust in identical capacities. All persons named as Trustees also serve in similar capacities for other funds advised by FMR. The business address of each Trustee and officer who is an "interested person" (as defined in the Investment Company Act of 1940) is 82 Devonshire Street, Boston, Massachusetts 02109, which is also the address of FMR. The business address of all the other Trustees is Fidelity Investments, P.O. Box 9235, Boston, Massachusetts 02205-9235. Those Trustees who are "interested persons" by virtue of their affiliation with either the trust or FMR are indicated by an asterisk (*). *EDWARD C. JOHNSON 3d (65), Trustee and President, is Chairman, Chief Executive Officer and a Director of FMR Corp.; a Director and Chairman of the Board and of the Executive Committee of FMR; Chairman and a Director of FMR Texas Inc., Fidelity Management & Research (U.K.) Inc., and Fidelity Management & Research (Far East) Inc. *J. GARY BURKHEAD (54), Trustee and Senior Vice President, is President of FMR; and President and a Director of FMR Texas Inc., Fidelity Management & Research (U.K.) Inc., and Fidelity Management & Research (Far East) Inc. RALPH F. COX (63), Trustee (1991), is a consultant to Western Mining Corporation (1994). Prior to February 1994, he was President of Greenhill Petroleum Corporation (petroleum exploration and production, 1990). Until March 1990, Mr. Cox was President and Chief Operating Officer of Union Pacific Resources Company (exploration and production). He is a Director of Sanifill Corporation (non-hazardous waste, 1993) and CH2M Hill Companies (engineering). In addition, he served on the Board of Directors of the Norton Company (manufacturer of industrial devices, 1983-1990) and continues to serve on the Board of Directors of the Texas State Chamber of Commerce, and is a member of advisory boards of Texas A&M University and the University of Texas at Austin. PHYLLIS BURKE DAVIS (63), Trustee (1992). Prior to her retirement in September 1991, Mrs. Davis was the Senior Vice President of Corporate Affairs of Avon Products, Inc. She is currently a Director of BellSouth Corporation (telecommunications), Eaton Corporation (manufacturing, 1991), and the TJX Companies, Inc. (retail stores, 1990), and previously served as a Director of Hallmark Cards, Inc. (1985-1991) and Nabisco Brands, Inc. In addition, she is a member of the President's Advisory Council of The University of Vermont School of Business Administration. RICHARD J. FLYNN (71), Trustee, is a financial consultant. Prior to September 1986, Mr. Flynn was Vice Chairman and a Director of the Norton Company (manufacturer of industrial devices). He is currently a Trustee of College of the Holy Cross and Old Sturbridge Village, Inc., and he previously served as a Director of Mechanics Bank (1971-1995). E. BRADLEY JONES (68), Trustee (1990). Prior to his retirement in 1984, Mr. Jones was Chairman and Chief Executive Officer of LTV Steel Company. He is a Director of TRW Inc. (original equipment and replacement products), Cleveland-Cliffs Inc . (mining), Consolidated Rail Corporation, Birmingham Steel Corporation, and RPM, Inc. (manufacturer of chemical products, 1990), and he previously served as a Director of NACCO Industries, Inc. (mining and marketing, 1985-1995) and Hyster-Yale Materials Handling, Inc. (1985-1995). In addition, he serves as a Trustee of First Union Real Estate Investments, a Trustee and member of the Executive Committee of the Cleveland Clinic Foundation, a Trustee and member of the Executive Committee of University School (Cleveland), and a Trustee of Cleveland Clinic Florida. DONALD J. KIRK (63), Trustee, is Executive-in-Residence (1995) at Columbia University Graduate School of Business and a financial consultant. From 1987 to January 1995, Mr. Kirk was a Professor at Columbia University Graduate School of Business. Prior to 1987, he was Chairman of the Financial Accounting Standards Board. Mr. Kirk is a Director of General Re Corporation (reinsurance), and he previously served as a Director of Valuation Research Corp. (appraisals and valuations, 1993-1995). In addition, he serves as Chairman of the Board of Directors of the National Arts Stabilization Fund, Vice Chairman of the Board of Trustees of the Greenwich Hospital Association, and as a Member of the Public Oversight Board of the American Institute of Certified Public Accountants' SEC Practice Section (1995). *PETER S. LYNCH (52), Trustee (1990) is Vice Chairman and Director of FMR (1992). Prior to May 31, 1990, he was a Director of FMR and Executive Vice President of FMR (a position he held until March 31, 1991); Vice President of Fidelity Magellan Fund and FMR Growth Group Leader; and Managing Director of FMR Corp. Mr. Lynch was also Vice President of Fidelity Investments Corporate Services (1991-1992). He is a Director of W.R. Grace & Co. (chemicals) and Morrison Knudsen Corporation (engineering and construction). In addition, he serves as a Trustee of Boston College, Massachusetts Eye & Ear Infirmary, Historic Deerfield (1989) and Society for the Preservation of New England Antiquities, and as an Overseer of the Museum of Fine Arts of Boston (1990). GERALD C. McDONOUGH (66), Trustee, is Chairman of G.M. Management Group (strategic advisory services). Prior to his retirement in July 1988, he was Chairman and Chief Executive Officer of Leaseway Transportation Corp. (physical distribution services). Mr. McDonough is a Director of ACME-Cleveland Corp. (metal working, telecommunications and electronic products), Brush-Wellman Inc. (metal refining), York International Corp. (air conditioning and refrigeration), Commercial Intertech Corp. (water treatment equipment, 1992), and Associated Estates Realty Corporation (a real estate investment trust, 1993). EDWARD H. MALONE (71), Trustee. Prior to his retirement in 1985, Mr. Malone was Chairman, General Electric Investment Corporation and a Vice President of General Electric Company. He is a Director of Allegheny Power Systems, Inc. (electric utility), General Re Corporation (reinsurance) and Mattel Inc. (toy manufacturer). In addition, he serves as a Trustee of the Naples Philharmonic Center for the Arts and Rensselaer Polytechnic Institute, and he is a member of the Advisory Boards of Butler Capital Corporation Funds and Warburg, Pincus Partnership Funds. MARVIN L. MANN (62), Trustee (1993) is Chairman of the Board, President, and Chief Executive Officer of Lexmark International, Inc. (office machines, 1991). Prior to 1991, he held the positions of Vice President of International Business Machines Corporation ("IBM") and President and General Manager of various IBM divisions and subsidiaries. Mr. Mann is a Director of M.A. Hanna Company (chemicals, 1993) and Infomart (marketing services, 1991), a Trammell Crow Co. In addition, he serves as the Campaign Vice Chairman of the Tri-State United Way (1993) and is a member of the University of Alabama President's Cabinet (1990). THOMAS R. WILLIAMS (67), Trustee, is President of The Wales Group, Inc. (management and financial advisory services). Prior to retiring in 1987, Mr. Williams served as Chairman of the Board of First Wachovia Corporation (bank holding company), and Chairman and Chief Executive Officer of The First National Bank of Atlanta and First Atlanta Corporation (bank holding company). He is currently a Director of BellSouth Corporation (telecommunications), ConAgra, Inc. (agricultural products), Fisher Business Systems, Inc. (computer software), Georgia Power Company (electric utility), Gerber Alley & Associates, Inc. (computer software), National Life Insurance Company of Vermont, American Software, Inc., and AppleSouth, Inc. (restaurants, 1992). FRED L. HENNING, JR. (56), Vice President, is Vice President of Fidelity's money market (1994) and fixed-income (1995) funds and Senior Vice President of FMR Texas Inc. LELAND BARRON (36), is manager and Vice President of U.S. Government Reserves. ROBERT LITTERST (36), is manager and Vice President of Cash Reserves. ARTHUR S. LORING (48), Secretary, is Senior Vice President (1993) and General Counsel of FMR, Vice President-Legal of FMR Corp., and Vice President and Clerk of FDC. KENNETH A. RATHGEBER (48), Treasurer (1995), is Treasurer of the Fidelity funds and is an employee of FMR (1995). Before joining FMR, Mr. Rathgeber was a Vice President of Goldman Sachs & Co. (1978-1995), where he served in various positions, including Vice President of Proprietary Accounting (1988-1992), Global Co-Controller (1992-1994), and Chief Operations Officer of Goldman Sachs (Asia) LLC (1994-1995). THOMAS D. MAHER (50), Assistant Vice President (1990), is Assistant Vice President of Fidelity's money market funds and Vice President and Associate General Counsel of FMR Texas Inc. (1990). Prior to 1990, Mr. Maher was an employee of FMR. JOHN H. COSTELLO (49), Assistant Treasurer, is an employee of FMR. LEONARD M. RUSH (49), Assistant Treasurer (1994), is an employee of FMR (1994). Prior to becoming Assistant Treasurer of the Fidelity funds, Mr. Rush was Chief Compliance Officer of FMR Corp. (1993-1994); Chief Financial Officer of Fidelity Brokerage Services, Inc. (1990-1993); and Vice President, Assistant Controller, and Director of the Accounting Department - First Boston Corp. (1986-1990). The following table sets forth information describing the compensation of each current trustee of each fund for his or her services as trustee for the fiscal year ended November 30, 1995.
* Information is as December 31, 199 5 for 219 funds in the complex. ** Interested trustees of the fund are compensated by FMR. The non-interested Trustees may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of a Deferred Compensation Plan (the Plan). Under the Plan, compensation deferred by a Trustee is periodically adjusted as though an equivalent amount had been invested and reinvested in shares of one or more funds in the complex designated by such Trustee (designated securities). The amount paid to the Trustee under the Plan will be determined based upon the performance of such investments. Deferral of Trustees' fees in accordance with the Plan will have a negligible effect on a fund's assets, liabilities, and net income per share, and will not obligate the fund to retain the services of any Trustee or to pay any particular level of compensation to the Trustee. Each fund may invest in such designated securities under the Plan without shareholder approval. Under a retirement program adopted in July 1988, the non-interested Trustees, upon reaching age 72, become eligible to participate in a retirement program under which they receive payments during their lifetime from a fund based on their basic trustee fees and length of service. The obligation of a fund to make such payments is not secured or funded. Trustees become eligible if, at the time of retirement, they have served on the Board for at least five years. Currently, Messrs. Ralph S. Saul, William R. Spaulding, Bertram H. Witham, and David L. Yunich, all former non-interested Trustees, receive retirement benefits under the program. On November 30, 1995, the Trustees and officers of each fund owned, in the aggregate, less than 1 % of each fund's total outstanding shares. Each fund employs FMR to furnish investment advisory and other services. Under its management contract with each fund, FMR acts as investment adviser and, subject to the supervision of the Board of Trustees, directs the investments of each fund in accordance with its investment objective, policies, and limitations. FMR also provides each fund with all necessary office facilities and personnel for servicing each fund's investments, compensates all officers of each fund and all Trustees who are "interested persons" of the trust or of FMR, and all personnel of each fund or FMR performing services relating to research, statistical, and investment activities. In addition, FMR or its affiliates, subject to the supervision of the Board of Trustees, provide the management and administrative services necessary for the operation of each fund. These services include providing facilities for maintaining each fund's organization; supervising relations with custodians, transfer and pricing agents, accountants, underwriters, and other persons dealing with each fund; preparing all general shareholder communications and conducting shareholder relations; maintaining each fund's records and the registration of each fund's shares under federal and state laws; developing management and shareholder services for each fund; and furnishing reports, evaluations, and analyses on a variety of subjects to the Trustees. In addition to the management fee payable to FMR and the fees payable to FSC, each fund pays all of its expenses, without limitation, that are not assumed by those parties. Each fund pays for the typesetting, printing, and mailing of its proxy materials to shareholders, legal expenses, and the fees of the custodian, auditor and non-interested Trustees. Although each fund's current management contract provides that each fund will pay for typesetting, printing, and mailing prospectuses, statements of additional information, notices, and reports to shareholders, the trust, on behalf of each fund has entered into a revised transfer agent agreement with FSC, pursuant to which FSC bears the costs of providing these services to existing shareholders. Other expenses paid by each fund include interest, taxes, brokerage commissions, and each fund's proportionate share of insurance premiums and Investment Company Institute dues. Each fund is also liable for such non-recurring expenses as may arise, including costs of any litigation to which each fund may be a party, and any obligation it may have to indemnify its officers and Trustees with respect to litigation. FMR is Cash Reserves' and U.S. Government Reserves' manager pursuant to management contracts dated December 1, 1993, and January 13, 1995, respectively, which were approved by shareholders on November 17, 1993, and September 21, 1994, respectively. For the services of FMR under the contracts, each fund pays FMR a monthly management fee composed of a group fee rate, an individual fund fee rate (.03%), and an income-based component of 6% of each fund's gross income in excess of a 5% yield. The maximum income-based component is .24% of average net assets. The group fee rate is based on the monthly average net assets of all of the registered investment companies with which FMR has management contracts and is calculated on a cumulative basis pursuant to the graduated fee rate schedule shown below on the left. The schedule below on the right shows the effective annual group fee rate at various asset levels, which is the result of cumulatively applying the annualized rates on the left. For example, the effective annual fee rate at $359 billion of group net assets - the approximate level for November 30, 1995 - was .1487%, which is the weighted average of the respective fee rates for each level of group net assets up to $390 billion. GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Under Cash Reserves' current management contract with FMR, the group fee rate is based on a schedule with breakpoints ending at .1400% for average group assets in excess of $174 billion. Prior to December 1, 1993, the group fee rate breakpoints shown above for average group assets in excess of $120 billion and under $228 billion were voluntarily adopted by FMR, and went into effect on January 1, 1992. The additional breakpoints shown above for average group assets in excess of $228 billion were voluntarily adopted by FMR on November 1, 1993. Prior to January 13, 1995 for U.S. Government Reserves, the group fee rate was based on a schedule with breakpoints ending at .1500% for average group assets in excess of $84 billion. The group fee rate breakpoints shown above for average group assets in excess of $120 billion and under $228 billion were voluntarily adopted by FMR on January 1, 1992. The additional breakpoints shown above for average group assets in excess of $228 billion were voluntarily adopted by FMR on November 1, 1993. The fund's current management contract reflects these extensions of the group fee schedule. On August 1, 1994, FMR voluntarily revised the prior extensions to the group fee rate schedule, and added new breakpoints for average group assets in excess of $156 billion and under $372 billion as shown in the schedule below. The revised group fee rate schedule was identical to the above schedule for average group assets under $156 billion. On January 1, 1996, FMR voluntarily added new breakpoints to the revised schedule for average group assets in excess of $372 billion, pending shareholder approval of a new management contract reflecting the revised schedule and additional breakpoints. The revised group fee rate schedule and its extensions provide for lower management fee rates as FMR's assets under management increase. For average group assets in excess of $156 billion, the revised group fee rate schedule with additional breakpoints voluntarily adopted by FMR is as follows: GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Each fund's individual fund fee rate is .03%. One-twelfth of the sum of the group fee rate and the individual fund fee rate is applied to the fund's average net assets for the current month, giving a dollar amount which is the fee for that month. Cash Reserves' contract further provides that FMR will reimburse the fund, in an amount not in excess of the fund's management fee for any fiscal year, if the fund's aggregate operating expenses exceed 1% of the average net assets of the fund. If a fund's monthly gross yield is 5% or less, the total management fee is the sum of the group fee and the individual fund fee. If a fund's monthly gross yield is greater than 5%, the management fee that FMR receives includes an income-based component. The income-based component equals 6% of that portion of the fund's gross income that represents a gross yield of more than 5% per year. The maximum income-based component is .24% (annualized) of average net assets, at a fund gross yield of 9% or more. Gross income for this purpose, includes interest accrued and/or discount earned (including both original issue discount and market discount) on portfolio obligations, less amortization of premium. Realized and unrealized gains and losses, if any, are not included in gross income. Fidelity Cash Reserves' management contract with FMR prior to December 1, 1993 , was dated January 24, 1993, and was approved by shareholders under a Plan of Conversion on November 18, 1992. For the services of FMR under the contract, the fund paid FMR a monthly management fee computed on the basis of the fund's gross income. To the extent that the monthly gross income of the fund was equivalent to an annualized yield of 5% or less, FMR received 4% of that amount of the fund's gross income. In addition, to the extent that the fund's monthly income exceeded an annualized yield of 5%, FMR received 6% of that excess. For this purpose, gross income included interest accrued or discount earned (including both original issue and market discount), less amortization of premium. The amount of discount or premium on portfolio instruments was fixed at the time of purchase. Realized and unrealized gains and losses, if any, were not included in gross income. Pursuant to the terms of the contract, limitations were imposed on the compensation FMR could receive under the above formula. These limitations were based on the fund's average monthly net assets as follows:
Average Monthly Net Assets Annualized Rate
On the first $1.5 billion .50% On the portion in excess of $1.5 to $3.0 billion .45% On the portion in excess of $3.0 billion to $4.5 billion .43% On the portion in excess of $4.5 billion to $6.0 billion .41% On the portion in excess of $6.0 billion .40%
The contract provided further that FMR would reimburse the fund, in an amount not in excess of the fund's management fee for any fiscal year, if the fund's aggregate operating expenses exceeded 1% of the average net assets of the fund. Fidelity U.S. Government Reserves' management contract with FMR prior to January 13, 1995 was dated October 1, 1994, and was approved by shareholders on September 21, 1994 in conjunction with an Agreement and Plan to convert the fund from a series of a Massachusetts business trust to a series of a Delaware b usiness trust. The table below shows the management fees paid to FMR by each fund for the last three fiscal years: Management Fees as a %
Years Ended November Management Fees of Average Net Assets
* For the period October 1, 1994 - November 30, 1994 FMR may, from time to time, voluntarily reimburse all or a portion of each fund's operating expenses (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses). FMR retains the ability to be repaid for these expense reimbursements in the amount that expenses fall below the limit prior to the end of the fiscal year. Expense reimbursements by FMR will increase each fund's total returns and yield and repayment of the reimbursement by each fund will lower its total returns and yield. To comply with the California Code of Regulations, FMR will reimburse each fund if and to the extent that each fund's aggregate annual operating expenses exceed specified percentages of its average net assets. The applicable percentages are 2 1/2% of the first $30 million, 2% of the next $70 million, and 1 1/2% of average net assets in excess of $100 million. When calculating each fund's expenses for purposes of this regulation, each fund may exclude interest, taxes, brokerage commissions, and extraordinary expenses, as well as a portion of its distribution plan expenses and custodian fees attributable to investments in foreign securities. SUB-ADVISOR: FMR has entered into a sub-advisory agreement with FTX pursuant to which FTX has primary responsibility for providing portfolio investment management services to each fund. Under the sub-advisory agreement s , dated January 24, 1993 and January 13, 1995 , for Cash Reserves and U.S. Government Reserves respectively, which were approved by FMR, the then sole shareholder for Cash Reserves on January 24, 1993 and by shareholders for U.S. Government Reserves on September 21, 1994, FMR pays FTX fees equal to 50% of the management fee payable to FMR under its management contract with each fund. The fees paid to FTX are not reduced by any voluntary or mandatory expense reimbursements that may be in effect from time to time. For the fiscal years ended November 30, 1995, 1994 and 1993, FMR paid FTX management fees of $20,432,000, $11,843,000 and $6,629,000, respectively, for Cash Reserves. For the fiscal year ended November 30, 1995 and the period October 1, 1994 through November 30, 1994, and the fiscal years ended September 30, 1994, and 1993, FMR paid FTX management fees of $1,381,000, $181,000, $1,024,000 and $2,444,000, respectively for U.S. Government Reserves. The Trustees have approved Distribution and Service Plans on behalf of the funds (the Plans) pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the Rule). The Rule provides in substance that a mutual fund may not engage directly or indirectly in financing any activity that is primarily intended to result in the sale of shares of a fund except pursuant to a plan approved on behalf of the fund under the Rule. The Plans, as approved by the Trustees, allow the funds and FMR to incur certain expenses that might be considered to constitute indirect payment by the funds of distribution expenses. Under each Plan, if the payment of management fees by the funds to FMR is deemed to be indirect financing by the funds of the distribution of their shares, such payment is authorized by the Plans. Each Plan also specifically recognizes that FMR, either directly or through FDC, may use its management fee revenue, past profits, or other resources, without limitation, to pay promotional and administrative expenses in connection with the offer and sale of shares of each fund. In addition, each Plan provides that FMR may use its resources, including its management fee revenues, to make payments to third parties that assist in selling shares of each fund, or to third parties, including banks, that render shareholder support services. No third party payments were made in fiscal 1995. Prior to approving each Plan, the Trustees carefully considered all pertinent factors relating to the implementation of the Plan, and have determined that there is a reasonable likelihood that the Plan will benefit the fund and its shareholders. In particular, the Trustees noted that the Plans do not authorize payments by a fund other than those made to FMR under its management contract with the fund. To the extent that each Plan gives FMR and FDC greater flexibility in connection with the distribution of shares of each fund, additional sales of fund shares may result. Furthermore, certain shareholder support services may be provided more effectively under the Plans by local entities with whom shareholders have other relationships. The Plans were approved by FMR as the then sole shareholder of Cash Reserves and U.S. Government Reserve on January 24, 1993 and January 13, 1995, respectively. Each fund's plan was approved by shareholders, in connection with a reorganization transaction on November 18, 1992 and September 21, 1994, respectively, pursuant to an agreement and plan of conversion. The Glass-Steagall Act generally prohibits federally and state chartered or supervised banks from engaging in the business of underwriting, selling, or distributing securities. Although the scope of this prohibition under the Glass-Steagall Act has not been clearly defined by the courts or appropriate regulatory agencies, FDC believes that the Glass-Steagall Act should not preclude a bank from performing shareholder support services, or servicing and recordkeeping functions. FDC intends to engage banks only to perform such functions. However, changes in federal or state statutes and regulations pertaining to the permissible activities of banks and their affiliates or subsidiaries, as well as further judicial or administrative decisions or interpretations, could prevent a bank from continuing to perform all or a part of the contemplated services. If a bank were prohibited from so acting, the Trustees would consider what actions, if any, would be necessary to continue to provide efficient and effective shareholder services. In such event, changes in the operation of the funds might occur, including possible termination of any automatic investment or redemption or other services then provided by the bank. It is not expected that shareholders would suffer any adverse financial consequences as a result of any of these occurrences. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein, and banks and financial institutions may be required to register as dealers pursuant to state law. Each fund may execute portfolio transactions with, and purchase securities issued by, depository institutions that receive payments under the Plans. No preference for the instruments of such depository institutions will be shown in the selection of investments. FSC is transfer, dividend disbursing, and shareholder servicing agent for each fund. FSC receives annual account fees and asset-based fees for each retail account and certain institutional accounts based on account size. With respect to certain institutional retirement accounts, FSC receives asset-based fees only. With respect to certain other institutional retirement accounts, FSC receives annual account fees and asset based fees based on fund type. FSC also collects small account fees from certain accounts with balances of less than $2,500. In addition, these fees are subject to increase based on postal rate changes. FSC pays out-of-pocket expenses associated with providing transfer agent services. In addition, FSC bears the expense of typesetting, printing, and mailing prospectuses, statements of additional information, and all other reports, notices, and statements to shareholders, with the exception of proxy statements. FSC also performs the calculations necessary to determine each fund's net asset value per share and dividends, and maintains each fund's accounting records. The annual fee rates for these pricing and bookkeeping services are based on each fund's average net assets, specifically, .0175% for the first $500 million of average net assets and .0075% for average net assets in excess of $500 million. The fee is limited to a minimum of $ 4 0,000 and a maximum of $ 80 0,000 per year. The table below shows the fees paid to FSC for pricing and bookkeeping services, including related out-of-pocket expenses during each fund's last three fiscal years ending November 30 :
* For the period October 31, 1994 to November 30, 1994 ** Years ended September 30 Each fund has a distribution agreement with FDC, a Massachusetts corporation organized on July 18, 1960. FDC is a broker-dealer registered under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. The distribution agreements call for FDC to use all reasonable efforts, consistent with its other business, to secure purchasers for shares of each fund, which are continuously offered at net asset value. Promotional and administrative expenses in connection with the offer and sale of shares are paid by FMR. TRUST ORGANIZATION. Fidelity Cash Reserves and Fidelity U.S. Government Reserves are funds of Fidelity Phillips Street Trust, an open-end management investment company organized as a Delaware business trust on September 17, 1992. Fidelity Cash Reserves acquired all of the assets of Fidelity Cash Reserves, a series of a Massachusetts business trust (also called Fidelity Cash Reserves) on January 24, 1993. Fidelity U.S. Government Reserves acquired all the assets of Fidelity U.S. Government Reserves, a series of Fidelity Charles Street Trust , a Massachusetts business trust, on January 13, 1995. Currently, there are two funds of Fidelity Phillips Street Trust: Fidelity Cash Reserves and Fidelity U.S. Government Reserves. The Trust Instrument permits the Trustees to create additional funds. In the event that FMR ceases to be the investment adviser to the trust or a fund, the right of the trust or fund to use the identifying name "Fidelity" may be withdrawn. There is a remote possibility that one fund might become liable for any misstatement in its prospectus or statement of additional information about another fund. The assets of the trust received for the issue or sale of shares of each fund and all income, earnings, profits, and proceeds thereof, subject only to the rights of creditors, are especially allocated to such fund, and constitute the underlying assets of such fund. The underlying assets of each fund are segregated on the books of account, and are to be charged with the liabilities with respect to such fund and with a share of the general expenses of the trust. Expenses with respect to the trust are to be allocated in proportion to the asset value of the respective funds, except where allocations of direct expense can otherwise be fairly made. The officers of the trust, subject to the general supervision of the Board of Trustees, have the power to determine which expenses are allocable to a given fund, or which are general or allocable to all of the funds. In the event of the dissolution or liquidation of the trust, shareholders of each fund are entitled to receive as a class the underlying assets of such fund available for distribution. SHAREHOLDER AND TRUSTEE LIABILITY. The trust is a business trust organized under Delaware law. Delaware law provides that shareholders shall be entitled to the same limitations of personal liability extended to stockholders of private corporations for profit. The courts of some states, however, may decline to apply Delaware law on this point. The Trust Instrument contains an express disclaimer of shareholder liability for the debts, liabilities, obligations, and expenses of the trust and requires that a disclaimer be given in each contract entered into or executed by the trust or the Trustees. The Trust Instrument provides for indemnification out of each fund's property of any shareholder or former shareholder held personally liable for the obligations of the fund. The Trust Instrument also provides that each fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the fund and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which Delaware law does not apply, no contractual limitation of liability was in effect, and the fund is unable to meet its obligations. FMR believes that, in view of the above, the risk of personal liability to shareholders is extremely remote. The Trust Instrument further provides that the Trustees, if they have exercised reasonable care, shall not be personally liable to any person other than the trust or its shareholders; moreover, the Trustees shall not be liable for any conduct whatsoever, provided that Trustees are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. VOTING RIGHTS. Each fund's capital consists of shares of beneficial interest. As a shareholder, you receive one vote for each dollar value of net asset value you own. The shares have no preemptive or conversion rights; the voting and dividend rights, the right of redemption, and the privilege of exchange are described in the Prospectus. Shares are fully paid and nonassessable, except as set forth under the heading "Shareholder and Trustee Liability" above. Shareholders representing 10% or more of the trust or a fund may, as set forth in the Trust Instrument, call meetings of the trust or fund for any purpose related to the trust or fund, as the case may be, including, in the case of a meeting of the entire trust, the purpose of voting on removal of one or more Trustees. The trust or any fund may be terminated upon the sale of its assets to, or merger with, another open-end management investment company or series thereof, or upon liquidation and distribution of its assets. Generally such terminations must be approved by vote of the holders of a majority of the trust or the fund as determined by the current value of each shareholder's investment in the fund or trust ; however, the Trustees may, without prior shareholder approval, change the form of organization of the trust by merger, consolidation, or incorporation. If not so terminated or reorganized, the trust and its funds will continue indefinitely. Under the Trust Instrument, the Trustees may, without shareholder vote, cause the trust to merge or consolidate into one or more trusts, partnerships, or corporations, or cause the trust to be incorporated under Delaware law, so long as the surviving entity is an open-end management investment company that will succeed to or assume the trust registration statement. Each fund may invest all of its assets in another investment company. CUSTODIAN. Bank of New York, 110 Washington Street, New York, New York, is custodian of the assets of each fund. The custodian is responsible for the safekeeping of a fund's assets and the appointment of the subcustodian banks and clearing agencies. The custodian takes no part in determining the investment policies of a fund or in deciding which securities are purchased or sold by a fund. However, a fund may invest in obligations of the custodian and may purchase securities from or sell securities to the custodian. Chemical Bank, headquartered in New York, also may serve as a special purpose custodian of certain assets in connection with pooled repurchase agreement transactions. FMR, its officers and directors, its affiliated companies, and the Board of Trustees may, from time to time, conduct transactions with various banks, including banks serving as custodians for certain funds advised by FMR. Transactions that have occurred to date include mortgages and personal and general business loans. In the judgment of FMR, the terms and conditions of those transactions were not influenced by existing or potential custodial or other fund relationships. AUDITORS. Coopers & Lybrand L.L.P., 1999 Bryan Street, Dallas, Texas serves as Cash Reserves' independent accountant. The auditor examines financial statements for the fund and provides other audit, tax, and related services. Price Waterhouse LLP, 2001 Ross Avenue, Suite 1800 , Dallas, Texas serves as U.S. Government Reserves' independent accountant. The auditor examines financial statements for the fund and provides other audit, tax, and related services. Each fund's financial statements and financial highlights for the fiscal year ended November 30, 1995 are included in each fund's Annual Report, which is a separate report supplied with this Statement of Additional Information. Each fund's financial statements and financial highlights are incorporated herein by reference. The descriptions that follow are examples of eligible ratings for the funds. A fund may, however, consider the ratings for other types of investments and the ratings assigned by other rating organizations when determining the eligibility of a particular investment. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS: Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: Leading market positions in well established industries. High rates of return on funds employed. Conservative capitalization structures with moderate reliance on debt and ample asset protection. Broad margins in earning coverage of fixed financial charges and with high internal cash generation. Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earning trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS: A - Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2, and 3 to indicate the relative degree of safety. A-1 - This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics will be denoted with a plus (+) sign designation. A-2 - Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated A-1. DESCRIPTION OF FITCH INVESTOR'S SERVICE, INC.'S COMMERCIAL PAPER RATINGS: FITCH-1 - (Highest Grade) Commercial paper assigned this rating is regarded as having the strongest degree of assurance for timely payment. FITCH-2 - (Very Good Grade) Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than the strongest issues. DESCRIPTION OF DUFF & PHELPS INC.'S COMMERCIAL PAPER RATINGS: DUFF 1 - High certainty of timely payment. Liquidity factors are excellent and supported by strong fundamental protection factors. Risk factors are minor. DUFF 2 - Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing internal funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. DESCRIPTION OF DUFF & PHELPS INC.'S CORPORATE BOND RATINGS: DUFF 1 - Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. DUFF 2 - High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions.
PART C - OTHER INFORMATION Item 24. Financial Statements and Exhibits (a)(i) Financial statements and financial highlights included in the Annual Report for Fidelity U.S Government Reserves for the fiscal year ended November 30, 1995, are incorporated herein by reference to the fund's Statement of Additional Information and were filed on January 9, 1996 for Fidelity Phillips Street Trust (File No. 811-2890) pursuant to Rule 30d-1 under the Investment Company Act of 1940 and are incorporated herein by reference. (a)(ii) Financial statements and financial highlights included in the Annual Report for Fidelity Cash Reserves for the fiscal year ended November 30, 1995 are incorporated herein by reference to the fund's Statement of Additional Information and were filed on January 9, 1996 for Fidelity Phillips Street Trust (File No. 811-2890) pursuant to Rule 30d-1 under the Investment Company Act of 1940 and are incorporated herein by reference. 1. (a) Trust Instrument dated September 17, 1992 is incorporated herein by reference to Exhibit 1(g) to Post-Effective Amendment No. 35. 2. (a) Bylaws of the Trust, as amended, are incorporated herein by reference to Exhibit 2(a) to Fidelity Union Street Trust II's (File No. 33-43757) Post-Effective Amendment No. 10. 3. Not applicable. 4. Not applicable. 5. (a) Management Contract, dated December 1, 1993, between Fidelity Cash Reserves and Fidelity Management & Research Company is incorporated herein by reference to Exhibit 5(a) to Post-Effective Amendment No. 38. (b) Sub-Advisory Agreement, dated January 24, 1993, between Fidelity Management & Research Company and FMR Texas Inc. on behalf of Fidelity Cash Reserves is incorporated herein by reference to Exhibit 5(b) to Post-Effective Amendment No. 35. (c) Management Contract, dated January 13, 1995, between Fidelity U.S. Government Reserves and Fidelity Management & Research Company is filed herein as Exhibit 5(c). (d) Form of Sub-Advisory Agreement between Fidelity Management & Research Company and FMR Texas Inc. on behalf of Fidelity U.S. Government Reserves was filed as Exhibit 5(d) to Post-Effective Amendment No. 38. 6. (a) General Distribution Agreement, dated January 24, 1993, between Fidelity Phillips Street Trust and Fidelity Distributors Corporation with respect to Fidelity Cash Reserves is incorporated herein by reference to Exhibit 6(a) to Post-Effective Amendment No. 35. (b) Form of General Distribution Agreement between Fidelity Phillips Street Trust and Fidelity Distributors Corporation with respect to Fidelity U.S. Government Reserves was filed as Exhibit 6(b) to Post-Effective Amendment No. 38. 7. (a) Retirement Plan for Non-Interested Person Trustees, Directors or General Partners, is incorporated herein by reference to Exhibit 7 to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (b) The Fee Deferral Plan for Non-Interested Person Directors and Trustees of the Fidelity Funds, effective as of December 1,1995 is incorporated herein by reference to Exhibit 7(b) to Fidelity School Street Trust's (File No. 2-57167) Post-Effective Amendment No. 47. 8. (a) Custodian Agreement and Appendix C, dated December 1, 1994, between The Bank of New York and the Registrant is incorporated herein by reference to Exhibit 8(a) to Fidelity Hereford Street Trust's Post-Effective Amendment No. 4 (File No. 33-52577). (b) Appendix A, dated September 14, 1995, to the Custodian Agreement, dated December 1, 1994, between The Bank of New York and the Registrant is incorporated herein by reference to Exhibit 8 (d) to Fidelity Charles Street Trust's Post-Effective Amendment No. 54 (File No. 2-73133). (c) Appendix B, dated September 14, 1995, to the Custodian Agreement dated December 1, 1994, between The Bank of New York and the Registrant is incorporated herein by reference to Exhibit 8 (e) to Fidelity Charles Street Trust's Post-Effective Amendment No. 54 (File No. 2-73133). 9. Not applicable. 10. Not applicable. 11. (a) Consent of Price Waterhouse LLP is filed herein as Exhibit 11(a). . (b) Consent of Coopers & Lybrand L.L.P. is filed herein as Exhibit 11(b). 12. Not applicable. 13. Not applicable. 14. (a) Fidelity Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(a) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (b) Fidelity Institutional Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(d) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (c) National Financial Services Corporation Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(h) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (d) Fidelity Portfolio Advisory Services Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(i) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (e) Fidelity 403(b)(7) Custodial Account Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(e) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (f) National Financial Services Corporation Defined Contribution Retirement Plan and Trust Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(k) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (g) The CORPORATEplan for Retirement Profit Sharing/401K Plan, as currently in effect, is incorporated herein by reference to Exhibit 14(l) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (h) The CORPORATEplan for Retirement Money Purchase Pension Plan, as currently in effect, is incorporated herein by reference to Exhibit 14(m) to Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (i) Fidelity Investments Section 403(b)(7) Individual Custodial Account Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(f) to Fidelity Commonwealth Trust's (File No. 2-52322) Post-Effective Amendment No. 57. (j) Plymouth Investments Defined Contribution Retirement Plan and Trust Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(o) to Fidelity Commonwealth Trust's (File No. 2-52322) Post-Effective Amendment No. 57. (k) The Fidelity Prototype Defined Benefit Pension Plan and Trust Basic Plan Document and Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(d) to Fidelity Securities Fund's (File No. 2-93601) Post-Effective Amendment No. 33. (l) The Institutional Prototype Plan Basic Plan Document, Standardized Adoption Agreement, and Non-Standardized Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(o) to Fidelity Securities Fund's (File No. 2-93601) Post-Effective Amendment No. 33. (m) The CORPORATEplan for Retirement 100SM Profit Sharing/401(k) Basic Plan Document, Standardized Adoption Agreement, and Non-Standardized Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(f) to Fidelity Securities Fund's (File No. 2-93601) Post-Effective Amendment No. 33. (n) The Fidelity Investments 401(a) Prototype Plan for Tax-Exempt Employers Basic Plan Document, Standardized Profit Sharing Plan Adoption Agreement, Non-Standardized Discretionary Contribution Plan No. 002 Adoption Agreement, and Non-Standardized Discretionary Contribution Plan No. 003 Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(g) to Fidelity Securities Fund's (File No. 2-93601) Post-Effective Amendment No. 33. (o) Fidelity Investments 403(b) Sample Plan Basic Plan Document and Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(p) to Fidelity Securities Fund's (File No. 2-93601) Post-Effective Amendment No. 33. (p) Fidelity Defined Contribution Retirement Plan and Trust Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(c) to Fidelity Securities Fund's (File No. 2-93601) Post-Effective Amendment No. 33. 15. (a) Distribution and Service Plan between Fidelity Cash Reserves and Fidelity Distributors Corporation is incorporated herein by reference to Exhibit 15(a) to Post-Effective Amendment No. 39. (b) Distribution and Service Plan between Fidelity U.S. Government Reserves and Fidelity Distributors Corporation is filed herein as Exhibit 15(b). 16. A revised schedule for computation of performance calculations for Fidelity Cash Reserves is incorporated herein by reference as Exhibit 16 to Post-Effective No. 39. 17. Financial data schedules are filed herein as Exhibit 27. 18. Not applicable. Item 25. Persons Controlled by or under Common Control with Registrant The Board of Trustees of Registrant is substantially the same as the Board of Trustees of other funds advised by FMR, each of which has Fidelity Management and Research Company as its investment adviser. In addition, the officers of these funds are substantially identical. Nonetheless, Registrant takes the position that it is not under common control with these other funds since the power residing in the respective boards and officers arises as the result of an official position with the respective funds. Item 26. Number of Holders of Securities as of November 30, 1995 Title of Class: Shares of Beneficial Interest Name of Series Number of Record Holders Fidelity U.S. Government Reserves 79,422 Pursuant to Del. Code Ann. title 12 (sub-section) 3817, a Delaware business trust may provide in its governing instrument for the indemnification of its officers and trustees from and against any and all claims and demands whatsoever. Article X, Section 10.02 of the Declaration of Trust states that the Registrant shall indemnify any present trustee or officer to the fullest extent permitted by law against liability, and all expenses reasonably incurred by him or her in connection with any claim, action, suit or proceeding in which he or she is involved by virtue of his or her service as a trustee, officer, or both, and against any amount incurred in settlement thereof. Indemnification will not be provided to a person adjudged by a court or other adjudicatory body to be liable to the Registrant or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties (collectively, "disabling conduct"), or not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Registrant. In the event of a settlement, no indemnification may be provided unless there has been a determination, as specified in the Declaration of Trust, that the officer or trustee did not engage in disabling conduct. Pursuant to Section 11 of the Distribution Agreement, the Registrant agrees to indemnify and hold harmless the Distributor and each of its directors and officers and each person, if any, who controls the Distributor within the meaning of Section 15 of the 1933 Act against any loss, liability, claim, damages or expense arising by reason of any person acquiring any shares, based upon the ground that the registration statement, Prospectus, Statement of Additional Information, shareholder reports or other information filed or made public by the Registrant included a materially misleading statement or omission. However, the Registrant does not agree to indemnify the Distributor or hold it harmless to the extent that the statement or omission was made in reliance upon, and in conformity with, information furnished to the Registrant by or on behalf of the Distributor. The Registrant does not agree to indemnify the parties against any liability to which they would be subject by reason of their own disabling conduct. Pursuant to the agreement by which Fidelity Service Company (FSC) is appointed sub-transfer agent, the Transfer Agent agrees to indemnify Service for its losses, claims, damages, liabilities and expenses to the extent the Transfer Agent is entitled to and receives indemnification from the Registrant for the same events. Under the Transfer Agency Agreement, the Registrant agrees to indemnify and hold the Transfer Agent harmless against any losses, claims, damages, liabilities, or expenses resulting from: (1) any claim, demand, action or suit brought by any person other than the Registrant, which names the Transfer Agent and/or the Registrant as a party and is not based on and does not result from the Transfer Agent's willful misfeasance, bad faith, negligence or reckless disregard of its duties, and arises out of or in connection with the Transfer Agent's performance under the Transfer Agency Agreement; or (2) any claim, demand, action or suit (except to the extent contributed to by the Transfer Agent's willful misfeasance, bad faith, negligence or reckless disregard of its duties) which results from the negligence of the Registrant, or from the Transfer Agent's acting upon any instruction(s) reasonably believed by it to have been executed or communicated by any person duly authorized by the Registrant, or as a result of the Transfer Agent's acting in reliance upon advice reasonably believed by the Transfer Agent to have been given by counsel for the Registrant, or as a result of the Transfer Agent's acting in reliance upon any instrument or stock certificate reasonably believed by it to have been genuine and signed, countersigned or executed by the proper person. Item 28. Business and Other Connections of Investment Adviser (1) FIDELITY MANAGEMENT & RESEARCH COMPANY FMR serves as investment adviser to a number of other investment companies. The directors and officers of the Adviser have held, during the past two fiscal years, the following positions of a substantial nature.
John Hickling Vice President of FMR (1993) and of funds advised by FMR.
(2) FMR TEXAS INC. (FMR Texas) FMR Texas provides investment advisory services to Fidelity Management & Research Company. The directors and officers of the Sub-Adviser have held the following positions of a substantial nature during the past two fiscal years.
(a) Fidelity Distributors Corporation (FDC) acts as distributor for most funds advised by FMR.
Name and Principal Positions and Offices Positions and Offices
Business Address* With Underwriter With Registrant
Edward C. Johnson 3d Director Trustee and President
W. Humphrey Bogart Director None
Kurt A. Lange President and Treasurer None
Thomas W. Littauer Senior Vice President None
Arthur S. Loring Vice President and Clerk Secretary
* 82 Devonshire Street, Boston, MA (c) Not applicable. Item 30. Location of Accounts and Records All accounts, books, and other documents required to be maintained by Section 31a of the 1940 Act and the Rules promulgated thereunder are maintained by Fidelity Management & Research Company or Fidelity Service Co., 82 Devonshire Street, Boston, MA 02109, or the funds' custodian The Bank of New York, 110 Washington Street, New York, N.Y. Not applicable. Not applicable. Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for the effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 40 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, and Commonwealth of Massachusetts, on the 12th day of January 1996. By /s/Edward C. Johnson 3d (dagger) Edward C. Johnson 3d, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
/s/Kenneth A. Rathgeber Treasurer January 12, 1996
/s/J. Gary Burkhead Trustee January 12, 1996
/s/Ralph F. Cox * Trustee January 12, 1996
/s/Phyllis Burke Davis * Trustee January 12, 1996
/s/Richard J. Flynn * Trustee January 12, 1996
/s/E. Bradley Jones * Trustee January 12, 1996
/s/Donald J. Kirk * Trustee January 12, 1996
/s/Peter S. Lynch * Trustee January 12, 1996
/s/Edward H. Malone * Trustee January 12, 1996
/s/Marvin L. Mann_____* Trustee January 12, 1996
/s/Gerald C. McDonough* Trustee January 12, 1996
/s/Thomas R. Williams * Trustee January 12, 1996
(dagger) Signatures affixed by J. Gary Burkhead pursuant to a power of attorney dated December 15, 1994 and filed herewith. * Signature affixed by Robert C. Hacker pursuant to a power of attorney dated December 15, 1994 and filed herewith. We, the undersigned Directors, Trustees or General Partners, as the case may be, of the following investment companies:
in addition to any other investment company for which Fidelity Management & Research Company acts as investment adviser and for which the undersigned individual serves as a Director, Trustee or General Partner (collectively, the "Funds"), hereby severally constitute and appoint Arthur J. Brown, Arthur C. Delibert, Robert C. Hacker, Richard M. Phillips, Dana L. Platt and Stephanie A. Djinis, each of them singly, my true and lawful attorney-in-fact, with full power of substitution, and with full power to each of them, to sign for me and my name in the appropriate capacities any Registration Statements of the Funds on Form N-1A or any successor thereto, any and all subsequent Pre-Effective Amendments or Post-Effective Amendments to said Registration Statements on Form N-1A or any successor thereto, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorneys-in-fact deem necessary or appropriate, to comply with the provisions of the Securities Act of 1933 and Investment Company Act of 1940, and all related requirements of the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or their substitutes may do or cause to be done by virtue hereof. WITNESS our hands on this fifteenth day of December, 1994. /s/Edward C. Johnson 3d /s/Donald J. Kirk
Edward C. Johnson 3d Donald J. Kirk
/s/J. Gary Burkhead /s/Peter S. Lynch
J. Gary Burkhead Peter S. Lynch
/s/Ralph F. Cox /s/Marvin L. Mann
Ralph F. Cox Marvin L. Mann
/s/Phyllis Burke Davis /s/Edward H. Malone
Phyllis Burke Davis Edward H. Malone
/s/Richard J. Flynn /s/Gerald C. McDonough
Richard J. Flynn Gerald C. McDonough
/s/E. Bradley Jones /s/Thomas R. Williams
E. Bradley Jones Thomas R. Williams
I, the undersigned President and Director, Trustee or General Partner, as the case may be, of the following investment companies:
in addition to any other investment company for which Fidelity Management & Research Company acts as investment adviser and for which the undersigned individual serves as President and Board Member (collectively, the "Funds"), hereby severally constitute and appoint J. Gary Burkhead, my true and lawful attorney-in-fact, with full power of substitution, and with full power to sign for me and in my name in the appropriate capacity any Registration Statements of the Funds on Form N-1A, Form N-8A or any successor thereto, any and all subsequent Pre-Effective Amendments or Post-Effective Amendments to said Registration Statements on Form N-1A or any successor thereto, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorney-in-fact deem necessary or appropriate, to comply with the provisions of the Securities Act of 1933 and Investment Company Act of 1940, and all related requirements of the Securities and Exchange Commission. I hereby ratify and confirm all that said attorneys-in-fact or their substitutes may do or cause to be done by virtue hereof. WITNESS my hand on the date set forth below. /s/Edward C. Johnson 3d December 15, 1994
I, the undersigned, Secretary of the investment companies for which Fidelity Management & Research Company acts as investment adviser (collectively, the "Funds"), hereby constitute and appoint each of Arthur J. Brown, Robert C. Hacker, Richard M. Phillips, Dana L. Platt, and Stephanie A. Djinis my true and lawful attorneys-in-fact, with full power to sign for me and in my name in the appropriate capacity, any and all representations with respect to the consistency of foreign language translation prospectuses with the original prospectuses filed in connection with the Post-Effective Amendments for the Funds as said attorney-in-fact deems necessary or appropriate to comply with the provisions of the Securities Act of 1933 and the Investment Company Act of 1940. I hereby ratify and confirm all that said attorneys-in-fact may do or cause to be done by virtue hereof. WITNESS my hand on this 9th day of December, 1994. | 485BPOS | 485BPOS | 1996-01-16T00:00:00 | 1996-01-16T16:04:13 |
0000950148-96-000047 | 0000950148-96-000047_0001.txt | CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C.,
Dated as of January 4, 1996
Rights Agreement, dated as of January 4, 1996 ("Agreement"), between GIANT GROUP, LTD., a Delaware corporation (the "Company"), and CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C., as Rights Agent (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a dividend of one preferred share purchase right (a "Right") for each share of Common Stock (as hereinafter defined) of the Company outstanding as of the Close of Business (as defined below) on January 16, 1996 (the "Record Date"), each Right representing the right to purchase one one-thousandth (subject to adjustment) of a share of Preferred Stock (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right (subject to adjustment as provided herein) with respect to each share of Common Stock that shall become outstanding between the Record Date and the earlier of the Distribution Date and the Expiration Date (as such terms are hereinafter defined); provided, however, that Rights may be issued with respect to shares of Common Stock that shall become outstanding after the Distribution Date and prior to the Expiration Date in accordance with Section 22.
Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meaning indicated:
(a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock then outstanding, but shall not include an Exempt Person (as such term is hereinafter defined); provided, however, that (i) if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person" became such inadvertently (including, without limitation, because (A) such Person was unaware that it beneficially owned a percentage of Common Stock that would otherwise cause such Person to be an "Acquiring Person" or (B) such Person was aware of the extent of its Beneficial Ownership of Common Stock but had no actual knowledge of the consequences of such Beneficial Ownership under this Agreement) and without any intention of changing or influencing control of the Company, and if such Person as promptly as practicable divested or divests itself of Beneficial Ownership of a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person," then such Person shall not be deemed to be or to have become an "Acquiring Person" for any purposes of this Agreement; (ii) if, as of the date hereof, any Person is the Beneficial Owner of a number of shares of Common Stock that would otherwise cause such Person to be an "Acquiring Person," such Person shall not be deemed to be or to have become an "Acquiring Person" unless and until such time as such Person shall become the Beneficial Owner of any additional shares of Common Stock (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Stock in shares of Common Stock or pursuant to a split or subdivision of the outstanding Common Stock, and other than any such additional shares of Common Stock of which such Person shall become the Beneficial Owner pursuant to or as the result of any employee benefit plan, employee stock or stock option plan, employment agreement or other compensation agreement of or with the Company or any Subsidiary of the Company relating to such Person's employment with or service as a director of the Company or any Subsidiary of the Company) unless, upon becoming the Beneficial Owner of such additional shares of Common Stock, such Person is not then the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding; and (iii) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares of Common Stock beneficially owned by such Person to 15% or more of the shares of Common Stock then outstanding, provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding by reason of such share acquisitions by the Company and shall thereafter become the Beneficial Owner of any additional shares of Common Stock, then such Person shall be deemed to be an "Acquiring Person" unless upon becoming the Beneficial Owner of such additional shares of Common Stock such Person is not the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding. For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date hereof.
(b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date of this Rights Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of, shall be deemed to have "Beneficial Ownership" of and shall be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates is deemed to beneficially own, directly or indirectly, within the meaning of Rule 13d-3 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Rights Agreement;
(ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (x) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase, (y) securities which such Person has a right to acquire upon the exercise of Rights at any time prior to the time that any Person becomes an Acquiring Person or (z) securities issuable upon the exercise of Rights from and after the time that any Person becomes an Acquiring Person if such Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) or Section 22 hereof ("original Rights") or pursuant to Section 11(i) or Section 11(n) with respect to an adjustment to original Rights; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security by reason of such agreement, arrangement or understanding if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or
(iii) which are beneficially owned, directly or indirectly, by any other Person and with respect to which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of such
provided, however, that no Person who is an officer, director or employee of an Exempt Person shall be deemed, solely by reason of such Person's status or authority as such, to be the "Beneficial Owner" of, to have "Beneficial Ownership" of or to "beneficially own" any securities that are "beneficially owned" (as defined in this Section 1(c)), including, without limitation, in a fiduciary capacity, by an Exempt Person or by any other such officer, director or employee of an Exempt Person.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M., Los Angeles, California time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Los Angeles, California time, on the next succeeding Business Day.
(f) "Common Stock" when used with reference to the Company shall mean the Common Stock, presently par value $.01 per share, of the Company. "Common Stock" when used with reference to any Person other than the Company shall mean the common stock (or, in the case of an unincorporated entity, the equivalent equity interest) with the greatest voting power of such other Person or, if such other Person is a subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person.
(g) "Common Stock equivalents" shall have the meaning set forth in Section 11(a)(iii) hereof.
(h) "Current Value" shall have the meaning set forth in Section 11(a)(iii) hereof.
(i) "Distribution Date" shall have the meaning set forth in Section 3 hereof.
(j) "equivalent preferred shares" shall have the meaning set forth in Section 11(b) hereof.
(k) "Exempt Person" shall mean the Company or any Subsidiary (as such term is hereinafter defined) of the Company, in each case including, without limitation, in its fiduciary capacity, or any employee benefit plan of the Company or of any Subsidiary of the Company, or any entity or trustee holding Common Stock for or pursuant to the terms of any such plan or for the purpose of funding any such plan or funding other employee benefits for employees of the Company or of any Subsidiary of the Company.
(l) "Exchange Ratio" shall have the meaning set forth in Section 24 hereof.
(m) "Expiration Date" shall have the meaning set forth in Section 7 hereof.
(n) "Flip-In Event" shall have the meaning set forth in Section 11(a)(ii) hereof.
(o) "Final Expiration Date" shall have the meaning set forth in Section 7 hereof.
(p) "NASDAQ" shall mean The NASDAQ Stock Market.
(q) "New York Stock Exchange" shall mean the New York Stock Exchange, Inc.
(r) "Person" shall mean any individual, firm, corporation, partnership, limited liability company, trust or other entity, and shall include any successor (by merger or otherwise) to such entity.
(s) "Preferred Stock" shall mean the Series A Junior Participating Preferred Stock, par value $.01 per share, of the Company having the rights and preferences set forth in the Form of Certificate of Designation attached to this Rights Agreement as Exhibit A.
(t) "Principal Party" shall have the meaning set forth in Section 13(b) hereof.
(u) "Redemption Date" shall have the meaning set forth in Section 7 hereof.
(v) "Redemption Price" shall have the meaning set forth in Section 23 hereof.
(w) "Right Certificate" shall have the meaning set forth in Section 3 hereof.
(x) "Securities Act" shall mean the Securities Act of 1933, as amended.
(y) "Section 11(a) (ii) Trigger Date" shall have the meaning set forth in Section 11(a)(iii) hereof.
(z) "Spread" shall have the meaning set forth in Section 11(a)(iii) hereof.
(aa) "Stock Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such, or such earlier date as a majority of the Board of Directors shall become aware of the existence of an Acquiring Person.
(bb) "Subsidiary" of any Person shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect a majority of the board of directors or other persons performing similar functions are beneficially owned, directly or indirectly, by such Person, and any corporation or other entity that is otherwise controlled by such Person.
(cc) "Substitution Period" shall have the meaning set forth in Section 11(a)(iii) hereof.
(dd) "Summary of Rights" shall have the meaning set forth in Section 3 hereof.
(ee) "Trading Day" shall have the meaning set forth in Section 11(d)(i) hereof.
Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date be the holders of Common Stock) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable.
Section 3. Issue of Right Certificates.
(a) Until the Close of Business on the earlier of (i) the tenth day after the Stock Acquisition Date or (ii) the tenth Business Day (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than an Exempt Person) of, or of the first public announcement of the intention of such Person (other than an Exempt Person) to commence, a tender or exchange offer the consummation of which would result in any Person (other than an Exempt Person) becoming the Beneficial Owner of shares of Common Stock aggregating 15% or more of the Common Stock then outstanding (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Stock registered in the names of the holders thereof and not by separate Right Certificates, and (y) the Rights will be transferable only in connection with the transfer of Common Stock. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Stock as of the close of business on the Distribution Date (other than any Acquiring Person or any Associate or Affiliate of an Acquiring Person), at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing one Right (subject to adjustment as provided herein) for each share of Common Stock so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Shares of Preferred Stock, in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Stock as of the Close of Business on the Record Date (other than any Acquiring Person or any Associate or Affiliate of any Acquiring Person), at the address of such holder shown on the records of the Company. With respect to certificates for Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with the Summary of Rights. Until the Distribution Date (or, if earlier, the Expiration Date), the surrender for transfer of any certificate for Common Stock outstanding on the Record Date, with or without a copy of the Summary of Rights, shall also constitute the transfer of the Rights associated with the Common Stock represented thereby.
(c) Certificates issued for Common Stock (including, without limitation, upon transfer of outstanding Common Stock, disposition of Common Stock out of treasury stock or issuance or reissuance of Common Stock out of authorized but unissued shares) after the Record Date but prior to the earlier of the Distribution Date and the Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between GIANT GROUP, LTD. and CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C., as Rights Agent, dated as of January 4, 1996 as the same may be amended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of GIANT GROUP, LTD. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. GIANT GROUP, LTD. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights owned by or transferred to any Person who is or becomes an Acquiring Person (as defined in the Rights Agreement) and certain transferees thereof will become null and void and will no longer be transferable
With respect to such certificates containing the foregoing legend, until the Distribution Date the Rights associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate, except as otherwise provided herein, shall also constitute the transfer of the Rights associated with the Common Stock represented thereby. In the event that the Company purchases or otherwise acquires any Common Stock after the Record Date but prior to the Distribution Date, any Rights associated with such Common Stock shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Stock which are no longer outstanding.
Notwithstanding this paragraph (c), the omission of a legend shall not affect the enforceability of any part of this Agreement or the rights of any holder of the Rights.
Section 4. Form of Right Certificates. The Right Certificates (and the forms of election to purchase shares and of assignment to be printed on the reverse thereof) shall be substantially in the form set forth in Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or interdealer quotation system on which the Rights may from time to time be listed or quoted, or to conform to usage. Subject to the provisions of Sections 11, 13 and 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of one one-thousandths of a share of Preferred Stock as shall be set forth therein at the price per one one-thousandth of a share of Preferred Stock set forth therein (the "Purchase Price"), but the number of such one one-thousandths of a share of Preferred Stock and the Purchase Price shall be subject to adjustment as provided herein.
Section 5. Countersignature and Registration.
(a) The Right Certificates shall be executed on behalf of the Company by the Chairman of the Board, Vice Chairman of the Board, the Chief Executive Officer or the President of the Company, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof and shall be attested by the Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the Person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any Person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Agreement any such Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at an office or agency designated for such purpose, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Sections 7(e), 11(a)(ii) and 14 hereof, at any time after the Distribution Date and prior to the Expiration Date, any Right Certificate or Right Certificates may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of one one-thousandths of a share of Preferred Stock as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the office or agency of the Rights Agent designated for such purpose. Thereupon the Rights Agent shall countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates.
(b) Subject to the provisions of Section 11(a)(ii) hereof, at any time after the Distribution Date and prior to the Expiration Date, upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights, Purchase Price; Expiration Date of Rights.
(a) Except as otherwise provided herein, the Rights shall become exercisable on the Distribution Date, and thereafter the registered holder of any Right Certificate may, subject to Section 11(a)(ii) hereof and except as otherwise provided herein, exercise the Rights evidenced thereby in whole or in part upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the office or agency of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one one-thousandths of a share of Preferred Stock (or other securities, cash or other assets, as the case may be) as to which the Rights are exercised, at any time which is both after the Distribution Date and prior to the time (the "Expiration Date") that is the earliest of (i) the Close of Business on January 4, 2006 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date") or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof.
(b) The Purchase Price shall be initially $30 for each one one-thousandth of a share of Preferred Stock purchasable upon the exercise of a and the number of one one-thousandths of a share of Preferred Stock or other securities or property to be acquired upon exercise of a Right shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) of this Section 7.
(c) Except as otherwise provided herein, upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the aggregate Purchase Price for the shares of Preferred Stock to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof, in cash or by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i)(A) requisition from any transfer agent of the Preferred Stock certificates for the number of shares of Preferred Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) requisition from the depositary agent depositary receipts representing interests in such number of one one-thousandths of a share of Preferred Stock as are to be purchased (in which case certificates for the Preferred Stock represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, promptly deliver such cash to or upon the order of the registered holder of such Right Certificate.
(d) Except as otherwise provided herein, in case the registered holder of any Right Certificate shall exercise less than all of the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the exercisable Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder of Rights upon the occurrence of any purported transfer or exercise of Rights pursuant to Section 6 hereof or this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of assignment or form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such transfer or exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Shares of Preferred Stock.
(a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock or any shares of Preferred Stock held in its treasury, the number of shares of Preferred Stock that will be sufficient to permit the exercise in full of all outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following the time that any Person becomes an Acquiring Person, shares of Common Stock and other securities) issuable upon the exercise of Rights may be listed or admitted to trading on any national securities exchange, or quoted on NASDAQ, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed or admitted to trading on such exchange, or quoted on NASDAQ, upon official notice of issuance upon such exercise.
(c) From and after such time as the Rights become exercisable, the Company shall use its best efforts, if then necessary to permit the issuance of shares of Preferred Stock (and, following the time that any Person becomes an Acquiring Person, shares of Common Stock and other securities) upon the exercise of Rights, to register and qualify such shares of Preferred Stock (and, following the time that any Person becomes an Acquiring Person, shares of Common Stock and other securities) under the Securities Act and any applicable state securities or "Blue Sky" laws (to the extent exemptions therefrom are not available), cause such registration statement and qualifications to become effective as soon as possible after such filing and keep such registration and qualifications effective until the earlier of the date as of which the Rights are no longer exercisable for such securities and the Expiration Date. The Company may temporarily suspend, for a period of time not to exceed 90 days, the exercisability of the Rights in order to prepare and file a registration statement under the Securities Act and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction unless the requisite qualification in such jurisdiction shall have been obtained and until a registration statement under the Securities Act (if required) shall have been declared effective.
(d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all shares of Preferred Stock (and, following the time that any Person becomes an Acquiring Person, shares of Common Stock and other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates therefor
(subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares.
(e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any shares of Preferred Stock (or shares of Common Stock or other securities) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Stock (or shares of Common Stock or other securities) in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or deliver any certificates or depositary receipts for Preferred Stock (or shares of Common Stock or other securities) upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by that holder of such Right Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose name any certificate for Preferred Stock is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the shares of Preferred Stock represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Stock transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a holder of Preferred Stock for which the Rights shall be exercisable, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares and Number of Rights. The Purchase Price, the number of shares of Preferred Stock or other securities or property purchasable upon exercise of each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares of Preferred Stock or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, the holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person becomes an Acquiring Person (the first occurrence of such event being referred to hereinafter as the "Flip-In Event"), then (A) the Purchase Price shall be adjusted to be the Purchase Price in effect immediately prior to the Flip-In Event multiplied by the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to such Flip-In Event, whether or not such Right was then exercisable, and (B) each holder of a Right, except as otherwise provided in this Section 11(a)(ii) and Section 11(a)(iii) hereof, shall thereafter have the right to receive, upon exercise thereof at a price equal to the Purchase Price (as so adjusted), in accordance with the terms of this Agreement and in lieu of shares of Preferred Stock, such number of shares of Common Stock as shall equal the result obtained by dividing the Purchase Price (as so adjusted) by 50% of the current per share market price of the Common Stock (determined pursuant to Section 11(d) hereof) on the date of such Flip-In Event; provided, however, that the Purchase Price (as so adjusted) and the number of shares of Common Stock so receivable upon exercise of a Right shall, following the Flip-In Event, be subject to further adjustment as appropriate in accordance with Section 11(f) hereof. Notwithstanding anything in this Agreement to the contrary, however, from and after the Flip-In Event, any Rights that are beneficially owned by (x) any Acquiring Person (or any Affiliate or Associate of any Acquiring Person), (y) a transferee of any Acquiring Person (or any such Affiliate or Associate) who becomes a transferee after the Flip-In Event or (z) a transferee of any Acquiring Person (or any such Affiliate or Associate) who became a transferee prior to or concurrently with the Flip-In Event pursuant to either (I) a transfer from the Acquiring Person to holders of its equity securities or to any Person with whom it has any continuing agreement, arrangement or understanding regarding the transferred Rights or (II) a transfer which the Board of Directors has determined is part of a plan, arrangement or understanding which has the purpose or effect of avoiding the provisions of this paragraph, and subsequent transferees of such Persons, shall be void without any further action and any holder of such Rights shall thereafter have no rights whatsoever with respect to such Rights under any provision of this Agreement. The Company shall use all reasonable efforts to ensure that the provisions of this Section 11(a)(ii) are complied with, but shall have no liability to any holder of Right Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or its Affiliates, Associates or transferees hereunder. From and after the Flip-In Event, no Right Certificate shall be issued pursuant to Section 3 or Section 6 hereof that represents Rights that are or have become void pursuant to the provisions of this paragraph, and any Right Certificate delivered to the Rights Agent that represents Rights that are or have become void pursuant to the provisions of this paragraph shall be cancelled. From and after the occurrence of an event specified in Section 13(a) hereof, any Rights that theretofore have not been exercised pursuant to this Section 11(a)(ii) shall thereafter be exercisable only in accordance with Section 13 and not pursuant to this Section 11(a)(ii).
(iii) The Company may at its option substitute for a share of Common Stock issuable upon the exercise of Rights in accordance with the foregoing subparagraph (ii) a number of shares of Preferred Stock or fraction thereof such that the current per share market price of one share of Preferred Stock multiplied by such number or fraction is equal to the current per share market price of one share of Common Stock. In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii), the Board of Directors shall, to the extent permitted by applicable law and any material agreements then in effect to which the Company is a party (A) determine the excess (such excess, the "Spread") of (1) the value of the shares of Common Stock issuable upon the exercise of a Right in accordance with the foregoing subparagraph (ii) (the "Current Value") over (2) the Purchase Price (as adjusted in accordance with the foregoing subparagraph (ii)), and (B) with respect to each Right (other than Rights which have become void pursuant to the foregoing subparagraph (ii)), make adequate provision to substitute for the shares of Common Stock issuable in accordance with the foregoing subparagraph (ii) upon exercise of the Right and payment of the Purchase Price (as adjusted in accordance therewith), (1) cash, (2) a reduction in such Purchase Price, (3) shares of Preferred Stock or other equity securities of the Company (including, without limitation, shares or fractions of shares of preferred stock which, by virtue of having dividend, voting and liquidation rights substantially comparable to those of the shares of Common Stock, are deemed in good faith by the Board of Directors to have substantially the same value as the shares of Common Stock (such shares of Preferred Stock and shares or fractions of shares of preferred stock are hereinafter referred to as "Common Stock equivalents")), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having a value which, when added to the value of the shares of Common Stock actually issued upon exercise of such Right, shall have an aggregate value equal to the Current Value (less the amount of any reduction in such Purchase Price), where such aggregate value has been determined by the Board of Directors upon the advice of a nationally recognized investment banking firm selected in good faith by the Board of Directors; provided, however, that if the Company shall not make adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the Flip-In Event (the "Section 11(a) (ii) Trigger Date"), then the Company shall be obligated to deliver, to the extent permitted by applicable law and any material agreements then in effect to which the Company is a party, upon the surrender for exercise of a Right and without requiring payment of such Purchase Price, shares of Common Stock (to the extent available), and then, if necessary, such number or fractions of shares of Preferred Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If, upon the occurrence of the Flip-In Event, the Board of Directors shall determine in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, then, if the Board of Directors so elects, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a) (ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such thirty (30) day period, as it may be extended, is herein called the "Substitution Period"). To
Company determines that some action need be taken pursuant to the second and/or third sentence of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 11(a)(ii) hereof and the last sentence of this Section 11(a)(iii) hereof, that such action shall apply uniformly to all outstanding Rights and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such second sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of the shares of Common Stock shall be the current per share market price (as determined pursuant to Section 11(d)(i)) on the Section 11(a)(ii) Trigger Date and the per share or fractional value of any "Common Stock equivalent" shall be deemed to equal the current per share market price of the Common Stock. The Board of Directors of the Company may, but shall not be required to, establish procedures to allocate the right to receive shares of Common Stock upon the exercise of the Rights among holders of Rights pursuant to this Section 11(a)(iii).
(b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Stock entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Stock (or shares having the same rights, privileges and preferences as the Preferred Stock ("equivalent preferred shares")) or securities convertible into Preferred Stock or equivalent preferred shares at a price per share of Preferred Stock or equivalent preferred shares (or having a conversion price per share, if a security convertible into shares of Preferred Stock or equivalent preferred shares) less than the then current per share market price of the Preferred Stock (determined pursuant to Section 11(d) hereof) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock and equivalent preferred shares outstanding on such record date plus the number of shares of Preferred Stock and equivalent preferred shares which the aggregate offering price of the total number of shares of Preferred Stock and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price, and the denominator of which shall be the number of shares of Preferred Stock and equivalent preferred shares outstanding on such record date plus the number of additional shares of Preferred Stock and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Shares of Preferred Stock and equivalent preferred shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Stock) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Preferred Stock (determined pursuant to Section 11(d) hereof) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one share of Preferred Stock, and the denominator of which shall be such current per share market price (determined pursuant to Section 11(d) hereof) of the Preferred Stock; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.
(d)(i) Except as otherwise provided herein, for the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security, and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported by the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, if the Preferred Stock is publicly traded, the "current per share market price" of the Preferred Stock shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Stock is not publicly traded but the Common Stock is publicly traded, the "current per share market price" of the Preferred Stock shall be conclusively deemed to be the current per share market price of the Common Stock as determined pursuant to Section 11(d)(i) multiplied by the then applicable Adjustment Number (as defined in and determined in accordance with the Certificate of Designation for the Preferred Stock). If neither the Common Stock nor the Preferred Stock is publicly traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one hundred-thousandth of a share of Preferred Stock or share of Common Stock or other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than the Preferred Stock, thereafter the Purchase Price and the number of such other shares so receivable upon exercise of a Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Sections 11(a), 11(b), 11(c), 11(e), 11(h), 11(i) and 11(m) hereof, as applicable, and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-thousandths of a share of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths of a share of Preferred Stock (calculated to the nearest one hundred-thousandth of a share of Preferred Stock) obtained by (i) multiplying (x) the number of one one-thousandths of a share covered by a Right immediately prior to such adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the Purchase Price pursuant to Sections 11(a)(i), 11(b) or 11(c) hereof to adjust the number of Rights, in substitution for any adjustment in the number of one one-thousandths of a share of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one-hundredth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company may, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-thousandths of a share of Preferred Stock issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-thousandths of a share of Preferred Stock which were expressed in the initial Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value, if any, of the fraction of Preferred Stock or other shares of capital stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Preferred Stock or other such shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such adjustments in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Stock, issuance wholly for cash of any shares of Preferred Stock at less than the current market price, issuance wholly for cash of Preferred Stock or securities which by their terms are convertible into or exchangeable for Preferred Stock, dividends on Preferred Stock payable in shares of Preferred Stock or issuance of rights, options or warrants referred to hereinabove in Section 11(b), hereafter made by the Company to holders of its Preferred Stock shall not be taxable to such stockholders.
(n) Anything in this Agreement to the contrary notwithstanding, in the event that at any time after the date of this Rights Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Stock payable in Common Stock or (ii) effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of a dividend payable in Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter, shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event.
(o) The Company agrees that, after the earlier of the Distribution Date or the Stock Acquisition Date, it will not, except as permitted by Sections 23, 24 or 27 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or eliminate the benefits intended to be afforded by the Rights.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Stock and the Preferred Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof (if so required under Section 25 hereof). The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earnings Power.
(a) In the event, directly or indirectly, at any time after the Flip-In Event (i) the Company shall merge with and into any other Person, (ii) any Person shall consolidate with the Company, or any Person shall merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Stock shall be changed into or exchanged for stock or other securities of any other Person (or of the Company) or cash or any other property, or (iii) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person (other than the Company or one or more wholly owned Subsidiaries of the Company), then upon the first occurrence of such event, proper provision shall be made so that: (A) each holder of a Right (other than Rights which have become void pursuant to Section 11(a)(ii) hereof) shall thereafter have the right to receive, upon the exercise thereof at the Purchase Price (as theretofore adjusted in accordance with Section 11(a)(ii) hereof), in accordance with the terms of this Agreement and in lieu of shares of Preferred Stock or Common Stock of the Company, such number of validly authorized and issued, fully paid, non-assessable and freely tradeable shares of Common Stock of the Principal Party (as such term is hereinafter defined), not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall equal the result obtained by dividing the Purchase Price (as theretofore adjusted in accordance with Section 11(a)(ii) hereof) by 50% of the current per share market price of the Common Stock of such Principal Party (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; provided, however, that the Purchase Price (as theretofore adjusted in accordance with Section 11(a)(ii) hereof) and the number of shares of Common Stock of such Principal Party so receivable upon exercise of a Right shall be subject to further adjustment as appropriate in accordance with Section 11(f) hereof to reflect any events occurring in respect of the Common Stock of such Principal Party after the occurrence of such consolidation, merger, sale or transfer; (B) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Rights Agreement; (C) the term "Company" shall thereafter be deemed to refer to such Principal Party; and (D) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of its shares of Common Stock in accordance with Section 9 hereof) in connection with such consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the shares of its Common Stock thereafter deliverable upon the exercise of the Rights; provided that, upon the subsequent occurrence of any consolidation, merger, sale or transfer of assets or other extraordinary transaction in respect of such Principal Party, each holder of a Right shall thereupon be entitled to receive, upon exercise of a Right and payment of the Purchase Price as provided in this Section 13(a), such cash, shares, rights, warrants and other property which such holder would have been entitled to receive had such holder, at the time of such transaction, owned the Common Stock of the Principal Party receivable upon the exercise of a Right pursuant to this Section 13(a), and such Principal Party shall take such steps (including, but not limited to, reservation of shares of stock) as may be necessary to permit the subsequent exercise of the Rights in accordance with the terms hereof for such cash, shares, rights, warrants and other property.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in (i) or (ii) of the first sentence of Section 13(a) hereof: (A) the Person that is the issuer of the securities into which the shares of Common Stock are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer the shares of Common Stock of which have the greatest aggregate market value of shares outstanding, or (B) if no securities are so issued, (x) the Person that is the other party to the merger, if such Person survives said merger, or, if there is more than one such Person, the Person the shares of Common Stock of which have the greatest aggregate market value of shares outstanding or (y) if the Person that is the other party to the merger does not survive the merger, the Person that does survive the merger (including the Company if it survives) or (z) the Person resulting from the consolidation; and
(ii) in the case of any transaction described in (iii) of the first sentence in Section 13(a) hereof, the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if each Person that is a party to such transaction or transactions receives the same portion of the assets or earning power so transferred or if the Person receiving the greatest portion of the assets or earning power cannot be determined, whichever of such Persons as is the issuer of Common Stock having the greatest aggregate market value of shares outstanding; provided, however, that in any such case described in the foregoing clause (b)(i) or (b)(ii), if the Common Stock of such Person is not at such time or has not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, then (1) if such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, the term "Principal Party" shall refer to such other Person, or (2) if such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stock of all of which is and has been so registered, the term "Principal Party" shall refer to whichever of such Persons is the issuer of Common Stock having the greatest aggregate market value of shares outstanding, or (3) if such Person is owned, directly or indirectly, by a joint venture formed by two or more Persons that are not owned, directly or indirectly, by the same Person, the rules set forth in clauses (1) and (2) above shall apply to each of the owners having an interest in the venture as if the Person owned by the joint venture was a Subsidiary of both or all of such and the Principal Party in each such case shall bear the obligations set forth in this Section 13 in the same ratio as its interest in such Person bears to the total of such interests.
(c) The Company shall not consummate any consolidation, merger, sale or transfer referred to in Section 13(a) hereof unless prior thereto the Company and the Principal Party involved therein shall have executed and delivered to the Rights Agent an agreement confirming that the requirements of Sections 13(a) and (b) hereof shall promptly be performed in accordance with their terms and that such consolidation, merger, sale or transfer of assets shall not result in a default by the Principal Party under this Agreement as the same shall have been assumed by the Principal Party pursuant to Sections 13(a) and (b) hereof and providing that, as soon as practicable after executing such agreement pursuant to this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Securities Act, if necessary, with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, use its best efforts to cause such registration statement to become effective as soon as practicable after such filing and use its best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the Expiration Date and similarly comply with applicable state securities laws;
(ii) use its best efforts, if the Common Stock of the Principal Party shall be listed or admitted to trading on the New York Stock Exchange or on another national securities exchange, to list or admit to trading (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on the New York Stock Exchange or such securities exchange, or, if the Common Stock of the Principal Party shall not be listed or admitted to trading on the New York Stock Exchange or a national securities exchange, to cause the Rights and the securities receivable upon exercise of the Rights to be authorized for quotation on NASDAQ or on such other system
(iii) deliver to holders of the Rights historical financial statements for the Principal Party which comply in all respects with the requirements for registration on Form 10 (or any successor form) under the
(iv) obtain waivers of any rights of first refusal or preemptive rights in respect of the Common Stock of the Principal Party subject to purchase upon exercise of outstanding Rights.
(d) In case the Principal Party has provision in any of its authorized securities or in its certificate of incorporation or by-laws or other instrument governing its corporate affairs, which provision would have the effect of (i) causing such Principal Party to issue (other than to holders of Rights pursuant to this Section 13), in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such Principal Party at less than the then current market price per share thereof (determined pursuant to Section 11(d) hereof) or securities exercisable for, or convertible into, Common Stock of such Principal Party at less than such then current market price, or (ii) providing for any special payment, tax or similar provision in connection with the issuance of the Common Stock of such Principal Party pursuant to the provisions of Section 13, then, in such event, the Company hereby agrees with each holder of Rights that it shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall have been canceled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with, or as a consequence of, the consummation of the proposed transaction.
(e) The Company covenants and agrees that it shall not, at any time after the Flip-In Event, enter into any transaction of the type described in clauses (i) through (iii) of Section 13(a) hereof if (i) at the time of or immediately after such consolidation, merger, sale, transfer or other transaction there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights, (ii) prior to, simultaneously with or immediately after such consolidation, merger, sale, transfer or other transaction, the stockholders of the Person who constitutes, or would constitute, the Principal Party for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates or Associates or (iii) the form or nature of organization of the Principal Party would preclude or limit the exercisability of the Rights.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights (except prior to the Distribution Date in accordance with Section 11(n) hereof). In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock). Interests in fractions of Preferred Stock in integral multiples of one one-thousandth of a share of Preferred Stock may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Stock represented by such depositary receipts. In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-thousandth of a share of Preferred Stock, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current per share market price of one share of Preferred Stock (as determined pursuant to Section 11(d) hereof) for the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Stock); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Stock), on his own behalf and for his own benefit, may enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate (or, prior to the Distribution Date, such Common Stock) in the manner provided therein and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Stock;
(b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office or agency of the Rights
Agent designated for such purpose, duly endorsed or accompanied by a proper
(c) the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the Common Stock certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in this Agreement), or to receive dividends or subscription rights, or otherwise, until the Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability arising therefrom, directly or indirectly.
(b) The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Preferred Stock or Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust powers of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, Vice Chairman of the Board, the Chief Executive Officer or the President and the Chief Financial Officer or Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a) (ii) hereof) or any adjustment in the terms of the Rights provided for in Sections 3, 11, 13, 23 and 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after receipt of a certificate furnished pursuant to Section 12, describing such change or adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Preferred Stock or other securities to be issued pursuant to this Agreement or any Right Certificate or as to whether any shares of Preferred Stock or other securities will, when issued, be validly authorized and issued fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any person reasonably believed by the Rights Agent to be one of the Chairman of the Board, Vice Chairman of the Board, the Chief Executive Officer or the President or the Secretary or Chief Financial Officer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five Business Days after the date any officer of the Company actually receives such application unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof.
(j) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate contained in the form of assignment or the form of election to purchase set forth on the reverse thereof, as the case may be, has not been completed to certify the holder is not an Acquiring Person (or an Affiliate or Associate thereof), a Rights Agent shall not take any further action with respect to such requested exercise of transfer without first consulting with the Company.
(k) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it.
Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Stock or Preferred Stock by registered or certified mail, and, following the Distribution Date, to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock or Preferred Stock by registered or certified mail, and, following the Distribution Date, to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or the laws of any other state of the United States or the District of Columbia, in good standing, having an office in the State of California, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $25 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock or Preferred Stock, and, following the Distribution Date, mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such forms as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Stock following the Distribution Date and prior to the Expiration Date, the Company may with respect to shares of Common Stock so issued or sold pursuant to (i) the exercise of stock options, (ii) under any employee plan or arrangement, (iii) upon the exercise, conversion or exchange of securities notes or debentures issued by the Company or (iv) a contractual obligation of the Company, in each case existing prior to the Distribution Date, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale.
(a) The Board of Directors of the Company may, at any time prior to the Flip-In Event, redeem all but not less than all the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (the redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. The Redemption Price shall be payable, at the option of the Company, in cash, shares of Common Stock or such other form of consideration as the Board of Directors shall determine.
(b) Immediately upon the action of the Board of Directors ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23 (or at such later time as the Board of Directors may establish for the effectiveness of such redemption), and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; provided, however, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights (or such later time as the Board of Directors may establish for the effectiveness of such redemption), the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption shall state the method by which the payment of the Redemption Price will be made.
(a) The Board of Directors of the Company may, at its option, at any time after the Flip-In Event, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 11(a)(ii) hereof) for Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such amount per Right being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after an Acquiring Person shall have become the Beneficial Owner of shares of Common Stock aggregating 50% or more of the shares of Common Stock then outstanding. From and after the occurrence of an event specified in Section 13(a) hereof, any Rights that theretofore have not been exchanged pursuant to this Section 24(a) shall thereafter be exercisable only in accordance with Section 13 and may not be exchanged pursuant to this Section 24(a). The exchange of the Rights by the Board of Directors may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish.
(b) Immediately upon the effectiveness of the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall promptly mail a notice of any such exchange to all of the holders of the Rights so exchanged at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the shares of Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights which have become void pursuant to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) The Company may at its option substitute, and, in the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit an exchange of Rights for Common Stock as contemplated in accordance with this Section 24, the Company shall substitute to the extent of such insufficiency, for each share of Common Stock that would otherwise be issuable upon exchange of a Right, a number of shares of Preferred Stock or fraction thereof (or equivalent preferred shares, as such term is defined in Section 11(b)) such that the current per share market price (determined pursuant to Section 11(d) hereof) of one share of Preferred Stock (or equivalent preferred share) multiplied by such number or fraction is equal to the current per share market price of one share of Common Stock (determined pursuant to Section 11(d) hereof) as of the date of the Flip-In Event.
(d) The Company shall not, in connection with any exchange pursuant to this Section 24, be required to issue fractions of shares of Common Stock or to distribute certificates which evidence fractional shares of Common Stock. In lieu of such fractional shares of Common Stock, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional shares of Common Stock would otherwise be issuable an amount in cash equal to the same fraction of the current per share market price of a whole share of Common Stock (as determined pursuant to Section 11(d) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall at any time after the earlier of the Distribution Date or the Stock Acquisition Date propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Stock or to make any other distribution to the holders of its Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision or combination of outstanding Preferred Stock), (iv) to effect the liquidation, dissolution or winding up of the Company, or (v) to declare or pay any dividend on the Common Stock payable in Common Stock or to effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of dividends in Common Stock), then, in each such case, the Company shall give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such liquidation, dissolution or winding up is to take place and the date of participation therein by the holders of the Common Stock and/or Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Stock for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the by the holders of the Common Stock and/or Preferred Stock, whichever shall be the earlier.
(b) In case any event described in Section 11(a)(ii) or Section 13 shall occur then the Company shall as soon as practicable thereafter give to each holder of a Right Certificate (or if occurring prior to the Distribution Date, the holders of the Common Stock) in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) and Section 13 hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows:
Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows:
CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C. 450 W. 33rd Street, 15th Floor New York, New York 10001 Attention: Chemical Mellon Equity Administration
Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. Except as provided in the penultimate sentence of this Section 27, for so long as the Rights are then redeemable, the Company may in its sole and absolute discretion, and the Rights Agent shall if the Company so directs, supplement or amend any provision of this Agreement in any respect without the approval of any holders of the Rights. At any time when the Rights are no longer redeemable, except as provided in the penultimate sentence of this Section 27, the Company may, and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates in order to (i) cure any ambiguity, (ii) correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) shorten or lengthen any time period hereunder, or (iv) change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable; provided that no such supplement or amendment shall adversely affect the interests of the holders of Rights as such (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), and no such amendment may cause the rights again to become redeemable or cause the Agreement again to become amendable other than in accordance with this sentence. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment.
Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock).
Section 30. Determinations and Actions by the Board of Directors. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise the rights and powers specifically granted to the Board of Directors of the Company or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including, without limitation, a determination to redeem or not redeem the Rights or to amend this Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) that are done or made by the Board of Directors of the Company in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights, as such, and all other parties, and (y) not subject the Board of Directors to any liability to the holders of the Rights.
Section 31. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
Section 32. Governing Law. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written.
CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
GIANT GROUP, LTD., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in accordance with the provisions of the Restated Certificate of Incorporation of the said Corporation, the said Board of Directors on January 4, 1996 adopted the following resolution creating a series of 12,500 shares of Preferred Stock designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Restated Certificate of Incorporation, a series of Preferred Stock, par value $.01 per share, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred Stock that shall be designated as "Series A Junior Participating Preferred Stock," and the number of shares constituting such series shall be 12,500. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Junior Participating Preferred Stock to less than the number of shares then issued and outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation.
(A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior
Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock, in preference to the holders of shares of any class or series of stock of the Corporation ranking junior to the Series A Junior Participating Preferred Stock as to the payment of dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 1st day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) the Adjustment Number (as defined below) times the aggregate per share amount of all cash dividends, and the Adjustment Number times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. The "Adjustment Number" shall initially be 1000. In the event the Corporation shall at any time after January 4, 1996 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to a number of votes equal to the Adjustment Number on all matters submitted to a vote of the stockholders of the Corporation.
(B) Except as required by law and by Section 10 hereof, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred
(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or
(iii) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Junior Participating Preferred Stock, or to such holders and holders of any such shares ranking on a parity therewith, upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired promptly after the acquisition thereof. All such shares shall upon their retirement become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to any conditions and restrictions on issuance set forth herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount per share (the "Series A Liquidation Preference") equal to the greater of (i) $100, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) the Adjustment Number times the per share amount of all cash and other property to be distributed in respect of the Common Stock upon such liquidation, dissolution or winding up of the Corporation.
(B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, that rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6.
7. Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to the Adjustment Number times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged.
8. No Redemption. Shares of Series A Junior Participating Preferred Stock shall not be subject to redemption by the Company.
9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise, and shall rank senior to the Common Stock as to such matters.
10. Amendment. At any time that any shares of Series A Junior Participating Preferred Stock are outstanding, the Restated Certificate of
Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class.
11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this ____ day of January, 1996.
NOT EXERCISABLE AFTER JANUARY 4, 2006 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS OWNED BY OR TRANSFERRED TO ANY PERSON WHO IS OR BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL BECOME NULL AND VOID AND WILL NO LONGER BE TRANSFERABLE.
This certifies that _______________ or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of January 4, 1996, as the same may be amended from time to time (the "Rights Agreement"), between GIANT GROUP, LTD., a Delaware corporation (the "Company"), and CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C., as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., Los Angeles, California time, on January 4, 2006 at the office or agency of the Rights Agent designated for such purpose, or of its successor as Rights Agent, one one-thousandth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the Company, at a purchase price of $30 per one one-thousandth of a share of Preferred Stock (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Rights Certificate (and the number of one one-thousandths of a share of Preferred Stock which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of January 4, 1996, based on the Preferred Stock as constituted at such date. As provided in the Rights Agreement, the Purchase Price, the number of one one-thousandths of a share of Preferred Stock (or other securities or property) which may be purchased upon the exercise of the Rights and the number of Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned office or agency of the Rights Agent. The Company will mail to the holder of this Right Certificate a copy of the Rights Agreement without charge after receipt of a written request therefor.
This Right Certificate, with or without other Right Certificates, upon surrender at the office or agency of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of shares of Preferred Stock as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Company at a redemption price of $.01 per Right or (ii) may be exchanged in whole or in part for shares of the Company's Common Stock, par value $.01 per share, or shares of Preferred Stock.
No fractional shares of Preferred Stock will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement) or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of ________________, 199__.
Form of Reverse Side of Right Certificate
(To be executed by the registered holder if such holder desires to transfer the Right Certificate)
FOR VALUE RECEIVED __________________________ hereby sells, assigns (Please print name and address of transferee) Rights represented by this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint________ Attorney, to transfer said Rights on the books of the within-named Company, with full power of substitution.
Signatures must be guaranteed by a bank, trust company, broker, dealer or other eligible institution participating in a recognized signature guarantee medallion program.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by, were not acquired by the undersigned from, and are not being assigned to an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement).
Form of Reverse Side of Right Certificate - continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights represented by the Rights Certificate)
The undersigned hereby irrevocably elects to exercise ___________ Rights represented by this Right Certificate to purchase the shares of Preferred Stock (or other securities or property) issuable upon the exercise of such Rights and requests that certificates for such shares of Preferred Stock (or such other securities) be issued in the name of:
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to:
(Please print name and address)
(Signature must conform to holder specified on Right Certificate)
Signatures must be guaranteed by a bank, trust company, broker, dealer or other eligible institution participating in a recognized signature guarantee medallion program.
Form of Reverse Side of Right Certificate - continued
The undersigned certifies that the Rights evidenced by this Right Certificate are not beneficially owned by, and were not acquired by the undersigned from, an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement).
The signature in the Form of Assignment or Form of Election to Purchase, as the case may be, must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, such Assignment or Election to Purchase will not be honored.
UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS OWNED BY OR TRANSFERRED TO ANY PERSON WHO IS OR BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL BECOME NULL AND VOID AND WILL NO LONGER BE TRANSFERABLE.
SUMMARY OF RIGHTS TO PURCHASE SHARES OF PREFERRED STOCK OF GIANT GROUP, LTD.
On January 4, 1996, the Board of Directors of GIANT GROUP, LTD. (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, par value $.01 per share, of the Company (the "Common Stock"). The dividend is payable on January 16, 1996 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Stock") of the Company at a price of $30 per one one- thousandth of a share of Preferred Stock (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of January 4, 1996, as the same may be amended from time to time (the "Rights Agreement"), between the Company and CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C., as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding shares of Common Stock (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate together with a copy of this Summary of Rights.
The Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with the Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Record Date upon transfer or new issuances of Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for shares of Common Stock outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights, will also constitute the transfer of the Rights associated
Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will expire on January 4, 2006 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case as described below.
The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights is subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for or purchase Preferred Stock at a price, or securities convertible into Preferred Stock with a conversion price, less than the then-current market price of the Preferred Stock or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in Preferred Stock) or of subscription rights or warrants (other than those referred to above).
The number of outstanding Rights is subject to adjustment in the event of a stock dividend on the Common Stock payable in shares of Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Distribution Date.
Shares of Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Preferred Stock will be entitled, when, as and if declared, to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 1000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Preferred Stock will be entitled to a minimum preferential liquidation payment of $100 per share (plus any accrued but unpaid dividends) but will be entitled to an aggregate payment of 1000 times the payment made per share of Common Stock. Each share of Preferred Stock will have 1000 votes, voting together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of Common Stock are converted or exchanged, each share of Preferred Stock will be entitled to receive 1000 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions.
Because of the nature of the Preferred Stock's dividend, liquidation and voting rights, the value of the one one- thousandth interest in a share of Preferred Stock purchasable upon exercise of each Right should approximate the value of one share of Common Stock.
In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of a Right at the then-current exercise price of the Right, that number of shares of Common Stock having a market value of two times the exercise price of the Right.
In the event that, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provisions will be made so that each holder of a Right (other than Rights beneficially owned by an Acquiring Person which will have become void) will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) that at the time of such transaction has a market value of two times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and prior to the earlier of one of the events described in the previous paragraph or the acquisition by such person or group of 50% or more of the outstanding shares of Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, for shares of Common Stock or Preferred Stock (or a series of the Company's preferred stock having equivalent rights, preferences and privileges), at an exchange ratio of one share of Common Stock, or a fractional share of Preferred Stock (or other preferred stock) equivalent in value thereto, per Right.
With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Preferred Stock will be issued (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), and in lieu thereof an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading day prior to the date of exercise.
At any time prior to the time an Acquiring Person becomes such, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
For so long as the Rights are then redeemable, the Company may, except with respect to the redemption price, amend the Rights in any manner. After the Rights are no longer redeemable, the Company may, except with respect to the redemption price, amend the Rights in any manner that does not adversely affect the interests of holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated _______, 1996. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, as the same may be amended from time to time, which is hereby incorporated herein by reference. | 8-K | EX-1 | 1996-01-16T00:00:00 | 1996-01-16T11:30:35 |
0000812073-96-000005 | 0000812073-96-000005_0008.txt | The Fund computes the "average annual total return" of each Class of the Fund by determining the average annual compounded rates of return during specified periods that equate the initial amount invested to the ending redeemable value of such investment. This is done by determining the ending redeemable value of a hypothetical $1,000 initial payment. This calculation is as follows:
Where: T = average annual total return. ERV = ending redeemable value at the end of the period covered by the computation of a hypothetical $1,000 payment made at the beginning of the period. P = hypothetical initial payment of $1,000 from which the maximum sales load is deducted. n = period covered by the computation, expressed in terms of years.
The Fund may also compute the aggregate total return of each Class of the Fund, which is calculated in a similar manner, except that the results are not annualized.
The calculation of average annual total return and aggregate total return assume that the maximum sales load is deducted from the initial $1,000 investment at the time it is made and that there is a reinvestment of all dividends and capital gain distributions on the reinvestment dates during the period. The ending redeemable value is determined by assuming complete redemption of the hypothetical investment and the deduction of all nonrecurring charges at the end of the period covered by the computations. The Fund may also quote other total return information that does not reflect the effects of the sales load.
The aggregate total return for the Class A shares of the Fund for the period from the inception of the Class A shares (March 29, 1995) through August 31, 1995 was 6.84%. Without reflecting the effects of the maximum 3.5% sales load, the aggregate total return for the Class A shares for such fiscal period was 10.71%. The aggregate total return for the Class C shares of the Fund for the period from the inception of the Class C shares (April 7, 1995) through August 31, 1995 was 10.46%. | 485BPOS | EX-99.B16 | 1996-01-16T00:00:00 | 1996-01-16T16:43:37 |
0000889812-96-000027 | 0000889812-96-000027_0001.txt | <DESCRIPTION>NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of MEDICAL ACTION INDUSTRIES INC. will be held on August 9, 1995 at Ernst & Young LLP, 395 N. Service Road, Melville, New York at 3:00 p.m. (the 'Annual Meeting'), for the following purposes:
1. To elect two directors to serve in Class II until the 1998 Annual
2. To consider and act upon the ratification of Ernst & Young LLP as independent public auditors of the Company for the fiscal year ending March 31,
3. To consider and act upon such other business as may properly come before the meeting or any adjournment thereof.
Only stockholders of record at the close of business on June 23, 1995 shall be entitled to vote at the Annual Meeting.
IF YOU DO NOT EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE SIGN AND RETURN THE ENCLOSED PROXY IN ORDER THAT YOUR SHARES MAY BE VOTED FOR YOU AS SPECIFIED.
By Order of the Board of Directors,
The Annual Meeting of Stockholders of MEDICAL ACTION INDUSTRIES INC. (the 'Company') will be held on Wednesday, August 9, 1995 at Ernst & Young LLP, 395 N. Service Road, Melville, New York at 3:00 p.m. for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. This statement is furnished in connection with the solicitation by the Board of Directors of proxies to be used at the Annual Meeting and at any and all adjournments of such meeting.
If a proxy in the accompanying form is duly executed and returned, the shares represented by such proxy will be voted as specified. Any person executing the proxy may revoke it prior to its exercise either by letter directed to the attention of the Corporate Secretary of the Company or in person at the Annual Meeting.
On June 23, 1995 (the 'Record Date'), the Company had outstanding one class of voting securities, namely 8,038,030 shares of Common Stock, $.001 par value. Stockholders are entitled to one vote for each share registered in their names at the close of business on the Record Date. A majority of the outstanding shares will constitute a quorum at the meeting. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business. Abstentions are counted in tabulations of the votes cast on proposals presented to stockholders, whereas broker non-votes are not counted for purposes of determining whether a proposal has been approved. The following table sets forth as of the Record Date certain information with regard to ownership of the Company's Common Stock by (i) each beneficial owner of 5% or more of the Company's Common Stock; (ii) each director; and (iii) all executive officers and directors of the Company as a group:
(1) Unless otherwise indicated, no director beneficially owns more than 1% of the Company's Common Stock.
(2) Includes shares (i) awarded under the Company's Restricted Management Stock Bonus Plan, and (ii) exercisable under the Company's Non-Qualified Stock Option Plan and Incentive Stock Option Plan.
This Proxy Statement has been mailed on or about July 1, 1995 to all stockholders as of the Record Date.
The Company's Board of Directors presently consists of seven directors, classified into three classes as nearly equal in number as possible, whose terms of office expire in successive years. The two directors named below in Class II, all of whom are presently directors of the Company, have been nominated for election as directors of the Company until the Annual Meeting of Stockholders in 1998 or until their respective successors are chosen and qualified. Shares represented by executed proxies in the form enclosed will be voted, unless otherwise indicated, for the election as directors of the aforesaid nominees, unless they shall be unavailable, in which event such shares may be voted for substitute nominee(s) designated by the Board of Directors. The Board of Directors has no reason to believe that the nominees will be unavailable or, if elected, will decline to serve. The following table sets forth the directors of the Company.
The Board of Directors held five meetings during the fiscal year ended March 31, 1995. Except for Dr. Nicosia, all directors attended 75% or more of the aggregate number of meetings of the Board and its committees, on which they serve. Non-employee directors receive $500 for each board meeting they attend. In addition, Mr. Wengrover is compensated pursuant to a separate consulting agreement.
The Board of Directors has established the following committees, all of which consist of three non-employee directors, Mr. Wengrover, Dr. Corso and Dr. Nicosia, to perform certain specific functions. Included among the committees are an Audit Committee, a Compensation Committee and a Stock Option Committee. There is no Nominating Committee of the Board of Directors.
AUDIT COMMITTEE. This Committee reviews the plan for and the results of the independent audit, reviews the Company's financial information and internal accounting and management controls, and performs other related duties. The Audit Committee held one meeting during the last fiscal year.
COMPENSATION COMMITTEE. This Committee makes recommendations to the Board of Directors with respect to compensation for the officers of the Company and the Chief Executive Officer. This Committee met one time during fiscal year 1995.
STOCK OPTION COMMITTEE. This Committee has reviewed and approved the grant of options pursuant to the Company's stock option plans for the Company's directors and officers. The Committee held one meeting during the last fiscal year.
Mr. Joseph R. Meringola has been Chairman of the Board and Chief Executive Officer of the Company since its inception in 1977. Mr. Meringola has served in various executive management and operating positions for the Company, including President and Chief Operating Officer. Mr. Meringola received a Bachelor of Science degree in business administration from C.W. Post College of Long Island University.
Mr. Paul D. Meringola, a director and President of the Company since November, 1992, has been employed by the Company for more than the past fifteen years in various executive positions. He previously served the Company as Vice President -- Operations from March, 1989 to October, 1991 and Senior Vice President (Chief Operating Officer) from October, 1991 to November, 1992.
Mr. Richard G. Satin, previously a director of the Company from October, 1987 to February, 1992, was reappointed to the Board of Directors in February, 1993. Mr. Satin has been employed by the Company as Vice President and General Counsel since January, 1993 and has been Corporate Secretary of the Company since October, 1991. In February, 1994, Mr. Satin was appointed Vice President -- Operations. Mr. Satin, a practicing attorney in the State of New York for more than the past ten years, was associated with the law firm of Blau, Kramer, Wactlar, Lieberman & Satin, P.C. from May, 1983 to January, 1993.
Mr. Grover A. Cox, a director of the Company since February, 1993, was Vice President -- Corporate from February, 1992 until December, 1993. Since April, 1994, Mr. Cox has been employed by Manzi Medical as Vice President -- Sales. Prior to joining the Company, Mr. Cox was employed by the Kendall Corporation for thirty years in various sales and marketing positions including Vice President--Corporate Accounts (Healthcare Products). Mr. Cox received a Bachelor of Arts degree in economics from Colgate University.
Dr. Philip F. Corso, a director of the Company since March, 1984, has been associated with the Yale University School of Medicine for more than the past ten years and is presently Assistant Clinical Professor. In addition, Dr. Corso is Senior Attending and Chief of Plastic Surgery at Bridgeport and Norwalk Hospitals in Connecticut. Dr. Corso has also published numerous articles in professional journals on plastic and reconstructive surgery.
Dr. Thomas A. Nicosia, a director of the Company since November, 1985, has been a practicing cardiologist for more than the past five years. Dr. Nicosia is a fellow of the American College of Cardiology and is affiliated with St.
Francis Hospital in Roslyn, New York and North Shore University Hospital in Manhasset, New York.
Mr. Bernard Wengrover, a director of the Company since October, 1990, has been a certified public accountant in the State of New York for more than twenty years and is a partner in the accounting firm of Schneider, Ehrlich & Wengrover. Mr. Wengrover was the Company's independent auditor from 1977 until March 31, 1989.
The Company's executive officers are as follows:
All of the executive officers of the Company hold office at the pleasure of the Board of Directors. Joseph R. and Paul D. Meringola are brothers.
Mr. Daniel Marsh has been employed by the Company for more than the past five years in various sales and marketing positions. Mr. Marsh was appointed Vice President of Sales and Marketing in February, 1994 and since April 1, 1993 served as Vice President -- International.
The following table sets forth information concerning the annual and long-term compensation of the Company's Chief Executive Officer and each of the Company's four most highly compensated executive officers (referred to collectively with the Chief Executive Officer as the 'named executives') during the years ended March 31, 1993, 1994 and 1995.
(1) Includes Chairman of the Board and Chief Executive Officer and the other most highly compensated executive officers as measured by salary and bonus.
(2) Represents the dollar value of restricted shares granted during the year in question, calculated by multiplying the closing market price of the Company's Common Stock on the date of grant by the number of shares awarded. The aggregate number of shares of restricted stock held by each named executive as of March 31, 1995, together with the value of those shares is as follows: Mr. Joseph R. Meringola -- 50,000 shares/$53,125; Mr. Paul D. Meringola -- 99,500 shares/$105,719; Richard G. Satin -- 52,000 shares/$55,250 and Daniel Marsh -- 27,000 shares/$28,688. The shares of restricted stock vest in four equal installments (25% increments) on the second, third, fourth and fifth anniversaries of the date of issuance. Dividends are paid in shares of restricted stock if and to the extent paid on the Company's Common Stock generally.
(3) The Company has entered into an Employment Agreement with Mr. Paul D. Meringola and Change of Control Agreements with Messrs. Paul D. Meringola, Satin and Marsh that may result in payments to each of them upon a change of control of the Company. These arrangements are described under 'Management -- Employment Agreement' and 'Change of Control Arrangements'.
(4) Includes, among other things, matching contributions under the Company's 401(K) Retirement Plan, the cost to the Company of the nonbusiness use of Company automobiles and amounts payable to Mr. Paul D. Meringola under his Employment Agreement.
(5) Messrs. Satin and Marsh became executive officers in February, 1993 and February, 1994, respectively.
During the fiscal year ended March 31, 1995, there were no individual grants of stock options made to the named executives.
The following table sets forth with respect to the named executives, information concerning the exercise of options during the last fiscal year and unexercised options held as of March 31, 1995:
OPTION EXERCISES AND FISCAL YEAR-END VALUES
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Pursuant to Section 16(a) of the Exchange Act of 1934, directors, certain officers, and beneficial owners of 10% or more of the Company's Common Stock ('reporting persons') are required from time to time to file with the Securities and Exchange Commission (the 'Commission') reports on Forms 3, 4 or 5, relating principally to transactions in Company securities by such persons. Based solely upon its review of the copies of such reports furnished to the Company, or written representations received by the Company that no other reports were required, the Company believes during fiscal 1995 that the reporting persons filed on a timely basis the reports required by Section 16(a) of the Securities Act of 1934.
The Compensation Committee is responsible for developing and making recommendations to the Company with respect to executive officer compensation policies, addressing such matters as salaries, incentive plans, benefits and over-all compensation. The Compensation Committee determines the compensation to be paid to the Chief Executive Officer and each of the other executive officers of the Company.
The objectives of the Compensation Committee in determining the type and amount of executive officer compensation are to provide a level of base compensation which allows the Company to attract and retain superior talent and to align the executive officers' interests with the success of the Company through the payment of a bonus based upon Company performance and participation in stock option and other stock ownership plans which provide the executive officers with the opportunity to build a substantial ownership interest in the Company.
The compensation of an executive officer of the Company includes cash compensation consisting of a base salary plus performance bonus, long-term incentive compensation in the form of stock options and restricted stock awards, and participation in various benefit plans generally available to employees of the Company.
Although the compensation paid to each of the Company's executive officers is well below the $1 million deduction limit under the Internal Revenue Code of 1986 (the 'Code'), the Company intends to take the necessary steps to conform its compensation to comply with the Code.
Base Salary. Compensation for each of the named officers consists of a base salary and annual and longer-term incentive compensation. In the setting of base salaries, consideration is given to national and local salary surveys and review of salaries paid to senior executives with comparable qualifications, experience and responsibilities at other companies in the particular geographic area. Annual and longer-term incentive compensation is tied to the Company's and the executive's success in achieving significant financial and non-financial goals.
The Committee weighs the value of achievement of subjective factors such as demonstrated management ability, initiative and contributions toward the Company's goal of leadership within the industry in which it competes. The Committee also weighs, when appropriate, the value of the individual's actions during times when progress towards predetermined goals was hindered by elements outside the Company's and the executive's control. The Committee recognizes that the operational challenges faced during unforeseen times or events are often valid reasons to modify what may otherwise be a negative result to the base salary decision.
Finally, the Committee considers the individual executive's impact on those elements that contribute to increased stockholder value. The Committee's discretion usually determines the weighing of these various factors in its final
determination of base salary development or adjustment.
Incentive Compensation. In evaluating the performance and setting the incentive compensation of the executive officers of the Company, the Committee developed an incentive program predominantly predicated on the attainment of specific levels of revenue and pre-tax income for the Company. To a lesser extent, the Committee considers other managerial goals stated as objectively as possible. For the fiscal year ended March 31, 1995, no incentive compensation was awarded to the named executives.
Stock Options and Grants. The Committee periodically considers the desirability of granting senior executives, including the named executives, awards under the Company's stock plans. The Committee believes that its past grants of stock options and restricted stock awards have successfully focused the Company's senior management on building profitability and stockholder value.
In determining the amount and nature of awards under such plans to be granted to the senior management group, including the named executives, the Committee reviews with the Chief Executive Officer awards recommended by him, taking into account the respective scope of accountability, strategies and operational goals and anticipated performance requirements and contributions of each member of the senior management group. The award to the Chief Executive Officer is established separately and is based, among other things, on the Committee's analysis of his past and expected future contributions to the Company's achievement of its long-term performance goals.
Determination of the Company's compensation of its Chief Executive Officer and founder, Joseph R. Meringola, takes into account the factors described above as pertinent to the remainder of the Company's executives, while also taking into consideration the nature of the Company's business and efforts expended in connection with development of the Company's strategy and product development activities.
The Committee has concluded that Mr. Meringola's performance warrants the compensation for 1995 as reflected in the Summary Compensation table on page 5.
Set forth below is a line graph comparing the cumulative total return on the Company's Common Stock against the cumulative total return of the Standard & Poor 500 Stock Index and a Peer Group Index for the period of five years commencing April 1, 1990 and ending March 31, 1995.
The Peer Group Index is comprised of the following publicly traded companies, all of whom are contained within the Standard Industry Code 3841:
Acme UTD Corp. Alliance Imaging Inc. Allied Healthcare Products, Inc. Electromedics Inc. Graham Field Health Products Namic USA Corp. Personal Diagnostics Inc. Protocol Systems Inc. Quest Medical Inc. Survival Technology Inc.
None of the companies in the Peer Group offers a fully comparable range of products and services. The returns of each company have been weighed according to their respective stock market capitalization for purposes of arriving at a peer group average.
The line graph assumes that $100 was invested on April 1, 1990 in each of the companies' common stock, the Standard & Poor 500 Stock Index and the Peer Group Index and that all dividends were reinvested.
In February, 1993, the Company entered into an Employment Agreement with Paul D. Meringola for the period April 1, 1993 through March 31, 1996. The Agreement provides for a salary at an annual rate of $150,000, together with cost of living increments and the reimbursement of medical expenses not otherwise covered by the Company's medical plans, up to a maximum of $5,000. The Agreement further provides that in the event there is a change in control of the Company, as defined therein, or in any person directly or indirectly controlling the Company, as also defined therein, Mr. Meringola has the option, exercisable within six months of becoming aware of such event, to terminate his Employment Agreement. Upon such termination, Mr. Meringola has the right to receive as a lump sum payment an amount equal to the compensation remaining to be paid for the balance of the term of the Agreement.
1989 NON-QUALIFIED STOCK OPTION PLAN
The Company's Board of Directors and stockholders approved a Non-Qualified Stock Option Plan (the 'Plan') which presently covers 1,150,000 shares of the Company's Common Stock. The Plan, which expires in 1999, permits the granting of non-qualified options to the Company's officers, directors and other senior executives and management and supervisory personnel and consultants. The Plan is administered by the Stock Option Committee, who determine, among other things, the individuals to whom, and the time or times at which, options shall be
granted, the number of shares to be subject to each option, the purchase price of the shares and the term of each option, with the exception that no option can be granted at less than 85% of the market value at the time of grant and options may only be exercised before the expiration of five years from the date of grant. Each option granted under the Plan may be exercised only during the continuance of an Optionee's employment or service with the Company.
The Company's Board of Directors and stockholders have approved the 1994 Stock Incentive Plan (the 'Incentive Plan'), which presently covers 500,000 shares of the Company's Common Stock. The Incentive Plan, which expires in 2004, permits the granting of incentive stock options, shares of restricted stock and non-qualified stock options. All officers and key employees of the Company and its affiliates are eligible to participate in the Incentive Plan. The Incentive Plan is administered by the Stock Option Committee, who determine the persons to whom, and the times at which, awards will be granted, the type of awards to be granted and all other related terms and conditions of the awards. The per share exercise price of any options may not be less than the fair market value of a share of Common Stock at the time of grant. As of March 31, 1995, no issuances have been made under the Incentive Plan.
The Company's Incentive Stock Option Plan (the 'Option Plan'), which covered 350,000 shares of the Company's Common Stock, $.001 par value per share, expired in May, 1994. The option price was the fair market value on the date of grant, unless the employee owns, as defined in the applicable sections of the Internal Revenue Code of 1954, as amended, 10% of the total combined voting power or value of the Common Stock of the Company immediately before the grant of any option, in which case the option price was at least 110% of the fair market value at the date of grant. Options expire five years from date of grant terminated, in which event, subject to certain exceptions, the options terminate three months subsequent to date of termination.
RESTRICTED MANAGEMENT STOCK BONUS PLAN
The Company's Restricted Management Stock Bonus Plan (the 'Bonus Plan'), which covered 500,000 shares of the Company's Common Stock, $.001 par value per share, expired in May, 1994. Shares issued under the Bonus Plan vest in four equal installments on the second, third, fourth and fifth anniversaries of the date of issuance. Except for those shares which have vested, shares issued under the Bonus Plan may not be sold, transferred or otherwise disposed of unless they are first offered to the Company for the same amount paid by the recipient.
MEDICAL ACTION INDUSTRIES INC. RETIREMENT PLAN
The Company has adopted, effective April 1, 1988, the Medical Action Industries Inc. Retirement Plan (the 'Retirement Plan') for certain employees pursuant to Section 401(k) of the Internal Revenue Code. All employees of the
Company and its subsidiaries are eligible to participate in the Retirement Plan. Subject to the terms and conditions of the Retirement Plan, each eligible employee may contribute up to 15% of his compensation, as defined therein. Each participant's contribution vests immediately.
In addition, the Retirement Plan provides for discretionary Company contributions, up to a maximum of 3% of such participant's compensation. Each participant's portion of the discretionary contribution vests over a period of four years.
For the fiscal year ended March 31, 1995, contributions under the Retirement Plan for Messrs. Joseph R. Meringola, Paul D. Meringola, Richard G. Satin and Daniel Marsh were approximately $1,920, $1,994, $1,397 and $1,507, respectively, and $6,818 for all officers as a group.
The Company has entered into agreements with three of its executive officers, Messrs. Paul D. Meringola, Satin and Marsh, which provide certain benefits in the event of a change in control of the Company. A 'change in control' of the Company is defined as, in general, the acquisition by any person of beneficial ownership of 20% or more of the voting stock of the Company, certain business combinations involving the Company or a change in a majority of the incumbent members of the Board of Directors, except for changes in the majority of such members approved by such members. If, within two years after a change in control, the Company or, in certain circumstances, the executive, terminates his employment, the executive is entitled to a severance payment equal to three times (i) such executive's highest annual salary within the five-year period preceding termination plus (ii) a bonus increment equal to the average of the two highest of the last five bonuses paid to such executive. In addition, the executive is entitled to the continuation of all employment benefits for a three-year period, the vesting of all stock options and certain other benefits, including payment of an amount sufficient to offset any 'excess parachute payment' excise tax payable by the executive pursuant to the provisions of the Internal Revenue Code or any comparable provision of state law.
Prior to a change in control, the rights and obligations of the executive with regard to his employment by the Company shall be determined in accordance with the policies and procedures adopted from time to time by the Company. The agreements deal only with certain rights and obligations of the executive subsequent to a change in control, and the existence of the agreement shall not be treated as raising any inference with respect to what rights and obligations exist prior to a change in control.
The Board of Directors recommends that the stockholders approve the appointment of Ernst & Young LLP as the Company's independent auditors to examine the financial statements of the Company for the fiscal year ending March 31, 1996. A representative of the firm plans to be present at the Annual Meeting, with the opportunity to make a statement if he desires to do so, and
will be available to respond to appropriate questions.
During fiscal 1995, the Company's Chairman of the Board, Joseph R. Meringola, satisfied in full previously outstanding loans made to him in the aggregate amount of $150,000.
The Board of Directors does not intend to present to the meeting any matters not referred to in the form of proxy. If any proposal not set forth in this Proxy Statement should be presented for action at the meeting, and is a matter which should come before the meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting them.
The cost of soliciting proxies in the accompanying form has been or will be paid by the Company. In addition to solicitation by mail, arrangements may be made with brokerage houses and other custodians, nominees and fiduciaries to send proxy material to their principals, and the Company may reimburse them for their expenses in so doing. To the extent necessary in order to assure sufficient representation, officers and regular employees of the Company may request the return of proxies personally, by telephone or telegram. The extent to which this will be necessary depends entirely upon how promptly proxies are received, and stockholders are urged to send in their proxies without delay.
Stockholder proposals with respect to the Company's next Annual Meeting of Stockholders must be received by the Company no later than April 1, 1996 to be considered for inclusion in the Company's next Proxy Statement.
A copy of the Annual Report has been mailed to every stockholder of record. The Annual Report is not to be considered proxy soliciting material.
By Order of the Board of Directors,
PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS
The undersigned hereby appoints Paul D. Meringola and Richard G. Satin, or either of them with full power of substitution, proxies to vote at the Annual Meeting of Stockholders of Medical Action Industries Inc. (the 'Company') to be held on August 9, 1995 at 3:00 p.m., local time, and at any adjournment or adjournments thereof, hereby revoking any proxies heretofore given, to vote all shares of common stock of the Company held or owned by the undersigned as directed below, and in their discretion upon such other matters as may come before the meeting.
/x/ Please mark your votes as in this example.
FOR / / WITHHELD / /
FOR, EXCEPT VOTE WITHHELD FOR THE FOLLOWING NOMINEE(S): ____________________
NOMINEES: Bernard Wengrover, Paul D. Meringola
2. Approval of the ratification of Ernst & Young LLP as independent public auditors of the Company for the fiscal year ending March 31, 1996.
FOR / / AGAINST / / ABSTAIN / /
(To be Signed on Reverse Side)
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS GIVEN HEREIN. IF NO INSTRUCTIONS ARE INDICATED, THE PERSONS NAMED PROXY HEREIN WILL VOTE ALL SHARES IN THE NAME OF THE UNDERSIGNED FOR THE MATTERS SET FORTH HEREIN AND, IN THEIR DISCRETION, FOR ANY OTHER BUSINESS WHICH MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT(S) THEREOF.
Please mark, date, sign and promptly return this proxy in the accompaning envelope. No postage is required if mailed within the United States.
NOTE: Please sign as name appears hereon. Joint owners should each sign. When administrator or guardian, please give full title as such. | 10-Q | EX-20 | 1996-01-16T00:00:00 | 1996-01-16T14:07:10 |
0000950124-96-000232 | 0000950124-96-000232_0001.txt | <DESCRIPTION>PRESS RELEASE BY CAPSURE HOLDING
CONTACT: Mary Jane Robertson FOR IMMEDIATE RELEASE
CAPSURE HOLDINGS EXPECTS TO REDUCE UNITED CAPITOL'S LOSS RESERVES BY $19.0 MILLION
CHICAGO, ILLINOIS -- January 12, 1996 -- Capsure Holdings Corp. (NYSE: CSH) today announced that it expects to reduce loss reserves at its United Capitol Insurance Company subsidiary by approximately $19.0 million.
Capsure expects to announce earnings for the fourth quarter and year ended December 31, 1995, in mid-February 1996. The loss reserve reduction is anticipated to increase Capsure's consolidated fourth quarter and full-year net income by $12.4 million, or 80 cents per share, and reduce the consolidated loss and combined ratios by 77 points for the fourth quarter and 19 points for the full year.
This estimated reduction follows the completion of a previously announced comprehensive independent actuarial evaluation of United Capitol's loss reserves as of September 30, 1995.
United Capitol's claims development has been favorable relative to expectations based on industry experience. Due to the limited prior operating experience of the company and the long-tail nature of its business, the company and its independent actuaries previously relied principally upon industry development patterns and expected loss ratios in estimating loss reserves. Given United Capitol's availability of over eight full years of experience and the growing evidence of favorable loss trends relative to industry indications, management and its independent actuaries have concluded that it is now appropriate to place greater reliance on the company's own development patterns and emerging loss ratios in estimating loss reserves.
"As time passes, more information about claims becomes known and reserve estimates are adjusted accordingly," said Bruce A. Esselborn, president of Capsure. "Because of the nature of United Capitol's business, in particular the time it takes to settle its unique liability claims, several years were required before substantial weight could be given to United Capitol's own loss experience in estimating its loss reserves."
Capsure Holdings Corp. is an acquisition company involved in specialty property and casualty insurance through Western Surety Company, Universal Surety of America and United Capitol Insurance Company. | 8-K | EX-28 | 1996-01-16T00:00:00 | 1996-01-16T09:01:48 |
0000918402-96-000004 | 0000918402-96-000004_0000.txt | [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES For the fiscal year ended September 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 its Charter)
(State or other jurisdiction of (I.R.S. Employer Identification
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (701) 258-4970
Securities registered pursuant to Section 12(g) of the Act:
$0.01 Par Value Common Stock
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 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.
As of December 1, 1995, the aggregate market value of the Registrant's voting stock held by nonaffiliates was $2,696,853.
As of December 1, 1995, Registrant had 12,537,227 shares of its $0.01 par value common stock issued and outstanding.
The information required by Part III is contained herein and will not be incorporated by reference to Registrant's definitive proxy statement.
Business Prior to Transactions in April of 1995. Fronteer Directory Company, Inc. (the "Company") is a corporation which was organized under the laws of the state of Colorado on September 14, 1988. The Company was formed for the purpose of assuming all of the assets and liabilities of a North Dakota corporation with the same name as the Company, incorporated on April 1, 1977. The focus of the Company's business changed in April of 1995, following the Company's acquisition of the assets of the holding company of a Denver, Colorado based securities broker dealer and the sale of 10 of the Company's 20 telephone directories to a third party. Before April of 1995, the Company's primary business was publishing telephone directories covering areas in the states of North Dakota, South Dakota, Montana, Idaho, Utah, Wyoming and Minnesota. The Company's primary source of revenue prior to April of 1995, was selling display advertisements in the yellow pages, selling bold and color listings in the white pages, selling advertisements on the back cover page, and selling discount coupons included as part of the telephone directories published by the Company.
Acquisition of RAFCO. On April 26, 1995, the Company signed a Plan of Reorganization and Exchange Agreement ("RAFCO Agreement") with RAFCO, Ltd., a Nevada corporation ("RAFCO"), whereby the Company acquired all of the assets of RAFCO in exchange for which the Company (i) assumed some of RAFCO's liabilities; (ii) issued 7,223,871 shares of the Company's $.01 par value common stock ("Common Stock") to RAFCO; and (iii) issued 87,500 shares of the Company's $.10 par value Series A Voting Cumulative Preferred Stock ("Preferred Stock") to RAFCO. RAFCO distributed the shares of the Company's Common Stock and the Preferred Stock to those persons who had been RAFCO shareholders prior to April 26, 1995, and shortly afterwards, RAFCO dissolved and ceased to exist as a corporation. Following compliance with Rule 14f-1 of the Securities Exchange Act of 1934, as amended, ("1934 Act"), all of the officers and directors of the Company, except the president, Dennis W. Olson, resigned, the size of the Company's Board of Directors was reduced to three, and Robert A. Fitzner, Jr. and Robert L. Long were appointed as directors. Dennis W. Olson continued serving as the president and director of the Company, but no other officers were appointed.
The transactions which occurred under the terms of the RAFCO Agreement were accounted for as a "reverse acquisition" of the Company by RAFCO using the purchase method of accounting. The Company's assets and liabilities were adjusted to their fair market value at the date of the business combination. The Company's operations are included in the consolidated financial statements beginning May 1, 1995, the effective date of the business combination. See "Financial Statements and Supplementary Data" for more information.
As a result of the transactions which occurred under the terms of the RAFCO Agreement and because Mr. Fitzner owned a majority of the outstanding shares of RAFCO before the RAFCO Agreement was signed, Mr. Fitzner owns 4,784,705 shares of the Company's Common Stock and 5,000 shares of the Preferred Stock or 37.9% of the outstanding voting securities of the Company. Mr. Fitzner's mother, Earlene E. Fitzner, owns 2,500 shares of the Company's Preferred Stock. Mr. Fitzner may be deemed to be in control of the Company due to his position as a director and his ownership of 37.9% of the Company's outstanding voting securities. The other persons who received shares of the Company's Common Stock following the signing of the RAFCO Agreement and, because they were shareholders of RAFCO before it dissolved, are : Kanouff Corporation (1,558,078 shares); Dorothy K. Englebrecht (220,272 shares); Steven Fishbein (220,272 shares); Peter O'Leary (220,272 shares); and Arlene Wilson (220,272 shares). Mr. Fitzner has entered into voting agreements with Ms. Englebrecht, Mr. Fishbein, Mr. O'Leary and Ms. Wilson (collectively "RAFCO Shareholders") which give Mr. Fitzner an irrevocable proxy to vote all of the shares of Common Stock owned by the RAFCO Shareholders until July 16, 1997. These voting agreements also give Mr. Fitzner the right to buy some or all of the shares of the Common Stock owned by the RAFCO Shareholders during the period from July 16, 1997 to September 15, 1997. Each of the RAFCO Shareholders has agreed not to sell or pledge any of their shares of Common Stock until after September 15, 1997, the expiration date of the voting agreements. The irrevocable proxies expire on July 16, 1997.
Under the RAFCO Agreement, the Company acquired all of the outstanding stock of RAF Financial Corporation, a Colorado corporation ("RAF"), and approximately 50% of the outstanding stock of Secutron Corp., a Colorado corporation ("Secutron"), along with furniture, fixtures and equipment which was used by RAFCO in its businesses and which the Company has continued to use in operating the businesses acquired under the RAFCO Agreement. RAF and Secutron became subsidiaries of the Company when the Company acquired the assets of RAFCO. See "Business -- Description of Businesses -- RAF Financial Corporation" and "Description of Businesses -- Secutron Corp." for further information about the businesses conducted by RAF and Secutron.
Sale of Directories to Telecom. On April 27, 1995, the Company signed a Sale and Purchase Agreement ("Telecom Agreement) with Telecom *USA Publishing Company, an Iowa corporation ("Telecom"). Under the terms of the Telecom Agreement, the Company sold 10 of its telephone directories located in the states of Idaho, Montana, South Dakota and Wyoming and certain equipment to Telecom for a total price of $2,189,846, some of which was paid to the Company in April of 1995, some in August of 1995, and the remainder of which was paid to the Company in October of 1995. The Telecom Agreement contemplated the sale of one additional directory for Bridgerland, Utah to Telecom, but the Company was unable to obtain an assignment to Telecom of the telephone publishing contract with the owners of the Bridgerland directory, and as a result, this directory was not sold to Telecom. As part of the Telecom Agreement, the Company agreed not to compete with Telecom's business in the states of Iowa, Minnesota, Michigan, Missouri, Nebraska, South Dakota, Colorado, Wyoming, Idaho, Montana, Illinois, Indiana and Wisconsin. However, if Telecom does not exercise its option to buy the Company's North Dakota directories, then the Company's noncompete agreement will be restricted to only those areas in which Telecom is actually conducting business on the date the option expires. See "Business -- Sale of Option to Telecom" for further information. In addition, nine of the Company's employees signed agreements not to compete with Telecom and Telecom agreed to pay these nine employees a total of $800,000 as consideration for signing these noncompete agreements. Four of the nine employees who signed noncompete agreements with Telecom were officers. Dennis W. Olson, who signed a noncompete agreement, is an officer and a director of the Company.
Sale of Option to Telecom. On April 27, 1995, the Company signed an option agreement with Telecom ("Option") which granted Telecom an option to buy the Company's nine North Dakota telephone directories. The consideration for this Option was a $500,000 loan from Telecom to the Company. Telecom agreed not to charge the Company any interest on the loan. Telecom may exercise its option between June 1, 1997 and June 1, 1999. If Telecom exercises its option, it has agreed to pay the Company a purchase price equal to the total net cash revenue less telephone company commissions for the most recent edition of each of the nine directories published and distributed before the date of the closing of the purchase under the Option. This purchase price is subject to adjustment under certain circumstances as described in the Option. If Telecom exercises its option, the full amount of the $500,000 loan made by Telecom to the Company will be deducted from the purchase price of the directories. If Telecom does not exercise its option, Telecom will forgive repayment of the full amount of the $500,000 loan made to the Company. Nine of the Company's employees will be required to sign agreements not to compete with Telecom if Telecom exercises its option to buy the North Dakota directories. One of these employees, Dennis W. Olson, is the president and also a director of the Company. In consideration for agreeing not to compete with Telecom, these nine employees of the Company will receive approximately 25% of the purchase price paid by Telecom for the nine North Dakota directories.
Formation. Prior to the Company's acquisition of RAFCO and the sale of certain of the Company's directories to Telecom in April of 1995, the Company's primary business was the publication of telephone directories covering areas in the states of North Dakota, South Dakota, Montana, Idaho, Utah, Wyoming and Minnesota. See "Business -- Business Prior to Transactions in April of 1995." Currently, the Company publishes 10 telephone directories, nine of which cover areas located in North Dakota and one of which covers an area in Utah. All nine of the North Dakota directories are included in an Option granted to Telecom in April of 1995.
See "Business -- Acquisition of RAFCO, -- Sale of Directories to Telecom, and -- Sale of Option to Telecom" for further information about these transactions. Under the terms of the RAFCO Agreement, the Company formed a Directory Division in which the Company's telephone directory publishing business and the business of two of its subsidiaries, Fronteer Personnel Services, Inc. ("FPS") and Fronteer Marketing Group, Inc. ("FMG") are conducted. The Directory Division is managed by an advisory board consisting of seven members, six of whom are former members of the Company's board of directors and the seventh member is Dennis W. Olson, president and a director of the Company.
Directory Business. The Company's directory business currently publishes and distributes telephone directories covering nine areas in North Dakota and one directory in Utah. In the areas covered by the Company's telephone directories, consumers often receive two telephone directories which contain the same telephone listings, one of which is published by the local telephone company and one of which is published by the Company's directory business. The Company's directory business competes directly with the directories published by local telephone companies and with other independent directory publishers. In some cases, there may be more than one independent directory publisher covering the same area. In the areas served by the Company's 10 directories, there are 17 competing directories, of which 15 are published by local telephone companies and two are published by other independent directory publishers. The Company's directory business publishes directories under contract with 13 small independent telephone companies, several of which are consolidated into larger directories. The Company published a total of 19 directories in fiscal year 1995. The table below shows information regarding the directories published by the Company during the last three fiscal years.
The Company's directory business derives revenue by selling advertisements in the yellow pages portion of its directories, selling bold listings, selling color listings in the white pages, selling advertisements on the back cover page, and selling discount coupons for goods and services. The Company's directory business employs 56 persons, including 14 full time salespersons, who are compensated on a commission basis. The directory business owns its own typesetting equipment which allows it to produce camera ready copies of its directories. The camera ready copy is then printed by third party printers who bid on each printing job. During fiscal year 1995, the directory business utilized three different printers, with approximately 70% of the printing work performed by one printer. If this one printer were to go out of business, this event would not have a material adverse effect on the directory business. All of the raw materials used by the directory business are generally available and the directory business is not dependent on any single supplier. During fiscal year 1995, a worldwide paper shortage caused a 20% to 30% increase in the cost of the paper used in the directories published by the Company, but paper prices are not expected to rise significantly in the foreseeable future.
The Company anticipates that its existing directory business will expand as a result of the sale by U.S. West Communications of 68 of its North Dakota telephone exchanges to 15 different small telephone companies. The Company's directory business currently has publishing contracts with 11 telephone companies which are buying a total of 43 exchanges from U.S. West Communications. The Company anticipates that the sale of exchanges by
U.S. West Communications will result in five of the Company's existing directories becoming the official directories for the new local telephone companies in these areas, leading to decreased competition and increased revenue for the Company's directory business.
Fronteer Personnel Services, Inc. Since October of 1992, the Company has performed payroll and benefits administration for small businesses through its wholly owned subsidiary, Fronteer Personnel Services, Inc., a North Dakota corporation ("FPS"), which was formed on October 30, 1992. FPS markets its services to small businesses in and around the Bismarck, North Dakota metropolitan area. FPS had four employees as of December 1, 1995, and its office is located at 2208 East Broadway, Bismarck, North Dakota, 58501. FPS had revenues of $66,374 for the period from May 1, 1995 to September 30, 1995, compared with net revenues of $72,934 and $24,198 in fiscal years 1994 and 1993, respectively. Also, FPS had operating losses of $31,249 for the period from May 1, 1995 to September 30, 1995, compared with operating losses of $53,216 and $149,012 in fiscal years 1994 and 1993, respectively. On December 7, 1994, FPS acquired 49% of the outstanding stock of Native American Document Conversion Services, LLC, a North Dakota limited liability company ("NADCOS"). American Indian Services, Inc., an Illinois corporation ("AISI"), is the majority shareholder of NADCOS. NADCOS is currently developing its business which it anticipates will consist primarily of document imaging and conversions. During fiscal year 1995, the business activities of NADCOS consisted of AISI marketing its services to the public.
Fronteer Marketing Group, Inc. On April 3, 1995, the Company formed a new wholly owned subsidiary, Fronteer Marketing Group, Inc., a North Dakota corporation ("FMG"), which engages in the outbound telemarketing business. In April of 1995, FMG acquired the assets of a telemarketing business which had ceased operations due to financial difficulties. FMG conducts outbound telemarketing which consists of soliciting consumers and businesses by telephone. FMG has 24 full time and six part time employees. FMG markets its services nationwide primarily through the services of a telemarketing trade association. FMG's office is located at Highway 49 South, Beulah, North Dakota, 58523. FMG had revenues of $149,780 and operating losses of $103,244 for the period from May 1, 1995 to September 30, 1995.
Financial Information. The Directory Division, including the Company's directory business, FPS and FMG, recognized $3,702,849 in revenue for the period May 1, 1995 through September 30, 1995, compared with $9,158,922 and $8,522,898 in fiscal years 1994 and 1993, respectively. The Directory Division experienced operating profits/losses of ($389,559) for the period from May 1, 1995 to September 30, 1995, as compared with $325,800 and ($205,018) in fiscal years 1994 and 1993, respectively.
General. RAF was incorporated in 1974 to engage in the retail stock brokerage business in the Rocky Mountain Area of the United States. RAF is registered as a broker dealer with the Securities and Exchange Commission ("Commission"), is a member of the National Association of Securities Dealers, Inc. ("NASD") and the Boston Stock Exchange, is an associated member of the American Stock Exchange, and is registered as a securities broker dealer in all 50 states. RAF is a member of the Securities Investor Protection Corporation ("SIPC") and other regulatory and trade organizations. RAF's securities business consists of providing securities transaction clearing services for other broker dealers on a fully disclosed basis, providing retail securities brokerage and investment services, trading fixed income and equity securities, providing investment banking services to corporate and municipal clients, managing and participating in underwriting corporate and municipal securities, and distributing mutual fund shares. During 1989, RAF registered the mark "RAF Financial Corporation" with the United States Patent and Trademark Office, and RAF has registered this name in 32 states. RAF intends to maintain all of its service mark registrations for the indefinite future in order to protect the goodwill associated with the mark. RAF conducts its business in five operating divisions. RAF's principal executive office is located at One Norwest Center, 1700 Lincoln Street, 32nd Floor, Denver, Colorado, 80203. RAF has branch offices located in Colorado Springs, Colorado; Fort Collins, Colorado; Atlanta, Georgia; Albany, New York; Reston, Virginia; and Chicago, Illinois.
Correspondent Clearing Division. The Correspondent Clearing Division provides clearing services on a fully disclosed basis to other broker dealers ("Correspondents") under the name of RFC Clearing Services. In a fully disclosed clearing transaction, the Correspondent's customer's identity is known to RAF, RAF physically maintains the customer's account, and RAF performs a variety of services for the customer as agent for the Correspondent. RAF receives service charges and fees from the Correspondent for performing these services. Electronic data processing is an integral part of RAF's clearing operations. RAF operates all of the data processing hardware and software necessary to input trading and back office data. RAF utilizes a proprietary software system which was developed in a joint effort between Secutron and RAF and uses IBM hardware. RAF's clearing division business diminished during the first nine months of 1995 as compared with the period January 1, 1994, through December 31, 1994, due to increased competition.
Retail Securities Brokerage Division. RAF conducts its retail brokerage business through its Retail Securities Brokerage Division. As of December 31, 1995, RAF had 115 account executives. At December 31, 1995, RAF had approximately 12,000 customer accounts, not including Correspondent customer accounts. RAF generates commission revenue when it acts as a broker on an agency basis, or as a dealer on a principal basis, to effect securities transactions for individual and institutional investors. RAF executes both listed and over the counter agency transactions for customers, executes transactions and puts and calls on options exchanges as agent for its customers, and sells a number of professionally managed mutual funds.
Corporate Finance Division. The Corporate Finance Division provides financial advisory and capital raising services to corporate clients. Financial advisory services involve advising clients in mergers and acquisitions and in various types of corporate valuations. RAF acts as an underwriter, dealer, and selling group member in public and private offerings of equity and debt securities. During the first nine months of 1995, RAF raised approximately $6,000,000 for four companies through its investment banking activities, which included two public offerings and two private placements.
Trading Division. Trading securities involves the purchase and sale of securities by RAF for its own account. Profits and losses are derived from the spread between bid and ask prices and market increases or decreases for the individual security during the holding period. RAF makes markets in corporate equities and trades in municipal and corporate bonds and various government securities. As of December 31, 1995, RAF made markets in 50 stocks.
Public Finance Division. The Public Finance Division of RAF provides professional financial advisory services to public entities, participates in underwriting and selling both negotiated and competitive bid municipal bond offerings, and structures and participates in municipal bond refinancings. During the first nine months of 1995, RAF's participation in offerings of municipal securities was approximately $26,000,000 as manager of seven offerings.
Financial Information. For the nine months ended September 30, 1995, RAF's revenues of $9,854,160 accounted for 57.4% of the Company's total operating revenues of $17,169,754 for the same period. RAF's revenues for the years ended December 31, 1994 and 1993 were $12,713,456 and $14,044,465 respectively. Also for the nine months ended September 30, 1995, RAF incurred a net loss of $809,790.
RAF Regulatory Net Capital. As a registered broker dealer in securities, RAF is subject to the net capital rule ("Rule") of the Commission. Under this Rule, RAF is required to maintain net capital, as computed under the Rule, equal to the greater of $100,000 or 2% of aggregate debit items, as determined under the Rule. The purpose of this Rule is to establish minimum net capital deemed necessary for a broker dealer to meet its commitments to its customers and to provide a measurement standard of financial integrity and liquidity of broker dealers. The Rule also contains provisions which limit the withdrawal of equity capital from a registered broker dealer such as RAF by shareholders such as the Company and limits unsecured advances from a registered broker dealer to its shareholders, employees or affiliates. Equity capital may not be withdrawn if the resulting net capital would be less than 5% of aggregate debits. RAF's net capital at September 30, 1995, as computed under the Rule, was $1,988,915; RAF's minimum net capital requirement was $250,000 on such date; and RAF's excess net capital was $1,738,915 on such date. On September 30, 1995, RAF's ratio of net capital to aggregate debits was 41%. At September 30, 1995, RAF's stockholders' equity was $7,090,567. There are numerous deductions which must be made from the net worth of a broker dealer in computing its regulatory net capital under the Rule. RAF's net capital deductions relate primarily to equipment, facilities, and advances to affiliates.
Sale of Bank Services Division. During the years 1991 through 1994, RAF directly invested in excess of $3,000,000 in the development of its Bank Services Division. These funds were utilized to develop computer software systems and to develop an organization consisting of data processing and marketing personnel. As a result, RAF's Bank Services Division operated at a loss during the development period in the amount of approximately $1,000,000. The services offered by this division to financial institutions, including banks, were designed to provide up to date information on the financial institution's liabilities, assets and business which would permit the client to make decisions in the areas of interest rate risk, liquidity, investment planning, annual budgets, strategic plans, and capital plans. During September of 1993, RAFCO entered into an agreement with Sheshunoff Information Services, Inc. ("SIS"), Trepp & Company, Inc. ("Trepp") and the Asset Backed Securities Group, a division of TFS Database Group, Inc., which is affiliated with Thomson Financial Networks Inc. ("Thomson") to form the STAR Alliance ("Alliance Agreement") to jointly market, prepare, and deliver specialized data and reports to the banking industry. Prior to July 1, 1995, RAFCO's primary responsibilities to the Alliance were the collection of data via modem or tape and the use of its proprietary software systems to make certain calculations and prepare reports for clients of the Alliance. From September of 1993, to June of 1994, the Bank Services Division of RAF performed these services for the Alliance on behalf of RAFCO. As of June 30, 1994, RAFCO transferred all of the business and ownership of the software systems to its wholly owned subsidiary, Risk Analytics, Inc. ("RAI"), and on July 1, 1994, RAI began performing services for the Alliance on behalf of RAFCO. As of January 1, 1995, RAFCO transferred ownership of RAI to RAF. Effective July 1, 1995, the members of the STAR Alliance signed a Termination Agreement in which RAI terminated its participation in the STAR Alliance. Simultaneously, RAI sold SIS all of the rights to its software ("STAR Software") and related products to enable SIS to assume RAI's former duties to the STAR Alliance. Under a Bill of Sale and a Services Agreement, both dated July 1, 1995, SIS purchased the STAR Software and agreed to pay RAF fees to use some of RAF's office space and related facilities for the transition period from July 1, 1995 through December 31, 1995, while SIS assumes RAI's former responsibilities to the STAR Alliance. RAI is bound by a covenant not to compete in the United States with the services offered by the remaining members of the STAR Alliance for two years after termination of the Alliance Agreement.
Bank Loan. In March of 1993, RAFCO sold $775,000 of 10% Senior Subordinated Promissory Notes ("Notes") to two Illinois banks ("Banks"). The obligations represented by the Notes were assumed by the Company when it acquired the assets of RAFCO on April 27, 1995. In August of 1995, the Banks requested that the Company substitute conventional loans for the obligations represented by the Notes. The Company agreed to retire the Notes held by the Banks by entering into loan agreements with the Banks. RAI assigned its right to receive payments from SIS under the Termination Agreement discussed above to the Company and the Company then pledged this right to the Banks as collateral for the loans. In December of 1995, the Company executed promissory notes totalling $775,000, payable to the Banks in installments on each July 15 beginning in 1996 and ending in 1999. Under the Termination Agreement, the Company is entitled to receive a total of $1,625,150 payable in installments. The first installment of $475,150 was paid to RAI on July 1, 1995, and subsequent installments are due on each June 30 beginning in 1996 and ending in 1999.
General. Secutron was incorporated under Colorado law on May 11, 1979. The Company owns 47.5% of the outstanding stock of Secutron and Mr. Anthony R. Kay owns approximately 47% of the outstanding stock of Secutron. Secutron's business consists of designing, developing, installing, marketing, and supporting software systems for the securities brokerage industry. Secutron markets hardware and software to securities brokerage firms as an IBM business partner. Secutron's IBM business partner relationship is as an industry through Real Applications Ltd., located in Woodland Hills, California. Secutron's wholly owned subsidiary, MidRange Solutions Corp., is a Colorado corporation formed on January 1, 1993 ("MSC"). MSC is in the business of selling IBM hardware and hardware manufactured by competitors of IBM, and MSC acts as a distributor for software products which are proprietary to third parties. MSC sells hardware and software to businesses in several different industries, including manufacturers, distributors and health care providers. MSC also has a contract with a software company under which it markets sophisticated financial accounting software to manufacturers and distribution companies located in specific areas in which MSC is the exclusive distributor of this software.
Products and Services. Secutron offers the following software products to the securities brokerage industry. The STARS software system is offered to broker dealers who clear their own transactions, and is a totally integrated software system which performs all of the functions required by self clearing broker dealers. The BCATS software system is offered to broker dealers who clear their securities transactions on a fully disclosed basis through a clearing broker dealer such as RAF, and is also a fully integrated software system which performs all of the accounting functions required by a fully disclosed broker dealer. The BCATS-MF software system is designed for use by broker dealers engaging in transactions in mutual funds. All of such software systems are designed to run on IBM computers. Both Secutron and MSC provide consulting, programming and facilities management services to their respective clients to support the software and hardware sold by them.
The Company's general business strategy is to expand the businesses conducted by RAF and Secutron, while maintaining the business conducted by the Company's Directory Division at its present size. The Company plans to keep the number of directories published by its directory business constant, pending the sale of nine out of its ten directories to Telecom between June 1, 1997 and June 1, 1999, under the terms of Telecom's Option. See "Business -- Sale of Option to Telecom" for further information. Due to decreased competition in its existing directory markets, the Company anticipates that revenues from its existing directories will increase in fiscal year 1996. See "Business -- Competition -- Directory Business." FMG plans to open several new telemarketing centers throughout North Dakota during 1996. FMG anticipates that a new telemarketing center with 24 telephone stations will be opened in Bismarck in March of 1996, and FMG plans to open another center of the same size in different communities around North Dakota every 60 to 90 days during the next two years. FMG has a working relationship with a coalition of economic development organizations from nine small North Dakota communities, whereby the communities will provide office space at a nominal monthly rental charge as an incentive to bring the telemarketing centers and jobs to their areas. FMG has contracted with a consultant to help with FMG's purchase and installation of the technology which will allow FMG to tie all of its separate sites together to act as one large center. With the installation of new telemarketing centers, FMG will pursue large inbound telemarketing contracts. FMG hopes to have five centers operational with a total of approximately 150 employees by the end of fiscal year 1996. FPS anticipates revenue and income growth primarily through increased insurance commissions from its insurance division in fiscal year 1996. The Company also expects growth in its payroll services business in conjunction with the anticipated expansion of FMG, which is under contract with FPS for its payroll services.
The volume of business conducted by RAF's clearing division in the first nine months of 1995 diminished due to increased competition and the Company's inability to match lower prices charged by the Company's clearing division competitors. The Company anticipates that the business conducted by RAF's clearing division will continue to diminish in fiscal year 1996. See "Business -- Description of Businesses -- RAF Financial Corporation -- Correspondent Clearing Division" for further information about this division. Management of the Company believes it is in the best interest of the entire Company to pursue a reduction in the clearing division business in order to decrease losses experienced and anticipated to be experienced by the clearing division. The Company plans to focus its efforts on increasing RAF's regulatory net capital and increasing the volume of business conducted by RAF's retail securities brokerage division. Management believes that increasing RAF's capital will give RAF the potential ability to expand its securities business which could make RAF more profitable and ultimately benefit all of the Company's businesses.
Employees. As of December 15, 1995, the Company had 287 full time employees, 84 of whom worked for the Directory Division in the Company's North Dakota offices and 172 of whom worked for RAF. As of December 15, 1995, Secutron had 31 employees. RAF's headquarters is located in Denver, Colorado, but 72 of RAF's employees work in branch offices of RAF located in Colorado Springs, Colorado; Fort Collins, Colorado; Reston, Virginia; Atlanta, Georgia; Albany, New York; and Chicago, Illinois. The Company considers its relations with its employees to be good.
Directory Business. The Company's directory business competes primarily with U.S. West Direct, which publishes telephone directories in many of the same markets in which the directory business publishes directories. U.S. West Direct has several advantages that the Company's directory business does not possess, including greater financial resources, name recognition and an affiliation with U.S. West, a large telephone company. Management believes the Company's directory business is able to compete effectively with U.S. West Direct in obtaining contracts with independent telephone companies due to the following factors: (i) some of the Company's directories are so small they may not be of interest to U.S. West Direct; (ii) the Company's directory business maintains good relations with the telephone companies for which it publishes directories; and (iii) management believes that the Company's directory business publishes directories which are superior to U.S. West Direct's directories with respect to including information about the community and offering more types of advertisements. In addition, management believes the Company's directory business competes effectively with U.S. West Direct in obtaining advertisements for its directories for the following reasons: (i) in some markets, the Company's directories list special telephone numbers for certain advertisers which consumers can call to obtain community information and a message from the advertisers; and (ii) the Company's directories usually charge lower advertising rates than U.S. West Direct. The Company's directory business also competes less directly with other forms of advertising media such as newspapers, magazines, television and radio, although it is difficult to assess how the Company's directory business is affected by other forms of advertising.
RAF. The securities industry has become considerably more concentrated and more competitive in recent periods as numerous securities firms have either ceased operation or have been acquired by or merged into other firms. In addition, companies not engaged primarily in the securities business, but having substantial financial resources, have acquired securities firms. The securities industry is now dominated by relatively few very large securities firms offering a wide variety of investment related services nationally and internationally. Numerous commercial banks have petitioned and received approval from the Board of Governors of the Federal Reserve System to enter into a variety of new securities activities. Various legislative proposals, if enacted, would permit commercial banks to engage in other types of securities related activities. These developments or other developments of a similar nature may lead to the creation of integrated financial service firms that offer a broader range of financial services than those offered by RAF. These developments have created large, well capitalized, integrated financial service firms with which RAF must compete. The securities industry has also experienced substantial commission discounting by broker dealers competing for institutional and individual brokerage business. An increasing number of specialized firms now offer "discount" services to individual customers. These firms generally effect transactions for their customers on an "execution only" basis without offering other services such as investment recommendations and research. Such discounting and an increase in the number of new and existing firms offering such discounts could adversely affect RAF's retail securities business.
The correspondent clearing business has become considerably more competitive over the past few years as numerous highly visible, large, well financed securities firms either have begun offering clearing services or have attempted to increase their securities clearing business. These developments have increased competition from firms with capital resources greater than those of RAF. Partially in response to this increase in competition, RAF has entered into negotiations with a large investment banking firm to sell its clearing division. The outcome of these negotiations is uncertain at this time.
Secutron. Secutron competes with numerous software and hardware distribution firms, and hardware manufacturers, some of which are larger than Secutron with greater financial resources than Secutron. Secutron also competes with firms that specialize in industry specific software and those that offer a variety of software products to businesses in various industries. MSC competes with hardware manufacturers and other licensed distributors of IBM hardware and distributors of hardware manufactured by competitors of IBM. Many of MSC's competitors are larger than MSC and have greater financial resources.
Directory Business. The Company's directory business is not subject to regulation by federal, state or local governments. The directory business is a member of the Yellow Pages Publishers Association ("Association") which has its own Code of Ethics which regulates the business practices of its members with respect to solicitation and billing of advertisers. If the directory business were to violate this Code of Ethics, it could be expelled from membership in the Association and lose national advertising accounts.
RAF. The securities industry in the United States is subject to extensive regulation under federal and state laws. The Securities and Exchange Commission ("Commission") is a federal agency charged with administration of the federal securities laws. Much of the regulation of brokers and dealers has been delegated to self regulatory organizations, principally the NASD and the exchanges. These self regulatory organizations adopt rules (which are subject to approval by the Commission) for governing the industry and conduct periodic examinations of member broker dealers. Securities firms are also subject to regulation by state securities commissions in the states in which they do business. Broker dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trading practices among broker dealers, capital structure of securities firms, record keeping, and the conduct of directors, officers, and employees. Additional legislation, changes in rules promulgated by the Commission and by self regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules often directly affect the method of operation and profitability of broker dealers. The Commission, the self regulatory authorities, and the state securities commissions may conduct proceedings which can result in censure, fine, suspension, or expulsion of a broker dealer, its officers, or employees.
RAF is required by federal law to belong to SIPC. When the SIPC fund falls below a certain minimum amount, members are required to pay annual assessments. The SIPC fund provides protection for securities held in customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances.
RAF is subject to the Commission's Uniform Net Capital Rule which is designed to measure the financial integrity and liquidity of a broker dealer and the minimum net capital deemed necessary to meet its commitments to its customers. RAF is in compliance with the Rule. Failure to maintain the required net capital may subject RAF to suspension by the Commission or other regulatory bodies and may ultimately require its liquidation. The Company is not itself a registered broker dealer and is not subject to the Net Capital Rule. However, under the Rule, the Company could be affected by the requirement that a broker dealer such as RAF under certain circumstances is prohibited, and under other circumstances may be temporarily restricted, by the Commission from the withdrawal of equity capital by a stockholder such as the Company.
Directory Division Properties. The directory business maintains its administrative offices and production facilities in a 9,400 square foot building owned by the Company at 216 North 23rd Street, Bismarck, North Dakota 58501. The Company is acquiring the property on which the building is located for $115,000 pursuant to a contract for deed with a nonaffiliated party. Since entering into the contract for deed, improvements totaling $122,519 have been made by the Company to the building. In October 1991, the Company completed renovation of 3,000 square feet of office space in this building. The improvements have been made with borrowed funds, and have been made part of the original contract for deed. The directory business also has a branch office at 1323 23rd Street South, Suite E, Fargo, North Dakota. FPS rents approximately 2,200 square feet of building located at 2208 East Broadway, Bismarck, North Dakota, 58501. FMG leases approximately 3,300 square feet of office space in a building located at Highway 49 South, Beulah, North Dakota.
RAF Properties. RAF's principal offices are located at One Norwest Center, 1700 Lincoln Street, 32nd Floor, Denver, Colorado, 80203, which consist of approximately 47,071 square feet of office space leased from Norwest Bank of Colorado, National Association and Norwest Corporation for the 31st and 32nd floors, respectively, of One Norwest Center in Denver, Colorado. RAFCO was the original lessee in two subleases, one with United Bank of Denver National Association for the 31st floor and one with Norwest Corporation for the 32nd floor, both of which were effective on January 30, 1992. Both of the subleases will expire on April 30, 2007. United Bank of Denver, National Association subsequently assigned its interest in the sublease for the 31st floor to Norwest Bank of Colorado, National Association, following the acquisition of United Bank of Colorado by Norwest Bank. RAFCO subsequently assigned its interest in both of the subleases to the Company, which then signed subleases with RAF under the same terms and conditions set forth in the original subleases. RAF pays the Company monthly rent of $27,147 and $26,788 for the 31st and 32nd floors, respectively.
Legal Proceedings Against the Directory Division. There are no pending material legal proceedings against the Company's directory business, FMG or FPS.
Legal Proceedings Against RAF. During 1994, a lawsuit was filed against RAF in Case No. 94-2235- CA-B, in the Circuit Court for the Fifth Judicial Circuit in Marion County, Florida. The complaint alleges damages against RAF and others in excess of $10,000,000 arising out of the alleged improper handling of securities by RAF and other defendants. The claims asserted against RAF are breach of contract, negligent misrepresentation, breach of fiduciary duty, and joint and several liability of all defendants. RAF is vigorously defending this lawsuit on the basis that, as clearing agent for a Correspondent, which is one of the other defendants, RAF owed no duty to the plaintiff and was legally required to follow the Correspondent's instructions with respect to the securities at issue. In November of 1995, the court issued an injunction pursuant to which the securities which are the subject of the lawsuit were returned to the custody of the plaintiff, an action which, at a minimum, management believes will greatly mitigate any alleged damages. RAF has and will continue to vigorously contest this matter. In addition, RAF is currently a defendant or codefendant in seven arbitrations involving former customers, each alleging compensatory damages of $25,000 or less; RAF is currently a defendant or codefendant in seven arbitrations with former customers and one arbitration in which RAF acted as the clearing agent, each alleging compensatory damages of $300,000 or less; RAF has brought an arbitration action against former customers in response to informal customer complaints against RAF for compensatory damages of approximately $527,000; RAF is a defendant or codefendant in three additional arbitrations in which former customers are alleging compensatory damages ranging from $488,000 to $914,000; and RAF is a defendant or codefendant in two civil lawsuits brought by former customers, one alleging $35,000 in damages, and one alleging an unspecified amount of damages. RAF is currently appealing a judgment against RAF entered in a civil lawsuit in November of 1995 for $190,000. RAF has also been asked by a party in a legal proceeding to turn over approximately $690,000 allegedly held by RAF on behalf of a debtor in a pending lawsuit, and a former employee has brought suit against RAF for $11,000 in compensatory damages. Management believes that while the outcome of these matters may have some effect on earnings in an interim reporting period, the outcome of these matters will not have a significant adverse effect on any annual reporting period or on the overall financial condition of the Company. From time to time, RAF has claims asserted against it by its customers and customers of its Correspondents. This is common in the industry and RAF views it as a recurrent factor. There are no other pending material legal proceedings to which the Company or any of its subsidiaries are a party, or of which any of their respective properties is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the Company's fiscal quarter ended September 30, 1995.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
(a) Market Information. The Company's Common Stock has been traded on the Nasdaq Small Cap Market under the symbol FDIR, since March 27, 1989. The following table shows the range of high and low bid quotations for the Common Stock, for each quarterly period since October 1, 1993, as reported by the NASD. These quotations represent prices between dealers and do not include retail markups, markdowns, or commissions and may not necessarily represent actual transactions.
(b) Holders. As of December 1, 1995, the Company had approximately 174 holders of record of its Common Stock and 19 holders of record of its Preferred Stock.
(c) Dividends. The Company has not declared cash dividends on its Common Stock since its inception and the Company does not anticipate paying any dividends in the foreseeable future. The Company is precluded from paying dividends on its Common Stock so long as shares of Preferred Stock are outstanding and if dividends have not been paid in full on the Preferred Stock. Holders of Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors out of funds at the time legally available therefor, cash dividends at an annual rate of 9% (equal to $.90 per share annually), payable quarterly in arrears. Cumulative dividends accrue and are payable to holders of record as they appear on the stock books of the Company on record dates which shall be the last day of the last calendar quarter ending prior to the dividend payment date. Preferred Stock dividends are payable quarterly at a rate of $0.23 per share ($.90 per share annually). The Preferred Stock was issued in April 1995 and the Company declared and paid two consecutive dividends for the quarters ended June 30, 1995 and September 30, 1995. Management currently believes that the Company will be able to pay the next quarterly dividend due in January 1996. The Preferred Stock has priority as to dividends over the Common Stock and any other stock of the Company ranking junior to or on a parity with the Preferred Stock and no dividend may be declared, paid or set aside for payment or other distribution declared or made upon the Common Stock or any other stock of the Company ranking junior to or on a parity with the Preferred Stock, nor shall funds be set aside for the purchase or redemption of any such stock, through a sinking fund or otherwise, unless all accrued and unpaid dividends on the Preferred Stock have been paid or declared and set aside for payment.
ITEM 6. SELECTED FINANCIAL DATA
As a result of the transaction described in the RAFCO Agreement, the former shareholders of RAFCO acquired a 55% interest in the Company. Accordingly, the transaction has been accounted for as a "reverse acquisition" of the Company by RAFCO using the purchase method of accounting and the Company's assets and liabilities prior to the transaction described in the RAFCO Agreement have been adjusted to their market value as of the date of the business combination. The adjustment to market value resulted in an intangible asset, directory publishing rights, which was recorded at $6,972,468. The Company's operations are included in the consolidated financial statements beginning May 1, 1995, the effective date of the business combination. As a result of the reverse acquisition accounting, historical financial statements presented for periods prior to the business combination date include the consolidated assets, liabilities, equity, revenues, and expenses of RAFCO only.
The following is selected consolidated financial information for the Company as of September 30, 1995 and for the nine months ended September 30, 1995, and for RAFCO as of December 31, 1994, 1993, 1992, 1991 and for each of the years in the four year period ended December 31, 1994. This information should be read in conjunction with the consolidated financial statements appearing in Item 8 of this Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
At September 30, 1995, shareholders' equity was $5,441,590 up $4,253,155 or 358%, over year end December 31, 1994. This increase was due to the shares issued in connection with the acquisition of RAFCO by the Company in April of 1995. The ratio of current assets to current liabilities at September 30, 1995, was 1.40 to 1, an increase from 1.14 to 1 at December 31, 1994.
Nine Months Ended September 30, 1995 Compared With 12 Months Ended December 31,
The Company's acquisition of RAFCO under the terms of the RAFCO Agreement described in "Business - - Acquisition of RAFCO," has been accounted for as a reverse acquisition of Fronteer Directory Company, Inc. ("Fronteer") by RAFCO using the purchase method of accounting. This resulted in Fronteer adjusting its assets and liabilities to their fair market value at the effective date of the acquisition, or May 1, 1995. The enclosed financial statements show RAFCO and its subsidiaries for the years ended December 31, 1994 and 1993, and the nine months ended September 30, 1995, while the Company and subsidiaries, including RAFCO, are consolidated from May 1, 1995 to September 30, 1995, in accordance with the purchase method of accounting.
On April 27, 1995, the Company entered into the Telecom Agreement whereby the Company sold 10 of its telephone directories to Telecom. See "Business -- Sales of Directories to Telecom." The transactions under the Telecom Agreement were accounted for in May of 1995, subsequent to the effective date of the business combination. The Company also granted an Option to Telecom on the same date whereby Telecom made a noninterest bearing and nonrecourse $500,000 loan to the Company in exchange for the Option to acquire the Company's nine North Dakota telephone directories. See "Business -- Sale of Option to Telecom." Because the Company adjusted its directories to their fair market value at the time of the acquisition of RAFCO, no gain or loss was recognized on the sale of the directories to Telecom. The book value of the directory publishing rights after the sale to Telecom was $4,692,769. This amount is being amortized over 10 years with amortization totalling $161,886 for the nine month period ended September 30, 1995.
The Company incurred a net loss for the nine months ended September 30, 1995, of $1,891,873 which compares to a net loss of $353,426 for the 12 months ended December 31, 1994.
Revenues for the nine months ended September 30, 1995 totalled $17,169,754, an increase of $910,854 over revenues of $16,258,900 for the year ended December 31, 1994. Directory revenues during the nine months ended September 30, 1995 totalled $3,625,038, which includes only five months of revenues for the directory business due to the business combination. Computer revenues from Secutron for the nine months ended September 30, 1995 were 92% of total revenues for the year ended December 31, 1994, an increase of 22% on an annualized basis. Broker dealer revenues for the nine months ended September 30, 1995 totalled $9,729,223 as compared to $12,713,456 for the year ended December 31, 1994. Broker dealer revenues for the nine months ended September 30, 1995 annualized for the year total $12,972,297, which is comparable to 1994.
Broker dealer revenues generated by RAF are made up of several components, which have changed in their makeup and materiality from 1994. Broker commissions of $7,051,366 for the nine months ended September 30, 1995 exceeded last year's annual total of $5,792,268. This amounts to an increase of $1,259,098, or 62%, over 1995 annualized revenues. This increase resulted in large part from RAF's new sales offices in Reston, Virginia and Atlanta, Georgia, which were opened in the summer of 1994, as well as from the addition of brokers in existing sales offices. RAF plans to increase its sales force and number of sales offices in 1996 and has already opened a new sales office in Chicago, Illinois since September 30, 1995, the end of the fiscal year.
Various changes in the way the Company evaluates its business opportunities took place in fiscal 1995. RAF's bank services division was sold to Sheshunoff Information Services, Inc. during the year. This completely eliminated bank services as a revenue source in 1995, while the bank services division produced revenue of over $1,150,000 during fiscal year 1994. Revenues from clearing operations also declined significantly during the nine months ended September 30, 1995 from $1,079,931 in 1994 to $182,215 in the nine months ended September 30, 1995. Factors specifically related to the clearing business and its capital requirements made the Company's clearing business uncompetitive during fiscal year 1995. The Company believes that its clearing operations will continue to decline in fiscal year 1996 due to its inability to compete in the clearing industry.
The corporate and public finance divisions of RAF had significantly lower revenues in fiscal 1995 as compared to fiscal 1994 due to a decrease in activity subsequent to an active fourth quarter in 1994, the continued unpredictable impact of interest rate fluctuation, and an amendment to the Colorado State Constitution, which placed many restrictions on public financing in the State of Colorado. Revenues for 1994 of $3,032,968 decreased to $1,340,573 for the nine months ended September 30, 1995.
Broker dealer commissions increased during the nine months ended September 30, 1995 by $785,543 over the year ended December 31, 1994, which coincides with an increase in commission revenues. However, commission revenues were up 22% over 1994, while commission expense was up only 18%. Not included in these percentages is a total of over $244,000 in advances to brokers which was forgiven and expensed during the nine months ended September 30, 1995. In order to attract broker dealers to RAF's two new offices in Reston, Virginia and Atlanta, Georgia, the former RAFCO made loans to its new salespeople. As the salespeople meet certain length of employment and sales goals, the loans are forgiven. A total of over $244,000 of these loans was expensed during 1995, while $180,000 remaining is being amortized over the employment period.
General and administrative expenses (G & A) totalled $6,550,305 for the nine months ended September 30, 1995. This compares to $8,829,454 for the year ended December 31, 1994. A total of approximately $75,000 in expenses related to the Company's acquisition of RAFCO was incurred during the year and is included in G & A. During 1995, the Company wrote down a note receivable due from a former RAFCO employee in the amount of $338,000, which has been in G & A. G & A includes no expenses for the Company's directory business prior to May 1, 1995. Fixed operating expenses for both RAF and the Company's directory business are in a state of decline due to the reorganization, and the sale of RAF's bank services division and the sale of certain of the Company's directories.
Interest income for the nine months ended September 30, 1995 totalled $496,316, a decline of $586,260 from the year ended December 31, 1994. This decrease is attributable to a large decline in the Company's margin debit interest, which is associated with the decline in the Company's clearing business and revenues during the period.
Other revenues increased from $30,214 during fiscal 1994 to $579,337 in the nine months ended September 30, 1995. Revenues of $149,780 and $66,374 for FMG and FPS, respectively, are included for the nine months ended September 30, 1995. In addition, a gain on the sale of a condominium of $96,094 is included in the nine months ended September 30, 1995.
The minority interest reflected in the financial statements relates to the approximately 52% of Secutron stock not owned by the Company.
Year Ended December 31, 1994 Compared With Year Ended December 31, 1993
Fiscal 1994 operating revenues decreased by 10% ($1,897,710) compared with revenues in fiscal 1993. The revenues for RAF declined 9% in fiscal year 1994, while those of Secutron declined 13% from fiscal 1993. RAF commissions, clearing fees, and transactional charges declined in 1994 and there was no offset to these declines by corporate or public finance, nor by the bank services division. In particular, decreasing clearing revenues were of concern, because these were not anticipated to recover without acquiring greater financial resources to become "balance sheet competitive" with other broker dealers offering similar services. Finally, in 1994, Secutron hardware and software sales declined faster and further on a percentage basis than did the revenues of RAF. Secutron, however, was undergoing a transition in 1994 of shifting its own customer base to the sale and service of IBM products as well as software sales to the brokerage community. Only net interest income showed an increase in 1994, increasing $69,358, or 16% over fiscal 1993.
1994 operating expenses decreased by $1,581,394, or 8%, a decrease similar to the decrease in operating revenues. Support personnel and related expenses at RAF were reduced and various departments decreased expenses, including cost of sales in 1994 compared with 1993. Expenses related to additional administrative costs, or the Correspondent clearing division, declined materially in 1994 compared with 1993.
At September 30, 1995, the Company had working capital of $4,130,358, up from $2,442,283 on December 31, 1994.
The Company currently has a line of credit with its primary lender whereby the Company may borrow up to 75% of its billed directory accounts receivable under 60 days old. The Company currently has over $1,300,000 available on this line. The Company also has credit agreements with the Pershing Division of Donaldson, Lufkin & Jenrette, which includes a broker loan line of finance securities owned, securities held for correspondent accounts, and receivables in customer margin accounts. This line may also be used to release pledged collateral against day loans. Outstanding balances under these credit arrangements are adequate to meet the short term operating needs of RAF. Liquidity is expected to be adequate in fiscal 1996.
The effects of inflation on the Company's operations is not material and is not anticipated to have any material effect in the future.
Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long Lived Assets to Be Disposed Of (SFAS 121) was issued in March, 1995, by the Financial Accounting Standards Board. It requires that long lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is required to be adopted for fiscal years beginning after December 15, 1995. Adopting this statement by the Company is not expected to have a significant effect on the consolidated financial statements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), was issued by the Financial Accounting Standards Board in October, 1995. SFAS 123 establishes financial accounting and reporting standards for stock based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. This statement defines a fair value based method of accounting for employee stock option or similar equity instrument, and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in Opinion 25 must make proforma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined by SFAS 123 had been applied. SFAS 123 is applicable to fiscal years beginning after December 15, 1995. The Company currently accounts for its equity instruments using the accounting prescribed by Opinion 25. The Company does not currently expect to adopt the accounting prescribed by SFAS 123; however, the Company will include the disclosures required by SFAS 123 in future consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data that constitute Item 8 are included at the end of this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
There were no changes in accountants or disagreements of the type required to be reported under this item between the Company and its independent accountants during the fiscal year ended September 30, 1994.
On September 1, 1995, the Company's former accountant, Eide Helmeke & Co. ("Eide"), located in Bismarck, North Dakota, resigned as the Company's principal accountant. Eide's report on the Company's consolidated financial statements for the fiscal year ended September 30, 1994 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to any uncertainty, audit, scope or accounting principles. Following the Company's acquisition of RAFCO in April 1995, the Board of Directors recommended and approved a change in accountants from Eide to KPMG Peat Marwick, LLP. During the Company's fiscal years ended September 30, 1993, and 1994, and during the interim period from October 1, 1994 through April 30, 1995, there were no disagreements with Eide on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to Eide's satisfaction, would have caused it to make a reference to the subject matter of the disagreement in connection with its report. The Company engaged KPMG Peat Marwick, Denver, Colorado, as its principal accountant on September 29, 1995.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The present term of office of each director will expire at the next annual meeting of shareholders and when his successor has been elected and qualified. The name, position with the Company, age of each director and the period during which each director has served are as follows:
Under the terms of the RAFCO Agreement, six of the seven members of the Board of Directors of the Company agreed to resign within 15 days after the date the RAFCO Agreement was signed and Dennis W. Olson, the seventh member of the Board, agreed to accept the resignations of the other six members and to appoint Robert A. Fitzner, Jr. and Robert L. Long as directors to fill two of the vacancies created by such resignations. Effective May 23, 1995, the resignations agreed to in the RAFCO Agreement were accepted, Messrs. Fitzner and Long were appointed as directors of the Company to fill two of the vacancies, and the size of the board of directors was set at three members. Other than the foregoing, there was no arrangement or understanding between any director or any other person pursuant to which any director was selected as such.
(b) Identification of Executive Officers.
Each executive officer will hold office until his successor duly is elected and qualified, until his death, resignation or until he shall be removed in the manner provided by the Company's Bylaws. The Company's executive officers, their ages, positions with the Company and periods during which they served are as follows:
There was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected as an executive officer.
(c) Identification of Certain Significant Employees.
Background. The following is a brief account of the business experience during the past five years of each director and executive officer of the Company:
No director of the Company is a director of any other entity that has its securities registered pursuant to Section 12 of the 1934 Act.
(f) Involvement in Certain Legal Proceedings.
No event required to be reported hereunder has occurred during the past five years.
(g) Promoters and Control Persons.
Disclosure under this paragraph is not applicable to the Company.
Compliance With Section 16(a) of the Securities Exchange Act of 1934.
To the Company's knowledge, during the Company's fiscal year ended September 30, 1995, the only directors, officers or more than 10% shareholders of the Company that failed to timely file a Form 3, Form 4 or Form 5 were Dennis W. Olson, Marlow Lindblom, Roland Haux and Larry Scott, each of whom filed late Forms 5 reporting the following number of transactions involving stock ownership which was the result of participation in the Company's ESOP and 401(k) retirement plans: Dennis W. Olson: nine transactions reported on five Forms 5; Marlow E. Lindblom: nine transactions reported on five Forms 5; Larry Scott: nine transactions reported on five Forms 5; and Roland Haux: four transactions reported on three Forms 5.
The following table provides certain information pertaining to the compensation paid by the Company and its subsidiaries for services rendered by Dennis W. Olson, the President of the Company, Robert A. Fitzner, Jr., the president of RAF, and Robert L. Long, the senior vice president of RAF. RAF became a subsidiary of the Company in April of 1995.
Effective September 30, 1988, the Company adopted an Incentive Stock Option Plan ("Plan"). The purpose of the Plan is to secure and retain key employees of the Company. The Plan authorizes the granting of options to officers, directors, and employees of the Company to purchase 600,000 shares of the Company's Common Stock subject to adjustment for various forms of recapitalization that may occur. No options may be granted after September 30, 1998, and fair value of options granted to each optionee cannot exceed $100,000 per year.
An employee must have six months of continuous employment with the Company before he or she may exercise an option granted under the Plan. Options under the Plan may not be granted at less than fair market value at the date of the grant. Options granted under the Plan are nonassignable and terminate three months after the optionee's employment ceases, except in the case of employment termination due to disability of the optionee, in which event the option expires twelve months from the date employment ceases. The Plan is administered by a committee selected by the Company's Board of Directors.
Effective December 12, 1988, the Company granted options under the Plan to 37 individuals, which included 32 employees, the Company's three officers, and two outside directors, for each such individual to purchase 4,000 shares at $.70 per share through December 12, 1993. Such grants involved an aggregate of 148,000 shares. Employees hired after December 12, 1988, and with the Company for six consecutive months, were each granted options to purchase 4,000 shares of the Company's stock at the closing price on the date of the grant, limited to a floor of $.70 per share. At September 30, 1995, options to purchase 43,000 shares under the Plan had been exercised and other options previously granted to purchase 342,000 shares had expired. Currently there are no options outstanding and 557,000 shares remain in the Plan.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted by the Company to Robert A. Fitzner, Jr., Dennis W. Olson or Robert L. Long during the Company's fiscal year ended September 30, 1995.
IN LAST FISCAL YEAR AND FISCAL YEAR
The following table sets forth information with respect to Dennis W. Olson and Robert L. Long concerning the exercise of options and underwriter's warrants during the Company's last fiscal year ended September 30, 1995, and unexercised options and warrants held as of September 30, 1995. Robert A. Fitzner, Jr. does not own any options or warrants to purchase securities of the Company.
Prior to the change in the members of the Board of Directors in May of 1995, directors of the Company who were not employees or officers received $1,000 per quarter. Since May of 1995, directors receive no compensation. Directors of Secutron who are not also officers or employees of Secutron receive $30,000 annually.
Long Term Incentive Plans - Awards in Last Fiscal Year.
During the year ended September 30, 1995, the executive officers of the Company earned or were awarded shares pursuant to the Company's Employee Stock Ownership Plan and the Company's 401(k) Plan as follows:
On September 22, 1989, the Company's Board of Directors adopted an Employee Stock Ownership Plan ("ESOP Plan") which provides in pertinent part that the Company may annually contribute tax deductible funds to the ESOP Plan, at its discretion, which are then allocated to the Company's employees based upon the employees' wages in relation to the total wages of all employees in the ESOP Plan.
The ESOP Plan provides that more than half of the assets in the ESOP Plan must consist of the Company's Common Stock. The ESOP Plan is administered by a board of trustees under the supervision of an advisory committee, both of which are appointed by the Company's board of directors. At September 30,1995, the ESOP Plan owned 493,900 shares of the Company's Common Stock and no other marketable securities. The ESOP Plan also had an outstanding bank loan of $350,000, which was secured by the stock in the ESOP Plan and was guaranteed by the Company. Employees become vested in the shares of the Company's Common Stock after six years in the ESOP Plan. Executive officers participate in the ESOP Plan in the same manner as other employees. Employees are 20% vested after two years, vesting an additional 20% each year up to 100% after six years in the ESOP Plan.
On April 1, 1991, the Company initiated a 401(k) plan, which provides in pertinent part that the Company's employees may deduct money from their paychecks on a pretax basis, which is invested into any of six investment choices provided by the 401(k) Plan. Taxes on funds invested in the 401(k) Plan are deferred until the money is drawn out, usually at retirement. All employees as of April 1, 1991, were eligible for the 401(k) Plan and new employees after that date become eligible for the 401(k) Plan on the April 1 or October 1 immediately following the completion of one year of employment. As an incentive, the Company provides a matching contribution of shares of the Company's Common Stock at the end of the year. This matching goes to all employees who are with the Company on September 30 and is a dollar for dollar matching up to the first $312.
Employees become vested in this matching at the rate of 20% per year, commencing two years after employment begins, and they are 100% vested after six years with the Company. At September 30, 1995, 254,800 shares of the Company's Common Stock had been purchased by the 401(k) Plan. Officers participate in the Plan in the same manner as other employees.
The Company has no other bonus, profit sharing, pension, retirement, stock purchase, deferred compensation, or other incentive plans.
Employment Contracts and Termination of Employment and Change-In-Control Arrangements.
There is no employment contract between the Company or RAF and Robert A. Fitzner, Jr. Robert L. Long and RAF have an oral agreement whereby Mr. Long receives commissions based on a percentage of the dollar amount of his clients' transactions and the dollar amount of all RAF corporate finance transactions and he receives one half of all warrants received by RAF as compensation for corporate finance transactions.
Legally effective as of January 1, 1995, the Company entered into an employment agreement with its president, Dennis W. Olson. The employment agreement is for a term of three years ending January 1, 1998; provides for annual compensation and benefits, provides that upon full disability, Mr. Olson will be entitled to full salary for three months, two thirds salary for three months, and one half salary for six months; provides that the employment agreement shall be binding upon any successor to the Company; and the agreement provides that, upon the expiration of the employment agreement, the Company shall be required, at Mr. Olson's option, to purchase from him up to 500,000 shares of the Company's Common Stock at $1.00 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a)(b) Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of December 1, 1995, the number of shares of the Company's outstanding Common Stock and Preferred Stock beneficially owned by each of the Company's current directors and officers, sets forth the number of shares of the Company's Common Stock and Preferred Stock beneficially owned by all of the Company's current directors and officers as a group and sets forth the number of shares of the Company's Common Stock and Preferred Stock owned by each person who owned of record, or was known to own beneficially, more than 5% of the Company's outstanding shares of Common Stock and Preferred Stock respectively:
There are presently no arrangements of any kind which may at a subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)(b) Transactions With Management and Others and Certain Business Relationships.
Certain officers and directors of the Company have in the past made personal loans to the Company when it was in need of short term financing. At September 30, 1995, such loans from affiliates were as follows:
This loan is unsecured, at a rate that would generally be available from local banking institutions for good customers and is subordinated to then outstanding bank loans to the Company. All loan transactions with related persons have been on terms no less favorable than those available from third parties. It is probable that the Company will continue to engage in such borrowing activities in the future; however, there are currently no specific plans to do so.
Robert A. Fitzner, Jr. became a director of the Company as a result of the reorganization transaction set forth in the RAFCO Agreement. See "Business -- Acquisition of RAFCO." As a result of such reorganization transaction, Mr. Fitzner received 4,784,705 shares of the Company's Common Stock and 5,000 shares of the Company's Preferred Stock. As a result of such reorganization transaction, the Company assumed the obligation to Mr. Fitzner on a 10% senior subordinated note due December 31, 2003 in the amount of $50,000. As a result of such reorganization transaction, the Company issued 2,500 shares of Preferred Stock to Earlene E. Fitzner, Mr. Fitzner's mother, and the Company has assumed the obligation to pay a 10% senior subordinated note due December 31, 2003 in the principal amount of $150,000 to Mr. Fitzner's mother and has assumed the obligation to pay a 10% senior subordinated note due December 31, 2003 in the principal amount of $50,000 to Mr. Fitzner's father, Robert A. Fitzner, Sr.
As a result of the reorganization transaction set forth in the RAFCO Agreement, Kanouff Corporation became the beneficial owner of approximately 12.4% of the Company's outstanding stock. See "Business -- Acquisition of RAFCO." Patricia M. Kanouff is an officer, director, and sole shareholder of Kanouff Corporation and John P. Kanouff, the husband of Patricia M. Kanouff, is an officer of Kanouff Corporation. John P. Kanouff is an officer, director, and shareholder of Hopper and Kanouff, P.C., a company providing legal services to clients, including the Company, RAF, and Secutron. During the period from October 1, 1994, to September 30, 1995, an aggregate of $316,000 was paid by the Company, RAF, and Secutron to Hopper and Kanouff, P.C. for legal services.
Robert L. Long became a director of the Company as a result of the reorganization transaction set forth in the RAFCO Agreement. See "Business -- Acquisition of RAFCO." During 1992, the Company entered into an investment banking agreement with RAF. As of April 26, 1995, RAF became a wholly owned subsidiary of the Company. One of the terms of Mr. Long's employment by RAF is that he will receive a percentage of any investment banking fees received by RAF. Under the investment banking agreement, the Company would be obligated to pay a fee to RAF as a result of the reorganization transaction between the Company and RAFCO which is described in "Business -- Acquisition of RAFCO." RAF has agreed to waive its portion of any such investment banking fee. On April 26, 1995, the Company agreed to pay a merger and acquisition fee to Mr. Long in an amount to be determined by negotiation within a reasonable time after April 26, 1995. Dennis W. Olson, Robert A. Fitzner, Jr., and Robert L. Long are in the process of negotiating the amount of such fee.
Dennis W. Olson is currently an officer and a director of the Company. On April 27, 1995, the Company entered into an agreement to sell certain of its assets to Telecom as described in "Business -- Sale of Directories to Telecom." Pursuant to the Telecom Agreement, Mr. Olson and certain other employees of the Company entered into agreements not to compete with Telecom. As compensation for this noncompetition agreement, Telecom has paid $100,000 out of the total of $250,000 to Mr. Olson. On April 27, 1995, the Company granted an option to Telecom to purchase additional assets of the Company, as described in "Business -- Sale of Option to Telecom." This option is exercisable for a period of two years beginning on June 1, 1997. If Telecom exercises this option, Mr. Olson and certain other employees of the Company will be obligated to enter into additional noncompete agreements with Telecom and will be paid additional amounts in consideration for such noncompete agreements. The amount of such noncompetition payments will not be determined until after Telecom exercises its option.
On March 22, 1995, Marlow E. Lindblom exercised a stock option and purchased 20,000 shares of Common Stock of the Company at $0.54 per share, and on April 28, 1995, Roland Haux exercised a stock option and purchased 70,000 shares of Common Stock of the Company at $0.58 per share. The Company has repaid the following loans to the president and former officers and directors: Dennis W. Olson was repaid $20,000 on April 18, 1995; Marlow E. Lindblom was repaid $10,000 on March 21, 1995; and Roland Haux was repaid $40,000 on April 27, 1995.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Consolidated Balance Sheets--September 30, 1995 and 1994 Consolidated Statements of Operations--Nine Months Ended September 30, 1995 and Years Ended December 31, 1994 and 1993 Consolidated Statement of Changes in Stockholders' Equity--Nine Months Ended September 30, 1995 and Years Ended December 31, 1994 and 1993 Consolidated Statements of Cash Flows--Nine Months Ended September 30, 1995 and Years Ended December 31, 1994 and 1993 Notes to Consolidated Financial Statements
(b) Current Reports on Form 8-K:
During the fiscal quarter ended September 30, 1995, one Current Report on Form 8-K was filed on July 10, 1995, amending a Current Report filed on May 9, 1995. The amended Current Report contained consolidated financial statements for RAFCO, Ltd. as of December 31, 1994 and 1993 and for the years ended December 31, 1992, 1993 and 1994, unaudited financial statements for RAFCO for the three months ended March 31, 1995, unaudited pro forma financial information for the Company as of March 31, 1995, for the six months ended March 31, 1995 and for the year ended September 30, 1994, and an auditor's report.
Exhibit 2.1 Plan of Reorganization and Exchange Agreement dated April 26, 1995 with Exhibits A, B, C, F and I (incorporated by reference to Exhibit 2.1 to Registrant's 8-K dated May 9, 1995).
Exhibit 2.2 Sale and Purchase Agreement dated April 27, 1995, with Exhibits A and J (incorporated by reference to Exhibit 2.2 to Registrant's 8-K dated May 9, 1995).
Exhibit 2.3 Option Agreement dated April 27, 1995, with Exhibits A, B, and D (incorporated by reference to Exhibit 2.3 to Registrant's 8-K dated May 9, 1995).
Exhibit 3.0 Articles of Incorporation of Registrant.
Exhibit 3.0(i) Articles of Amendment to the Registrant's Articles of Incorporation dated April 28, 1995 (incorporated by reference to Exhibit 3.0(i) to Registrant's 8-K dated May 9, 1995).
Exhibit 3.2 Bylaws of Registrant.
Exhibit 9.1 Voting Trust Agreement between Robert A. Fitzner, Jr. and Dorothy K. Englebrecht dated June 2, 1995.
Exhibit 9.2 Voting Trust Agreement between Robert A. Fitzner, Jr. and Steven M. Fishbein dated June 2, 1995.
Exhibit 9.3 Voting Trust Agreement between Robert A. Fitzner, Jr. and Peter K. O'Leary dated June 2, 1995.
Exhibit 9.4 Voting Trust Agreement between Robert A. Fitzner, Jr. and Arlene M. Wilson dated June 2, 1995.
Exhibit 10.1 Incentive Stock Option Plan as amended January 15, 1992.
Exhibit 10.2 Employee Stock Ownership Plan.
Exhibit 10.4 Employment Agreement between Dennis W. Olson and the Regis- trant dated January 1, 1995.
Exhibit 10.5 Employees/Officers/Directors Form of Non-Competition Agreement; Covenant Not to Compete and Confidentiality Agreement (incorporated by reference to Exhibit 2.2 to Registrant's 8-K dated May 9, 1995).
Exhibit 16 Letter Re Change in Certifying Accountant.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 27 Financial Data Schedule
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 16, 1996 FRONTEER DIRECTORY COMPANY, INC.
By: /s/ Dennis W. Olson Dennis W. Olson, President and Chief
Lance Olson, Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
January 16, 1996 Dennis W. Olson, Director /s/ Dennis. W. Olson
January 16, 1996 Robert A. Fitzner, Jr. /s/ Robert A. Fitzner, Jr.
January 16, 1996 Robert L. Long, Director /s/ Robert L. Long
See accompanying notes to consolidated financial stateme
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION, BUSINESS COMBINATION, AND PRINCIPLES OF CONSOLIDATION - On April 26, 1995, Fronteer Directory Company, Inc. (Fronteer or the Company) entered into a Plan of Reorganization and Exchange Agreement (the Agreement) with RAFCO, Ltd. (RAFCO). Under the Agreement, Fronteer acquired all of the assets of RAFCO in exchange for the assumption by Fronteer of the liabilities of RAFCO and the issuance by Fronteer to RAFCO of 7,223,871 shares of $.01 par value common stock and 87,500 shares of $.10 par value series A voting cumulative preferred stock ($10.00 per share redemption value). RAFCO has dissolved as a corporation and has distributed Fronteer's common and preferred stock to the shareholders of RAFCO. As a result of the transaction, the former shareholders of RAFCO acquired a 55% interest in Fronteer. Accordingly, the transaction has been accounted for as a "reverse acquisition" of Fronteer by RAFCO using the purchase method of accounting and Fronteer's assets and liabilities have been adjusted to their market value as of the date of the business combination. The adjustment to market value resulted in an intangible asset, directory publishing rights, which was recorded at $6,972,468 (see note 6). Fronteer's operations have been included in the accompanying consolidated financial statements beginning May 1, 1995, the effective date of the transaction. As a result of the reverse acquisition accounting, historical financial statements presented for periods prior to the business combination date include the consolidated assets, liabilities, equity, revenues, and expenses of RAFCO only.
The consolidated financial statements include the Company and the accounts of Fronteer Directory (Fronteer) and its wholly-owned subsidiaries, Fronteer Personnel Services, Inc. (FPS), Fronteer Marketing Group, Inc. (FMG), and RAF Financial Corporation (RAF). They also include a majority-owned subsidiary, Secutron Corporation (Secutron). All significant intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements.
Fronteer is engaged in the publishing and distribution of telephone directories, while FPS is engaged in employee leasing, and FMG is engaged in the telemarketing business. RAF operates as a registered securities broker/dealer. Secutron is engaged in industry specific software development and provides consulting services.
B. CASH EQUIVALENTS - For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
C. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - Fronteer grants credit to customers throughout the directory market, primarily in North Dakota. Although Fronteer has a diversified customer base, a substantial portion of its debtors' ability to honor their contract is dependent upon the economic conditions in North Dakota. Broker dealer customer receivables include amounts due on cash transactions and margin accounts.
Amounts due to or from directors or officers of the Company, related to normal cash accounts, are not classified as customer related in accordance with the rules of the Securities and Exchange Commission.
The allowance for doubtful accounts is maintained at a level adequate to absorb probable losses and credit losses inherent in the business based upon Fronteer's prior history of credit losses. Management determines the adequacy of the allowance based upon reviews of individual accounts, recent loss experience, current economic conditions, the risk characteristics of the various categories of accounts and other pertinent factors. Fronteer establishes payment terms with customers ranging from a single payment due upon publication of the directory to twelve equal monthly payments commencing upon publication of the directory. Any accounts remaining on Fronteer's books fifteen months following publication of the directory, due to additional payment arrangements made with Fronteer outside of the original contract, are charged to the allowance for doubtful accounts.
Securities owned by customers are held as collateral for substantially all of the broker dealer customer receivables. An allowance for doubtful accounts has been established for all unsecured broker dealer customer receivables.
D. SECURITIES - Securities transactions are recorded on a settlement-date basis, usually the third business day following the trade date. The effect of using settlement date rather than trade date for the recording of securities transactions is not significant.
Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" requires that trading securities be recorded at market value. In accordance with financial reporting requirements for broker/dealers, the Company's financial instruments, including securities, are all recorded at market value. Securities without a readily available market value are recorded at estimated fair value. Securities are valued monthly and the resulting unrealized appreciation or depreciation is included in operations as trading profit or loss. Realized gains and losses are determined using the average cost method.
In October 1994, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FASB) No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" which prescribes disclosure requirements for transactions in certain derivative financial instruments including futures, forward, swap, and option contracts, and other financial instruments with similar characteristics. Although RAF is authorized to enter into such transactions in the ordinary course of business, and may do so in the future, no such transactions were consummated during the nine months ended September 30, 1995.
E. REVENUE AND COST RECOGNITION - Revenues from advertising sales are recognized at the point individual directories are published. Costs of selling and production are recorded as deferred directory costs when incurred and charged to cost of sales in the period during which the related directory is published. Deferred directory costs are allocated to incomplete directories based upon the relative percentage of contracts sold as of year-end on incomplete directories to total current year earned revenues. Printing costs are charged to cost of sales in the period during which the related directory is published. Costs of distribution are charged to cost of sales as incurred. General administrative costs are charged to expenses as incurred.
Revenue from the sale of computer equipment and installation of software is generally recognized when the equipment and related software is installed and accepted by the customer.
Costs incurred in researching, designing, and planning for the development of new software are included in computer hardware and software operations in the accompanying consolidated financial statements. All amounts are charged to operations as incurred until such time as the costs meet the criteria for capitalization. Such costs were not significant in 1995, 1994, or 1993.
F. PROPERTY, FURNITURE, AND EQUIPMENT - Property and equipment are stated at cost. Additions, renewals and betterments are capitalized, whereas expenditures for maintenance and repairs are charged to expense. The cost and related accumulated depreciation of assets retired or sold are removed from the appropriate asset and depreciation accounts, and the resulting gain or loss is reflected in income.
It is the policy of the Company to provide depreciation using the accelerated and straight-line methods based on the estimated useful lives of the assets as follows:
Vehicles & Furniture 3-5 years
G. AMORTIZATION - Directory publishing rights are amortized over ten years using the straight-line method.
H. INCOME TAXES - The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which prescribes the use of the asset and liability method of accounting for income taxes.
I. DESCRIPTION OF LEASING ARRANGEMENTS - The Company leases office space under operating leases from which its business is conducted in certain branches under short-term leasing arrangements. In addition, the Company leases equipment under leases classified as capital leases. All leases expire over the next year.
J. LOSS PER COMMON SHARE - Loss per common share has been calculated based upon the net loss available to common shareholders divided by the weighted average number of common shares outstanding during the period. Common stock equivalents, including outstanding options and warrants, are considered in determining the weighted average number of common shares outstanding during the period unless antidilutive.
NOTE 2 - STOCKHOLDERS' EQUITY
In conjunction with the Agreement, the Company issued 87,500 shares of $.10 par value per share, Series A Voting Cumulative Preferred Stock ("Series A Preferred"). The stated value of the Series A Preferred is $10 per share and has a liquidation preference of $10 per share plus accrued and unpaid dividends. Regular dividends are 9% per annum payable quarterly. If the Company is for any reason unable to pay cash dividends, such unpaid dividends will accumulate without interest until the Company can legally pay such dividends. The Company has the option to redeem all or part of the Series A Preferred on a pro rata basis upon 90 days prior written notice at December 31, 1995, and at December 31 or each year thereafter at $11 per share plus unpaid dividends.
NOTE 3 - SEGREGATED CASH
Pursuant to Rule 15c3-3 of the Securities and Exchange Commission, RAF is required to maintain cash or cash equivalents on deposit in special reserve bank accounts for the exclusive benefit of its customers. At September 30, 1995, RAF had balances in such accounts of approximately $296,000. All of this amount is in excess of the reserve requirement.
NOTE 4 - SECURITIES OWNED
Securities owned by the Company as of September 30, 1995 and December 31, 1994, consist of the following:
NOTE 5 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
As a securities broker and dealer, RAF is engaged in various securities trading and brokerage activities. A portion of RAF's transactions are collaterized and are executed with and on behalf of institutional investors including other brokers and dealers.
RAF's exposure to credit risk associated with the nonperformance of these customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the customers' ability to satisfy their obligations to RAF. RAF's principal activities are also subject to the risk of counterparty nonperformance.
In the normal course of business, RAF's customer and correspondent clearance activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose RAF to off-balance sheet credit risk in the event the customer is unable to fulfill its contractual obligations.
RAF's customer securities activities are transacted on either a cash or margin basis. In margin transactions, RAF extends credit and monitors cash and securities collateral in customers' accounts, subject to various regulatory margin requirements. In connection with these activities, RAF executes and clears customer transactions involving the sale of securities not yet purchased. Such transactions may expose RAF to off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. In the event the customer fails to satisfy it obligations, RAF may be required to purchase or sell financial instruments at prevailing market prices in order to fulfill the customer's obligations.
NOTE 6 - INTANGIBLE ASSET AND SALE OF DIRECTORIES
In connection with the business combination discussed in note 1, Fronteer 's assets were adjusted to their fair market value pursuant to the purchase method of accounting, which resulted in an intangible asset, directory publishing rights, which was recorded at $6,972,468. Immediately thereafter, Fronteer sold ten of its directories to Telecom*USA Publishing. As a result of the purchase price allocation to the sold directories of $2,279,699, no gain or loss was recorded on the sale.
NOTE 7 - LONG-TERM NOTES RECEIVABLE
Notes receivable consist of the following:
NOTE 8 - DEFERRED REVENUE
Sales contracts for advertising in directories not published totaled approximately $2,200,000 as of September 30, 1995. This amount will be recorded as revenue upon publication of the directories. The deferred revenue balance of $639,184 as of September 30, 1995, represents advance payments received on these contracts. These amounts together with the balances of the contracts will be recognized as revenue when the directories are published.
NOTE 9 - PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment is comprised of the following:
Depreciation expense totaled $402,525 for the nine months ended September 30, 1995, and $395,572 and $493,772 for the years ended December 31, 1994 and 1993, respectively.
NOTE 10 - NOTES PAYABLE TO RELATED PARTIES
The Company has various notes payable to related parties in the amount of $548,900 at September 30, 1995. Such notes payable are unsecured, payable on demand, and bear interest at a variable rate not to exceed the interest rate on the Company's line of credit with BNC National Bank. At September 30, 1995, the interest rate was 11.5%.
NOTE 11 - LONG-TERM DEBT
Long-term debt is comprised of the following:
A line of credit agreement has been executed with BNC National Bank providing the Company with loans in the total amount of $1,300,000 on a revolving basis. The line of credit is due April 7, 1996 at which time all unpaid principal is due and payable. Interest on unpaid principal is payable monthly at the Wall Street Journal Prime Rate plus 2.75%. At September 30, 1995, no balances were outstanding under the line of credit.
The BNC National Bank loan agreement includes various restrictions affecting the conduct of Fronteer's business while the agreement is in force, including limited expansion. It also requires maintenance of net income of 2.5% of sales, equity to total assets of not less than 35%, and cash flow coverage of at least 100% of all debt service, and limiting the outstanding line of credit to 75% of accounts receivable less than 60 days old. Fronteer was in compliance with all provisions of the loan agreement as of September 30, 1995.
Minimum principal payments required on long-term debt during the next five years are as follows: 1996 -$589,706; 1997 - $128,556; 1998 - $7,075; 1999 - $506,501; 2000 - $7,094; thereafter -$1,325,000.
NOTE 12 - BROKER DEALER PAYABLES
Broker dealer payables includes amounts due on customer margin debits collateralized by customer securities. Such amounts bear interest at a fluctuating rate that generally corresponds to the broker call money rate (7.5% at September 30, 1995).
NOTE 13 - INCOME TAXES
Income tax benefit for the year ended December 31, 1993, consisted of the following:
Income tax benefit in 1993 differs from the amount computed by applying the federal statutory tax rate to loss before income taxes and cumulative effect of change in accounting for income taxes primarily due to state income taxes.
Temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities that result in significant deferred tax assets and liabilities at September 30, 1995 and December 31, 1994, are as follows:
The net deferred tax liability is presented in the accompanying consolidated balance sheets as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that the deferred tax asset will be realized. The ultimate realization of the deferred tax asset is dependent on the generation of future taxable income in the period in which the temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on these considerations, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at September 30, 1995. In 1994, the change in the valuation allowance was an increase of $91,915.
Net operating loss carryforwards for income tax purposes of approximately $165,000 will be available to offset future taxable income through 2010. Contribution carryforwards of approximately $158,000 expire in varying amounts through 2000.
Effective January 1, 1993, the Company adopted the provisions of SFAS No. 109 on a prospective basis. The cumulative effect of this change in the method of accounting for income taxes was to decrease the net loss by $141,080. The adoption of SFAS No. 109 did not have a significant impact on the Company's 1993 provision for income taxes.
Fronteer and RAF lease office space under long-term noncancelable operating leases. The leases for office space provide for annual escalations for utilities, taxes, and service costs, as well as escalating rental rates over the term of the leases. Minimum future rental payments required by such leases are as follows:
Rental expense included in the statement of operations totaled $917,963 for the nine months ended September 30, 1995, and $1,018,131 and $1,140,248 for the years ended December 31, 1994 and 1993, respectively.
The Company has leased equipment under leases classified as capital leases. The following is a schedule of future minimum lease payments under the capital leases, as well as the present value of the net minimum lease payments as of September 30, 1995:
Year ending September 30, 1996 $ 60,407 Less amount representing interest (3,235)
Present value of net minimum lease payments $ 57,172
NOTE 15 - EMPLOYEE STOCK OWNERSHIP AND EMPLOYEE BENEFIT PLANS
The Company has adopted an employee stock ownership plan (ESOP) for its employees. Contributions to the plan are at the discretion of the Company. All employees as of October 1, 1989 are eligible to participate in the plan and new employees after that date become eligible on April 1 or October 1 which follows the completion of one year of employment. The plan provides that more than half of the assets in the plan must consist of the Company's common stock. The plan has certain debt of $350,000 which has been used to purchase the Company's common stock. Such debt is guaranteed by the Company and accordingly has been recorded in the accompanying consolidated financial statements. During the nine months ended September 30, 1995, the Company contributed $10,000 to the plan.
The Company has a retirement savings plan covering all employees who are over 21 years of age and have completed one year of eligibility service. Persons employed as of April 1, 1991, the inception date of the plan, were included. The plan meets the qualifications of Section 401(k) of the Internal Revenue Code. Under this plan, eligible employees can contribute through payroll deductions up to 15% of their base compensation. The Company will make a discretionary matching contribution equal to a percentage of the employee's contribution. The Company contributed $44,934 during the nine months ended September 30, 1995.
The Company does not provide any post employment benefits to retired or terminated employees.
NOTE 16 - STOCK OPTIONS
At September 30, 1995, the Company had 420,000 stock options outstanding, which were granted to certain officers and an outside public relations firm during 1992 and 1993. The exercise prices range from $.70 to $.95 per share. Of the total number of options outstanding, 80,000 expire March 6, 1996, and 340,000 expire August 26, 1997.
The Company has 156,250 warrants outstanding at September 30, 1995. Each warrant allows the holder to purchase one share of common stock at $.96 per share. The warrants can be exercised between June 26, 1993 and June 26, 1997.
NOTE 17 - MINIMUM NET CAPITAL REQUIREMENTS
The Company, as a registered securities broker/dealer, is subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1) (the Rule). The Company has elected to operate pursuant to the alternative computation provided by the Rule.
Under the alternative computation, the Company is required to maintain "net capital" equal to the greater of $250,000 or 2% of "aggregate debit" items (primarily customer-related receivables) included in the formula for Determination of Reserve Requirements for Brokers and Dealers, as those terms are defined in the Rule. In addition, equity capital may not be withdrawn if resulting "net capital" would be less than 5% of "aggregate debits". At September 30, 1995, the Company had a ratio of net capital to aggregate debits of 41%, a "net capital" requirement of $250,000, and actual "net capital" of $1,988,915.
NOTE 18 - OFFICER LIFE INSURANCE
As of September 30, 1995, the Company is the owner-beneficiary of term life insurance policies on the lives of two officers:
Name Face Amount of Policy
NOTE 19 - SUPPLEMENTAL DISCLOSURES RELATED TO STATEMENTS OF Supplemental disclosures of cash flow information:
NOTE 20 - SEGMENT REPORTING
Information regarding business segments is summarized below. Operations for Fronteer are for the period from the date of the business combination, May 1, 1995, to September 30, 1995. Operations for RAF and Secutron are for the nine months ended September 30, 1995.
Identifiable assets by industry are those assets that are used in the Company's operations in each industry.
NOTE 21 - COMMITMENTS AND CONTINGENCIES
The Company has guaranteed a promissory note of the Fronteer Directory Company, Inc. Employee Stock Ownership Plan. The unpaid balance on this note totalled $350,000 as of September 30, 1995.
The Company is a defendant in certain arbitration and litigation matters arising from its activities as a broker/dealer and underwriter. In the opinion of management, these matters have been adequately provided for in the accompanying financial statements, and the ultimate resolution of the arbitration and litigation will not have a significant adverse effect on the financial condition of the Company. | 10-K | 10-K | 1996-01-16T00:00:00 | 1996-01-16T13:14:38 |
0000928389-96-000008 | 0000928389-96-000008_0000.txt | <DESCRIPTION>VAN KAMPEN MERRITT PROXY STATEMENT FILING - DEFS14A
INFORMATION REQUIRED IN PROXY STATEMENT
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ___)
Filed by the Registrant [ ] Filed by a Party other than the Registrant [ X ]
[ ] Preliminary Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 [ ] Confidential, for Use of the Commission Only (as permitted by
Van Kampen Merritt Series Trust (Name of Registrant as Specified In Its Charter)
Blazzard, Grodd & Hasenauer, P.C. (Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
2) Form, Schedule or Registration Statement No.:
VAN KAMPEN MERRITT SERIES TRUST
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held February 9, 1996
VAN KAMPEN MERRITT SERIES TRUST:
NOTICE IS HEREBY GIVEN to the holders of shares of beneficial interest (the "Shares") of Van Kampen Merritt Series Trust (the "Trust"), a Massachusetts business trust, that a Special Meeting of the Shareholders of the Trust (the "Meeting"), will be held at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on Friday, February 9, 1996, at 9:00 a.m., local time, for the following purposes:
1. To elect five Trustees to serve until their respective successors are duly elected and qualified;
2. To approve a proposed New Investment Advisory Agreement between the Trust and Cova Investment Advisory Corporation, as described in the accompanying Proxy Statement and attached as Exhibit B thereto;
3. To approve a proposed Sub-Advisory Agreement between Cova Investment Advisory Corporation and Van Kampen American Capital Investment Advisory Corp., as described in the accompanying Proxy Statement and attached as Exhibit C thereto.
4. To transact such other business as may properly come before the Meeting or any adjournment thereof.
Holders of record of the Shares at the close of business on December 26, 1995 are entitled to notice of and to vote at the Meeting and at any adjournment thereof.
By order of the Board of Trustees
THE PROXY IS SOLICITED BY COVA LIFE. COVA LIFE RECOMMENDS THAT YOU CAST YOUR VOTE: IN FAVOR OF THE NOMINEES FOR THE BOARD OF TRUSTEES LISTED IN THE PROXY STATEMENT; FOR THE APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT; AND FOR THE APPROVAL OF THE SUB-ADVISORY AGREEMENT. THE CURRENT BOARD EXPRESSES NO OPINION AND OFFERS NO RECOMMENDATION WITH RESPECT TO THE APPROVAL.
PLEASE FILL IN, DATE AND SIGN YOUR PROXY AND MAIL IT IN THE ENCLOSED ENVELOPE.
VAN KAMPEN MERRITT SERIES TRUST
This Proxy Statement is furnished in connection with the solicitation of proxies to be voted at a Special Meeting of Shareholders of Van Kampen Merritt Series Trust, a Massachusetts business trust (the "Trust"), and at any and all adjournments thereof (the "Meeting"), to be held at the Trust's offices, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on Friday, February 9, 1996, at 9:00 a.m., local time. The approximate mailing date of this Proxy Statement and accompanying form of proxy is January 15, 1996.
The Board of Trustees of the Trust (the "Board" or the "Board of Trustees") has fixed the close of business on December 26, 1995 as the record date (the "Record Date") for the determination of holders of shares of beneficial interest ("Shares") of the Trust entitled to vote at the Meeting. Shareholders on the Record Date will be entitled to one vote for each full Share held and a fractional vote for each fractional Share. THIS PROXY IS SOLICITED BY COVA LIFE. This Proxy is not solicited by the Trust, the Board of Trustees or VKAC.
As of the Record Date, there were 3,787,503.890 Shares of the Quality Income Portfolio, 3,455,928.724 Shares of the High Yield Portfolio, 34,329,015.100 Shares of the Money Market Portfolio, 5,976,845.972 Shares of the Stock Index Portfolio and 1,459,658.562 Shares of the Growth and Income Portfolio outstanding. As of the Record Date, the World Equity Portfolio and the Utility Portfolio had not yet commenced investment operations. See page 14 for information concerning the substantial shareholders of the Shares of the Trust.
The Meeting has been called by the Board pursuant to Article X, Section 10.1 of the Trust's Agreement and Declaration of Trust at the written request of Cova Financial Services Life Insurance Company which, together with its insurance company affiliates ("Cova Life"), owns one hundred percent (100%) of the Shares of the Trust. As described further herein, Proposal 1 calls for the election of new Trustees. THE CURRENT BOARD EXPRESSES NO OPINION AND OFFERS NO RECOMMENDATION WITH RESPECT TO THE APPROVAL.
Shares which represent interests in a particular Portfolio of the Trust vote separately on those matters which pertain only to that Portfolio. These matters are Proposals 2 and 3 and, as appropriate, any other business which may properly come before the Meeting. With respect to such matters, a vote of all Shareholders of the Trust may not be binding on a Portfolio whose Shareholders have not approved such matter. The voting requirement for passage of a particular proposal depends on the nature of the particular proposal. With respect to Proposals 2 and 3, a vote of the "majority of the outstanding voting securities" of a Portfolio which shall mean the lesser of (i) 67% or more of the Shares of the Portfolio entitled to vote thereon present in person or by proxy at the Meeting if holders of more than 50% of the outstanding Shares of the Portfolio are present in person or represented by proxy, or (ii) more than 50% of the outstanding Shares of the Portfolio is necessary to approve the New Investment Advisory Agreement (as defined below) between the Trust, on behalf of each respective Portfolio, and Cova Investment Advisory Corporation ("Cova Advisory") and to approve the proposed Sub-Advisory Agreement between Cova Advisory and Van Kampen American Capital Investment Advisory Corp. ("VKAC"). With respect to Proposal 1, an affirmative vote of a majority of the Shares of the Trust present in person or by proxy is required to elect the nominee Trustees of the Trust.
The Trust was established to be used exclusively as the underlying investment for certain variable annuity contracts ("Variable Contracts") to be issued by Cova Life. All shares of each Portfolio of the Trust are owned by Cova Life. Pursuant to current interpretations of the Investment Company Act of 1940, as amended (the "1940 Act"), Cova Life will solicit voting instructions from owners of Variable Contracts with respect to matters to be acted upon at the Meeting. All Shares of each Portfolio of the Trust will be voted by Cova Life in accordance with voting instructions received from such Variable Contract owners. Cova Life will vote all of the Shares which it is entitled to vote in the same proportion as the voting instructions given by Variable Contract owners, on the issues presented, including Shares which are attributable to Cova Life's interest in the Trust. Cova Life has fixed the close of business on February 1, 1996, as the last day on which voting instructions will be accepted.
The costs of the Meeting, including the solicitation of proxies, will be paid by Cova Life. Cova Life will also assume the costs associated with the solicitation of voting instructions from its Variable Contract owners. This Proxy is solicited by Cova Life. This Proxy is not solicited by the Trust, the Board of Trustees or VKAC.
Cova Life recommends that you cast your vote: IN FAVOR of the nominees for the Board of Trustees listed in this Proxy Statement; FOR the approval of the New Investment Advisory Agreement; and FOR the approval of the Sub-Advisory Agreement. Any proxy may be revoked at any time prior to its exercise by a written notice of revocation addressed to and received by the Secretary of the Trust, by delivering a duly executed proxy bearing a later date, or by attending the Meeting and voting in person.
The Trust knows of no business other than that mentioned in proposals one through three of the Notice which will be presented for consideration at the Meeting. If any other matters are properly presented, it is the intention of the persons named as proxies to vote proxies in accordance with their best judgment. In the event a quorum is present at the Meeting but sufficient votes to approve any of the Proposals are not received, the persons named as proxies may propose one or more adjournments of such Meeting to permit further solicitation of proxies provided they determine that such an adjournment and additional solicitation is reasonable and in the interest of shareholders based on a consideration of all relevant factors, including the nature of the relevant proposal, the percentage of votes then cast, the percentage of negative votes then cast, the nature of the proposed solicitation activities and the nature of the reasons for such further solicitation.
The Trust may, but is not required to, hold annual meetings of shareholders for the election of Trustees. Cova Life has selected and nominated all nominees for election as Trustees at this Special Meeting of Shareholders. The five individuals named in the table below have been nominated for election as Trustees, each to hold office until his or her successor is duly elected and has qualified. Of the nominees, Mr. Myers is the only current Trustee of the Board of Trustees. If reelected as a Trustee, Mr. Myers intends to continue to serve on the Board for a one year period, after which he intends to resign therefrom.
An affirmative vote of a majority of the Shares of the Trust present in person or by proxy is required to elect the nominees. It is the intention of the persons named in the enclosed proxy to vote the Shares represented by them for the election of the nominees listed below unless the proxy is marked otherwise.
The Declaration of Trust provides that the Board shall consist of not less than three nor more than eleven trustees. Following the Meeting, the Trust does not contemplate holding regular meetings of Shareholders to elect Trustees or otherwise. In the event a vacancy occurs on the Board by reason of death, resignation or a reason other than removal by the Shareholders, the remaining Trustees shall appoint a person to fill the vacancy for the entire unexpired term. The Trust has no procedure to consider persons recommended by Variable Contract owners for nomination to the Board of Trustees of the Trust.
When an investment company does not hold regular annual meetings, it is a requirement under the 1940 Act and a policy of the Trust that holders of record of not less than two-thirds of the outstanding shares of the investment company may file a declaration in writing or may vote at a special meeting of Shareholders for the purpose of removing a Trustee. The Board will be required to promptly call a meeting of Shareholders for the purpose of voting upon the question of removal of any such Trustee(s) when requested in writing to do so by the record holders of not less than 10% of the total outstanding Shares of the Trust. In addition, the Board will comply with the requirements of Section 16(c) of the 1940 Act with respect to communications with Shareholders.
Each of the nominees named below has agreed to serve as a Trustee if elected; however, should any nominee become unable or unwilling to accept nomination or election, the proxies will be voted for one or more substitute nominees designated by Cova Life.
The following sets forth the names, ages, principal occupations and other information respecting the Trustee nominees:
The compensation of the officers and Trustees who are "interested persons" (as defined in the 1940 Act) of VKAC is paid by VKAC. The Trust pays the compensation of all other officers and Trustees of the Trust. Each Portfolio compensates the Trustees who are not interested persons of VKAC as follows: until the Portfolio has $25 Million in net assets each Trustee receives $2,000 per year and $200 per meeting of the Board of Trustees, plus expenses; in excess of $25 Million, each Trustee receives $2,500 per year and $250 per meeting of the Board of Trustees, plus expenses. The aggregate amount paid during the fiscal year ended December 31, 1994 to Trustees who are not such "interested persons" was $105,225. In that the proposed new Board, if elected, will be comprised of fewer members, it is anticipated that there will be a reduction in the aggregate amount of fees and expenses paid to the nominee Trustees.
The officers of the Trust serve for one year or until their respective successors are chosen and qualified. The Trust's officers currently receive no compensation from the Trust but are also officers of VKAC and certain of its affiliates and receive compensation in such capacities. The following table sets forth certain information concerning the current principal executive officers of the Trust:
Except as otherwise noted, the address of each of the above officers is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
If the nominee Trustees are elected, the following individuals will be recommended for election by Cova Advisory as officers of the Trust:
As of the Record Date, the Trustees and officers as a group owned no outstanding Shares of the Trust.
The affirmative vote of a majority of the Shares of the Trust present in person or by proxy is required to elect the nominees. COVA LIFE RECOMMENDS THAT CONTRACT OWNERS VOTE IN FAVOR OF THE NOMINEES FOR THE BOARD OF TRUSTEES LISTED IN THIS PROXY STATEMENT. THE CURRENT BOARD EXPRESSES NO OPINION AND OFFERS NO RECOMMENDATION WITH RESPECT TO THE APPROVAL.
APPROVAL OF PROPOSED NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE TRUST AND
Cova Life has requested that this Special Meeting of Shareholders be called for the purpose, among others, of approving a proposed new Investment Advisory Agreement between the Trust and Cova Advisory. A copy of the current Investment Advisory Agreement ("Current Investment Advisory Agreement") dated March 9, 1993 (and January 14, 1994 with respect to the World Equity Portfolio and the Utility Portfolio) is attached hereto as Exhibit A. A copy of the proposed new Investment Advisory Agreement ("New Investment Advisory Agreement") between the Trust and Cova Advisory is attached hereto as Exhibit B.
VKAC currently manages the business and affairs of the Portfolios of the Trust, subject to the control of the Board of Trustees, pursuant to the Current Investment Advisory Agreement. VKAC, formerly known as Van Kampen Merritt Investment Advisory Corp., has served as investment adviser to the Trust since the Trust commenced its investment operations. VKAC is a wholly-owned subsidiary of Van Kampen American Capital, Inc. which in turn is a wholly-owned subsidiary of VKAC Holding, Inc. VKAC Holding, Inc. is indirectly controlled by Clayton & Dubilier Associates IV Limited Partnership, the general partners of which are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc., a New York based private investment partnership. VKAC's principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital, Inc. is a diversified asset management company with more than two million retail investor accounts and nearly $50 billion under management or supervision. Van Kampen American Capital, Inc.'s over 40 open-end and 38 closed-end funds and more than 2,700 unit investment trusts are distributed by financial advisers nationwide. In connection with advising the Trust, VKAC utilizes at its own expense credit analysis and research services provided by its affiliate, McCarthy, Crisanti & Maffei, Inc.
Cova Life has determined that it would be in its own best interest and in the best interest of its Variable Contract owners to implement new investment advisory arrangements for the Trust. Prior to February, 1993, VKAC and Cova Life were affiliated entities. Because the entities are no longer affiliated, Cova Life believes that it would be in the best interests of Cova Life and its Variable Contract owners if an entity affiliated with Cova Life (i.e., Cova Advisory) provides management and oversight of the investments of the beneficial owners of the Trust's shares, Cova Life's Variable Contract owners.
These new arrangements, if approved by the shareholders of the Trust, would result in the selection of Cova Advisory as the new investment adviser to each of the Portfolios of the Trust. Cova Advisory would retain VKAC as sub-adviser for the Portfolios of the Trust to assist it, among other things, in managing the investment and reinvestment of the assets of each Portfolio of the Trust (as described in further detail in Proposal 3 hereof).
Under the Current Investment Advisory Agreement between the Trust and VKAC, VKAC supplies investment research and portfolio management, including the selection of securities for the Trust to purchase, hold, or sell and selection of brokers through whom the Trust's portfolio transactions are executed. VKAC also administers the business affairs of the Trust, furnishes offices, necessary facilities and equipment, provides administrative services, and permits its officers and employees to serve without compensation as Trustees and officers of the Trust. The Trust pays VKAC a monthly fee at the annual rate as set forth below for its services under the Current Investment Advisory Agreement equal to a percentage of the average daily net assets of the Portfolios of the Trust:
For the year ended December 31, 1994, VKAC was paid advisory fees as follows: $200,948 with respect to the Quality Income Portfolio, $153,084 with respect to the High Yield Portfolio, $266,474 with respect to the Stock Index Portfolio and $58,701 with respect to the Growth and Income Portfolio. VKAC waived its advisory fee of $293,512 with respect to the Money Market Portfolio. There were no advisory fees paid with respect to the World Equity Portfolio or the Utility Portfolio in that they have not yet commenced investment operations.
NO FEE INCREASE IS BEING PROPOSED HEREIN. THE TRUST IS OBLIGATED TO PAY THE SAME ADVISORY FEES UNDER THE NEW INVESTMENT ADVISORY AGREEMENT AS IT IS OBLIGATED TO PAY UNDER THE CURRENT INVESTMENT ADVISORY AGREEMENT.
If the New Investment Advisory Agreement and the proposed Sub-Advisory Agreement had been in effect for the year ended December 31, 1994, Cova Advisory and VKAC would have received the following fees, respectively, assuming that no fees were waived:
The Current Investment Advisory Agreement also provides that VKAC shall not be liable for any error of judgment or of law, or for any loss suffered by the Trust in connection with the matters to which the agreement relates, except a loss resulting from willful misfeasance, bad faith, or gross negligence on the part of VKAC in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under the Current Investment Advisory Agreement.
The Trust pays all other expenses incurred in its operation including, but not limited to, direct charges relating to the purchase and sale of its portfolio securities, interest charges, fees and expenses of legal counsel and independent auditors, taxes and governmental fees, expenses (including clerical expenses) of issuance, sale or repurchase of its Shares, membership fees in trade associations, expenses of registering its Shares for sale under federal securities laws, expenses of printing and distributing reports, notices and proxy materials to existing shareholders, expenses of filing reports and other documents filed with governmental agencies, expenses of annual and special Shareholders' meetings, fees and disbursements of the transfer agents, custodians and sub-custodians, expenses of disbursing dividends and distributions, fees, expenses and out-of-pocket costs of its Trustees who are not affiliated with VKAC, insurance premiums, indemnification and other expenses not expressly provided for in the Current Investment Advisory Agreement, and any extraordinary expenses of a nonrecurring nature.
The Current Investment Advisory Agreement may be terminated without penalty by vote of a majority of the Board, by vote of the outstanding shares of beneficial interest of any Portfolio, or by VKAC on sixty (60) days written notice to the other party. The Trust or any Portfolio of the Trust, may effect termination by action of the Board of Trustees or by vote of a majority of the outstanding shares of any Portfolio, accompanied by proper notice. The Current Investment Advisory Agreement will terminate without penalty in the event of its assignment.
The Current Investment Advisory Agreement provides that it will continue in effect from year to year only so long as its continuance is approved in accordance with the requirements of the 1940 Act.
The foregoing summary of the Current Investment Advisory Agreement between the Trust and VKAC is qualified by reference to the Current Investment Advisory Agreement, which is attached as Exhibit A to this Proxy Statement.
The Current Investment Advisory Agreement, dated March 9, 1993 (and amended as of January 14, 1994 for purposes of the addition of the World Equity and Utility Portfolios), was last approved by the Board of Trustees, including those Trustees who are not parties to the Current Investment Advisory Agreement or "interested persons" of any such party, on August 11, 1995. It was last approved by the shareholders by a majority vote of the shareholders of all Portfolios of the Trust (except the World Equity Portfolio and the Utility Portfolio, each of which had not yet been formed) on January 14, 1993, the approval of which was necessitated by the acquisition of VKAC's then parent company which may have resulted in an assignment and thus a termination of the then existing investment advisory agreement.
The Trust and each of the Van Kampen American Capital Funds advised by VKAC and distributed by Van Kampen American Capital Distributors, Inc. have entered into Legal Services Agreements pursuant to which Van
Kampen American Capital provides legal services, including without limitation: accurate maintenance of the funds' minute books and records, preparation and oversight of the funds' regulatory reports, and other information provided to shareholders, as well as responding to day-to-day legal issues on behalf of the funds. Payment by the Trust for such services is made on a cost basis for the employment of personnel, as well as the overhead and the equipment necessary to render such services. Other funds distributed by Van Kampen American Capital Distributors, Inc. also receive legal services from Van Kampen American Capital. Of the total costs for legal services provided to funds distributed by Van Kampen American Capital Distributors, Inc., one half of such costs is allocated equally to each fund and the remaining one half of such costs is allocated to specific funds based on monthly time records. It is anticipated that the Legal Services Agreement will be terminated upon the approval of the proposed new advisory arrangements described herein. COVA Advisory intends to provide, or secure the provision of, such services for the Trust upon the implementation of the proposed new advisory arrangements.
The Trust distributes its own shares.
Cova Advisory, One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644 is an Illinois corporation which was incorporated on August 31, 1993 under the name Oakbrook Investment Advisory Corporation and which is registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. Cova Advisory is a wholly-owned subsidiary of Cova Life Management Company, a Delaware corporation, which in turn, is a wholly-owned subsidiary of Cova Corporation, a Missouri corporation, which in turn, is a wholly-owned subsidiary of General American Life Insurance Company ("General American"), a St. Louis-based mutual company. General American has more than $235 billion of life insurance in force and approximately $9.6 billion in assets.
The names and principal occupations of the officers and directors of Cova Advisory are as follows:
Proposed New Investment Advisory Agreement
As described elsewhere above, Cova Life is proposing new investment advisory arrangements for the Trust including the appointment of Cova Advisory as the new investment adviser to all Portfolios of the Trust. The proposed New Investment Advisory Agreement, attached as Exhibit B hereto, must be approved (i) by a majority of the Trustees of the Trust who are not parties to the New Investment Advisory Agreement or "interested persons" of any such party ("Disinterested Trustees") and (ii) as to each Portfolio, by holders of a majority of the outstanding voting securities of each such Portfolio of the Trust. The New Investment Advisory Agreement, if approved, will take effect on May 1, 1996 and will continue in effect until May 1, 1998 and thereafter for successive annual periods as long as such continuance is approved in accordance with the 1940 Act.
As indicated elsewhere herein, Cova Life believes that it is in its own best interests and the interests of its Variable Contract Owners for Cova Advisory to become the new investment adviser to the Trust and thus exercise control of the management and oversight of the Trust's investments. Cova Advisory currently intends to retain VKAC as sub-adviser to supervise and implement the investment activities of the Portfolios, including responsibility for overall portfolio management. See Proposal (3) for a further description of the terms of the proposed Sub-Advisory Agreement.
The terms of the New Investment Advisory Agreement are substantially the same as the terms of the Current Investment Advisory Agreement. THE TRUST IS OBLIGATED TO PAY THE SAME ADVISORY FEES UNDER THE NEW INVESTMENT ADVISORY AGREEMENT AS IT IS OBLIGATED TO PAY UNDER THE CURRENT INVESTMENT ADVISORY AGREEMENT. The advisory fees will be paid to Cova Advisory which, in turn, will pay a portion of these fees to VKAC pursuant to the terms of the proposed
Sub-Advisory Agreement. See Proposal (3) for additional information concerning the terms of the proposed Sub-Advisory Agreement.
Consideration of New Investment Advisory Arrangements by Proposed New Trustees
As stated above, in addition to shareholder approval, the 1940 Act requires that the proposed New Investment Advisory Agreement be approved by a majority of the Disinterested Trustees of the Trust. If Proposal 1 hereof, described elsewhere herein, is approved by the Shareholders at this Meeting, it is intended that the newly constituted Board of Trustees will hold a special meeting of the Board on February 9, 1996. At that meeting, the newly constituted Board of Trustees will consider, among other things, the proposed advisory and sub-advisory arrangements described herein, including the proposed New Investment Advisory Agreement and the proposed Sub-Advisory Agreement. In connection with its consideration of these proposed new advisory and sub-advisory arrangements, the newly constituted Board of Trustees will be provided in advance of the Board meeting with various materials for its consideration including copies of the proposed New Investment Advisory Agreement and Sub-Advisory Agreement; comparative data as to the performance and advisory fee rates of the Portfolios and other like mutual funds; a comparison with the expense ratios of other mutual funds; and copies of all proxy soliciting materials including copies of the financial statements of Cova Advisory and VKAC. If approved by the Shareholders at this Meeting and if approved by the newly constituted Board of Trustees at its special meeting scheduled for February 9, 1996, it is intended that the proposed new advisory and sub-advisory arrangements described herein will take effect on May 1, 1996.
Transactions on U.S. stock exchanges and other agency transactions involve the payment by the Trust of negotiated brokerage commissions. Such commissions vary among different brokers. Also, a particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign securities often involve the payment of fixed brokerage commissions, which are generally higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Trust usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Trust includes a disclosed, fixed commission or discount retained by the underwriter or dealer.
It is currently intended that VKAC, as sub-adviser, will place all orders for the purchase and sale of portfolio securities for the Trust and buy and sell securities for the Trust through a substantial number of brokers and dealers. In so doing, VKAC will use its best efforts to obtain for the Trust the best price and execution available. In seeking the best price and execution, VKAC, having in mind the Trust's best interests, will consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience, and financial stability of the broker-dealer involved, and the quality of service rendered by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive research, statistical, and quotation services from broker-dealers which execute portfolio transactions for the clients of such advisers. Consistent with this practice, VKAC may receive research, statistical, and quotation services from any broker-dealers with which it places the Trust's portfolio transactions. These services, which in some cases may also be purchased for cash, include such matters as general economic and security market reviews, industry and company reviews, evaluations of securities, and recommendations as to the purchase and sale of securities. Some of these services may be of value to VKAC and/or its affiliates in advising various of their clients (including the Trust), although not all of these services are necessarily useful and of value in managing the Trust. The management fees paid by the Trust are not reduced because VKAC and/or its affiliates may receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, VKAC may cause a Portfolio to pay a broker-dealer which provides brokerage and research services to VKAC an amount of disclosed commission for effecting a securities transaction for the Portfolio in excess of the commission which another broker-dealer would have charged for effecting that transaction. VKAC's authority to cause a Portfolio to pay any such greater commissions is also subject to such policies as Cova Advisory or the Trustees may adopt from time to time.
INVESTMENT DECISIONS. If purchases or sales of securities of the Trust and of one or more other investment companies or clients advised by VKAC are considered at or about the same time, transactions in such securities will be allocated among the several investment companies and clients, in a manner deemed equitable by VKAC, to each such investment company or client, taking into account their respective sizes and the amount of securities to be purchased or sold. Although it is possible that in some cases this procedure could have a detrimental effect on the price paid for the security by the Trust or the volume of the security purchased by the Trust, it is also possible that the ability to participate in volume transactions and to negotiate lower brokerage commissions will be beneficial to the Trust.
Shareholders of each Portfolio will vote separately to approve or disapprove the New Investment Advisory Agreement with respect to that Portfolio. As provided in the 1940 Act, approval of the New Investment Advisory Agreement as to a Portfolio requires the affirmative vote of a "majority of the outstanding voting securities" of the Portfolio, which for this purpose means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Portfolio and (2) 67% or more of the shares of the Portfolio present at the Meeting if more than 50% of the outstanding shares are present at the Meeting in person or by proxy. COVA LIFE RECOMMENDS THAT CONTRACT OWNERS VOTE TO APPROVE THE PROPOSED NEW INVESTMENT ADVISORY AGREEMENT. THE CURRENT BOARD EXPRESSES NO OPINION AND OFFERS NO RECOMMENDATION WITH RESPECT TO THE APPROVAL.
APPROVAL OF PROPOSED SUB-ADVISORY AGREEMENT BETWEEN COVA INVESTMENT ADVISORY CORPORATION AND VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
As described above, Cova Life has requested that this Special Meeting of Shareholders be called for the purpose, among other things, of approving new advisory arrangements. VKAC currently serves as the investment adviser to all Portfolios of the Trust as described more fully in Proposal 2. It is now proposed by Cova Life that Cova Advisory become the new investment adviser to all Portfolios of the Trust. Cova Advisory will retain VKAC as sub-adviser pursuant to the terms of the proposed Sub-Advisory Agreement, a copy of which is attached hereto as Exhibit C.
A full description of VKAC is set forth in Proposal 2 above.
All the Portfolios (except the Utility Portfolio) of the Trust will be managed by VKAC by a committee composed of persons who are officers or employees of VKAC. Daniel Smith is an Assistant Vice President of VKAC and is primarily responsible for the management of the Utility Portfolio. Mr. Smith has been employed by VKAC for the past five years.
The proposed Sub-Advisory Agreement between Cova Advisory and VKAC provides that VKAC will manage the investment and reinvestment of the assets of the Portfolios, subject to the supervision of Cova Advisory and the Board of Trustees. VKAC will, under the Sub-Advisory Agreement, evaluate economic, statistical and financial information and undertake such investment research as it shall deem advisable; purchase and sell securities and other investments for the Portfolios; and provide such reports and data as are requested by Cova Advisory and the Board of Trustees.
The Sub-Advisory Agreement may be terminated at any time without the payment of any penalty, by a majority of the Board of Trustees of the Trust, by a vote of the majority of the outstanding shares of beneficial interest of any Portfolio or by VKAC on sixty (60) days' written notice to Cova Advisory. The Agreement may be terminated by Cova Advisory only with the approval of a majority of the Board of Trustees of the Trust. The Agreement will terminate automatically in the event of its assignment or in the event of the termination of the New Investment Advisory Agreement.
For the services to be provided by VKAC, Cova Advisory will pay VKAC a monthly fee at the annual rate as set forth below as a percentage of the daily net assets of the Portfolios.
In the event that Cova Advisory elects to waive a portion of its advisory fee, VKAC has agreed to waive the same amount of its sub-advisory fee.
COVA LIFE RECOMMENDS THAT CONTRACT OWNERS VOTE TO APPROVE THE PROPOSED SUB-ADVISORY AGREEMENT. THE CURRENT BOARD EXPRESSES NO OPINION AND OFFERS NO RECOMMENDATION WITH RESPECT TO THE APPROVAL.
As of the Record Date, Cova Variable Annuity Account One, a separate account of Cova Financial Services Life Insurance Company, and Cova Variable Annuity Account Five, a separate account of Cova Financial Life Insurance Company, were known to the Board of Trustees and the management of the Trust to own of record 100% of the Shares. On that date, the officers and Trustees of the Trust together owned no Variable Contracts.
Ownership by Certain Beneficial Owners
Cova Life has advised the Trust that as of the Record Date, there are no persons who own Variable Contracts which will entitle them to instruct Cova Life with respect to more than 5% of the Shares.
The expense of preparing, printing and mailing the enclosed form of proxy and accompanying Notice and this Proxy Statement and solicitation of proxies will be borne by Cova Life.
REPORTS TO SHAREHOLDERS AND FINANCIAL STATEMENTS
The Trust's Annual Report to Shareholders, which includes audited financial statements of the Trust as of December 31, 1994 and the Trust's Semi-Annual Report to Shareholders which includes unaudited financial statements of the Trust as of June 30, 1995, may be obtained without charge by calling (800) 831-LIFE or writing to Cova Life at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.
Cova Life does not intend to present and does not have reason to believe that others will present any other items of business at the Meeting. However, if other matters are properly presented to the Meeting for a vote, the proxies will be voted upon such matters in accordance with the judgment of the persons acting under the proxies.
By Order of Cova Life
THIS INVESTMENT ADVISORY AGREEMENT dated as of March 9, 1993, by and between VAN KAMPEN MERRITT SERIES TRUST (the "Trust"), a Massachusetts business trust, and VAN KAMPEN MERRITT INVESTMENT ADVISORY CORP. (the "Advisor"), a Delaware corporation.
1. (a) Retention of Advisor by Fund. The Trust hereby employs the Advisor to act as the investment advisor for and to (i) manage the investment and reinvestment of the assets of the Quality Portfolio, High Yield Portfolio, Growth and Income Portfolio, Money Market Portfolio and Stock Index Portfolio, each being a sub-trust of the Trust (hereinafter referred to individually as the "Sub-Trust") in accordance with each such Sub-Trust's investment objective and policies and limitations, or (ii) in the event the Advisor shall retain a sub-advisor in accordance with the provisions of the sub-paragraph (b) hereunder, to supervise and implement the investment activities of any Sub-Trust for which such sub-advisor has been retained, including responsibility for overall management and administrative support including managing, providing for and compensating any sub-advisors; and to administer its affairs to the extent requested by, and subject to the review and supervision of, the Board of Trustees of the Trust for the period and upon the terms herein set forth. The investment of funds shall be subject to all applicable restrictions of applicable law and of the Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of Trustees of the Trust with respect to each Sub-Trust as may from time to time be in force and delivered or made available to the Advisor.
(b) Advisor's Acceptance of Employment. The Advisor accepts such employment and agrees during such period to render such services, to select, retain and compensate any sub-advisors, to supply investment research and portfolio management (including without limitation the selection of securities for each Sub-Trust to purchase, hold or sell and the selection of brokers through whom such Sub-Trust's portfolio transactions are executed, in accordance with the policies adopted by the Sub-Trust and its Board of Trustees), to administer the business affairs of each Sub-Trust, to furnish offices and necessary facilities and equipment to each Sub-Trust, to provide administrative services for each Sub-Trust, to render periodic reports to the
Board of Trustees of the Trust with respect to each Sub-Trust, and to permit any of its officers or employees, or those of any sub-advisor to serve without compensation as trustees or officers of the Sub-Trust if elected to such positions.
(c) Independent Contractor. The Advisor and any sub-advisors shall be deemed to be independent contractors under this Agreement and any sub-advisory agreements with the Advisor and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Trust or any Sub-Trust in any way or otherwise be deemed as agent of the Trust or any Sub-Trust.
(d) Non-Exclusive Agreement. The services of the Advisor to any Sub-Trust under this Agreement are not to be deemed exclusive, and the Advisor shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, each Sub-Trust will pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of such Sub-Trust as set forth in Schedules A through E attached hereto and incorporated by reference herein.
(b) Determination of Net Asset Value. The net asset value of each Sub-Trust shall be calculated as of the close of the New York Stock Exchange (the "Exchange") on each day the Exchange is open for trading or such other time or times as the trustees may determine in accordance with the provisions of applicable law and of the Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of Trustees of the Trust as from time to time in force. For the purpose of the foregoing computations, on each day when net asset value is not calculated, the net asset value of a share of beneficial interest of each Sub-Trust shall be deemed to be the net asset value of such share as of the close of business of the last day on which such calculation was made.
(c) Proration. For the month and year in which this Agreement becomes effective or terminates, there shall be an appropriate proration of the Advisor's fee on the basis of the number of days that the Agreement is in effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Advisor, the Sub-Trust shall assume and pay any expenses for services rendered by a custodian for the safekeeping of the such Sub-Trust's securities or other property, for keeping its books of account, for any other charges of the custodian and for calculating the net asset value of the Sub-Trust as provided above. Neither the Advisor or any sub-advisor shall be required to pay, and each Sub-Trust shall assume and pay, the charges and expenses of its operations, including compensation of the trustees of the Trust (other than those who are interested persons of the Advisor or any sub-advisor and other than those who are interested persons of the principal underwriter of the Sub-Trust but not of the Advisor or any sub-advisor, if the principal underwriter has agreed to pay such compensation), charges and expenses of independent accountants, of legal counsel and of any transfer or dividend disbursing agent, costs of acquiring and disposing of portfolio securities, interest (if any) on obligations incurred by such Sub-Trust, costs of share certificates, membership dues in the Investment Company Institute or any similar organization, costs of reports and notices to shareholders, costs of registering shares of such Sub-Trust under the federal securities laws, miscellaneous expenses and all taxes and fees to federal, state or other governmental agencies on account of the registration of securities issued by such Sub-Trust, filing of corporate documents or otherwise. Neither the Trust or any Sub-Trust shall pay or incur any obligation for any management or administrative expenses for which the Trust or such Sub-Trust intends to seek reimbursement from the Advisor without first obtaining the written approval of the Advisor. The Advisor shall arrange, if desired by the Trust, for officers or employees of the Advisor or any sub-advisor to serve, without compensation from the Trust, as trustees, officers or agents of the Trust if duly elected or appointed to such positions and subject to their individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it is understood that trustees, officers, shareholders and agents of the Trust or any Sub-Trust are or may be interested in the Advisor or any sub-advisor as trustees, directors, officers, shareholders, agents or otherwise and that the trustees, directors, officers, shareholders and agents of the Advisor may be interested in the Trust and any Sub-Trust as trustees, officers, shareholders, agents or otherwise.
5. Liability. The Advisor shall not be liable for any error in judgment or of law, or for any loss suffered by the Trust or any Sub-Trust in connection with the matters to which this Agreement or any sub-advisory agreement relates, except (1) a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Advisor in the performance of its obligations and duties, (2) by reason of its reckless disregard of its obligations and duties under this Agreement, or (3) from willful misfeasance, bad faith or gross negligence on the part of any sub-advisor in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under any sub-advisory agreement between it and the Advisor.
6. (a) Term. This Agreement shall become effective on the date hereof and shall remain in full force until December 31, 1994, unless sooner terminated as hereinafter provided. This Agreement shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved at least annually in the manner required by the Investment Company Act of 1940, as amended (the "Investment Company Act"). Any sub-advisory agreement between the Advisor and any sub-advisor shall remain in full force and effect from its date of effectiveness until the second anniversary of such date unless sooner terminated as hereinafter provided. Any such sub-advisory agreement shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved at least annually in the manner required by the Investment Company Act.
(b) Termination. This Agreement, and any sub-advisory agreement between the Advisor and any sub-advisor, shall be submitted to the shareholders of the Trust and each Sub-Trust for approval at the first shareholders meeting and shall automatically terminate if not approved by a majority of the shares of the Sub-Trust present and voting at such meeting. This Agreement, and any sub-advisory agreement between the Advisor and any sub-advisor, shall automatically terminate in the event of its assignment. This Agreement, and any sub-advisory agreement between the Advisor and any sub-advisor, may be terminated at any time without the payment of any penalty by a majority of the Board of Trustees of the Trust, by vote of the outstanding shares of beneficial interest of any Sub-Trust or, in the case of this Advisory Agreement only, by the Advisor or, in the case of a sub-advisory agreement between the Advisor and any sub-advisor, the sub-advisor, on sixty (60) days written notice to the other party. The Trust or any Sub-Trust may effect termination by action of the Board of Trustees or by vote of a majority of the outstanding shares of beneficial interest of such Sub-Trust, accompanied by appropriate notice. This Agreement, and any sub-advisory agreement between the Advisor and any sub-advisor, may be terminated at any time without the payment of any penalty and without advance notice by the Board of Trustees or by vote of a majority of the outstanding shares of beneficial interest of the Trust or any Sub-Trust in the event that it shall have been established by a court of competent jurisdiction that (1) the Advisor or any officer or director of the Advisor has taken any action which results in a breach of the covenants of the Advisor set forth herein or (2) that any sub-advisor or any trustee, director or officer of any sub-advisor has taken any action which results in a breach of the covenants of such sub-advisor set forth in any sub-advisory agreement between such sub-advisor and the Advisor. No sub-advisory agreement shall be cancelable by the Advisor without the approval of a majority of the Board of
(c) Payment upon Termination. Termination of this Agreement shall not affect the right of the Advisor to receive payment on any unpaid balance of the compensation described in Section 2 earned prior to such termination.
7. The Advisor shall not enter into any sub-advisory agreement with any sub-advisor respecting the management of assets of any Sub-Trust which is inconsistent with the terms hereof or with the Investment Company Act or the Investment Advisers Act of 1940.
8. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder shall not be thereby affected.
9. Notices. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice.
10. Disclaimer. The Advisor acknowledges and agrees that, as provided by Section 5.5 of the Declaration of Trust of the Fund, the shareholders, trustees, officers, employees and other agents of the Trust and any Sub-Trust shall not personally be bound by or liable hereunder, nor shall resort be had to their private property for the satisfaction of any obligation or claim hereunder.
IN WITNESS WHEREOF, the Fund and the Advisor have caused this Agreement to be executed on the day and year first above written.
VAN KAMPEN MERRITT INVESTMENT ADVISORY CORP.
President, Chief Operating Officer and Director
VAN KAMPEN MERRITT SERIES TRUST
President, Chief Operating Officer and Trustee
VAN KAMPEN MERRITT SERIES TRUST, QUALITY INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated March 9 1993, the Quality Income Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Quality Income Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, HIGH YIELD PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated March 9, 1993, the High Yield Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the High Yield Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, GROWTH AND INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated March 9, 1993, the Growth and Income Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Growth and Income Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, MONEY MARKET PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated March 9, 1993, the Money Market Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Money Market Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, STOCK INDEX PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated March 9, 1993, the Stock Index Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to .50 of 1% of the average daily net assets of the Stock Index Portfolio.
THIS AMENDMENT dated as of January 14, 1994, to the Investment Advisory Agreement dated as of March 9, 1993 (the "Agreement") by and between VAN KAMPEN MERRITT SERIES TRUST (the "Trust"), a Massachusetts business trust, and VAN KAMPEN MERRITT INVESTMENT ADVISORY CORP., a Delaware corporation (the "Advisor").
WHEREAS, the Trust has established the World Equity Portfolio and the Utility Portfolio, each being a separate sub-trust, and desires to retain the Advisor to serve as investment adviser of each sub-trust: and
WHEREAS, the Advisor desires to serve as investment adviser for each of the World Equity Portfolio and the Utility Portfolio; THEREFORE
1. Section 1 (a) of the Agreement is hereby amended so as to include the World Equity Portfolio and the Utility Portfolio in the definition of a
2. Section 2(a) of the Agreement is hereby amended so as to include Schedule F, attached hereto, relating to the investment management fee payable by the World Equity Portfolio to the Advisor and Schedule G, attached hereto, relating to the investment management fee payable by the Utility Portfolio to the Advisor.
IN WITNESS WHEREOF, the Trust and the Advisor have caused this Amendment to the Agreement to be executed on the day and year first above written.
VAN KAMPEN MERRITT SERIES TRUST WORLD EQUITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated March 9, 1993, the World Equity Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the World Equity Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST UTILITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated March 9, 1993, the Utility Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Utility Portfolio as follows:
THIS INVESTMENT ADVISORY AGREEMENT dated as of ____________, 1996, by and between VAN KAMPEN MERRITT SERIES TRUST (the "Trust"), a Massachusetts business trust, and COVA INVESTMENT ADVISORY CORPORATION (the "Advisor"), an Illinois corporation.
1. (a) Retention of Advisor by Trust. The Trust hereby employs the Advisor to act as the investment advisor for and to (i) manage the investment and reinvestment of the assets of the Quality Income Portfolio, High Yield Portfolio, Growth and Income Portfolio, Money Market Portfolio, Stock Index Portfolio, World Equity Portfolio and the Utility Portfolio, each being a sub-trust of the Trust (hereinafter referred to individually as the "Sub-Trust"), in accordance with each such Sub-Trust's investment objective and policies and limitations, or (ii) in the event the Advisor shall retain a sub-advisor in accordance with the provisions of sub-paragraph (b) hereunder, to supervise and implement the investment activities of any Sub-Trust for which such sub-advisor has been retained, including responsibility for overall management and administrative support including managing, providing for and compensating any sub-advisors; and to administer its affairs to the extent requested by, and subject to the review and supervision of, the Board of Trustees of the Trust for the period and upon the terms herein set forth. The Advisor shall select the entities with or through which the purchase, sale or loan of securities is to be effected; provided that the Advisor will place orders pursuant to its investment determinations either directly with the issuer or with a broker or dealer, and if with a broker or dealer, (a) will attempt to obtain the best net price and most favorable execution of its orders, and (b) may nevertheless in its discretion purchase and sell portfolio securities from and to brokers and dealers who provide the Advisor with research, analysis, advice and similar services and pay such brokers and dealers in return a higher commission or spread than may be charged by other brokers or dealers.
The Trust hereby authorizes any entity or person associated with the Advisor or any sub-advisor retained by Advisor pursuant to this Agreement, which is a member of a national securities exchange, to effect any transaction on the exchange for the account of the Trust which is permitted by Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and the Trust hereby consents to the retention of compensation for such transactions in accordance with Rule 11a2-2(T)(a)(iv).
The investment of funds shall be subject to all applicable restrictions of applicable law and of the Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of Trustees of the Trust with respect to each Sub-Trust as may from time to time be in force and delivered or made available to the Advisor.
(b) Advisor's Acceptance of Employment. The Advisor accepts such employment and agrees during such period to render such services, to select, retain and compensate any sub-advisors, to supply investment research and portfolio management (including without limitation the selection of securities for each Sub-Trust to purchase, hold or sell and the selection of brokers through whom such Sub-Trust's portfolio transactions are executed, in accordance with the policies adopted by the Sub-Trust and its Board of Trustees), to administer the business affairs of each Sub-Trust, to furnish offices and necessary facilities and equipment to each Sub-Trust, to provide administrative services for each Sub-Trust, to render periodic reports to the Board of Trustees of the Trust with respect to each Sub-Trust, and to permit any of its officers or employees, or those of any sub-advisor to serve without compensation as trustees or officers of the Sub-Trust if elected to such positions. (c) Independent Contractor. The Advisor and any sub-advisors shall be deemed to be independent contractors under this Agreement and any sub-advisory agreements with the Advisor and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Trust or any Sub-Trust in any way or otherwise be deemed an agent of the Trust or any Sub-Trust.
(d) Non-Exclusive Agreement. The services of the Advisor to any Sub-Trust under this Agreement are not to be deemed exclusive, and the Advisor shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, each Sub-Trust will pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of such Sub-Trust as set forth in Schedules A through G attached hereto and incorporated by reference herein.
(b) Determination of Net Asset Value. The net asset value of each Sub-Trust shall be calculated as of the close of the New York Stock Exchange (the "Exchange") on each day the Exchange is open for trading or such other time or times as the trustees may determine in accordance with the provisions of applicable law and of the Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of Trustees of the Trust as from time to time in force. For the purpose of the foregoing computations, on each day when net asset value is not calculated, the net asset value of a share of beneficial interest of each Sub-Trust shall be deemed to be the net asset value of such share as of the close of business of the last day on which such calculation was made.
(c) Proration. For the month and year in which this Agreement becomes effective or terminates, there shall be an appropriate proration of the Advisor's fee on the basis of the number of days that the Agreement is in effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Advisor, the Sub-Trust shall assume and pay any expenses for services rendered by a custodian for the safekeeping of such Sub-Trust's securities or other property, for keeping its books of account, for any other charges of the custodian and for calculating the net asset value of the Sub-Trust as provided above. Neither the Advisor nor any sub-advisor shall be required to pay, and each Sub-Trust shall assume and pay, the charges and expenses of its operations, including compensation of the trustees of the Trust (other than those who are interested persons of the Advisor or any sub-advisor and other than those who are interested persons of the principal underwriter of the Sub-Trust but not of the Advisor or any sub-advisor, if the principal underwriter has agreed to pay such compensation), charges and expenses of independent accountants, of legal counsel and of any transfer or dividend disbursing agent, costs of acquiring and disposing of portfolio securities, interest (if any) on obligations incurred by such Sub-Trust, costs of share certificates, membership dues in the Investment Company Institute or any similar organization, costs of reports and notices to shareholders, costs of registering shares of such Sub-Trust under the federal securities laws, miscellaneous expenses and all taxes and fees to federal, state or other governmental agencies on account of the registration of securities issued by such Sub-Trust, filing of corporate documents or otherwise. Neither the Trust nor any Sub-Trust shall pay or incur any obligation for any management or administrative expenses for which the Trust or such Sub-Trust intends to seek reimbursement from the Advisor without first obtaining the written approval of the Advisor. The Advisor shall arrange, if desired by the Trust, for officers or employees of the Advisor or any sub-advisor to serve, without compensation from the Trust, as trustees, officers or agents of the Trust if duly elected or appointed to such positions and subject to their individual consent to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it is understood that trustees, officers, shareholders and agents of the Trust or any Sub-Trust are or may be interested in the Advisor or any sub-advisor as trustees, directors, officers, shareholders, agents or otherwise and that the trustees, directors, officers, shareholders and agents of the Advisor may be interested in the Trust and any Sub-Trust as trustees, officers, shareholders, agents or otherwise.
5. Liability. The Advisor shall not be liable for any error in judgment or of law, or for any loss suffered by the Trust or any Sub-Trust in connection with the matters to which this Agreement or any sub-advisory agreement relates, except (1) a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Advisor in the performance of its obligations and duties, or (2) by reason of its reckless disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof and shall remain in full force until _________, 1998 unless sooner terminated as hereinafter provided. This Agreement shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved at least annually in the manner required by the Investment Company Act of 1940, as amended (the "Investment Company Act"). Any sub-advisory agreement between the Advisor and any sub-advisor shall remain in full force and effect from its date of effectiveness until the second anniversary of such date unless sooner terminated as hereinafter provided. Any such sub-advisory agreement shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved at least annually in the manner required by the Investment Company Act.
(b) Termination. This Agreement, and any sub-advisory agreement between the Advisor and any sub-advisor, shall be submitted to the shareholders of the Trust and each Sub-Trust for approval at a shareholders' meeting and shall automatically terminate if not approved by a majority of the shares of the Sub-Trust present and voting at such meeting. This Agreement, and any sub-advisory agreement between the Advisor and any sub-advisor, shall automatically terminate in the event of its assignment. This Agreement, and any sub-advisory agreement between the Advisor and any sub-advisor, may be terminated at any time without the payment of any penalty by a majority of the Board of Trustees of the Trust, by vote of the outstanding shares of beneficial interest of any Sub-Trust or, in the case of this Advisory Agreement only, by the Advisor or, in the case of a sub-advisory agreement between the Advisor and any sub-advisor, the sub-advisor, on sixty (60) days written notice to the other party. The Trust or any Sub-Trust may effect termination by action of the Board of Trustees or by vote of a majority of the outstanding shares of beneficial interest of such Sub-Trust, accompanied by appropriate notice. No sub-advisory agreement shall be cancelable by the Advisor without the approval of a majority of the Board of Trustees of the Trust. Any sub-advisory agreement will terminate automatically in the event of the termination of this Agreement.
(c) Payment upon Termination. Termination of this Agreement shall not affect the right of the Advisor to receive payment on any unpaid balance of the compensation described in Section 2 earned prior to such termination.
7. Consistency with Sub-Advisory Agreements. The Advisor shall not enter into any sub-advisory agreement with any sub-advisor respecting the management of assets of any Sub-Trust which is inconsistent with the terms hereof or with the Investment Company Act or the Investment Advisers Act of 1940.
8. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder shall not be thereby affected.
9. Notices. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice.
10. Disclaimer. The Advisor acknowledges and agrees that, as provided by Section 5.5 of the Declaration of Trust of the Trust, the shareholders, trustees, officers, employees and other agents of the Trust and any Sub-Trust shall not personally be bound by or liable hereunder, nor shall resort be had to their private property for the satisfaction of any obligation or claim hereunder.
IN WITNESS WHEREOF, the Trust and the Advisor have caused this Agreement to be executed on the day and year first above written.
VAN KAMPEN MERRITT SERIES TRUST
VAN KAMPEN MERRITT SERIES TRUST, QUALITY INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated __________, 1996, the Quality Income Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Quality Income Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, HIGH YIELD PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated ___________, 1996, the High Yield Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the High Yield Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, GROWTH AND INCOME PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated ___________, 1996, the Growth and Income Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Growth and Income Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, MONEY MARKET PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated __________, 1996, the Money Market Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Money Market Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, STOCK INDEX PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated ___________, 1996, the Stock Index Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to .500 of 1% of the average daily net assets of the Stock Index Portfolio.
VAN KAMPEN MERRITT SERIES TRUST, WORLD EQUITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated _____________, 1996, the World Equity Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the World Equity Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST, UTILITY PORTFOLIO
In accordance with Section 2(a) of the Investment Advisory Agreement dated ____________, 1996, the Utility Portfolio shall pay to the Advisor at the end of each calendar month an investment management fee equal to a percentage of the average daily net assets of the Utility Portfolio as follows:
VAN KAMPEN MERRITT SERIES TRUST
This Agreement is made between COVA INVESTMENT ADVISORY CORPORATION, an Illinois corporation, having its principal place of business in Oakbrook Terrace, Illinois (hereinafter referred to as the "Advisor"), VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware corporation, having its principal place of business in Oakbrook Terrace, Illinois (hereinafter referred to as the "Sub-Advisor") and VAN KAMPEN MERRITT SERIES TRUST, a Massachusetts business trust (hereinafter referred to as the "Trust").
WHEREAS, the Trust, an open-end diversified management investment company, as that term is defined in the Investment Company Act of 1940, as amended (the "Act"), that is registered as such with the Securities and Exchange Commission has appointed Advisor as investment adviser for and to the Quality Income Portfolio, the High Yield Portfolio, the Growth and Income Portfolio, the Money Market Portfolio, the Stock Index Portfolio, the World Equity Portfolio and the Utility Portfolio, each being a sub-trust of the Trust (referred to individually as the "Sub-Trust"), pursuant to the terms of an investment advisory agreement between the Trust and Advisor ("Investment Advisory
WHEREAS, Sub-Advisor is engaged in the business of rendering investment
WHEREAS, Advisor desires to retain Sub-Advisor to provide certain investment management services for the Sub-Trusts as more fully described below;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Retention of Sub-Advisor. Advisor hereby retains Sub-Advisor to assist Advisor in its capacity as investment adviser for the Sub-Trusts. Subject to the oversight and review of Advisor and the Board of Trustees of the Trust, Sub-Advisor shall manage the investment and reinvestment of the assets of the Sub-Trusts. Sub-Advisor will determine in its discretion, subject to the oversight and review of Advisor, the investments to be purchased or sold, will provide Advisor with records concerning its activities which Advisor or the Trust is required to maintain, and will render regular reports to Advisor and to officers and Trustees of the Trust concerning its discharge of the foregoing responsibilities.
Sub-Advisor, in its supervision of the investments of the Sub-Trusts, will be guided by each Sub-Trust's investment objectives and policies and the provisions and restrictions contained in the Declaration of Trust and By-Laws of the Trust and as set forth in the Registration Statement and exhibits as may be on file with the Securities and Exchange Commission, all as communicated by Advisor to Sub-Advisor.
Sub-Advisor shall be deemed to be an independent contractor under this Agreement and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Trust or any Sub-Trust in any way or otherwise be deemed an agent of the Trust or any Sub-Trust.
2. Fee. Advisor shall pay to Sub-Advisor, for all services rendered to the Sub-Trusts by Sub-Advisor hereunder, the sub-advisory fees set forth in Exhibit A attached hereto. During the term of this Agreement, Sub-Advisor will bear all expenses incurred by it in the performance of its duties hereunder.
3. Term. The term of this Agreement shall begin on the date of its execution and shall remain in effect for two years from that date and from year to year thereafter, subject to the provisions for termination and all of the other terms and conditions hereof, if such continuation is specifically approved at least annually in the manner required by the Act. This Agreement shall be submitted to the shareholders of the Trust and each Sub-Trust for approval at a shareholders' meeting and shall automatically terminate if not approved by a majority of the shares of the Sub-Trust present and voting at such meeting.
4. Termination. This Agreement may be terminated at any time without the payment of any penalty, by a majority of the Board of Trustees of the Trust, by a vote of the majority of the outstanding shares of beneficial interest of any Sub-Trust or by the Sub-Advisor on sixty (60) days written notice to the Advisor.
This Agreement will terminate automatically in the event of the termination of the Investment Advisory Agreement.
Notwithstanding any provision of this Agreement, this Agreement may not be canceled by the Advisor without the approval of a majority of the Board of Trustees of the Trust.
This Agreement shall automatically terminate in the event of its assignment. The Sub-Advisor may employ or contract with any other person, persons, corporation, or corporations at its own cost and expense as it shall determine in order to assist it in carrying out its obligations and duties under this Agreement.
5. Sub-Advisor's Representations - Section 817(h). Sub-Advisor represents and warrants that the Sub-Trusts will at all times be invested in such a manner as to ensure compliance with Section 817(h) of the Internal Revenue Code of 1986, as amended and Treasury Regulations Section 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. Sub-Advisor will be relieved of this obligation and shall be held harmless when direction from the Advisor or Trustees causes non-compliance with Section 817(h) and/or Regulation Section 1.817-5. Sub-Advisor agrees to provide quarterly reports to Advisor, executed by a duly authorized officer of Sub-Advisor, within seven (7) days of the close of each calendar quarter certifying as to compliance with said Section or Regulations. In addition to the quarterly reports, Advisor may request and Sub-Advisor agrees to provide Section 817 diversification compliance reports at more frequent intervals, as reasonably requested by Advisor.
6. Liability. The Sub-Advisor shall not be liable for any error in judgment or of law, or for any loss suffered by the Trust or any Sub-Trust in connection with the matters to which this Agreement relates, except (1) a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Sub-Advisor in the performance of its obligations and duties or (2) by reason of its reckless disregard of its obligations and duties under this Agreement.
7. Brokerage. The Sub-Advisor shall place all orders for the purchase and sale of portfolio securities for the accounts of the Sub-Trusts with broker-dealers selected by the Sub-Advisor. In executing portfolio transactions and selecting broker-dealers, the Sub-Advisor will use its best efforts to seek best execution on behalf of the Sub-Trusts. In assessing the best execution available for any transaction, the Sub-Advisor shall consider all 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-dealer, and the reasonableness of the commission, if any (all for the specific transaction and on a continuing basis). In evaluating the best execution available, and in selecting the broker-dealer to execute a particular transaction, the Sub-Advisor may also consider the brokerage and research services (as those terms are used in Section 28(e) of the Securities Exchange Act of 1934) provided to the Sub-Trusts and/or other accounts over which the Sub-Advisor or an affiliate of the Sub-Advisor (to the extent permitted by law) exercises investment discretion. The Sub-Advisor is authorized to cause the Sub-Trusts to pay a broker-dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the Sub-Trusts which is in excess of the amount of commission another broker-dealer would have charged for effecting that transaction if, but only if, the Sub-Advisor 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 in terms of that particular transaction or in terms of all of the accounts over which investment discretion is so exercised.
8. Amendment. This Agreement may be amended at any time by agreement of the parties, provided that the amendment shall be approved in the manner required by the Act.
9. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Illinois.
10. Registration as Investment Adviser. The Advisor and Sub-Advisor each hereby acknowledges that it is registered as an investment adviser under the Investment Advisers Act of 1940, it will use its reasonable best efforts to maintain such registration, and it will promptly notify the other if it ceases to be so registered, if its registration is suspended for any reason, or if it is notified by any regulatory organization or court of competent jurisdiction that it should show cause why its registration should not be suspended or terminated.
Witness the due execution hereof this ____ day of _________, 1996.
VAN KAMPEN MERRITT SERIES TRUST
For all services rendered by Sub-Advisor hereunder, Advisor shall pay to Sub-Advisor and Sub-Advisor agrees to accept as full compensation for all services rendered hereunder, fees at the end of each calendar month equal to a percentage of the average daily net assets of the Sub-Trusts as follows:
VAN KAMPEN MERRITT SERIES TRUST
KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder(s) of the Money Market Portfolio of Van Kampen Merritt Series Trust ("Trust") hereby appoints ______________________________________________, or any one of them true and lawful attorneys, with power of substitution of each, to vote all shares which the undersigned is entitled to vote, at the Special Meeting of Shareholders of the Trust to be held on February 9, 1996 at the Offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois at 9:00 a.m., local time, and at any adjournment thereof ("Meeting"), as follows:
1. To elect each of the following persons as a Trustee of the Trust to serve until their respective successors are duly elected and qualified: Stephen M. Alderman, William C. Mair, Theodore A. Myers, Deborah A. Vohasek and R. Kevin Williams as Trustees of the Trust.
To withhold authority to vote for any individual nominee, please write his or her name below and the number of shares withholding authority to vote for such nominee:
2. To approve an Investment Advisory Agreement between the Trust and Cova Investment Advisory Corporation.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To approve a Sub-Advisory Agreement between Cova Investment Advisory Corporation and Van Kampen American Capital Investment Advisory Corp.
FOR ( ) AGAINST ( ) ABSTAIN ( )
Discretionary authority is hereby conferred as to all other matters as may properly come before the Meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
Cova Financial Services Life Insurance Company
Name and Title of Authorized Officer
Owning Shares in this Portfolio:
Cova Variable Annuity Account One
TOTAL SHARES OF THIS PORTFOLIO OWNED AND BEING VOTED BY THE INSURANCE COMPANY:
VAN KAMPEN MERRITT SERIES TRUST
KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder(s) of the Quality Income Portfolio of Van Kampen Merritt Series Trust ("Trust") hereby appoints ______________________________________________, or any one of them true and lawful attorneys, with power of substitution of each, to vote all shares which the undersigned is entitled to vote, at the Special Meeting of Shareholders of the Trust to be held on February 9, 1996 at the Offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois at 9:00 a.m., local time, and at any adjournment thereof ("Meeting"), as follows:
1. To elect each of the following persons as a Trustee of the Trust to serve until their respective successors are duly elected and qualified: Stephen M. Alderman, William C. Mair, Theodore A. Myers, Deborah A. Vohasek and R. Kevin Williams as Trustees of the Trust.
To withhold authority to vote for any individual nominee, please write his or her name below and the number of shares withholding authority to vote for such nominee:
2. To approve an Investment Advisory Agreement between the Trust and Cova Investment Advisory Corporation.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To approve a Sub-Advisory Agreement between Cova Investment Advisory Corporation and Van Kampen American Capital Investment Advisory Corp.
FOR ( ) AGAINST ( ) ABSTAIN ( )
Discretionary authority is hereby conferred as to all other matters as may properly come before the Meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
Cova Financial Services Life Insurance Company
Name and Title of Authorized Officer
Owning Shares in this Portfolio:
Cova Variable Annuity Account One
TOTAL SHARES OF THIS PORTFOLIO OWNED AND BEING VOTED BY THE INSURANCE COMPANY:
VAN KAMPEN MERRITT SERIES TRUST
KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder(s) of the High Yield Portfolio of Van Kampen Merritt Series Trust ("Trust") hereby appoints ______________________________________________, or any one of them true and lawful attorneys, with power of substitution of each, to vote all shares which the undersigned is entitled to vote, at the Special Meeting of Shareholders of the Trust to be held on February 9, 1996 at the Offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois at 9:00 a.m., local time, and at any adjournment thereof ("Meeting"), as follows:
1. To elect each of the following persons as a Trustee of the Trust to serve until their respective successors are duly elected and qualified: Stephen M. Alderman, William C. Mair, Theodore A. Myers, Deborah A. Vohasek and R. Kevin Williams as Trustees of the Trust.
To withhold authority to vote for any individual nominee, please write his or her name below and the number of shares withholding authority to vote for such nominee:
2. To approve an Investment Advisory Agreement between the Trust and Cova Investment Advisory Corporation.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To approve a Sub-Advisory Agreement between Cova Investment Advisory Corporation and Van Kampen American Capital Investment Advisory Corp.
FOR ( ) AGAINST ( ) ABSTAIN ( )
Discretionary authority is hereby conferred as to all other matters as may properly come before the Meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
Cova Financial Services Life Insurance Company
Name and Title of Authorized Officer
Owning Shares in this Portfolio:
Cova Variable Annuity Account One
TOTAL SHARES OF THIS PORTFOLIO OWNED AND BEING VOTED BY THE INSURANCE COMPANY:
VAN KAMPEN MERRITT SERIES TRUST
KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder(s) of the Growth and Income Portfolio of Van Kampen Merritt Series Trust ("Trust") hereby appoints ______________________________________________, or any one of them true and lawful attorneys, with power of substitution of each, to vote all shares which the undersigned is entitled to vote, at the Special Meeting of Shareholders of the Trust to be held on February 9, 1996 at the Offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois at 9:00 a.m., local time, and at any adjournment thereof ("Meeting"), as follows:
1. To elect each of the following persons as a Trustee of the Trust to serve until their respective successors are duly elected and qualified: Stephen M. Alderman, William C. Mair, Theodore A. Myers, Deborah A. Vohasek and R. Kevin Williams as Trustees of the Trust.
To withhold authority to vote for any individual nominee, please write his or her name below and the number of shares withholding authority to vote for such nominee:
2. To approve an Investment Advisory Agreement between the Trust and Cova Investment Advisory Corporation.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To approve a Sub-Advisory Agreement between Cova Investment Advisory Corporation and Van Kampen American Capital Investment Advisory Corp.
FOR ( ) AGAINST ( ) ABSTAIN ( )
Discretionary authority is hereby conferred as to all other matters as may properly come before the Meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
Cova Financial Services Life Insurance Company
Name and Title of Authorized Officer
Owning Shares in this Portfolio:
Cova Variable Annuity Account One
TOTAL SHARES OF THIS PORTFOLIO OWNED AND BEING VOTED BY THE INSURANCE COMPANY:
VAN KAMPEN MERRITT SERIES TRUST
KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder(s) of the Stock Index Portfolio of Van Kampen Merritt Series Trust ("Trust") hereby appoints ______________________________________________, or any one of them true and lawful attorneys, with power of substitution of each, to vote all shares which the undersigned is entitled to vote, at the Special Meeting of Shareholders of the Trust to be held on February 9, 1996 at the Offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois at 9:00 a.m., local time, and at any adjournment thereof ("Meeting"), as follows:
1. To elect each of the following persons as a Trustee of the Trust to serve until their respective successors are duly elected and qualified: Stephen M. Alderman, William C. Mair, Theodore A. Myers, Deborah A. Vohasek and R. Kevin Williams as Trustees of the Trust.
To withhold authority to vote for any individual nominee, please write his or her name below and the number of shares withholding authority to vote for such nominee:
2. To approve an Investment Advisory Agreement between the Trust and Cova Investment Advisory Corporation.
FOR ( ) AGAINST ( ) ABSTAIN ( )
3. To approve a Sub-Advisory Agreement between Cova Investment Advisory Corporation and Van Kampen American Capital Investment Advisory Corp.
FOR ( ) AGAINST ( ) ABSTAIN ( )
Discretionary authority is hereby conferred as to all other matters as may properly come before the Meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
Cova Financial Services Life Insurance Company
Name and Title of Authorized Officer
Owning Shares in this Portfolio:
Cova Variable Annuity Account One
TOTAL SHARES OF THIS PORTFOLIO OWNED AND BEING VOTED BY THE INSURANCE COMPANY:
INSTRUCTIONS TO COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Services Life Insurance Company (the "Company") to vote all shares of the Money Market Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Services Life Insurance Company (the "Company") to vote all shares of the Quality Income Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Services Life Insurance Company (the "Company") to vote all shares of the High Yield Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Services Life Insurance Company (the "Company") to vote all shares of the Growth and Income Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED. IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Services Life Insurance Company (the "Company") to vote all shares of the Stock Index Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY.
COVA FINANCIAL SERVICES LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Life Insurance Company (the "Company") to vote all shares of the Money Market Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY.
COVA FINANCIAL LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Life Insurance Company (the "Company") to vote all shares of the Quality Income Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY.
COVA FINANCIAL LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Life Insurance Company (the "Company") to vote all shares of the Growth and Income Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY.
COVA FINANCIAL LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED. IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
INSTRUCTIONS TO COVA FINANCIAL LIFE INSURANCE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS OF VAN KAMPEN MERRITT SERIES TRUST TO BE HELD ON FEBRUARY 9, 1996 INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY
The undersigned hereby instructs Cova Financial Life Insurance Company (the "Company") to vote all shares of the Stock Index Portfolio of VAN KAMPEN MERRITT SERIES TRUST (the "Trust") represented by shares held by the undersigned at a special meeting of shareholders of the Trust to be held at 9:00 a.m., local time, on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois and at any adjournment thereof, as follows:
IMPORTANT: Please sign on the reverse side.
INSTRUCTIONS SOLICITED ON BEHALF OF COVA FINANCIAL LIFE INSURANCE COMPANY.
COVA FINANCIAL LIFE INSURANCE COMPANY WILL VOTE SHARES HELD ON BEHALF OF THE CONTRACT OWNER AS INDICATED ON THE REVERSE SIDE OR FOR ANY PROPOSAL FOR WHICH NO CHOICE IS INDICATED.
RECEIPT OF THE NOTICE OF THE SPECIAL MEETING AND THE ACCOMPANYING PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
IF THIS INSTRUCTION FORM IS SIGNED AND RETURNED AND NO SPECIFICATION IS MADE, THE COMPANY SHALL VOTE FOR ALL PROPOSALS. IF THIS INSTRUCTION CARD IS NOT RETURNED OR IS RETURNED UNSIGNED, THE COMPANY SHALL VOTE YOUR SHARES IN THE SAME PROPORTION AS IT VOTES THE SHARES FOR WHICH IT HAS RECEIVED INSTRUCTIONS.
Signature (of joint owner, if any)
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS CARD. When signing as attorney, executor, administrator, trustee, guardian, or as custodian for a minor, please sign your name and give your full title as such. If signing on behalf of a corporation, please sign full corporate name and your name and indicate your title. If you are a partner signing for a partnership, please sign the partnership name and your name. Joint owners should each sign this proxy. Please sign, date and return.
Cova Financial Services Life Insurance Company
Re: Special Meeting of Shareholders Van Kampen Merritt Series Trust
Van Kampen Merritt Series Trust is holding a special meeting of shareholders of the Trust on February 9, 1996, at the offices of the Trust, One Parkview Plaza, Oakbrook Terrace, Illinois. As the owner of a Cova Variable Annuity contract, you may instruct Cova to cast the number of votes to which you are entitled as shown on the enclosed Voting Instructions Card(s). The Voting Instructions Card(s) has your name as it appears on your contract and the total number of shares you owned in each portfolio through Cova Variable Annuity Account One or Cova Variable Annuity Account Five, in California, as of December 26, 1995.
The items to be voted upon are listed on the Voting Instructions Card(s). You may vote for or against, or abstain from voting on each separate item. You also need to sign your name exactly as it appears on the Voting Instructions Card(s) and return it (them) to Cova using the enclosed pre-paid envelope.
The Voting Instructions, if completed in proper form and not revoked, will be voted by Cova as specified by you. If no choice is specified, each vote entitled to be directed by you will be cast FOR election of the nominees referred to in Item 1 of the Voting Instructions Card(s) and FOR each of the proposals in the other items. Votes for which instructions have not been received must be voted by Cova in the same proportion as votes for which instructions have been received. On all other matters that may properly come before the meeting, the proxies will be voted at the discretion of those exercising the proxies. The voting instructions may be revoked at any time before the votes evidenced thereby are voted as indicated in the enclosed Proxy Statement.
Cova will not accept any Voting Instructions received after the close of business on February 1, 1996. As your vote is important, we encourage you to take this opportunity to exercise your voting rights.
One Tower Lane * Suite 3000 * Oakbrook Terrace, IL 60181-4644 | DEFS14A | DEFS14A | 1996-01-16T00:00:00 | 1996-01-16T13:25:22 |
0000950130-96-000141 | 0000950130-96-000141_0003.txt | KNOW ALL MEN BY THESE PRESENTS that each of the undesigned does hereby nominate, constitute and appoint Lynn Chipperfield and Richard B. Loynd or either of them, as his agent and attorney-in-fact, in his name to execute on behalf of the undersigned a Registration Statement or Form S-3 to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in connection with the registration under said Act of shares of Common Stock of INTERCO INCORPORATED (the "Company") to be sold by the Company, the authority herein given to include execution of amendments to any part of such Registration Statement and generally to do and perform all things necessary to be done in the premises as fully and effectively in all respects as the undersigned could do if personally present.
IN WITNESS WHEREOF this Power of Attorney has been executed in counterparts by individuals listed below as of the 15th day of January, 1996.
/s/ Steven W. Alstadt /s/ Bruce A. Karsh Steven W. Alstadt Bruce A. Karsh
/s/ Leon D. Black /s/ John H. Kissick Leon D. Black John H. Kissick
/s/ Michael S. Gross /s/ Donald E. Lasater Michael S. Gross Donald E. Lasater
/s/ John J. Hannan /s/ Lee M. Liberman John J. Hannan Lee M. Liberman
/s/ Joshua J. Harris /s/ Richard B. Loynd Joshua J. Harris Richard B. Loynd | S-3 | EX-24 | 1996-01-16T00:00:00 | 1996-01-16T17:17:18 |
0000950130-96-000128 | 0000950130-96-000128_0010.txt | <DESCRIPTION>PLAN OF DISTRIBUTION - CLASS B SHARES
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
The Distribution and Service Plan (the Plan) set forth below which is designed to conform to the requirements of Rule 12b-1 under the Investment Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (NASD) has been adopted by Prudential Distressed Securities Fund, Inc. (the Fund) and by Prudential Securities Incorporated (Prudential Securities), the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the Fund will employ the Distributor to distribute Class B shares issued by the Fund (Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as compensation for its services, a distribution and service fee with respect to Class B shares.
A majority of the Board of Directors of the Fund including a majority who are not "interested persons" of the Fund (as defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the Rule 12b-1 Directors), have determined by votes cast in person at a meeting called for the purpose of voting this Plan that there is a reasonable likelihood that adoption of this Plan will benefit the Fund and its shareholders. Expenditures under this Plan by the Fund for Distribution Activities (defined below) are primarily intended to result in the sale of Class B shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or other qualified broker-dealers and their account executives to provide distribution assistance to their customers who are investors in the Fund, to defray the costs and expenses associated with the preparation, printing and distribution of prospectuses and sales literature and other promotional and distribution activities and to provide for the servicing and maintenance of shareholder accounts.
The material aspects of the Plan are as follows:
The Fund shall engage the Distributor to distribute Class B shares of the Fund and to service shareholder accounts using all of the facilities of the Prudential Securities distribution network including sales personnel and branch office and central support systems, and also using such other qualified broker- dealers and financial institutions as the Distributor may select, including Pruco Securities Corporation (Prusec). Services provided and activities undertaken to distribute Class B shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing personal service and/or maintaining shareholder accounts a service fee of .25 of 1% per annum of the average daily net assets of the Class B shares (service fee). The Fund shall calculate and accrue daily amounts payable by the Class B shares of the Fund hereunder and shall pay such amounts monthly or at such other intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a distribution fee of .75 of 1% per annum of the average daily net assets of the Class B shares of the Fund for the performance of Distribution Activities. The Fund shall calculate and accrue daily amounts payable by the Class B shares of the Fund hereunder and shall pay such amounts monthly or at such other intervals as the Board of Directors may determine. Amounts payable under the Plan shall be subject to the limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class B shares of the Fund will not be used to pay the distribution expenses incurred with respect to any other class of shares of the Fund except that distribution expenses attributable to the Fund as a whole will be allocated to the Class B shares according to the ratio of the sale of Class B shares to the total sales of the Fund's shares over the Fund's fiscal year or such other allocation method approved by the Board of Directors. The allocation of distribution expenses among classes will be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with performance of Distribution Activities including central office and branch
(c) amounts paid to Prusec for performing services under a selected dealer agreement between Prusec and the Distributor for sale of Class B shares of the Fund, including sales commissions and trailer commissions paid to, or on account of, agents and indirect and overhead costs associated with
(d) advertising for the Fund in various forms through any available medium, including the cost of printing and mailing Fund prospectuses, statements of additional information and periodic financial reports and sales literature to persons other than current shareholders of the Fund;
(e) sales commissions (including trailer commissions) paid to, or on account of, broker-dealers and other financial institutions (other than Prusec) which have entered into selected dealer agreements with the Distributor with respect to Class B shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Directors of the Fund for review, at least quarterly, a written report specifying in reasonable detail the amounts expended for
Distribution Activities (including payment of the service fee) and the purposes for which such expenditures were made in compliance with the requirements of Rule 12b-1. The Distributor will provide to the Board of Directors of the Fund such additional information as they shall from time to time reasonably request, including information about Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the commissions and account servicing fees to be paid by the Distributor to account executives of the Distributor and to broker-dealers and other financial institutions which have selected dealer agreements with the Distributor.
The Plan shall not take effect until it has been approved by a vote of a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of the Class B shares of the Fund, the Plan shall, unless earlier terminated in accordance with its terms, continue in full force and effect thereafter for so long as such continuance is specifically approved at least annually by a majority of the Board of Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast in person at a meeting called for the purpose of voting on the continuation of the Plan.
This Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors, or by vote of a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Class B shares of the Fund.
The Plan may not be amended to change the combined service and distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to increase materially the amounts payable under this Plan unless such amendment shall be approved by the vote of a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Class B shares of the Fund. All material amendments of the Plan shall be approved by a majority of the Board of Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast in person at a meeting called for the purpose of voting on the Plan.
While the Plan is in effect, the selection and nomination of the Rule 12b-1 Directors shall be committed to the discretion of the Rule 12b-1 Directors.
The Fund shall preserve copies of the Plan and any related agreements and all reports made pursuant to Section 4 hereof, for a period of not less than six years from the date of effectiveness of the Plan, such agreements or reports, and for at least the first two years in an easily accessible place. | N-1A EL | EX-99.15(B) | 1996-01-16T00:00:00 | 1996-01-16T12:24:57 |
0000912057-96-000542 | 0000912057-96-000542_0002.txt | RIGHT TO PURCHASE 25,000 SHARES OF NUCLEAR METALS, INC.
THIS WARRANT AND THE SECURITIES THAT MAY BE ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "FEDERAL ACT") OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SECURITIES THAT MAY BE ACQUIRED UPON THE EXERCISE OF THIS WARRANT MAY BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER PROVISIONS OF THE FEDERAL ACT AND ALL APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF ANY EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THE WARRANT OR THE OTHER SECURITIES. NEITHER THIS WARRANT NOR THE SECURITIES THAT MAY BE ACQUIRED UPON THE EXERCISE OF THIS WARRANT MAY BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY LISTED IN SCHEDULE A TO THIS WARRANT.
Nuclear Metals, Inc., a Massachusetts corporation (the "COMPANY"), hereby certifies that, for value received, State Street Bank and Trust Company ("SSB") or assigns (SSB, or such assigns who may be the registered holder or holders hereof, are hereinafter referred to as the "HOLDER") is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time prior to the Expiration Date, that number of fully paid and non-assessable shares of Common Stock (as defined in Section 11 hereof), as shall be equal to the Initial Warrant Number (as hereinafter defined) at a purchase price per share equal to the Initial Exercise Price (as hereinafter defined) SUBJECT, HOWEVER, to adjustment both as to such number of shares and as to such price as hereinafter set forth (such price per share as so adjusted from time to time being herein called the "Exercise Price").
This Warrant is issued pursuant to the Warrant Agreement (the "AGREEMENT") dated September 26, 1995, between the Company and SSB, a copy of which is on file at the principal office of the Company. The Holder of this Warrant shall be entitled to all of the benefits of the Agreement as provided therein and by acceptance of this Warrant the Holder agrees to comply with the terms, conditions and obligations imposed by the Agreement.
Section 1. DEFINITIONS. Terms defined in the Agreement and not otherwise defined herein are used herein with the meanings so defined therein. Certain terms are used in this Warrant as specifically defined in Section 11 hereof.
Section 2. EXERCISE OF WARRANT.
Section 2.1. EXERCISE. Subject to the limitations set forth in Section 3, this Warrant may be exercised by the Holder hereof at any time during the Warrant Exercise Period by surrender of this Warrant to the Company at its principal office, together with (i) the form of subscription at the end hereof duly executed by such Holder, (ii) such other documents, statements, subscription agreements or other items as may be reasonably requested by the Company in furtherance of its requirements pursuant to Section 3 below, and (iii) payment, by certified or official bank check payable to the order of the Company or by wire transfer to its account, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then being exercised by the Exercise Price then in effect (such amount, the "EXERCISE PAYMENT"), except that the Holder may, at its option, elect to pay the Exercise Payment by canceling a portion of this Warrant that is equal to the number of shares determined by dividing the Exercise Payment by (i) the Current Market Price as of the date of exercise or (ii) if the Current Market Price cannot be determined because the Common Stock is not listed or admitted to unlisted trading on the New York Stock Exchange, another national securities exchange, or the National Market System, the Estimated Current Market Price (as hereinafter defined) (such manner of payment, a "NON-CASH EXERCISE PAYMENT"). The "ESTIMATED CURRENT MARKET PRICE" means the amount most recently determined by the Company's Board of Directors in its reasonable discretion to represent the fair market value per share of the Common Stock (including without limitation a determination for purpose of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company). Upon request of the Holder, the Company's Board of Directors (or a representative thereof) shall promptly notify the Holder of the Estimated Current Market Price. Notwithstanding the foregoing, if the Company's Board of Directors has not made such a determination within the three-month period prior to an exercise of the Warrant in which the Holder has elected to make a Non-Cash Exercise Payment, then (A) the Estimated Current Market Price shall be the amount next determined by the Company's Board of Directors in its reasonable discretion to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Company's Board of Directors shall make such a determination within 15 days of a request by the Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection shall be delayed until such determination is made.
In the event the Warrant is not exercised in full, the Company, at its expense, will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor and dated September 26, 1995, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of the number of such shares (without giving effect to any adjustment therein) for which this Warrant shall have been exercised (including by way of a Non-Cash Exercise Payment).
Section 2.2. CLASS OF STOCK RECEIVABLE UPON EXERCISE. Any other provisions hereof to the contrary notwithstanding, no Bank Affiliate shall be entitled to exercise the right under this Warrant to purchase any share or shares of Common Stock if, as a result of such purchase, such Bank Affiliate would own, control or have power to vote a greater quantity of securities of any kind than the Bank Affiliate shall be permitted to own, control or have power to vote under any law or under any regulation, rule or other requirement of any governmental authority at any time applicable to such Bank Affiliate.
Section 3. RESTRICTIONS ON TRANSFER.
Section 3.1. COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. Holder hereby acknowledges that neither this Warrant nor any of the securities that may be acquired upon exercise of this Warrant have been registered under the Securities Act of 1933, as amended, or under the securities laws of any state. The Holder acknowledges that, upon exercise of this Warrant, the securities to be issued upon such exercise may come under applicable federal and state securities (or other) laws requiring registration, qualification or approval of governmental authorities before such securities may be validly issued or delivered upon notice of such exercise. The Company's sole obligation to any Holder upon exercise hereof shall be to use its best efforts to obtain exemptions from registration or qualification for the issuance of such securities under applicable state and federal securities laws, and the Holder further agrees that the issuance of such securities shall be deferred until such exemptions shall have been obtained; and it is further agreed that the Company shall have no other obligation or liability to the Holder for non-issuance of such securities except to return the Warrant surrendered and to refund to the Holder any consideration tendered in respect of the Exercise Price. With respect to any such securities, this Warrant may not be exercised by, and securities shall not be issued to, any Holder in any state in which such exercise would be unlawful. The Holder agrees that the Company may place such legend or legends on certificates representing securities issued upon exercise of this Warrant as the Company may reasonably deem necessary to comply with applicable state and federal securities laws for the issuance of such securities.
The provisions of this Section 3 shall apply to the transfer of this Warrant and the shares of Common Stock purchasable upon exercise of this Warrant, subject to adjustments from time to time pursuant to the provisions contained in this Warrant (such securities, together with any shares of stock or warrants or rights issued as, or resulting from the issuance of, a dividend or other distribution upon such securities or any other shares of stock or warrants or rights substituted therefor being herein in the aggregate called "RESTRICTED SECURITIES"). Each such transfer of a Restricted Security is herein called a "RESTRICTED ACTION." The holder of any Restricted Security, by its acceptance thereof, agrees that it will not take any Restricted Action for so long as the restrictions imposed by this Section 3 are in effect. The restrictions imposed by this Section 3 upon the transferability of Restricted Securities (i) shall cease and terminate as to any particular Restricted Securities when such securities shall have been effectively registered under the Securities Act and all applicable state securities laws and disposed of in accordance with the registration statement covering such Restricted Securities, and (ii) shall cease and terminate as to any particular Restricted Securities or with respect to any particular Restricted Action when, in the opinion of counsel for the Holder thereof, which counsel shall be Messrs. Goodwin, Procter & Hoar, or such other counsel as shall be reasonably satisfactory to the Company, such opinion to be concurred in by counsel to the Company (such concurrence not to be unreasonably withheld), such restrictions are no longer required with respect to such Restricted Securities or such Restricted Action, as the case may be, in order to insure compliance with the Securities Act or under any applicable state securities laws. Whenever such restrictions shall terminate as to any Restricted Securities, the same shall no longer be deemed to be Restricted Securities and the holder thereof shall be entitled to receive from the Company, without expense (other than transfer taxes, if any), new securities of like tenor not bearing the applicable legend set forth on such securities.
Section 4. DELIVERY OF STOCK CERTIFICATES ON EXERCISE.
Section 4.1. DELIVERY. Subject to the complete terms and conditions of this Agreement, including without limitation the limitations set forth in Section 3 hereof, as soon as practicable after the exercise of this Warrant in full or in part, and in any event within ten (10) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock to which such Holder shall be entitled on such exercise, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise.
Section 4.2. FRACTIONAL SHARES. This Warrant may not be exercised as to fractional shares of the Common Stock. In the event that the exercise of this Warrant, in full or in part, results in the issuance of any fractional share of Common Stock, then in such event the Holder of this Warrant shall be entitled to cash equal to the fair market value of such fractional share as determined in good faith and on a reasonable basis by the Company's Board of Directors.
Section 5. ADJUSTMENT FOR DIVIDENDS, DISTRIBUTIONS AND RECLASSIFICATIONS.
In case at any time or from time to time, the holders of Common Stock shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor:
(a) other or additional stock or other securities or property (other than cash) by way of dividend; or
(b) other or additional (or less) stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar
OTHER THAN additional shares of Common Stock issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in Section 7 hereof), then and in each such case the Holder of this Warrant, on the exercise hereof as provided in Section 2 hereof, shall be entitled to receive the amount of stock and other securities and property (including cash in the case referred to in subsection (b) of this Section 5) which such Holder would have received prior to or would have held on the date of such exercise if on the date hereof he had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the case referred to in subsection (b) of this Section 5) receivable by such Holder as aforesaid during such period, giving effect to all further adjustments called for during such period by Sections 6 and 7 hereof.
Section 6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
Section 6.1. CERTAIN ADJUSTMENTS. In case at any time or from time to time, the Company shall (i) effect a capital reorganization, reclassification or recapitalization, (ii) consolidate with or merge into any other person, or (iii) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then in each such case, the Holder of this Warrant, on the exercise hereof as provided in Section 2 hereof at any time after the consummation of such reorganization, recapitalization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Stock) issuable on such exercise prior to such consummation or effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof.
Section 6.2. APPOINTMENT OF TRUSTEE FOR WARRANT HOLDERS UPON DISSOLUTION. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall, at its expense, deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holders of the Warrant after the effective date of such dissolution pursuant to this Section 6 to a bank or trust company having its principal office in Boston, Massachusetts, as trustee for the Holder or Holders of the Warrant.
Section 6.3. CONTINUATION OF TERMS. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 6 (any such event, a "Business Combination"), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the
Combination, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 8 hereof.
Section 7. STOCK SPLITS, STOCK DIVIDENDS, REDUCTION IN WARRANT NUMBER; PREEMPTIVE RIGHTS.
Section 7.1 STOCK EVENTS. If at any time there shall occur any stock split, stock dividend, reverse stock split or other subdivision of the Company's Common Stock ("STOCK EVENT"), then the number of shares of Common Stock to be received by the Holder of this Warrant shall be appropriately adjusted such that the proportion of the number of shares issuable hereunder prior to such Stock Event to the total number of shares of the Company outstanding (on a fully diluted basis, as such term is defined in Section 11.11) prior to such Stock Event is equal to the proportion of the number of shares issuable hereunder after such Stock Event to the total number of shares of the Company outstanding (on a fully diluted basis) after such Stock Event. No adjustment to the Exercise Price shall be made in connection with any adjustment of the number of shares of Common Stock receivable upon exercise of this Warrant, except that the Exercise Price shall be proportionately decreased or increased upon the occurrence of any stock split or other subdivision of the Common Stock.
Section 7.2 OTHER ISSUANCES OF COMMON STOCK. Subject to Section 7.3 and unless the Holder of this Warrant shall otherwise agree, if at any time there shall be any increase in the number of shares of Common Stock outstanding or which the Company is obligated to issue, or covered by any option, warrant or convertible security which is outstanding or which the Company is obligated to issue, then the number of shares of Common Stock to be received by the holder of this Warrant shall be adjusted to that number determined by multiplying the number of shares of Common Stock purchasable hereunder prior thereto by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding (on a fully diluted basis) immediately after such increase, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding (on a fully diluted basis) immediately prior to such increase. Thereupon, the Exercise Price shall be correspondingly reduced so that the aggregate Exercise Price for all shares of Common Stock covered hereby shall remain unchanged.
Section 8. CERTAIN OBLIGATIONS OF THE COMPANY. The Company will from time to time, in accordance with the laws of The Commonwealth of Massachusetts, take action to increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock authorized but remaining unissued and unreserved for other purposes shall be insufficient to permit the exercise of this Warrant.
The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock or out of shares of its treasury stock, solely for the purpose of issue upon exercise of the purchase rights evidenced by this Warrant, a number of shares of Common Stock equal to the Warrant Number in effect from time to time.
The Company will not, by amendment of its Articles of Organization, including without limitation, amendment of the par value of its Common Stock, or through reorganization, consolidation, merger, dissolution, issuance of capital stock or sale of treasury stock (otherwise than upon exercise of this Warrant) or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the material performance or observance of any of the covenants, stipulations or conditions in this Warrant to be observed or performed by the Company. The Company will at all times in good faith assist, insofar as it is able, in the carrying out of all of the provisions of this Warrant in a reasonable manner and in the taking of all other action which may be necessary in order to protect the rights of the holder of this Warrant against dilution in the manner required by the provisions of this Warrant.
The Company will maintain an office where presentations and demands to or upon the Company in respect of this Warrant may be made. The Company will give notice in writing to the registered holder of this Warrant, at the address of the registered holder of this Warrant appearing on the books of the Company, of each change in the location of such office.
Section 9. ACCOUNTANTS' CERTIFICATE AS TO ADJUSTMENTS. In each case of any event that may require any adjustment or readjustment in the shares of Common Stock issuable on the exercise of this Warrant, the Company at its expense will promptly prepare a certificate setting forth such adjustment or readjustment, or stating the reasons why no adjustment or readjustment is being made, and showing, in detail, the facts upon which any such adjustment or readjustment is based, including a statement of (i) the number of shares of the Company's Common Stock then outstanding on a fully diluted basis, and (ii) the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted and readjusted (if required by Section 7) on account thereof. The Company will forthwith mail a copy of each such certificate to each Holder of a Warrant, and will, on the written request at any time of any Holder of a Warrant, furnish to such Holder a like certificate setting forth the calculations used to determine such adjustment or readjustment. At its option, the Holder of a Warrant may confirm the adjustment noted on the certificate by causing such adjustment to be computed by an independent certified public accountant at the expense of the Company.
Section 10. NOTICES OF RECORD DATE. In the event of:
(a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive
(b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or any consolidation or merger of the Company with or into any other Person; or
(c) any voluntary or involuntary dissolution, liquidation or
then, and in each such event, the Company will mail or cause to be mailed to the Holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least 30 days prior to the date specified in such notice on which any such action is to be taken.
Section 11. DEFINITIONS. As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
Section 11.1. The term BANK AFFILIATE means any Person which is a bank holding company or a subsidiary of a bank holding company as defined in the Bank Holding Company Act of 1956, as amended, or other applicable banking laws of the United States and the rules and regulations promulgated thereunder.
Section 11.2. The term COMPANY shall include Nuclear Metals, Inc., a Massachusetts corporation, and any corporation which shall succeed to or assume the obligations of the Company hereunder.
Section 11.3. The term COMMON STOCK includes (i) the Company's Common Stock, having $.10 par value, (ii) any other capital stock of any class or classes (however designated) of the Company, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and (iii) any other securities into which or for which any of the securities described in clauses (i) or (ii) above have been converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.
Section 11.4. The term EXPIRATION DATE shall mean September 26, 2005.
Section 11.5. The term INITIAL EXERCISE PRICE shall mean $11.89.
Section 11.6. The term INITIAL WARRANT NUMBER shall mean 25,000.
Section 11.7. The term OTHER STOCK shall mean stock of the Company other than the Company's Common Stock.
Section 11.8. The term OUTSTANDING WARRANT shall mean the Initial Warrant Number as adjusted herein minus the number of Warrants exercised pursuant to Section 2.1 hereof.
Section 11.9. The term PERSON shall mean an individual, partnership, corporation, association, trust, joint venture, unincorporated organization or any government, governmental department or agency or political subdivision thereof.
Section 11.10. The term WARRANT EXERCISE PERIOD shall mean the period beginning on the date hereof and ending on the Expiration Date.
Section 11.11. The term "FULLY DILUTED" when used in connection with the Common Stock of the Company shall mean, as of any given date, the shares of Common Stock actually issued and outstanding or which the Company is obligated to issue on such date together with all shares of such Common Stock that would be issued on such date assuming conversion or exercise of all warrants, options or other rights or securities (including shares of the Company's Preferred Stock) which provide for the acquisition of shares of Common Stock and which are then outstanding or which the Company is obligated to issue.
Section 12. WARRANT AGENT. The Company may, by written notice to the holder of this Warrant, appoint an agent having an office in Boston, Massachusetts for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 2 hereof, and exchanging or replacing this Warrant pursuant to the Agreement, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.
Section 13. REMEDIES. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.
Section 14. NOTICES. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, or sent by telecopier, facsimile machine or telex to such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company.
Section 15. TRANSFER. Subject to the provisions of this Agreement and the Warrant Agreement, including without limitation the provisions of Section 3 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the registered Holder thereof in person or by a duly authorized attorney, upon surrender of this Warrant together with an assignment hereof properly endorsed. Until transfer hereof on the registration books of the Company, the Company may treat the registered Holder hereof as the owner hereof for all purposes. Any
Warrant and any rights hereunder, by acceptance thereof, agrees to assume all of the obligations of a Holder thereunder and to be bound by all of the terms and provisions of the Agreement.
Section 16. MISCELLANEOUS. In case any provision of this Warrant shall be invalid, illegal or unenforceable, or partially invalid, illegal or unenforceable, the provision shall be enforced to the extent, if any, that it may legally be enforced and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This Warrant and any term hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the domestic substantive laws (and not the conflict of law rules) of The Commonwealth of Massachusetts. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant shall take effect as an instrument under seal.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer and its corporate seal to be impressed hereon and attested by its Secretary.
Dated: September 26, 1995 NUCLEAR METALS, INC.
(Corporate Seal) By. /S/ JAMES M. SPIEZIO
(To be signed only on exercise of
The undersigned, the holder of the within Common Stock Purchase Warrant, hereby irrevocably elects to exercise this Common Stock Purchase Warrant for, and to purchase thereunder * shares of Common Stock of Nuclear Metals, Inc. (the "Company") and herewith makes payment of $__________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to _________________, whose address is ______________________. The undersigned agrees that this election is subject to the complete terms and conditions of the Warrant Agreement dated _________, 1995, and the undersigned agrees to deliver to the Company such additional documentation as may be requested by the Company in accordance with the Warrant Agreement.
(Signature must conform in all respects to name of Holder as specified on the face of
*Insert here the number of shares (all or part of the number of shares called for in the Common Stock Purchase Warrant) as to which the Common Stock Purchase Warrant is being exercised without making any adjustment for any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Common Stock Purchase Warrant, may be deliverable on exercise, it being understood that the exercise of the Common Stock Purchase Warrant with respect to the number of shares set forth herein is deemed also to be the exercise of the Common Stock Purchase Warrant with respect to such other stock, securities, cash or property.
(To be signed only on transfer of
For value received, the undersigned hereby sells, assigns, and transfers unto ________ of _________ the right represented by the within Common Stock Purchase Warrant to purchase _______ shares of Common Stock of Nuclear Metals, Inc. to which the within Common Stock Purchase Warrant relates, and appoints ____________ as Attorney to transfer such right on the books of Nuclear Metals, Inc. with full power of substitution in the premises.
(Signature must conform in all respects to name of Holder as specified on the face of
Signed in the presence of: | 10-K | EX-4 | 1996-01-16T00:00:00 | 1996-01-16T17:13:10 |
0000950124-96-000247 | 0000950124-96-000247_0000.txt | As Filed with the Securities and Exchange Commission on January 16, 1996
THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
(Name, address, including zip code, and telephone number, including area code of agent for service)
This Registration Statement, which was declared effective by the Securities and Exchange Commission on December 28, 1992, registered 1,000,000 shares of the Common Stock, par value $1.00 per share, of Dean Foods Company (the "Common Stock"). Of this amount, Dean Foods Company (the "Company") issued 679,975 shares of Common Stock to the shareholders of W.B. Roddenbery Company, Inc. ("Roddenbery") pursuant to the terms of an Agreement and Plan of Merger, dated as of December 21, 1992. Accordingly, the Company hereby deregisters 320,025 shares of Common Stock originally covered by the Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Post-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Village of Franklin Park, State of Illinois, on the 16th day of January, 1996
By: /s/ Howard M. Dean Chairman of the Board and
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities indicated as of the 30th day of October, 1995. | S-4/A | S-4/A | 1996-01-16T00:00:00 | 1996-01-16T15:49:37 |
0000898430-96-000113 | 0000898430-96-000113_0002.txt | <DESCRIPTION>STOCK OPTION AND TENDER AGREEMENT
STOCK OPTION AND TENDER AGREEMENT
STOCK OPTION AND TENDER AGREEMENT, dated as of December 18, 1995, among AMERICAN BRANDS, INC., a Delaware corporation ("Parent"), and each other party listed on the signature pages hereof (each, a "Stockholder"),
W I T N E S S E T H : - - - - - - - - - -
WHEREAS, Parent, HCAC, INC., a Delaware corporation wholly-owned by Parent ("Purchaser"), and COBRA GOLF INCORPORATED, a Delaware corporation (the "Company"), propose to enter into an Agreement and Plan of Merger, dated as of the date hereof (as the same may be amended from time to time, the "Merger Agreement"), which provides, upon the terms and subject to the conditions thereof, for the acquisition by Purchaser of all the outstanding shares of Common Stock, par value $0.001 per share, of the Company (the "Company Common Stock") through (a) a tender offer (the "Offer") for all shares of Company Common Stock for $36.00 per share net to the sellers thereof in cash without interest thereon (the "Initial Offer Price", and as such price may be increased from time to time pursuant to the terms of any amended Offer, the "Offer Price") and (b) a second step merger pursuant to which Purchaser will merge with and into the Company (the "Merger") and all outstanding shares of Company Common Stock (other than the shares held by Parent or Purchaser or any other direct or indirect subsidiary of Parent and shares of Company Common Stock held in the treasury of the Company or owned by any subsidiary of the Company) will be converted into the right to receive the Offer Price in cash; and
WHEREAS, as of the date hereof each Stockholder is the record and beneficial owner of, or is the trustee of a trust that is the record holder of, and whose beneficiaries are the beneficial owners of, the number of shares of Company Common Stock set forth opposite such Stockholder's name on Exhibit A hereto (all such shares (the "Existing Shares") and any shares hereafter acquired by the Stockholders prior to the termination of this Agreement (the "After-Acquired Shares") being referred to herein as the "Shares");
WHEREAS, as a condition to the willingness of Parent and Purchaser to enter into the Merger Agreement, Parent has required that each Stockholder agree, and, in order to induce Parent and Purchaser to enter into the Merger Agreement to acquire the Company, each Stockholder has agreed, severally, but not jointly, to (i) tender all of such Stockholder's Shares pursuant to the grant Parent the option to purchase such Stockholder's Shares and (iii) appoint Parent as such Stockholder's proxy to vote its Shares;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter contained and contained in the Merger Agreement, and intending to be legally bound hereby, the parties hereto hereby agree as follows:
GRANT OF PLEDGE AND SECURITY INTEREST; TENDER
SECTION 1.01. Grant of Pledge and Security Interest. (a) For the purpose of securing the due and prompt performance of all the obligations of such Stockholders under this Agreement, subject to the provisions of Section 7.11 hereof each Stockholder hereby irrevocably grants to Parent a pledge and security interest in such Stockholder's Shares, and (i) until delivery of the Shares pursuant to the third sentence of this Section 1.01(a), all proceeds thereof subject to the terms of this Agreement and dividends thereon and (ii) thereafter, all dividends thereon. Notwithstanding the provisions of the preceding sentence, subject to the provisions of Section 7.11 hereof unless and
Stockholder defaults in the performance of the obligation to deliver such Stockholder's Shares or to sell such Stockholder's Shares under this Agreement, Parent shall not have the right to receive and/or retain any such proceeds and/or dividends contemplated by the immediately preceding sentence. In order to perfect such security interests, each Stockholder shall deliver to Parent any and all stock certificates evidencing such Stockholder's (i) Existing Shares, not later than 5:00 p.m. New York time on the fifth Business Day (as defined below) following the date of this Agreement, and (ii) After-Acquired Shares, not later than 5 p.m. New York time on the third Business Day following the acquisition thereof. Parent shall have all the rights and remedies of a secured party provided or permitted under the Uniform Commercial Code. For the purposes of this Agreement, the term "Business Day" shall mean any day (other than a Saturday or Sunday) on which commercial banks are open for business in the City of New York.
(b) Upon termination of the Merger Agreement, Parent automatically releases any and all liens on all Shares of each Stockholder granted hereunder and shall promptly (and in any event not later than two Business Days following such termination) (i)(A) send any and all stock certificates in its possession evidencing a Stockholder's Shares to such Stockholder by overnight courier to the address set forth below such Stockholder's name on the signature page hereof (provided that if any such stock certificates are not received by such Stockholder, Parent shall promptly put up an indemnity bond required by the Company to issue new certificates to such Stockholder, including, without limitation, any such bond required in accordance with Section 8-405 of the Uniform Commercial Code of the applicable jurisdiction) or (B) irrevocably direct the depositary for the Offer to properly withdraw and deliver to each Stockholder the stock certificates evidencing such Stockholder's Shares which were validly tendered pursuant to the Offer, if any, and (ii) return any other documentation delivered to Parent by any such Stockholder together with any dividends obtained or received by Parent in respect of such Stockholder's Shares to such Stockholder by overnight courier to the address set forth below such Stockholder's name on the signature page hereof.
(c) Notwithstanding anything to the contrary in this Agreement, Parent shall have no rights of ownership in any Stockholder's Shares unless and until such Shares are sold pursuant to the Option or in the
Offer pursuant to the terms of this Agreement, but Parent shall otherwise be permitted to exercise its rights hereunder.
SECTION 1.02. Tender of Shares. Each Stockholder shall validly tender all such Stockholder's Shares pursuant to the Offer and agrees not to withdraw any Shares so tendered without Parent's consent, provided, however, that if the Offer Price is for any reason increased above the Initial Offer Price, then each Stockholder hereby agrees that such Stockholder shall promptly (and in any event not later than three Business Days after the first public announcement of such increase) properly withdraw all such Shares, and provided further that following any such withdrawal each Stockholder validly shall tender all of such Stockholder's Shares pursuant to the Offer but only upon the written direction of Parent. The obligation of the Stockholders under this Section 1.02 shall be deemed satisfied, with respect to all Shares delivered pursuant to Section 1.01, by the appointment and grant pursuant to Section 5.03.
SECTION 2.01. Grant of Options. Each Stockholder hereby grants to Parent an irrevocable option (each, an "Option") to purchase such Stockholder's Shares at a price per Share equal to (a) the Initial Offer Price or (b) in the event that such Offer Price is increased and Purchaser has accepted for payment, and paid for, any shares of Company Common Stock pursuant to the Offer, the Initial Offer Price plus an amount equal to one-half of the excess of the final Offer Price paid by Purchaser for any shares of Company Common Stock pursuant to the Offer over such Initial Offer Price (in either event, the "Option Price").
SECTION 2.02. Exercise of Options. Provided that (a) to the extent necessary, any applicable waiting periods (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act") with respect to the exercise of an Option shall have expired or been terminated, (b) Purchaser shall have accepted shares of Company Common Stock for payment pursuant to the Offer and (c) no preliminary or permanent injunction or other order, decree or ruling issued by any court or governmental or regulatory authority, domestic or foreign, of competent jurisdiction prohibiting the exercise of an Option or the delivery of shares of Common Stock shall be in effect, Parent may exercise the Options, in whole but not in part, at any time, or from time to time, until the termination of this Agreement (at which time each Option granted hereunder shall terminate). Parent hereby acknowledges and agrees that if any shares of Company Common Stock are accepted for payment pursuant to the Offer, Parent will cause all but not part of each Stockholder's Shares subject to this Agreement to be acquired either pursuant to (i) the Offer or (ii) the exercise of the Options. In the event that Parent exercises the Options and purchases all of the Shares from the Stockholders, the closing of such purchase (the "Stock Option Closing") shall occur within two Business Days after Parent shall have accepted any shares of Company Common Stock for payment pursuant to the Offer.
SECTION 2.03. Payment for and Delivery of Certificates. At the Stock Option Closing, (a) each Stockholder shall deliver to Parent a certificate or certificates evidencing the number of such Stockholder's Shares, and each such certificate shall be duly endorsed in blank, or with appropriate stock powers, duly executed in blank, attached thereto, in proper form for transfer, with the signature of such Stockholder thereon guaranteed in a form acceptable to the Company's transfer agent, and with all applicable taxes paid or provided for (provided, that in no event shall a Stockholder be obligated to pay or provide for more taxes than if such Stockholder's Shares were purchased in the Offer), together with such other documents as may be necessary in Parent's judgment to effect the transfer thereof to Parent (including, but not limited to, the consent of any spouse of such Stockholder, if required for the transfer contemplated hereby) and (b) Parent shall pay, by wire transfer in immediately available funds or by certified or bank check payable in same day funds to such Stockholder, an amount equal to the product of (i) the Option Price and (ii) the number of such Stockholder's Shares for which certificates have been delivered to Parent pursuant to this Agreement at the Stock Option Closing. The obligation of the Stockholders under this Section 2.03 shall be deemed satisfied, with respect to all Shares delivered pursuant to Section 1.01, by the appointment and grant pursuant to Section 5.03.
SECTION 2.04. Adjustments Upon Changes in Capitalization. In the event of any change in the number of issued and outstanding shares of Company Common Stock by reason of any stock dividend, subdivision, merger, recapitalization, combination, conversion or exchange of shares, or any other change in the corporate or capital structure of the Company (including, without limitation, the declaration or payment of any extraordinary dividend of cash or securities) which would have the effect of diluting or otherwise adversely affecting Parent's rights and privileges under this Agreement, the number and kind of the Shares and the consideration payable in respect of the Shares shall be appropriately and equitably adjusted to restore to Parent its rights and privileges under this Agreement. Without limiting the scope of the foregoing, in any such event, at the option of Parent, each Option shall represent the right to purchase, in addition to the number and kind of Shares which Parent would be entitled to purchase pursuant to the immediately preceding sentence, whatever securities, cash or other property the Shares subject to the Option shall have been converted into or otherwise exchanged for, together with any securities, cash or other property which shall have been distributed with respect to such Shares.
Each Stockholder hereby severally, but not jointly, represents and warrants to Parent that:
SECTION 3.01. Organization. Such Stockholder (if it is a corporation, partnership or other legal entity) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization with all requisite power and authority (corporate or otherwise) to execute, deliver and perform its obligations under this Agreement.
SECTION 3.02. Authority; Enforceability. The execution and delivery by such Stockholder of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action (corporate or otherwise) on the part of such Stockholder. This Agreement has been duly executed and delivered by or on behalf of such Stockholder, and if such Stockholder is married and such Stockholder's Shares constitute community property, by or on behalf of such Stockholder's spouse, and, assuming due execution and delivery by Parent hereof, constitutes the legal, valid and binding obligation of such Stockholder and such spouse enforceable against each with its terms, subject to the qualification, however, that enforcement of the rights and remedies created hereby may be limited by bankruptcy, insolvency, reorganization and other similar laws of general application relating to or affecting the rights and remedies of creditors and that the remedy of specific enforcement or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought.
SECTION 3.03. No Breach; Required Filings and Consents. (a) The execution and delivery of this Agreement by such Stockholder does not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, with or without the giving of notice or lapse of time, or both, conflict with, or result in a breach or violation of, or a default under the provisions of, or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit under (i) the Certificate of Incorporation or By-laws, trust agreement or similar organizational documents of such Stockholder (in the case of a Stockholder that is a corporation, partnership, trust or other legal entity), or (ii) any covenant, agreement, indenture or instrument to which such Stockholder or (if such Stockholder purports to be a corporation) any of its subsidiaries is a party or any order, ruling, decree, judgment, arbitration award, statute, law, ordinance, rule, regulation or stipulation to which such Stockholder or (if such Stockholder purports to be a corporation) any of its subsidiaries or its or their respective properties or assets is subject, or result in the creation of any lien, charge or encumbrance upon any of such Stockholder's Shares. No trust of which such Stockholder is a trustee requires the consent of any beneficiary to the execution and delivery of this Agreement, to the compliance with the provisions hereof and to the consummation of the transactions contemplated hereby that has not been previously obtained.
(b) The execution and delivery of this Agreement by such Stockholder does not, and the performance of this Agreement by such Stockholder will not, require any approval, order or authorization of, or filing or registration with, or allowance by, or consent of or notification to any federal, state or local government or any court, administrative or regulatory agency or commission or other governmental authority or agency, domestic or foreign, except for requirements, if any, (A) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, (B) the HSR Act, and (C) as may be required by any applicable state securities or takeover laws.
SECTION 3.04. Title to Shares; No Other Shares or Proxy. Such Stockholder is the record and beneficial owner of, or is a trustee of a trust that is the record owner of, and whose beneficiaries are the beneficial owners of, the number of Existing Shares set forth opposite such Stockholder's name on Exhibit A, free and clear of any pledge, lien, security interest, charge, claim, equity, option, proxy, voting restriction, right of first refusal or other limitation on disposition or encumbrance of any kind, other than pursuant to this Agreement and other than those Shares covered by Section 7.11 that are pledged. The number of Existing Shares set forth opposite such Stockholder's name on Exhibit A hereto represent the only Shares owned of record or beneficially by such Stockholder as of the date hereof. Such Stockholder has full right, power and authority to sell, pledge, transfer and deliver its Existing Shares pursuant to this Agreement, except for those Shares covered by Section 7.11 that are pledged, and upon the acquisition of any After-Acquired right, power and authority to sell, pledge, transfer and deliver such After- Acquired Shares pursuant to this Agreement. Upon delivery of the Shares purchased from such Stockholder and payment of the Option Price therefor as contemplated herein, Parent will receive good and valid title to such Shares, free and clear of any pledge, lien, security interest, charge, claim, equity, option, proxy, voting restriction or encumbrance of any kind. There are no outstanding proxies with respect to Shares owned of record or beneficially by such Stockholder.
SECTION 3.05. No Brokers. No broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial adviser's or other similar fee or commission from Parent, Purchaser or the Company in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of such Stockholder, except as otherwise specifically provided in the Merger Agreement or made by or on behalf of Parent or Purchaser or its authorized representatives.
SECTION 3.06. Consideration for Proxy. Such Stockholder understands and acknowledges that Parent is entering into, and causing Purchaser to enter into, the Merger Agreement conditioned upon Stockholder's execution and delivery of this Agreement. Such Stockholder acknowledges that the irrevocable proxy set forth in Section 5.02 is granted in consideration for the execution and delivery of the Merger Agreement by Parent and Purchaser.
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby makes the same representations and warranties to each Stockholder as Parent has made to the Company in Article V of the Merger Agreement with the same effect as though such representations and warranties were herein set forth in full.
TRANSFER AND VOTING OF SHARES; APPOINTMENTS;
SECTION 5.01. Transfer of Shares. During the term of this Agreement, and except as otherwise provided herein or with the prior written consent of Parent, each Stockholder shall not (a) sell, pledge or otherwise dispose of any of its Shares, (b) deposit its Shares into a voting trust or enter into a voting agreement or arrangement with respect to such Shares, (c) grant any proxy, power-of-attorney or other authorization in or with respect to such Shares or contract, option or other arrangement or undertaking with respect to the direct or indirect sale, assignment, transfer or other disposition of any Shares.
SECTION 5.02. Voting of Shares; Further Assurances. (a) Each Stockholder, by this Agreement, does hereby constitute and appoint Parent, or any nominee of Parent (the "Proxyholder"), with full power of substitution, during and only for the term of this Agreement, as its true and lawful attorney and proxy, for and in its name, place and stead, to vote each of such Stockholder's Shares as its proxy, at every annual, special or adjourned meeting of the stockholders of the Company (including the right to sign its name (as stockholder) to any consent, certificate or other document relating to the Company that the law of the State of Delaware may permit or require) as follows: (i) in favor of approval and adoption of the Merger Agreement and all related matters; (ii) against any action or agreement that would result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement; and (iii) against any action or agreement (other than the Merger Agreement or the transactions contemplated thereby) that would impede, interfere with, delay, postpone or attempt to discourage the Merger (together with (i) and (ii) above, the "Permitted Matters"). EACH STOCKHOLDER INTENDS THAT PURSUANT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT AND FOR SO LONG AS THIS AGREEMENT IS IN EFFECT THIS PROXY BE IRREVOCABLE AND COUPLED WITH AN INTEREST IN THE SHARES AND SUPPORTED BY THE PLEDGE OF THE SHARES AS PROVIDED HEREIN. Each Stockholder hereby revokes any proxy previously granted with respect to Shares owned of record or beneficially by such Stockholder. The proxy granted hereby shall expire and have no further force or effect upon the termination of this Agreement. Each Stockholder agrees to refrain from taking any action contrary to or in any manner inconsistent with the terms of this Agreement, including, with respect to the Permitted Matters only, (a) voting at any annual, special or adjourned meeting of the stockholders of the Company, (b) executing any written consent in lieu of a meeting of the stockholders of the Company, (c) exercising any rights of dissent with respect to the Shares and (d) granting any proxy or authorization to any person with respect to the voting of the Shares, except pursuant to this Agreement. Each Stockholder acknowledges receipt of, and that it has reviewed, a copy of the Merger Agreement.
(b) Each Stockholder shall perform such further acts and execute such further documents and instruments as may reasonably be required to vest in the Proxyholder the power to carry out the provisions of this Agreement.
SECTION 5.03. Appointment of Attorney-in-Fact. Subject to the provisions of Section 7.11 hereof each Stockholder hereby irrevocably (a) appoints each Proxyholder as such Stockholders' attorneys-in-fact, with an irrevocable instruction to the Proxyholder (i) validly to tender such Stockholder's Shares into the Offer, (ii) properly to withdraw such Stockholder's Shares from the Offer, (iii) to transfer such Stockholder's Shares at the Stock Option Closing, and (iv) to execute any instrument of transfer and/or other documents and do all such other acts and things as may in the opinion of the Proxyholder be necessary or expedient for the purpose of, or in connection with, tendering or withdrawing such Shares into or from the Offer or transferring such Shares at the Stock Option Closing and (b) agrees not to exercise or attempt to exercise any rights pertaining to the Shares without the prior written consent of Parent.
SECTION 5.04. No Solicitation. Each Stockholder agrees to abide by
6.1(l) of the Merger Agreement. Nothing contained in this Section 5.04 shall be deemed to prevent any Stockholder in his capacity as an officer or director of the Company from exercising his fiduciary duties.
SECTION 5.05. Other Actions. Each Stockholder serving as a trustee of a revocable trust, and each beneficiary of such trust, shall not take any action to revoke or terminate such trust or take any other action to restrict, limit or frustrate in any way the transactions contemplated by this Agreement. Each such beneficiary hereby acknowledges and agrees to be bound by the terms of this Agreement applicable to it.
SECTION 6.01. Termination. This Agreement shall terminate upon the earlier to occur of (i) the termination of the Merger Agreement or (ii) the Effective Time of the Merger. Upon termination, this Agreement shall have no further force or effect, except for Section 1.01(b) and Section 7.07 which shall continue to apply to any case, action or proceeding relating to the enforcement of this Agreement.
SECTION 7.01. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered, mailed or transmitted, and shall be effective upon receipt, if delivered personally, mailed by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like changes of address) or sent by electronic transmission to the telecopier number specified below:
Attention: Gilbert L. Klemann, II, Esq.
New York, New York 10112 Attention: Edward P. Smith, Esq.
(b) If to a Stockholder, to the address set forth below such Stockholder's name on the signature pages hereof:
Skadden, Arps, Slate, Meagher & Flom 300 South Grand Avenue, Suite 3400 Attention: Nick P. Saggese, Esq. Joseph J. Giunta, Esq.
SECTION 7.02. Headings. The headings in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.
SECTION 7.03. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.
SECTION 7.04. Entire Agreement. This Agreement supersedes any and all oral or written agreements and understandings heretofore made relating to the subject matter hereof and contains the entire agreement of the parties hereto relating to the subject matter hereof.
SECTION 7.05. Assignment. This Agreement shall not be assigned by operation of law or otherwise.
SECTION 7.06. 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 or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 7.07. Specific Performance; Injunctions. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of, and injunctive relief to prevent breaches of or non-compliance with, the terms hereof, in addition to any other remedy at law or in equity.
SECTION 7.08. Expenses. Each of the parties hereto shall pay, without right of reimbursement from any other party hereto, the costs incurred by such party incident to the performance of such party's obligations hereunder, whether or not the transactions contemplated hereby shall be consummated, including, without limitation, the fees and disbursements of counsel, accountants and consultants employed by the respective parties hereto in connection with the transactions contemplated hereby.
SECTION 7.09. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware.
SECTION 7.10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
SECTION 7.11. Previously Pledged, Lost or Stolen Shares. Solely with respect to the 300,582 Shares owned of record by The John L. Schroeder and Kathleen A. Schroeder Living Trust Dated 1-4-80, the 26,667 Shares owned of record by Merrill Lynch (collateral account) and 50,000 Shares of the 602,351 Shares owned of record by the Crow 1990 Community Property Trust Dated 6-8-90, which have been previously pledged, or as to which certificates have been lost or stolen, such Stockholder shall not be obligated to grant the pledge or security interest contemplated by Section 1.01 or the appointment of attorney- in-fact contemplated by Section 5.03 with respect to such Shares but shall instead tender such Shares into the Offer as promptly as reasonably practicable in accordance with Section 1.02 and withdraw and retender such Shares to the extent required by Section 1.02 and the terms hereof; provided, that if such Shares are no longer pledged, or such lost or stolen certificates representing such Shares are replaced, found or recovered, then with respect to such Shares such Stockholder shall promptly arrange for the grant of the pledge and security interest contemplated by Section 1.01 and the appointment of attorney-in-fact contemplated by Section 5.03.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
By: /s/ Gilbert L. Klemann II Name: Gilbert L. Klemann II
GARY E. BISZANTZ LIVING TRUST
By: /s/ Gary E. Biszantz Rancho Santa Fe, CA 92067
GARY E. BISZANTZ AND FRANCES
By: /s/ Gary E. Biszantz
By: /s/ Frances B. Biszantz
By: /s/ Gary E. Biszantz
By: /s/ Thomas L. Crow Lane, La Jolla, CA 92037
By: /s/ Carol Ann Crow
THOMAS L. CROW 9% NET INCOME
By: /s/ Thomas L. Crow
By: /s/ Carol Ann Crow
THOMAS L. CROW 20% NET INCOME
By: /s/ Thomas L. Crow
By: /s/ Carol Ann Crow Carol A. Crow, its trustee
THOMAS L. CROW G.P. FBO CROW
By: /s/ Thomas L. Crow Thomas L. Crow, its _____
By: /s/ Carol Ann Crow Carol A. Crow, its ______
By: /s/ Thomas L. Crow Thomas L. Crow, its _____
By: /s/ Gary S. Vandeweghe Drive, San Jose, CA 95127
By: /s/ Barbara M. Vandeweghe
By: /s/ Gary S. Vandeweghe
By: /s/ Barbara M. Vandeweghe
By: /s/ Gary S. Vandeweghe
By: /s/ Barbara M. Vandeweghe
By: /s/ Gary S. Vandeweghe
DONALD C. SHERMAN LIVING TRUST
By: /s/ Donald C. Sherman
By: /s/ Donald C. Sherman
THE JOHN L. SCHROEDER AND
By: /s/ John L. Schroeder View Ave., Del Mar, CA
JOHN L. SCHROEDER AND KATHLEEN
By: /s/ John L. Schroeder
By: /s/ John L. Schroeder
By: /s/ John L. Schroeder
By: /s/ John L. Schroeder
ARTHUR B. SCHULTZ LIVING TRUST
By: /s/ Arthur B. Schultz*
By: /s/ Arthur B. Schultz*
By: /s/ Arthur B. Schultz*
* All by Gary S. Vandeweghe
WHEREAS, each of the Donald C. Sherman Living Trust dated August 5, 1980 (the "Sherman Living Trust"), of which Mr. Sherman is the sole Trustee, Thomas L. Crow, as custodian of a Merrill Lynch collateral account (the "Merrill Lynch Account"), the Crow 1990 Community Property Trust dated June 8, 1990 (the "Crow Community Property Trust"), of which Thomas L. and Carol Ann Crow, husband and wife, are the sole co-Trustees, the Arthur B. Schultz Living Trust dated June 8, 1994 (the "Schultz Living Trust"), of which Mr. Schultz is the sole Trustee, and the Arthur B. Schultz Charitable Remainder Trust dated December 22, 1994 (the "Schultz Charitable Remainder Trust"), of which Mr. Schultz is the sole Trustee (collectively, the "Stockholders"), is a party to the Stock Option and Tender Agreement (the "Agreement"), dated as of December 18, 1995, among the Stockholders, certain other parties thereto and American Brands, Inc. (the
WHEREAS, pursuant to Section 5.01 of the Agreement each of the Stockholders has agreed not to transfer their shares of common stock par value $.001 per share (the "Common Stock") of Cobra Golf Incorporated, without the Company's
WHEREAS, each of the Stockholders wishes to transfer ownership of certain shares of Common Stock and seeks the consent of the Company to such transfer and the Company wishes to consent to such transfer;
WHEREAS, the Donald C. & Diane D. Sherman 5% Net Income with Make-up Charitable Remainder Unitrust #1 dated December 22, 1994 (the "Sherman Charitable Unitrust #1"), of which Donald C. and Diane D. Sherman, husband and wife, are the sole co-Trustees, holds 111,889 shares of Common Stock transferred to it by the Starr Charitable Remainder Unitrust dated August 3, 1994 (NIMCRUT #1), and wishes to become a party to the
WHEREAS, the Sherman Living Trust wishes to transfer 622,889 shares of Common Stock into the Donald C. & Diane D. Sherman 10% Charitable Remainder Unitrust #2 dated December 22, 1994 (the "Sherman Charitable Unitrust #2"), of which Donald C. and Diane D. Sherman, husband and wife, are the sole co- Trustees, and the Sherman Charitable Unitrust #2 wishes to become a party to the
WHEREAS, the Sherman Living Trust wishes to transfer 40,000 shares of Common Stock into the Sherman Family Living Trust dated December 22, 1994 (the "Family Living Trust"), of which Donald C. and Diane D. Sherman, husband and wife, are the sole co-Trustees, and the Family Living Trust wishes to become a
WHEREAS, the TLC/CGC Trust dated February 27, 1995 (the "TLC/CGC Trust"), of which James E. Moeller and Southpac International Trust, Inc., are the sole co-Trustees, holds 436,018 shares of Common Stock transferred to it by the Crow Community Property Trust for the benefit of Thomas L. & Carol Ann Crow, and wishes to become a party to the Agreement;
WHEREAS, Thomas L. Crow, as custodian of the Merrill Lynch Account, wishes to transfer 22,667 shares of Common Stock into the Thomas L. Crow 6% Net Income with Make-up Charitable Remainder Trust #3 dated July 6, 1995 (the "Crow Charitable Remainder Trust"), of which Thomas L. and Carol Ann Crow, husband and wife, are the sole co-Trustees, and the Crow Charitable Remainder Trust wishes to become a party to the Agreement;
WHEREAS, Thomas L. Crow, as custodian of the Merrill Lynch Account, wishes to transfer 4,000 shares of Common Stock into the Crow Community Property Trust;
WHEREAS, the Crow Community Property Trust wishes to transfer 116,333 shares of Common Stock into the Crow Charitable Remainder Trust; and
WHEREAS, the Schultz Living Trust wishes to transfer 3,300 and 70,000 shares of Common Stock in 1995 and 1996, respectively, into the Schultz
NOW, THEREFORE, the parties hereto agree as follows:
1. The Sherman Living Trust may transfer 622,889 and 40,000 shares of Common Stock held by it into the Sherman Charitable Unitrust #2 and the Family Living Trust (collectively the "Sherman Transferees"), respectively;
2. Thomas L. Crow may transfer 4,000 shares of Common Stock from the Merrill Lynch Account into the Crow Community Property Trust; Thomas L. Crow may transfer 22,667 shares of Common Stock from the Merrill Lynch Account into the Crow Charitable Remainder Trust and the Crow Community Property Trust may also transfer 116,333 shares of Common Stock held by it into the Crow Charitable Remainder Trust (the "Crow Transferee");
3. The Schultz Living Trust may transfer 3,300 and 70,000 shares of Common Stock held by it in 1995 and 1996, respectively, into the Schultz Charitable Remainder Trust (the "Schultz Transferee", and, together with the Sherman Transferees and the Crow Transferee, the "Transferees");
4. The Transferees, the TLC/CGC Trust and the Sherman Charitable Unitrust #1 agree that they will be bound by the terms of the Agreement as if they were parties thereto on the date it was entered into and hereby, severally, but not jointly, makes the same representations and warranties to the Company as those made by the Selling Stockholders (as defined in the Agreement) in the Agreement, except that any reference to Exhibit A in Section 3.04 of the Agreement shall be deemed to be a reference to Annex A hereto and further agree that all shares of Common Stock held by them or received by them in the transfers described in Items 1 through 3 above shall constitute Existing Shares (as defined in the Agreement) for purposes of such Agreement; and
5. Notwithstanding the foregoing, (i) the Transferees, the TLC/CGC Trust and the Sherman Charitable Unitrust #1 shall not be obligated to deliver to the Company certificates representing such Existing Shares held by them until 5:00 p.m. New York time on December 29, 1995, provided however, that certificates representing 73,300 and 119,021 shares of Common Stock may be delivered by the Schultz Charitable Remainder Trust and the Schultz Living Trust, respectively, up to 5:00 p.m. New York time on January 3, 1996, and (ii) neither James E. Moeller nor Southpac International Trust, Inc., as the sole co-Trustees of the TLC/CGC Trust, shall be deemed to have given a proxy pursuant to section 5.02 of the Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the date first above written.
By: /s/ JOSEPH J. GRIFFIN Title:
DONALD C. SHERMAN LIVING TRUST DATED
By: /s/ DONALD C. SHERMAN
DONALD C. AND DIANE D. SHERMAN 5% NET INCOME WITH MAKE-UP CHARITABLE REMAINDER UNITRUST #1 DATED DECEMBER 22, 1994
By: /s/ DONALD C. SHERMAN
By: /s/ DIANE D. SHERMAN
DONALD C. AND DIANE D. SHERMAN 10% CHARITABLE REMAINDER UNITRUST #2 DATED
By: /s/ DONALD C. SHERMAN
By: /s/ DIANE D. SHERMAN
SHERMAN FAMILY LIVING TRUST DATED
By: /s/ DONALD C. SHERMAN
By: /s/ DIANE D. SHERMAN
By: /s/ THOMAS L. CROW Thomas L. Crow, its custodian
TLC/CGC TRUST DATED FEBRUARY 27, 1995
By: /s/ JAMES E. MOELLER
By: /s/ SOUTHPAC INTERNATIONAL TRUST
THOMAS L. CROW 6% NET INCOME WITH MAKE-UP CHARITABLE REMAINDER TRUST #3 DATED JULY
By: /s/ THOMAS L. CROW
By: /s/ CAROL ANN CROW
CROW 1990 COMMUNITY PROPERTY TRUST DATED JUNE 8, 1990
By: /s/ THOMAS L. CROW
By: /s/ CAROL ANN CROW
THE ARTHUR B. SCHULTZ LIVING TRUST DATED
By: /s/ ARTHUR B. SCHULTZ
THE ARTHUR B. SCHULTZ CHARITABLE REMAINDER TRUST DATED DECEMBER 22, 1994
By: /s/ ARTHUR B. SCHULTZ
After giving effect to the transactions contemplated by this Stock Transfer Agreement, the following parties beneficially own the following number of shares of Common Stock.
Starr Charitable Remainder Unitrust Dated 0 August 3, 1994 (NIMCRUT #1)***
Donald C. & Diane D. Sherman 5% Net Income 111,889 With Make-up Charitable Remainder Unitrust #1
Donald C. Sherman Living Trust Dated August 5, 0
Donald C. & Diane D. Sherman 10% Charitable 622,889 Remainder Unitrust #2 Dated December 22, 1994
Sherman Family Living Trust Dated December 22, 40,000
Merrill Lynch (collateral account #240-27K85) 0
TLC/CGC Trust Dated February 27, 1995 436,018
Thomas L. Crow 6% Net Income With Make-up 139,000 Charitable Remainder Trust #3 Dated July 6,
Crow 1990 Community Property Trust Dated June 54,000
Thomas L. Crow 9% Net Income with Make-up 279,721 Charitable Remainder Trust #1 Dated December
Thomas L. Crow 20% Net Income with Make-up 55,945 Charitable Remainder Trust #2 Dated December
Thomas L. Crow G.P. FBO Crow Family Limited 250,000
Arthur B. Schultz Living Trust Dated June 8, 336,342*
Arthur B. Schultz Charitable Remainder Trust 98,300**
Arthur B. Schultz Charitable Foundation Dated 50,000
* Excludes 3,300 shares which will be transferred in 1995 and 70,000 shares which will be transferred before January 3, 1996 in each case into the Arthur B. Schultz Charitable Remainder Trust Dated December 22, 1994 from Certificate No. SD1309 (in the amount of 192,321 shares of Common Stock), and includes a new certificate will be issued before January 3, 1996 for the balance to the Arthur B. Schultz Living Trust Dated June 8, 1994.
** Includes 3,300 shares of Common Stock to be transferred in 1995 and 70,000 shares of Common Stock to be transferred before January 3, 1996 from the Arthur B. Schultz Living Trust Dated June 8, 1994.
*** Party to the Stock Option and Tender Agreement but not a party to this Stock Transfer Agreement. | 8-K | EX-99.2 | 1996-01-16T00:00:00 | 1996-01-16T16:19:34 |
0000912057-96-000458 | 0000912057-96-000458_0000.txt | As Filed with the Securities and Exchange Commission on January 12, 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.)
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
PRESIDENT AND CHIEF EXECUTIVE OFFICER ROBOTIC VISION SYSTEMS, INC. (Name, address, including zip code, and telephone number, including area code, of agent for service)
COPIES OF ALL COMMUNICATIONS AND NOTICES TO:
PARKER DURYEE ROSOFF & HAFT NEW YORK, NEW YORK 10017
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At such time after the effective date of this Registration Statement as the Selling Stockholders shall determine.
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following
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, as amended, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box./X/
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. / /
* Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c).
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 Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
(Cross Reference Sheet Pursuant to Item 501 of Regulation S-K)
Items in Form S-3 Location in Registration Statement ----------------- or Heading in Prospectus
1. Forepart of the Registration Facing Page of the Registration Statement and Outside Front Statement; Cross-Reference Sheet; Cover Page of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Table of Contents; Available Cover Pages of Prospectus Information; Incorporation of
3. Summary Information, Risk The Company Factors and Ratio of Earnings
4. Use of Proceeds Cover Page; Selling Stockholders
5. Determination of Offering Price Cover Page; Selling Stockholders
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Cover Page; Selling Stockholders
9. Description of Securities Incorporation of Certain Documents to be Registered by Reference
10. Interests of Named Experts Legal Opinion; Experts
12. Incorporation of Certain Incorporation of Certain Information by Reference Information by Reference
13. Disclosure of Commission *
This Prospectus relates to 369,856 shares of common stock, par value $0.01 per share (the "Common Stock"), of Robotic Vision Systems, Inc. (the "Company"), which shares are being offered for sale by the persons named herein under the caption "Selling Stockholders" (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Selling Stockholders."
The Common Stock is quoted on The Nasdaq National Market (the "NASDAQ-NM") under the symbol "ROBV." On January 8, 1996, the closing last sale price of the Common Stock as reported by the NASDAQ-NM was $22.50 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Selling Stockholders, or their pledgees, donees, transferees or other successors, may sell the Common Stock in any of three ways: (i) through broker-dealers; (ii) through agents or (iii) directly to one or more purchasers. The distribution of the Common Stock may be effected from time to time in one or more transactions (which may involve crosses or block transactions) (A) in the over-the-counter market, or (B) in transactions otherwise than in the over-the-counter market. Any of such transactions may be effected at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices. The Selling Stockholders may effect such transactions by selling the Common Stock to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders and/or commissions from purchasers of the Common Stock for whom they may act as agent (which discounts, concessions or commissions will not exceed those customary in the types of transactions involved). The Selling Stockholders and any broker-dealers or agents that participate in the distribution of the Common
Stock might be deemed to be underwriters, and any profit on the sale of the Common Stock by them and any discounts, commissions or concessions received by any such broker-dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act of 1933, as amended (the "Securities Act").
The Company has agreed to bear all expenses (other than selling discounts, concessions and commissions) in connection with the registration and sale of the Common Stock being offered by the Selling Stockholders. The Company has agreed to indemnify the Selling Stockholders against certain liabilities, including liabilities under the Securities Act.
The Common Stock being offered hereby by the Selling Stockholders has not been registered for sale under the securities laws of any state or jurisdiction as of the date of this Prospectus. Brokers or dealers effecting transactions in the Common Stock should confirm the registration thereof under the securities law of the state in which such transactions occur, or the existence of any exemption from registration.
The date of this Prospectus is , 1996
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . 2
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
No dealer, salesperson or other person has been authorized to give any information or to make any representations not contained in this Prospectus or incorporated by reference to this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. The delivery of this Prospectus at any time does not imply that the information contained herein is correct as of any time subsequent to its date.
Robotic Vision Systems, Inc. (the "Company") produces automated 3- dimensional ("3-D") vision-based systems for inspection and measurement and is a leader in advanced electro-optical sensor technology.
The Company's core business is its Electronics Division which supplies inspection equipment to the semiconductor industry. The Company also has an Aircraft Safety Division which is developing an ice detection product for the aviation industry. The Electronics Division's LS-Series lead scanning systems offer automated high-speed 3-D semiconductor package lead inspection with the added feature of non-contact scanning of the packages in their shipping trays. The systems use a laser-based, non-contact, 3-D measurement technique to inspect and sort quad flat packs, thin quad flat packs, plastic leaded chip carriers, ball grid arrays and thin small outline packs from their carrying trays. The system measurements include coplanarity, total package height, true position spread and span, as well as lead angle, width, pitch and gap.
Acuity Imaging, Inc. ("Acuity"), which became a wholly-owned subsidiary of the Company on September 20, 1995, designs, develops, manufactures and supplies machine vision systems to a diversity of markets.
The Company was incorporated in New York in 1976 and reincorporated in Delaware in 1977. Its executive offices are located at 425 Rabro Drive East, Hauppauge, New York 11788; telephone (516) 273-9700.
On October 23, 1995, the Company consummated a merger with International Data Matrix, Inc., a privately owned company located in Clearwater, Florida ("IDM"), pursuant to which IDM became a wholly owned subsidiary of the Company (the "IDM Merger"). IDM markets a line of 2-D Data Matrix-TM- code readers and is widely recognized in the emerging high-density 2-D bar code segment of the bar code industry. The IDM Merger was structured as a tax-free organization and accounted for as a pooling of interests. As a consequence of the IDM Merger, the Company issued 369,856 shares of its Common Stock to the Selling Stockholders in exchange for all of the outstanding shares of IDM common stock. See "Selling Stockholders."
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at 7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60621. Copies of such material may be obtained from the Public Reference Section of the Commission at prescribed rates by writing to the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is made to the Registration Statement, copies of which can be obtained from the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated herein by reference are the following documents filed by the Company with the Commission (File No. 0-8623) under the Exchange Act:
(a) The Company's Annual Report on Form 10-K for its fiscal year ended September 30, 1995 (the "Annual Report");
(b) The Company's Current Report on Form 8-K dated October 3, 1995, relating to the Company's acquisition by merger of Acuity;
(c) The Company's Current Report on Form 8-K and 8-K/A-1 dated October 23, 1995, relating to the IDM Merger; and
(d) The Company's Registration Statement on Form 8-A for a description of the Common Stock.
All documents filed by the Company with the Commission pursuant to Sections 13, 14 and 15(d) of the Exchange Act subsequent hereto, but prior to the termination of this offering, shall be deemed to be incorporated herein by reference and to be a part hereof from their respective dates of filing.
The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the documents referred to above which have been incorporated into this Prospectus by reference (other than the exhibits to such documents). Requests or such copies should be directed to Robert H. Walker, Secretary, Robotic Vision Systems, Inc., 425 Rabro Drive East, Hauppauge, New York 11788; telephone number: (516) 273-9700.
The following table sets forth certain information with respect to the Selling Stockholders, all of whom acquired their respective shares of RVSI Common Stock pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization dated October 20, 1995 by and between RVSI and IDM by which IDM became a wholly owned subsidiary of RVSI. The 58 Selling Stockholders named below, at least 26 of which are "accredited investors", as such term is defined in Rule 501, promulgated under the Securities Act, acquired their shares of RVSI Common Stock absent registration under the Securities act by reason of the exemption from such registration afforded by the provisions of Section 4(2) thereof and Regulation D promulgated thereunder. The Company will receive no proceeds from the sale of the shares by the Selling Stockholders.
(1) Prior to the IDM Merger, such person beneficially owned more than 5% of the outstanding common stock of IDM.
(2) Prior to the IDM Merger, Telxon Corporation had the right, and exercised such right, to nominate two persons to IDM's board of directors.
(3) Prior to the IDM Merger, Dennis G. Priddy, the founder of IDM, was IDM's President and a director.
(4) Prior to the IDM Merger, Houston Venture Partners had the right, and exercised such right, to nominate one person to IDM's board of directors.
(5) Prior to February 1995, Stephen M. Wagman was a director of IDM.
(6) Prior to the IDM Merger, Robert A. Goodman was a director of IDM.
The Selling Stockholders, or their pledgees, donees, transferees or other successors, may sell the Common Stock in any of three ways: (i) through broker-dealers; (ii) through agents or (iii) directly to one or more purchasers. The distribution of the Common Stock may be effected from time to time in one or more transactions (which may involve crosses or block transactions) (A) in the over-the-counter market, or (B) in transactions otherwise than in the over-the-counter market. Any of such transactions may be effected at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices. The Selling Stockholders may effect such transactions by selling the Common Stock to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders and/or commissions from purchasers of the Common Stock for whom they may act as agent (which discounts, concessions or commissions will not exceed those customary in the types of transactions involved). The Selling Stockholders and any broker-dealers or agents that participate in the distribution of the Common Stock might be deemed to be underwriters, and any profit on the sale of the them and any discounts, commissions or concessions received by any such broker-dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act.
The legality of the Common Stock offered hereby will be passed upon for the Company by Parker Duryee Rosoff & Haft A Professional Corporation, 529 Fifth Avenue, New York, New York 10017. Jay M. Haft, of counsel to such Firm and a director of the Company, beneficially owns 158,946 shares of Common Stock of the Company, as well as options and warrants to acquire an additional 357,600 shares of such Common Stock. Members of Parker Duryee Rosoff & Haft, other than Mr. Haft, beneficially own 148,625 shares of Common Stock of the Company and warrants to acquire an additional 72,667 shares of Common Stock of the Company.
The financial statements incorporated in this Prospectus by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1995 and the supplemental financial statements of the Company and its consolidated subsidiaries included in this Prospectus as of September 30, 1995 and 1994 and for each of the three years in the period ended September 30, 1995, except Acuity Imaging, Inc. and subsidiaries for the years ended September 30, 1995 and December 31, 1994, and except Itran Corporation for the year ended December 31, 1993 have been audited by Deloitte & Touche LLP as stated in their reports which are incorporated by reference and appear herein, respectively, in the Registration Statement. The financial statements of Acuity Imaging, Inc. and subsidiaries and Itran Corporation for the periods indicated above (consolidated with those of the Company) have been audited by Arthur Andersen LLP as stated in their reports, which are incorporated by reference and included herein. Such financial statements and supplemental financial statements of the Company and its consolidated subsidiaries are incorporated by reference and included herein, respectively, in reliance upon the respective reports of such firms given upon their authority as experts in accounting and auditing. Both of the foregoing firms are independent auditors.
The financial statements of International Data Matrix, Inc. as of September 30, 1995 and December 31, 1994 and for the nine months ended September 30, 1995 and the year ended December 31, 1994 incorporated in this Prospectus by reference from the Company's Current Report on Form 8-K/A-1 dated October 23, 1995, and the financial statements of Acuity Imaging, Inc. (formerly Automatix Incorporated) as of December 31, 1993 and for each of the two years in the period ended December 31, 1993 incorporated in this Prospectus by reference from the Company's Current Report on Form 8-K dated October 3, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports, which are incorporated herein by reference, and have been so incorporated in reliance upon the reports of such firm given their authority as experts in accounting and auditing. The financial statements of Acuity Imaging, Inc. as of December 31, 1994 and for the year then ended incorporated in this Prospectus by reference from the Company's Current Report on Form 8-K dated october 3, 1995 have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, which is incorporated herein by reference and has been so incorporated in reliance upon the authority of said firm as experts in accounting and auditing.
To the Board of Directors and Stockholders of Robotic Vision Systems, Inc. and Subsidiaries:
We have audited the accompanying supplemental consolidated balance sheets of Robotic Vision Systems, Inc. and subsidiaries (the "Company") as of September 30, 1995 and 1994, and the related supplemental consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1995. 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 did not audit the financial statements of Acuity Imaging, Inc. and subsidiaries ("Acuity"), a wholly-owned subsidiary, for the years ended September 30, 1995 and December 31, 1994 and 1993, respectively, which statements reflect total assets constituting 12% and 30% of consolidated total assets as of September 30, 1995 and 1994, respectively, and total revenues constituting 29%, 46%, and 47% of consolidated total revenues for the years ended September 30, 1995, 1994 and 1993, respectively. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Acuity, is based solely on the report of such other auditors, with the exception that in 1993, we audited the financial statements of a subsidiary of Acuity, which statements reflect total revenues constituting 22% of consolidated total revenues of the Company for the year ended September 30, 1993.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an 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.
The supplemental consolidated financial statements give retroactive effect to the merger of Robotic Vision Systems, Inc. and subsidiaries and International Data Matrix, Inc. ("IDM") as of October 23, 1995, which has been accounted for as a pooling of interests as described in Note 2 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not cover the date of consummation. These supplemental consolidated financial statements do not extend through the date of consummation, however, they will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the business combination are issued.
In our opinion, based on our audits and the reports of the other auditors, such supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles after financial statements are issued for a period which includes the date of consummation of the merger described above.
/s/ Deloitte & Touche LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the consolidated balance sheets of Acuity Imaging, Inc. (a Delaware corporation and a wholly owned subsidiary of Robotic Vision Systems, Inc.) and subsidiaries as of September 30, 1995 and December 31, 1994, and the related consolidated statements of operations and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Acuity Imaging, Inc. and subsidiaries at September 30, 1995 and December 31, 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
On September 20, 1995, Robotic Vision Systems, Inc. acquired Acuity Imaging, Inc.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Itran Corporation:
We have audited the balance sheets of Itran Corporation (a Delaware corporation) as of December 31, 1993, and the related statements of operations, stockholders' investment and cash flows for the year then ended. 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 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 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 Itran Corporation as of December 31, 1993, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
On January 24, 1994, Itran Corporation merged with Automatix, Incorporated with Automatix as the surviving corporation. The surviving corporation was renamed Acuity Imaging, Inc.
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1995 AND 1994
See notes to supplemental consolidated financial statements.
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
See notes to supplemental consolidated financial statements.
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
See notes to supplemental consolidated financial statements.
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
See notes to supplemental consolidated financial statements.
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (CONTINUED)
See notes to supplemental consolidated financial statements.
ROBOTIC VISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
A. DESCRIPTION OF BUSINESS - Robotic Vision Systems, Inc. and subsidiaries (the "Company") is principally engaged in the development, manufacture and marketing of automated two dimensional and three dimensional vision-based systems for inspection and measurement products which have a variety of commercial and military applications.
B. PRINCIPLES OF CONSOLIDATION - The supplemental consolidated financial statements include the financial statements of Robotic Vision Systems, Inc., Acuity Imaging, Inc. and subsidiaries (a wholly-owned subsidiary) ("Acuity"), and International Data Matrix, Inc. (a wholly-owned subsidiary) ("IDM"). All significant intercompany transactions and balances have been eliminated in consolidation.
The supplemental consolidated financial statements of the Company have been prepared to give retroactive effect to the business combination with IDM (Note 2) which occurred on October 23, 1995 and has been accounted for as a pooling of interests.
C. REVENUES AND COST OF REVENUES - The Company recognizes revenue on its standard electronic inspection and measurement products upon shipment. Revenue from the licensing of software is recognized when the software is delivered if collectibility is probable and there are no significant vendor obligations. Engineering service and support revenue is recognized when such services are rendered. The Company recognizes revenues and related cost of revenues associated with the long-term contracts using the percentage-of-completion method of accounting, measured by the percentage of total costs incurred in relation to total estimated costs at completion. Contract costs include material, direct labor, manufacturing overhead and other direct costs. The degree of accuracy with which the Company is able to estimate the profit to be realized on fixed-price long-term contracts is greater as the contract approaches completion; accordingly, the Company reviews its estimates periodically and records adjustments thereto as required. On firm fixed-price contracts which are in the early stages of completion, and for which estimates of profit cannot be reasonably determined, the Company utilizes the percentage- of-completion method recognizing revenue in amounts equal to costs incurred until such time that profit margins can be reasonably estimated. If a loss is anticipated on a contract, the entire amount of the estimated loss is accrued in the period in which the loss becomes known.
Revenues are billed in accordance with the terms of each contract. The Company estimates that all of its unbilled receivables at September 30, 1995 will become billable during the ensuing twelve months.
D. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes money market accounts and certain debt securities issued by the United States government with an original maturity of three months or less.
E. INVESTMENTS - Investments consist of certain debt securities issued by the United States government with maturities through November 1997. The Company's intention is to hold such investments until their maturity, therefore, such investments are recorded at their amortized cost. As of September 30, 1995, the aggregate fair value of investments maturing within one year was approximately $993,000 and the fair value of investments with maturities of longer than one year was approximately $2,020,000. The aggregate unrealized gain as of September 30, 1995 was approximately $24,000. As of September 30, 1994, the aggregate fair value of investments maturing within one year was approximately $1,478,000 and the fair value of investment with maturities of longer than one year was approximately $1,447,000. The aggregate unrealized loss as of September 30, 1994 was approximately $70,000.
F. PLANT AND EQUIPMENT - Plant and equipment is recorded at cost less accumulated depreciation and amortization and includes the costs associated with demonstration equipment and other equipment internally developed by the Company. The cost of internally developed assets includes direct material and labor costs and applicable factory overhead. Depreciation is computed by the straight-line method over estimated lives ranging from two to eight years. Leasehold improvements are amortized over the lesser of their respective estimated useful lives or lease terms.
G. INVENTORIES - Inventories are stated at the lower of cost (using the first-in, first-out cost flow assumption) or market.
H. SOFTWARE DEVELOPMENT COSTS - Software development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86. Capitalized software development costs are amortized primarily over a five- year period, which is the estimated useful life of the software. Amortization begins in the period in which the related product is available for general release to customers.
I. RESEARCH AND DEVELOPMENT COSTS - The Company charges research and development costs for Company-funded projects to operations as incurred. Research and development costs which are reimbursable under customer-funded contracts are treated as contract costs.
J. INCOME TAXES - Deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
K. FOREIGN CURRENCY TRANSLATION - Assets and liabilities of the Company's European subsidiary are translated at the exchange rate in effect at the balance sheet date. Income statement accounts are translated at the average exchange rate for the year. The resulting translation adjustments are excluded from operations and accumulated as a separate component of stockholders' equity. Transaction gains are included in net income and totaled $4,000, $19,000 and $0 in 1995, 1994 and 1993, respectively.
L. INCOME PER SHARE - Net income per common share is computed by dividing each year's net income by the respective weighted average number of shares of common stock outstanding during the period, after giving effect to dilutive options and warrants. The effect of options and warrants was calculated using the modified treasury stock method for the years ended September 30, 1994 and 1993.
M. FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
A. CASH AND CASH EQUIVALENTS - The carrying amounts approximate fair value because of the short maturity of these instruments.
B. INVESTMENTS - Fair value equals quoted market value.
C. RECEIVABLES - The carrying amount approximates fair value because of the short maturity of these instruments.
D. DEBT - The carrying amounts approximate fair value because of the relatively short maturity of those instruments.
N. RECLASSIFICATION - Certain amounts in the 1993 and 1994 financial statements have been reclassified to conform with the 1995 presentation.
A. INTERNATIONAL DATA MATRIX, INC.
On October 23, 1995, the Company acquired the outstanding shares of IDM for approximately 370,000 shares of the Company's common stock, having a market value at the date of the merger of approximately $8,183,000. IDM is a developer and seller of computerized visual inspection equipment. This acquisition has been accounted for as a pooling of interests and accordingly, the supplemental consolidated financial statements have been restated to include the accounts of IDM for all periods presented. The accompanying September 30, 1994 and 1993 supplemental consolidated financial statements include IDM's amounts for the years ended December 31, 1994 and 1993. The accompanying supplemental consolidated financial statement for the year ended September 30, 1995 include the operations of IDM on a common fiscal year. IDM's net loss for the period October 1, 1994 through December 31, 1994 of $154,000, included twice in the accompanying supplemental consolidated statements of income as a result of conforming fiscal years, has been included as an adjustment to consolidated accumulated deficit. As of September 30, 1995, $145,000 of expense have been incurred related to this merger.
The following is a reconciliation of certain restated amounts with amounts previously reported:
B. ACUITY IMAGING, INC. AND SUBSIDIARIES
On September 20, 1995, the Company acquired the outstanding shares of Acuity for approximately 1,448,000 shares of the Company's common stock, having a market value at the date of the merger of approximately $31,141,000. Acuity is a developer and seller of computerized visual inspection equipment. Outstanding Acuity stock options were converted into options to purchase approximately 114,000 shares of the Company's common stock. This acquisition has been accounted for as a pooling of interests. The accompanying September 30, 1994 and 1993 supplemental consolidated financial statements include Acuity's amounts for the years ended December 31, 1994 and 1993. The accompanying supplemental consolidated financial statement for the year ended September 30, 1995 include the operations of Acuity on a common fiscal year. Acuity's net income for the period October 1, 1994 through December 31, 1994 of $255,000, included twice in the accompanying supplemental consolidated statements of income as a result of conforming fiscal years, has been included as an adjustment to consolidated accumulated deficit. Included in the operating results of the Company for the year ended September 30, 1995 are approximately $19,153,000 of revenues and $1,188,000 of net loss of Acuity prior to the date of acquisition (September 20, 1995). Expenses of $1,160,000 have been incurred related to this merger.
C. MERGER OF ACUITY (FORMERLY AUTOMATIX INCORPORATED) WITH ITRAN CORP.
On January 26, 1994, Acuity (formerly Automatix Incorporated ["Automatix"]) merged with Itran Corp. ("Itran") in a tax-free exchange of approximately 1,483,000 registered shares of Automatix common stock for substantially all of Itran's outstanding common and preferred stock. Itran was a developer and seller of computerized visual inspection equipment. Automatix was the surviving corporation and, simultaneously with the merger, changed its name to Acuity Imaging, Inc. Outstanding Itran stock options were converted into options to purchase approximately 162,000 shares of Acuity's common stock. The merger has been accounted for as a pooling of interests. Expenses of approximately $1,091,000 were incurred related to this merger.
Receivables at September 30, 1995 and 1994 consisted of the following:
Unbilled receivables primarily relate to sales recorded on standard products which have been shipped, but have not yet been finally accepted by the customer. The Company has no significant remaining obligations relating to these unbilled receivables and collectibility is probable.
Inventories at September 30, 1995 and 1994 consisted of the following:
The benefit from income taxes for the fiscal years ended September 30, 1995, 1994 and 1993 consisted of the following:
The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") during fiscal 1993. The adoption of SFAS 109 was made as of the beginning of the fiscal year on a prospective basis. This accounting change had no effect on the Company's financial statements as of the date of adoption. However, the adoption of SFAS 109 resulted in an increase in the income tax benefit recognized in
therefore, an increase in net income of $584,000 ($0.04 per common share for both primary and fully diluted).
The adjustments of the valuation allowance during fiscal 1995, 1994 and 1993 emanate from the Company's profitable operations during those years and the extent to which the Company can substantiate projected future earnings. The deferred tax assets as of September 30, 1995 and 1994 are equivalent to the benefit to be derived from net operating loss carryforwards that were expected to be utilized to offset future taxable income projected as of the respective balance sheet dates. The deferred tax assets at September 30, 1995 and 1994 have been limited to the benefit to be derived from projected future income, primarily due to the Company's projected future profitability currently being primarily dependent on one existing product line.
A reconciliation between the statutory U.S. Federal income tax rate and the Company's effective tax rate for the years ended September 30, 1995, 1994 and 1993 is as follows:
The net deferred tax asset at September 30, 1995, 1994 and 1993 is comprised of the following:
As of September 30, 1995, Robotic Vision Systems, Inc. ("RVSI") had Federal net operating loss carryforwards of approximately $11,997,000. Such loss carryforwards expire in the fiscal years 2001 through 2007. Additionally, RVSI had Federal income tax credits of approximately $847,000 and state income tax credits of approximately $499,000. The utilization of the carryforwards to offset future tax liabilities is dependent upon the Company's ability to generate sufficient taxable income during the carryforward periods.
As of September 30, 1995, Acuity had Federal net operating loss carryforwards of approximately $11,851,000 and foreign net operating loss carryforwards relating to its United Kingdom subsidiary of approximately $349,000. Such loss carryforwards expire in the fiscal years 1996 through 2010. In addition, Acuity has available approximately $325,000 of unused investment tax credits. Because of the changes in ownership, as defined in the Internal Revenue Code, which occurred in January 1994 and September 1995 (Note 2), certain of the net operating loss carryforwards and credits are subject to annual limitations.
As of September 30, 1995, IDM had Federal net operating loss carryforwards of approximately $3,400,000. Such loss carryforwards expire in the fiscal years 2006 through 2010. In addition, IDM has available approximately $37,000 of unused general business tax credits. Because of the changes in ownership, as defined in the Internal Revenue Code, which occurred in October 1995 (Note 2), certain of the net operating loss carryforwards and credits are subject to annual limitations.
Plant and equipment at September 30, 1995 and 1994 consisted of the following:
Other assets at September 30, 1995 and 1994 consisted of the following:
Certain software development costs totaling $535,000 and $433,000 have been capitalized during the fiscal years ended September 30, 1995 and 1994, respectively. Amortization expense relating to software development costs for 1995, 1994 and 1993 was $325,000, $239,000 and $137,000, respectively.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at September 30, 1995 and 1994 consisted of the following:
In March 1995, Acuity obtained a revolving line of credit that provided for borrowings up to the lesser of $3,500,000 or 80 percent of eligible accounts receivable, as defined, plus 50 percent of unpledged domestic cash and cash equivalents. Interest was payable monthly at a rate of prime plus .5 percent. Borrowings under the line were secured by substantially all assets of Acuity. The agreement required, among other covenants, that Acuity maintain minimum levels of profitability, current ratio, net worth and limits the levels of leverage.
After the merger with RVSI, the line of credit balance of $1,375,000 was repaid with the proceeds from a 90-day note payable from a new bank, guaranteed by RVSI. The note is collateralized by certain investments and cash equivalents of RVSI. The note has a maturity date of December 28, 1995. At September 30, 1995, the outstanding balance under the note was $1,385,000, bearing interest at 8.25 percent.
RVSI had a line of credit agreement with a bank under which RVSI could borrow up to $1,500,000 against certain customer accounts receivable and inventory. $63,000 was outstanding under this agreement at September 30, 1994. Borrowings under the agreement bore interest at the higher of the bank's prime rate or the Federal funds rate plus one-half of one percent. The agreement expired in June 1995.
At September 30, 1994, IDM had several short-term notes payable outstanding totaling approximately $236,000 to certain of its then existing stockholders at interest rates ranging from 7 to 10 percent. All outstanding balances were either repaid or satisfied through the issuance of shares of IDM common stock sold in IDM's 1995 private placement (Note 13). IDM also had outstanding $350,000 of loans representing bridge financing from three institutional investors (the "Investors"). These loans bore interest at the rate of 8 percent.
In January and February 1995, IDM obtained additional bridge financing totaling $280,000 from the Investors. All amounts owed to the Investors were satisfied through the 1995 private placement of IDM's common stock (Note 13). In addition, in June through September 1995, these Investors, as well as a former stockholder of IDM common stock, loaned IDM a total of $270,000 for working capital purposes. Such loans bore interest at the rate of 10 percent and were secured by certain accounts receivable, inventory, and equipment. Such amounts were repaid in October 1995.
DEFINED BENEFIT PLAN - The Company has a noncontributory pension plan for employees who meet certain minimum eligibility requirements. The level of retirement benefit is based on a formula which considers both employee compensation and length of credited service.
Plan assets are invested in pooled bank investment accounts, and the fair value of such assets is based on the quoted market prices of underlying securities in such accounts. The Company funds pension plan costs based on minimum and maximum funding criteria as determined by independent actuarial consultants.
The components of net pension cost for the fiscal years ended September 30, 1995, 1994 and 1993 are summarized as follows:
The funded status of the plan compared with the accrued expense included in the Company's consolidated balance sheet at September 30, 1995 and 1994 is as follows:
Significant assumptions used in determining net periodic pension cost and related pension obligations are as follows:
DEFINED CONTRIBUTION STOCK OWNERSHIP AND DEFERRED COMPENSATION PLAN - The Company has a defined contribution plan for all eligible employees, as defined by the Plan. The Plan provides for employee cash contributions ranging from two to ten percent of compensation and matching employer contributions of Company stock at a rate of 25 percent of an employee's contribution, limited to a maximum of six percent of a participant's compensation. The Plan also provides for additional employer contributions of Company stock at the discretion of the Company's Board of Directors. The Company incurred $83,000, $60,000 and $36,000 for employer contributions to the Plan in 1995, 1994 and 1993, respectively. In 1995, 1994 and 1993, the Company issued 12,000, 9,000 and 16,000 shares, respectively, of its common stock to the Plan related to its prior year contribution.
STOCK APPRECIATION RIGHTS - During fiscal 1992, the Company entered into a stock appreciation rights agreement with its President. Under the terms of the agreement, the President will receive a cash payment equal to the appreciation in the market value of a fixed number of shares of the Company's common stock if certain conditions are met.
The Company records the compensation expense related to this agreement at the date that the amount of payment to be made can be reasonably estimated. The Company recorded compensation expense of $90,000 and $85,000 related to this agreement during fiscal 1995 and 1994, respectively. No compensation expense was recorded relating to this agreement during fiscal 1993. No additional compensation may be earned under this agreement.
OPERATING LEASES - The Company has entered into operating lease agreements for equipment, and manufacturing and office facilities. The minimum noncancelable scheduled rentals under these agreements are as follows:
Rent expense for 1995, 1994 and 1993 was $798,000, $755,000 and $694,000, respectively.
LITIGATION - During fiscal 1992, the Company instituted an action against Cybo Systems, Inc. ("Cybo"), alleging that Cybo breached certain agreements between the parties with respect to the sale by the Company to Cybo of all of the assets of its welding and cutting systems business.
In response to the action brought by the Company, Cybo asserted claims against the Company alleging, among other things, breach of contract and warranties, fraud, bad faith, trespass and conversion. Cybo is seeking aggregate damages in excess of $10,000,000. The Company
believes that Cybo's claims are without merit and plans to defend against them vigorously. The Company's management, after discussion with legal counsel, believes that the ultimate outcome of this matter will not have a material adverse impact on the Company's consolidated financial position or results of operations.
UNITED STATES GOVERNMENT CONTRACTS - Certain of the Company's contracts are subject to audit by applicable United States governmental agencies. Until such audits are completed, the ultimate profit on these contracts cannot be finally determined; however, in the opinion of management, the final contract settlements will not have a material adverse effect on the Company's consolidated financial position or results of operations.
PRIVATE EQUITY PLACEMENTS - During fiscal 1995, the Company entered into an agreement with a group of investors. Under the agreement, the Company received approximately $9,386,000, after expenses, in exchange for the issuance of 1,110,000 shares of the Company's common stock. The Company also issued warrants exercisable through June 2000 to purchase approximately 68,000 shares of the Company's common stock at exercise prices ranging from $8.75 to $9.00 per share.
During fiscal 1995, IDM entered into an agreement with a group of investors and certain then existing stockholders. Under the agreement, IDM received approximately $1,765,000 after expenses, in exchange for 46,447 shares of IDM's common stock (approximately 119,000 equivalent shares of RVSI common stock). IDM used approximately $785,000 of the net proceeds to satisfy certain notes payable and related accrued interest and $60,000 of the net proceeds to satisfy certain accounts payable.
During fiscal 1994, the Company entered into an agreement with a group of investors. Under the agreement the Company received approximately $3,804,000, after expenses, in exchange for the issuance of 1,360,000 shares of the Company's common stock. The Company also issued warrants exercisable through December 1999 to purchase 51,000 shares of the Company's common stock at an exercise price of $3.75 per share.
During fiscal 1994, IDM entered into an agreement with an investor and certain existing stockholders. Under the agreement, IDM received approximately $491,000, after expenses, in exchange for 22,796 shares of IDM's common stock (approximately 59,000 equivalent shares of RVSI common stock). IDM used approximately $227,000 of the net proceeds to satisfy certain notes payable and related accrued interest.
WARRANTS ISSUED FOR SERVICES RENDERED - During fiscal 1995, the Company issued warrants under certain agreements granting the holders thereof the right through July 1999 to purchase up to approximately 82,000 shares of the Company's common stock at exercise prices ranging from $5.81 to $23.38 per share as compensation for professional services rendered. The Company recorded an expense of approximately $92,000 related to the issuance of such warrants.
During fiscal 1994, the Company issued warrants for the purchase of 30,000 shares of the Company's common stock at an exercise price of $4.69 per share as compensation for
professional services rendered. The Company recorded an expense of approximately $38,000 related to the issuance of such warrants.
During fiscal 1993, the Company issued warrants under certain agreements granting the holders thereof the right through June 1998 to purchase up to approximately 227,000 shares of the Company's common stock at exercise prices ranging from $0.88 to $3.00 per share as compensation for professional services rendered. The Company recorded an expense of approximately $125,000 related to the issuance of such warrants.
WARRANT ISSUED IN SETTLEMENT OF LITIGATION - During fiscal 1993, the Company issued warrants in connection with the settlement of a lawsuit to purchase up to 25,000 shares of the Company's common stock at an exercise price of $4.37 per share. The expiration date of such warrants is November 1, 1996. The Company recorded an expense of approximately $25,000 related to the issuance of such warrants.
WARRANTS EXERCISED - During fiscal 1995, the Company received approximately $492,000 in connection with the issuance of approximately 324,000 shares of its common stock upon the exercise of warrants to purchase such shares at prices ranging between $1.00 and $4.38 per share.
During fiscal 1994, the Company received approximately $270,000 in connection with the issuance of approximately 243,000 shares of its common stock upon the exercise of warrants to purchase such shares at prices between $0.88 and $4.38 per share.
WARRANTS OUTSTANDING - As of September 30, 1995, there were warrants outstanding to purchase approximately 1,198,000 shares of the Company's common stock with exercise prices ranging between $1.00 and $23.38 per share.
STOCK OPTION PLANS - The Company has four stock option plans (the 1977, 1982, 1987 and 1991 plans) which provide for the granting of options to employees or directors at prices and terms as determined by the Board of Directors' Stock Option Committee (the "Committee"). With respect to the 1977 and 1987 plans, option prices may not be less than the fair market value at date of grant. Any excess of the fair market value of shares under option at the date of grant over the exercise price is charged to operations over the period in which the stock options vest. All options issued by the Company to date have exercise prices which were equal to market value of the Company's common stock at the date of grant. No new options may be granted under the 1977 and 1982 plans.
The following table sets forth summarized information concerning the Company's stock options:
14. SEGMENT AND PRINCIPAL CUSTOMER INFORMATION
For the purposes of segment reporting, management considers the Company to operate in one industry, the machine vision industry.
During 1995, revenues from a single customer represented 16 percent of total revenues. No other customer accounted for more than 10 percent of total revenues for fiscal 1995, 1994 and 1993.
Foreign export sales accounted for 64 percent, 41 percent and 52 percent of the Company's revenues in fiscal 1995, 1994 and 1993, respectively.
The Company's domestic and foreign export sales during the years ended September 30, 1995, 1994 and 1993 are set forth below:
On November 20, 1995, the Company obtained a revolving line of credit from a bank that provides for maximum borrowings of $6,000,000. The agreement expires on January 31, 1999. Borrowings under the agreement are secured by all accounts receivable of the Company and will bear interest at the adjusted LIBOR rate, as defined, plus two percent. The Company will pay a commitment fee of one quarter of one percent per annum on any unused portion of the credit facility. The terms of the agreement, among other matters, require the Company to maintain certain tangible net worth, debt to equity, working capital, and earnings before depreciation and amortization to long-term debt ratios and restrict the payment of cash dividends. * * * * * * *
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the offering described in the Registration Statement:
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article SEVENTH of the Certificate of Incorporation of Robotic Vision Systems, Inc. (the "Registrant") provides with respect to the indemnification of directors and officers that the Registrant shall indemnify to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, each person that such Section grants the Registrant power to indemnify. Article TENTH of the Certificate of Incorporation of the Registrant also provides that no director shall be liable to the corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except with respect to (1) a breach of the director's duty of loyalty to the corporation or its stockholders, (2), acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) liability under Section 174 of the Delaware General Corporation Law or (4) a transactions from which the director derived an improper personal benefit, it being the intention of the foregoing provision to eliminate the ability of the corporation's directors to the corporation or its stockholders to the fullest extent permitted by Section 102(b)(7) of Delaware General Corporation Law, as amended from time to time.
Section 145 of Delaware Corporation Law provides, inter alia, that to the extent a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding, whether civil, criminal, administrative or investigative or in defense of any claim, issue, or matter therein (hereinafter, a "Proceeding"), by reason of the fact that he is or was a director, officer, employee or agent of a corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (collectively an "Agent" of the corporation), he shall be indemnified against expenses (including attorney's fees) actually and reasonably incurred by him in connection therewith.
Section 145 also provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened Proceeding by reason of the fact that he is or was an Agent of the corporation, against expenses (including attorney's fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he 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 proceeding, had no reasonable cause to believe his conduct was unlawful; provided, however, that in an action by or in the right of the corporation, the corporation may not indemnify such person in respect of any claim, issue, or matter as to which he is adjudged to be liable to the corporation unless, and only to the extent that, the Court of Chancery or the court in which such proceeding was brought determines that, despite the adjudication of liability but in view of all the circumstances of the case, such person is reasonably entitled to indemnity.
The undersigned Registrant hereby undertakes:
(7) That for the purpose of determining any liability under the Securities Act of 1933, as amended (the "Securities Act"), 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.
(8) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement 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 Registration Statement.
(9) To remove from registration any means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(10) That, for purposes of determining any liability under the Securities Act, each filing of Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that is incorporated by reference in the Registration
Statement, shall be deemed to be a new registration statement relating to the securities offered herein, 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 Securities Act may be permitted to directors, officers and controlling persons of Registrant pursuant to Item 15 of this Part II to the Registration Statement, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of 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, 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 the public policy as expressed in the Securities 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 of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Village of Hauppauge, and State of New York, on the 12th day of January, 1996.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Pat V. Costa and Robert H. Walker, and each of them, with full power to act without the other, 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, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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 dates indicated: | S-3 | S-3 | 1996-01-16T00:00:00 | 1996-01-12T17:51:07 |
0000873084-96-000010 | 0000873084-96-000010_0000.txt | PROSPECTUS SUPPLEMENT This Prospectus Supplement DATED JANUARY 16, 1996 filed pursuant to Rule 424(b)(3), TO PROSPECTUS DATE relates to Registration Statement NOVEMBER 10, 1992, AS No. 33-41484 and the Prospectus SUPPLEMENTED THROUGH dated November 10, 1992
Pursuant to Section 13 of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 16, 1996
Sears Credit Account Master Trust I (Exact name of registrant as specified in charter)
(State of (Commission (IRS Employer Organization) File Number) Identification No.)
c/o Sears Receivables Financing Group, Inc. (Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (302) 888-3176
Former name, former address and former fiscal year, if changed since last report: Not Applicable
On January 16, 1996, Registrant made available the Monthly Investor Certificateholders' Statement set forth as Exhibit 21.
Item 7. Financial Statements and Exhibits
21. Monthly Investor Certificateholders' Statement related to the distribution of January 16, 1996 and reflecting the performance of the Trust during the Due Period ended in December 1995, which will accompany the distribution on January 16, 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 thereunto duly authorized.
Sears Credit Account Master Trust I
By: Sears Receivables Financing Group, Inc.
21. Monthly Investor Certificateholders' Statement - (January 16, 1996). | 424B3 | 424B3 | 1996-01-16T00:00:00 | 1996-01-16T10:46:51 |
0000950109-96-000223 | 0000950109-96-000223_0000.txt | AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1996
THE SECURITIES ACT OF 1933
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF INCORPORATION CLASSIFICATION CODE) IDENTIFICATION NO.) (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
WILLIAM B. KING, P.C. EDWARD J. SCHNEIDMAN, ESQ. JOSEPH L. JOHNSON III, ESQ. STUART M. LITWIN, ESQ. GOODWIN, PROCTER & HOAR MAYER, BROWN & PLATT EXCHANGE PLACE 190 S. LASALLE STREET BOSTON, MA 02109-2881 CHICAGO, IL 60603-3441
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon consummation of the merger (the "Merger") of Tucker Properties Corporation ("Tucker") with and into Bradley Real Estate, Inc. ("Bradley") pursuant to an Agreement and Plan of Merger dated as of October 30, 1995 described in the enclosed Joint Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ]
(1) Represents the estimated maximum number of additional shares of common stock of Bradley to be issued to holders of units in Tucker Operating Limited Partnership upon exercise of their redemption rights. At the time of the initial filing of the registration statement on December 7, 1995, Bradley registered 7,428,202 shares of its common stock for issuance to the stockholders of Tucker in connection with the Merger and paid a registration fee of $33,837 relating to those shares.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f)(1) and based on the average of the high and low sales price per share of common stock of Tucker on January 11, 1996, on the New York Stock Exchange. If the Merger is consummated, a maximum of six hundred eighty-six thousandths (.686) of a share of common stock of Bradley will be issued for every one share of common stock of Tucker.
(3) Calculated in accordance with Rule 457(a) and Rule 457(c).
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PURSUANT TO RULE 404(A) OF REGULATION C AND ITEM 501(B) OF REGULATION S-K THE JOINT PROXY STATEMENT/PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-4.
* Item is omitted because answer is negative or Item is inapplicable.
You are cordially invited to attend a Special Meeting of Stockholders of Bradley Real Estate, Inc. ("Bradley") to be held at 10:00 a.m., Eastern time, on February , 1996, at , Boston, Massachusetts (the "Special Meeting").
At the Special Meeting, you will be asked to approve the merger of Tucker Properties Corporation ("Tucker") with and into Bradley (the "Merger") and the Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and between Bradley and Tucker, pursuant to which, among other things, each outstanding share of Tucker common stock will be converted into the right to receive a percentage of a share of Bradley common stock to be determined as follows. If the average per share closing price of Bradley common stock for the 20 trading days prior to the fifth day preceding the closing of the Merger is $16.00 or more, each share of Tucker common stock will be exchanged for .665 of a share of Bradley common stock. If such average closing price is between $15.50 and $16.00, the exchange ratio will be determined by dividing $10.64 by the average closing price. If such average closing price is $15.50 or less, the exchange ratio will be .686 of a share of Bradley common stock. Approval of the Merger and the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Bradley common stock.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, BRADLEY AND ITS STOCKHOLDERS. THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE THE MERGER AND THE MERGER AGREEMENT.
The accompanying Joint Proxy Statement/Prospectus provides detailed information concerning the proposed Merger, the reasons for your Board of Directors' recommendation of the Merger and the Merger Agreement and certain additional information, including, without limitation, the information set forth under the heading "Risk Factors," which describes, among other items, potential adverse effects to stockholders as a result of the Merger. We urge you to carefully consider all of the information in the Joint Proxy Statement/Prospectus. It is important that your shares of Bradley common stock be represented at the Special Meeting, regardless of the number of shares you hold. Therefore, please sign, date and return your proxy card as soon as possible, whether or not you plan to attend the Special Meeting. This will not prevent you from voting your shares in person if you subsequently choose to attend the Special Meeting.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY , 1996
To the Stockholders of Bradley Real Estate, Inc.:
A Special Meeting of Stockholders of Bradley Real Estate, Inc., a Maryland corporation ("Bradley"), will be held at 10:00 a.m., Eastern time, on February , 1996, at , Boston, Massachusetts (the "Special Meeting") for the following purposes:
1. To consider and vote upon a proposal to approve the merger of Tucker Properties Corporation ("Tucker") with and into Bradley (the "Merger") and the Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and between Bradley and Tucker, pursuant to which, among other things, each outstanding share of Tucker common stock will be converted into the right to receive a percentage of a share of Bradley common stock to be determined as follows. If the average per share closing price of Bradley common stock for the 20 trading days prior to the fifth day preceding the closing of the Merger is $16.00 or more, each share of Tucker common stock will be exchanged for .665 of a share of Bradley common stock. If such average closing price is between $15.50 and $16.00, the exchange ratio will be determined by dividing $10.64 by the average closing price. If such average closing price is $15.50 or less, the exchange ratio will be .686 of a share of Bradley common stock. A copy of the Merger Agreement is attached as Annex A to the Joint Proxy Statement/Prospectus accompanying this Notice.
2. To transact such other business as may properly come before the meeting or any adjournments or postponements thereof.
Holders of record of shares of Bradley common stock at the close of business on January , 1996 are entitled to notice of, and to vote at, the Special Meeting. The Merger and other related matters are more fully described in the accompanying Joint Proxy Statement/Prospectus, and the Annexes thereto, which form a part of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS RETURNED A PROXY.
By Order of the Board of Directors
40 SKOKIE BOULEVARD, SUITE 600
You are cordially invited to attend a Special Meeting of Stockholders of Tucker Properties Corporation ("Tucker") to be held at 9:00 a.m., Central time, on February , 1996, at , Chicago, Illinois (the "Special Meeting").
At the Special Meeting, you will be asked to approve the merger (the "Merger") of Tucker with and into Bradley Real Estate, Inc. ("Bradley") and the Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and between Bradley and Tucker, pursuant to which, among other things, each outstanding share of Tucker common stock will be converted into the right to receive a percentage of a share of Bradley common stock to be determined as follows. If the average per share closing price of Bradley common stock for the 20 trading days prior to the fifth day preceding the closing of the Merger is $16.00 or more, each share of Tucker common stock will be exchanged for .665 of a share of Bradley common stock. If such average closing price is between $15.50 and $16.00, the exchange ratio will be determined by dividing $10.64 by the average closing price. If such average closing price is $15.50 or less, the exchange ratio will be .686 of a share of Bradley common stock. Approval of the Merger and the Merger Agreement requires the affirmative vote of the holders of two-thirds of the outstanding shares of Tucker common stock.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, TUCKER AND ITS STOCKHOLDERS. THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE THE MERGER AND THE MERGER AGREEMENT.
The accompanying Joint Proxy Statement/Prospectus provides detailed information concerning the proposed Merger, the reasons for your Board of Directors' recommendation of the Merger and the Merger Agreement and certain additional information, including, without limitation, the information set forth under the heading "Risk Factors," which describes, among other items, potential adverse effects to stockholders as a result of the Merger. We urge you to carefully consider all of the information in the Joint Proxy Statement/Prospectus. It is important that your shares of Tucker common stock be represented at the Special Meeting, regardless of the number of shares you hold. Therefore, please sign, date and return your proxy card as soon as possible, whether or not you plan to attend the Special Meeting. This will not prevent you from voting your shares in person if you subsequently choose to attend the Special Meeting.
Chairman of the Board and President
40 SKOKIE BOULEVARD, SUITE 600
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY , 1996
To the Stockholders of Tucker Properties Corporation:
A Special Meeting of Stockholders of Tucker Properties Corporation, a Maryland corporation ("Tucker"), will be held at 9:00 a.m., Central time, on February , 1996, at , Chicago, Illinois (the "Special Meeting") for the following purposes:
1. To consider and vote upon a proposal to approve the merger (the "Merger") of Tucker with and into Bradley Real Estate, Inc. ("Bradley") and the Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and between Bradley and Tucker, pursuant to which, among other things, each outstanding share of Tucker common stock will be converted into the right to receive a percentage of a share of Bradley common stock to be determined as follows. If the average per share closing price of Bradley common stock for the 20 trading days prior to the fifth day preceding the closing of the Merger is $16.00 or more, each share of Tucker common stock will be exchanged for .665 of a share of Bradley common stock. If such average closing price is between $15.50 and $16.00, the exchange ratio will be determined by dividing $10.64 by the average closing price. If such average closing price is $15.50 or less, the exchange ratio will be .686 of a share of Bradley common stock. A copy of the Merger Agreement is attached as Annex A to the Joint Proxy Statement/Prospectus accompanying this Notice.
2. To transact such other business as may properly come before the meeting or any adjournments or postponements thereof.
The Board of Directors of Tucker has fixed the close of business on January , 1996 as the record date for the determination of the holders of shares of Tucker common stock entitled to notice of, and to vote at, the Special Meeting. The Merger and other related matters are more fully described in the accompanying Joint Proxy Statement/Prospectus, and the Annexes thereto, which form a part of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS RETURNED A PROXY.
By Order of the Board of Directors
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
+ 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 JANUARY 16, 1996
This Joint Proxy Statement and Prospectus ("Joint Proxy Statement/Prospectus") is being furnished to the holders of common stock, par value $.01 per share ("Bradley Common Stock"), of Bradley Real Estate, Inc., a Maryland corporation ("Bradley"), in connection with the solicitation of proxies by the Board of Directors of Bradley for use at a Special Meeting of Stockholders of Bradley to be held at , Boston, Massachusetts, on February , 1996, at 10:00 a.m., Eastern time, and at any and all adjournments or postponements thereof (the "Bradley Special Meeting"). This Joint Proxy Statement/Prospectus also constitutes the Prospectus of Bradley with respect to the issuance of up to 7,742,951 shares of Bradley Common Stock to be issued to stockholders of Tucker Properties Corporation, a Maryland corporation ("Tucker"), in connection with the Merger (as hereinafter defined). Bradley Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "BTR." On January , 1996, the closing price for Bradley Common Stock as reported by the NYSE Composite Tape was $ per share.
This Joint Proxy Statement/Prospectus is also being furnished to the holders of common stock, par value $.001 per share ("Tucker Common Stock"), of Tucker in connection with the solicitation of proxies by the Board of Directors of Tucker for use at a Special Meeting of Stockholders of Tucker to be held at , Chicago, Illinois, on February , 1996, at 9:00 a.m., Central time, and at any and all adjournments or postponements thereof (the "Tucker Special Meeting").
This Joint Proxy Statement/Prospectus relates to the proposed merger (the "Merger") of Tucker with and into Bradley, pursuant to the Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and between Bradley and Tucker. Bradley will be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Company"), and upon completion of the Merger, the separate corporate existence of Tucker will cease. At the time the Merger becomes effective, each issued and outstanding share of Tucker Common Stock will be converted into the right to receive a percentage of a share of Bradley Common Stock to be determined as follows. If the average per share closing price of Bradley Common Stock as reported on the NYSE over the 20 trading days immediately preceding the fifth day prior to the date of the closing of the Merger (the "Closing Price") is $16.00 or more, each share of Tucker Common Stock will be exchanged for .665 of a share of Bradley Common Stock. If the Closing Price is between $15.50 and $16.00, the exchange ratio will be determined by dividing $10.64 by the Closing Price. If the Closing Price is $15.50 or less, the exchange ratio will be .686 of a share of Bradley Common Stock. In connection with the consummation of the Merger, Bradley will issue an aggregate number of shares of Bradley Common Stock ranging from 7,200,808 shares (assuming an exchange ratio of .665) to 7,428,202 shares (assuming an exchange ratio of .686), depending on the market price of Bradley Common Stock prior to the closing of the Merger. Consummation of the Merger is subject to various conditions (which must be satisfied or waived), including approval of the Merger and the Merger Agreement by the holders of two-thirds of the outstanding shares of Tucker Common Stock at the Tucker Special Meeting and by the holders of a majority of the outstanding shares of Bradley Common Stock at the Bradley Special Meeting. The stockholders of each of Bradley and Tucker also will consider and vote upon such other business as may properly come before the Bradley Special Meeting or the Tucker Special Meeting, as the case may be, or any adjournment(s) or postponement(s) thereof.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER, SEE "RISK FACTORS" ON PAGE 22.
All information contained in this Joint Proxy Statement/Prospectus with respect to Bradley has been provided by Bradley. All information contained in this Joint Proxy Statement/Prospectus with respect to Tucker has been provided by Tucker.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy are first being mailed to stockholders of Bradley and Tucker on or about January , 1996. A stockholder who has given a proxy may revoke it at any time prior to its exercise. 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 JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JANUARY , 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR THE ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED HEREIN SINCE THE DATE HEREOF.
Bradley and Tucker are each subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy and information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy and information statements and other information filed by Bradley and Tucker can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, reports, proxy and information statements and other information concerning Bradley and Tucker can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005, on which the Bradley Common Stock and Tucker Common Stock are listed.
This Joint Proxy Statement/Prospectus does not contain all the information set forth in the Registration Statement on Form S-4 and exhibits relating thereto, including any amendments (the "Registration Statement"), of which this Joint Proxy Statement/Prospectus is a part, and which Bradley has filed with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). Reference is made to such Registration Statement for further information with respect to Bradley and the Bradley Common Stock offered hereby. Statements contained herein or incorporated herein by reference concerning the provisions of documents are summaries of such documents, and each statement is qualified in its entirety by reference to the copy of the applicable document if filed with the Commission or attached as an annex hereto.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are hereby incorporated by reference into this Joint Proxy Statement/Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1994
2. Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1995 (filed May 11, 1995), June 30, 1995 (filed August 14, 1995) and September 30, 1995 (filed November 13, 1995);
3. Current Reports on Form 8-K dated March 30, 1994 (filed August 13, 1994) reporting the acquisition of Rivercrest Shopping Center, June 29, 1995 (filed June 30, 1995) reporting the execution of the Underwriting Agreement relating to the public offering of 2,500,000 shares of Bradley Common Stock and November 3, 1995 (filed November 3, 1995) reporting the execution of the Merger Agreement;
4. The description of the Bradley Common Stock contained or incorporated by reference in Bradley's Registration Statement on Form 8-A, dated August 5, 1994, (filed August 8, 1994) including any amendments thereto; and
5. Proxy Statement dated and filed March 29, 1995 in connection with Bradley's 1995 Annual Meeting of Stockholders.
1. The information contained under the captions "The Properties," "Growth Strategy and Philosophy" and "Federal Income Tax Considerations" in Tucker's Registration Statement on Form S-11 (No. 33-64942) dated October 4, 1993 (filed October 4, 1993), including all exhibits thereto;
2. Annual Report on Form 10-K for the fiscal year ended December 31, 1994
3. Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1995 (filed May 17, 1995), June 30, 1995 (filed August 15, 1995) and September 30, 1995 (filed November 14, 1995);
4. Current Report on Form 8-K dated October 30, 1995 (filed November 3, 1995) reporting the execution of the Merger Agreement;
5. The description of the Tucker Common Stock contained or incorporated by reference in Tucker's Registration Statement on Form 8-A, dated and filed September 27, 1993, including any amendments thereto, such amendments filed on October 4, 1993 and October 19, 1993; and
6. Proxy Statement dated May 1, 1995 (processed May 8, 1995) in connection with Tucker's 1995 Annual Meeting of Stockholders.
In addition, all reports and other documents filed by each of Bradley and Tucker pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the Bradley Special Meeting and the Tucker Special Meeting shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such reports and documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Joint Proxy Statement/Prospectus to the extent that a statement contained herein, or in any other subsequently filed document that also is incorporated or deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Joint Proxy Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST OF ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED TO, IN THE CASE OF DOCUMENTS RELATING TO BRADLEY, 699 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116, ATTENTION: DONNA MACAULEY (TELEPHONE NO. (617) 867-4200), OR, IN THE CASE OF DOCUMENTS RELATING TO TUCKER, 40 SKOKIE BOULEVARD, SUITE 600, NORTHBROOK, ILLINOIS 60062, ATTENTION: MARY TIERNEY GIBSON, SHAREHOLDER RELATIONS (TELEPHONE NO. (708) 272-9800, EXT. 46). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY FEBRUARY , 1996.
[MAP SHOWING LOCATION OF BRADLEY AND TUCKER PROPERTIES]
The following is a brief summary of certain information contained elsewhere in this Joint Proxy Statement/Prospectus and the Annexes hereto relating to the proposed merger (the "Merger") of Tucker Properties Corporation ("Tucker") with and into Bradley Real Estate, Inc. ("Bradley"), pursuant to which Bradley will be the surviving corporation (sometimes hereinafter referred to as the "Surviving Company") and the separate corporate existence of Tucker will cease. This summary does not purport to contain all material information relating to the Merger and the Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and between Bradley and Tucker, and is qualified in its entirety by the more detailed information and financial statements contained or incorporated by reference in this Joint Proxy Statement/Prospectus. STOCKHOLDERS OF BRADLEY AND TUCKER SHOULD READ CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE ANNEXES ATTACHED HERETO IN THEIR ENTIRETY. Unless the context indicates otherwise, all references to Bradley and Tucker include their respective subsidiaries and affiliated partnerships.
Bradley is one of the nation's oldest continuously qualified real estate investment trusts ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Bradley focuses on the ownership and operation of community shopping centers, primarily in the Midwestern and the Northeastern regions of the United States. Bradley's objective is to enhance the operating performance and value of its portfolio through renovation, expansion and leasing strategies designed to meet the needs of an evolving retail marketplace. Bradley also seeks to create value through the acquisition of properties which can benefit from Bradley's expertise in shopping center management, renovation and expansion. Bradley's properties currently encompass approximately 3.0 million square feet of rentable retail space.
Originally organized in 1961 as a Massachusetts business trust under the name Bradley Real Estate Trust, Bradley was reorganized as a Maryland corporation in October 1994. Bradley's principal executive office is located at 699 Boylston Street, Boston, Massachusetts 02116 and its telephone number is (617) 867-4200.
Tucker is a leader in the Midwest in the development, acquisition and long- term ownership of community shopping centers. Headquartered in Northbrook, Illinois, Tucker owns and manages more than 4.3 million square feet of income- producing properties. The properties are located primarily in Chicago and other areas of the Midwest, with tenants primarily selling value-oriented merchandise.
Tucker is a Maryland corporation, formed on May 28, 1993, which elected to qualify as a REIT under the Code following the public offering of its common stock, par value $.001 per share ("Tucker Common Stock"), in October 1993. Tucker is a fully integrated real estate management and development company and was established to continue the business of The Tucker Companies, Inc. ("TTC"), its affiliates and related real estate entities (collectively, the "Predecessor Business") as an owner, manager and developer of shopping centers. TTC was founded in 1976 by Kenneth L. Tucker, Tucker's Chairman of the Board, President and a Director.
All of Tucker's real estate properties are held by, and all of its operations are conducted through, the Tucker Operating Limited Partnership ("TOP") and its subsidiaries. TOP was formed for the purpose of acquiring, operating and expanding the business of Tucker and certain of its affiliates. Tucker is the sole general partner of TOP and owns 95.9% of the outstanding partnership units of TOP ("TOP Units"). The limited partners of TOP, including Kenneth L. Tucker, Richard H. Tucker, Tucker's Executive Vice President, Chief Operating Officer and a Director, and Harold Eisenberg, Tucker's Executive Vice President-- Leasing and Development and a Director (collectively, the "Management Directors"), were equity holders of the entities which previously owned the properties transferred to TOP in connection with Tucker's initial public offering in October 1993. The TOP Units are exchangeable, subject to certain limitations imposed to protect Tucker's status as a REIT, into shares of Tucker Common Stock on the basis of one TOP Unit for one share of Tucker Common Stock.
Tucker Financing Partnership ("TFP") was created to facilitate the refinancing of indebtedness encumbering certain of the Tucker properties through a loan to TFP from a trust qualifying as a real estate mortgage investment conduit (the "Tucker REMIC") for federal income tax purposes. The six Tucker properties owned by TFP collateralize a $100,000,000 mortgage note (the "Tucker REMIC Note") held by the Tucker REMIC and issued pursuant to that certain indenture (the "Tucker REMIC Indenture") dated as of June 1, 1994 by and among TFP, Bankers Trust Company of California, N.A. (the "Indenture Trustee") and Bankers Trust Company. TOP is the 99% general partner of TFP, and Tucker Financing Corp. ("TFC"), a wholly-owned subsidiary of Tucker, is the 1% general partner of TFP.
Tucker's principal executive office is located at 40 Skokie Boulevard, Suite 600, Northbrook, Illinois 60062 and its telephone number is (708) 272-9800.
Pursuant to the Merger Agreement, at the time the Merger becomes effective (the "Effective Time"), Tucker will merge with and into Bradley and the separate corporate existence of Tucker will cease. Bradley will be the Surviving Company and the former Tucker stockholders will become Bradley stockholders with all of the rights and privileges attendant thereto. As a result of the Merger, Bradley will succeed to Tucker's partnership interest in TOP and its equity interest in TFC. Immediately following the Merger, the following subsidiaries or affiliates of Tucker will remain in existence and will become subsidiaries or affiliates of Bradley, as applicable: TOP, TFC (or its successor), TFP, Tucker Management Corp. ("TMC"), Tucker Management Limited Partnership, Williamson Square Associates Limited Partnership and Tucker Properties Investment, Inc. ("TPI") (or its successor). A chart outlining the corporate structure of the Surviving Company following the Merger is set forth on page 31.
Following the consummation of the Merger, Bradley and Tucker believe that the Surviving Company will be one of the largest owners and operators of community shopping centers in the Midwestern region of the United States. The Surviving Company will own 31 community shopping centers encompassing approximately 7.3 million square feet of rentable retail space in eleven states. As the map on page (v) indicates, the Merger allows the Surviving Company to enter four new states (Tennessee, Kentucky, Indiana and Wisconsin) and to significantly expand its presence throughout the Midwest.
The current executive officers and directors of Bradley will manage the business and affairs of the Surviving Company following the consummation of the Merger. For information concerning these persons, see "Management of the Surviving Company." Following the Merger, the Surviving Company will employ most of Tucker's property management personnel. Given the strength of Tucker's property-level operational personnel and systems, Bradley's management believes the Merger will broaden its existing property management capabilities and allow the Surviving Company to internalize its property management and leasing functions.
Bradley is currently in discussions with the lead lender under its existing $65 million secured revolving credit facility regarding replacing this facility with a $150 million unsecured revolving credit facility. For a description of the terms of Bradley's existing credit facility, see "The Companies--Bradley." Bradley anticipates that the new credit facility will be available for the acquisition, development, renovation and expansion of new and existing properties (including, but not limited to, capital improvements, tenant improvements, and leasing commissions), and other working capital purposes. It is anticipated that the interest rates available under the new credit facility will be more favorable than those currently available under Bradley's existing secured credit facility and may become even more favorable in the event the Surviving Company (x) meets certain loan to value tests or (y) receives an investment grade unsecured debt rating. Bradley anticipates that the new credit facility will contain financial and other covenants which are consistent with similar unsecured lines of credit for comparable publicly-traded REITs. Bradley believes that the increased size, lower interest rate and unsecured nature of the new credit facility will increase the Surviving Company's financial flexibility and prospects for obtaining an investment grade debt rating. It is currently contemplated that the new credit facility will become effective simultaneously with the closing of the Merger. While discussions regarding a new credit facility are ongoing, there can be no assurance that such a credit facility will be obtained, or if obtained, when it will become effective or become available. If this new credit facility cannot be obtained, consent to the Merger would be required from the existing revolving credit lenders to Bradley and Tucker and an extension of the Tucker credit agreement would be required. See "The Merger Agreement-- Conditions to the Merger."
The Board of Directors of each of Bradley and Tucker have approved the Merger and the Merger Agreement, a copy of which is attached hereto as Annex A, pursuant to which, upon fulfillment (or waiver) of the conditions set forth therein, at the Effective Time (i) Tucker will be merged with and into Bradley, with Bradley being the Surviving Company in the Merger, and (ii) each issued and outstanding share of Tucker Common Stock will be converted into the right to receive a percentage of a share of common stock, par value $.01 per share, of Bradley ("Bradley Common Stock"), to be determined as follows. If the average per share closing price of Bradley Common Stock as reported on the New York Stock Exchange (the "NYSE") over the 20 trading days immediately preceding the fifth day prior to the date of the closing of the Merger (the "Closing Price") is $16.00 or more, each share of Tucker Common Stock will be exchanged for .665 of a share of Bradley Common Stock. If the Closing Price is between $15.50 and $16.00, the exchange ratio will be determined by dividing $10.64 by the Closing Price. If the Closing Price is $15.50 or less, the exchange ratio will be .686 of a share of Bradley Common Stock. (The applicable percentage of a share of Bradley Common Stock to be issued to Tucker stockholders in connection with the Merger upon such conversion will sometimes hereinafter be referred to as the "Exchange Ratio.") The Closing Price for Bradley Common Stock for the 20 trading days ended January , 1996 was $ . The Exchange Ratio was the result of arms-length negotiations between Bradley and Tucker.
No fractional shares of Bradley Common Stock will be issued in connection with the Merger. In lieu thereof, a holder of Tucker Common Stock otherwise entitled to a fractional share of Bradley Common Stock will be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying the Closing Price by the fraction of a share of Bradley Common Stock to which such holder would otherwise be entitled.
Based upon the number of shares of Tucker Common Stock and Bradley Common Stock outstanding at January , 1996, the former Tucker stockholders will hold, immediately after the Merger, (i) assuming an Exchange Ratio of .665, approximately 7,200,808 shares of Bradley Common Stock, representing approximately 39% of the aggregate number of outstanding shares of Bradley Common Stock; and (ii) assuming an Exchange Ratio of .686, approximately 7,428,202 shares of Bradley Common Stock, representing approximately 40% of the aggregate number of outstanding shares of Bradley Common Stock.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Board of Directors of Tucker believes that the Merger is fair to and in the best interests of Tucker and its stockholders. THE TUCKER BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF TUCKER VOTE FOR THE MERGER AND THE MERGER AGREEMENT. The primary factors that Tucker's Board of Directors considered in reaching the foregoing conclusions were:
(i) Tucker's highly-leveraged capital structure, its decline in funds from operations ("FFO") and its resulting difficulty in accessing capital markets; (ii) the Tucker Board of Directors' belief that there are no feasible alternatives to a merger available to Tucker that are likely in the near term to significantly improve the profitability of Tucker's existing operations; (iii) the Tucker Board of Directors' belief that the Merger is the best offer reasonably available for Tucker's stockholders; (iv) the anticipated cost savings and operating efficiencies available to the Surviving Company from the Merger; (v) Tucker's and Bradley's stock price multiples relative to each other and to the multiples of comparable REITs; (vi) the terms of the Merger Agreement, including the Exchange Ratio and the equity interest in the Surviving Company to be received by Tucker's stockholders; (vii) the fact that the Merger will provide an opportunity for Tucker's stockholders to share in any future appreciation of the Surviving Company; (viii) the fact that the Merger is structured to enable Tucker's stockholders to convert their shares of Tucker Common Stock into shares of Bradley Common Stock on a tax-free basis; (ix) the similarities between Tucker and Bradley, with both companies being of similar size, focused primarily in the retail sector and owning properties concentrated in the Midwest; (x) the complementary strengths of Tucker and Bradley, including Tucker's property management and leasing capabilities and Bradley's property acquisition and capital markets expertise; (xi) the fact that the Surviving Company will have increased capacity which will allow it to attract national tenants and provide it with increased negotiating leverage; and (xii) the Total Market Capitalization (as measured by the aggregate value of the outstanding common stock plus outstanding indebtedness) of the Surviving Company will be larger than Tucker's Total Market Capitalization, which will provide Tucker's stockholders with enhanced liquidity. In making its recommendation, the Tucker Board of Directors also considered the opinion, analyses and presentations of PaineWebber Incorporated ("PaineWebber"), Tucker's financial advisor, including its oral opinion of October 29, 1995, which will be confirmed by a written opinion on the date that this Joint Proxy Statement/Prospectus is mailed to Tucker stockholders, to the effect that, as of the date of such opinion, and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to Tucker's stockholders. See "The Merger--Reasons for the Merger; Recommendation of the Board of Directors of Tucker" and "--Opinion of Tucker's Financial Advisor."
The Board of Directors of Bradley believes that the Merger is fair to and in the best interests of Bradley and its stockholders. THE BRADLEY BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF BRADLEY VOTE FOR THE MERGER AND THE MERGER AGREEMENT. The primary factors that Bradley's Board of Directors considered in reaching the foregoing conclusions were its belief that: (i) the Merger will result in the Surviving Company becoming one of the leading owners and operators of community shopping centers in the Midwest; (ii) the Merger will provide the Surviving Company with a broader and more diverse tenant base and thus reduce the potential impact on Bradley of the loss of any tenant and also enhance its position with regional and national tenants; (iii) the Merger will be accretive (i.e., will result in an incremental increase) to the projected net income per share, FFO per share and cash available for distribution per share of the Surviving Company in 1996 and 1997; (iv) the Merger will provide the Surviving Company with greater access to the capital markets including increasing the likelihood of access by the Surviving Company to unsecured investment grade debt; (v) the Merger will improve the liquidity of the Surviving Company's common stock; (vi) the Merger will allow the Surviving Company to improve the terms of its revolving credit agreement, including increasing the amount available under such line and obtaining such financing on an unsecured basis; (vii) the Merger will lead to ongoing operating synergies and additional cost savings, initially estimated to be approximately $1.4 million per annum prior to the offset of costs associated with the Merger (which costs are estimated to be approximately $8.5 million); and (viii) the Merger will broaden Bradley's property management capabilities and allow it to internalize its property management and leasing functions. In making its recommendation, the Board of Directors of Bradley also considered the opinion, analyses and presentations of Alex. Brown & Sons Incorporated ("Alex. Brown"), Bradley's financial advisor, including its oral opinion of October 20, 1995, confirmed by a written opinion, dated October 30, 1995, to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to Bradley's stockholders. See "The Merger--Reasons for the Merger; Recommendation of the Board of Directors of Bradley" and "-- Opinion of Bradley's Financial Advisor."
For a discussion of the circumstances surrounding the Merger and the reasons for the recommendations of the Boards of Directors of Tucker and Bradley, see "The Merger--Background of the Merger," "--Reasons for the Merger; Recommendation of the Board of Directors of Tucker" and "--Reasons for the Merger; Recommendation of the Board of Directors of Bradley."
On October 29, 1995, PaineWebber delivered its oral opinion to Tucker's Board of Directors to the effect that, as of such date, based on PaineWebber's review and subject to certain limitations, the Exchange Ratio was fair, from a financial point of view, to the holders of Tucker Common Stock. PaineWebber will render such opinion in writing on the date that this Joint Proxy Statement/Prospectus is mailed to Tucker stockholders. In rendering such opinion, PaineWebber has, among other things, (i) reviewed certain publicly available financial information concerning Tucker and Bradley; (ii) reviewed certain information, including financial forecasts, related to the business, earnings, cash flow, assets and prospects of Tucker and Bradley, furnished to PaineWebber by Tucker and Bradley, respectively; (iii) conducted discussions with members of the senior management of Tucker and Bradley concerning their respective businesses and prospects; (iv) reviewed the historical market prices and trading activities for Tucker Common Stock and Bradley Common Stock and compared such prices and trading histories with those of certain other publicly-traded companies which PaineWebber deemed to be relevant; (v) compared the financial position and results of operations of Tucker and Bradley with those of certain other publicly-traded companies which PaineWebber deemed to be relevant; (vi) reviewed the Merger Agreement; (vii) reviewed the Amended and Restated TOP Agreement of Limited Partnership (the "Amended TOP Partnership Agreement"); and (viii) reviewed such other financial studies and analyses and performed such investigations and took into account such other matters as PaineWebber deemed appropriate, including its assessment of general economic, market and monetary conditions. A copy of the full text of the written opinion of PaineWebber, which sets forth the assumptions made, procedures followed, matters considered and limits of its review, will be attached as Annex B to this Joint Proxy Statement/Prospectus, and should be read in its entirety. See "The Merger--Opinion of Tucker's Financial Advisor."
On October 30, 1995, Alex. Brown delivered its written opinion to Bradley's Board of Directors to the effect that, as of such date, based upon the facts and circumstances as they existed at that time and subject to certain limitations, the Exchange Ratio was fair, from a financial point of view, to Bradley's stockholders. In rendering such opinion, Alex. Brown (i) reviewed the Merger Agreement and certain related documents; (ii) reviewed certain publicly available financial information concerning Bradley and Tucker and certain internal financial analyses and other information furnished to it by Bradley and Tucker; (iii) held discussions with members of the senior managements of Bradley and Tucker regarding the business and prospects of Bradley and Tucker Common Stock; (v) compared certain financial and stock market information for Tucker and Bradley with similar information for certain other companies whose securities are publicly-traded; (vi) reviewed the financial terms of certain recent business combinations; and (vii) performed such other studies and analyses and considered such other factors as it deemed comparable, in whole or in part. A copy of the full text of the written opinion of Alex. Brown, which sets forth the assumptions made, procedures followed, matters considered and limits of its review, is attached as Annex C to this Joint Proxy Statement/Prospectus, and should be read in its entirety. See "The Merger-- Opinion of Bradley's Financial Advisor."
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN OFFICERS AND DIRECTORS
In considering the recommendation of the Boards of Directors of Tucker and Bradley to approve the Merger and the Merger Agreement, stockholders should be aware that conflicts of interest exist because certain members of the management and the Board of Directors of Tucker have certain interests in, and will receive benefits from, the Merger that are separate from the interests of, and benefits to, the stockholders of Tucker generally. Stockholders that are not directors or officers of Tucker will not receive these benefits. In connection with the execution of the Merger Agreement, Tucker adopted and entered into the following plans and agreements: (i) the Tucker Severance Pay Plan (the "Severance Plan"), pursuant to which all employees of Tucker and its affiliates (with the exception of those described below) whose employment terminates under certain specified conditions prior to December 31, 1996 will be entitled to receive a severance payment equal to six weeks' base salary plus an additional two weeks' base salary for each full year of regular full-time employment with Tucker, its predecessors and their respective affiliates (including TTC), up to a maximum payment of twice the employee's annual compensation for the calendar year immediately prior to the employee's termination of employment; (ii) a severance agreement with Kenneth Tucker, Tucker's Chairman of the Board, President and a Director, pursuant to which Mr. Tucker will be entitled to receive (a) a severance payment of $225,000 if his employment is terminated under certain specified conditions prior to December 31, 1996 or if he is still employed by Tucker as of the Effective Time and (b) twelve months of continued health care coverage following termination of employment if his employment is terminated under certain specified conditions prior to December 31, 1996; (iii) individual severance agreements with Richard Tucker, Tucker's Executive Vice President, Chief Operating Officer and a Director, Harold Eisenberg, Tucker's Executive Vice President--Leasing and Development and a Director, and Lawrence Tucker, Tucker's Vice President, pursuant to which the employee will be entitled to receive a severance payment of $123,000, $122,000 and $58,000, respectively, which severance payments were substantially identical to the payments such individuals would have received under the Severance Plan, as well as twelve months of continued health care coverage, if his employment is terminated under certain specified conditions prior to December 31, 1996; (iv) an agreement with Norris Eber, Tucker's Senior Vice President--Asset Management and Acquisitions, pursuant to which Mr. Eber will receive (a) $139,000 if he is still employed by Tucker as of the Effective Time and (b) a severance payment of $61,000 and twelve months of continued health care coverage if his employment is terminated under certain specified conditions prior to December 31, 1996; and (v) a severance agreement with William Karnes, Tucker's Chief Financial Officer, pursuant to which Mr. Karnes will receive twelve months of continued health care coverage if his employment is terminated under certain specified conditions prior to or concurrently with the consummation of the Merger or if his employment is terminated for any reason after the consummation of the Merger but prior to December 31, 1996. Tucker previously entered into an employment agreement with Mr. Karnes pursuant to which he will receive a severance payment equal to twelve months' base salary (currently $210,000) if his employment is terminated under certain conditions. Bradley has agreed to assume and be bound by these agreements after the Effective Time. Bradley also has entered into a three-year consulting agreement with Kenneth Tucker, effective as of the Effective Time, pursuant to which Mr. Tucker will receive an aggregate payment of $405,000, consisting of three annual consulting fee payments of $135,000 each. In addition, Bradley has agreed to continue to provide the directors, officers, employees, advisors and agents of Tucker and each of its subsidiaries with all rights to indemnification or exculpation existing under their respective charters or bylaws in effect as of the date of the Merger Agreement with respect to matters occurring at or prior to the Effective Time, and to provide such persons with certain indemnification rights under Bradley's Articles of Amendment and Restatement (the "Bradley Charter") and Bradley's Bylaws (the "Bradley Bylaws"). Bradley has also agreed to purchase, at or prior to the Effective Time, liability insurance coverage for Tucker's directors and officers for a period of six years which will provide the directors and officers with $10,000,000 of aggregate coverage. In addition, Bradley has agreed to adopt certain amendments to Tucker's existing indemnification agreements with its directors. See "The Merger--Conflicts of Interest Arising from Benefits to Certain Officers and Directors of Tucker" and "The Merger Agreement-- Indemnification." In connection with the execution of the Merger Agreement, Bradley, Tucker and certain of the limited partners of TOP, including the Management Directors, agreed to an amendment and restatement of the TOP Agreement of Limited Partnership (the "TOP Partnership Agreement"), which, among other things, limits in certain respects the environmental indemnification obligations of the Management Directors under the TOP Partnership Agreement and requires Bradley to register the shares of Bradley Common Stock which the limited partners may receive upon redemption of TOP Units under the Securities Act of 1933, as amended (the "Securities Act"). In connection with the consummation of the Merger, Kenneth and Richard Tucker also have agreed to transfer their equity interests in TMC to two individuals who are officers of Bradley for $500 each at or prior to the Effective Time. Approval of the Merger by stockholders does not constitute a ratification of any of the foregoing transactions. See "The Merger Agreement--Transfer of Interests in TMC."
Because of these potential conflicts of interest, the Tucker Board of Directors designated the non-management directors as a special committee (the "Tucker Special Committee") to evaluate and negotiate on behalf of Tucker any compensation, severance and other arrangements or transactions involving Tucker's management. The Tucker Special Committee was represented by its own independent counsel. Tucker believes that Tucker's stockholders were not adversely affected by any of such compensation, severance and other arrangements or transactions.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Mayer, Brown & Platt, counsel for Tucker, has delivered its opinion to Tucker that, on the basis of facts, representations and assumptions set forth in such opinion, the Merger will be treated for United States federal income tax purposes as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Accordingly, (i) no gain or loss will be recognized by Tucker as a result of the Merger, and (ii) no gain or loss will be recognized by any stockholder of Tucker who receives Bradley Common Stock in exchange for Tucker Common Stock (except with respect to any cash received in lieu of a fractional interest in Bradley Common Stock). Goodwin, Procter & Hoar, counsel for Bradley, has delivered its opinion to Bradley that, on the basis of facts, representations and assumptions set forth in such opinion, the Merger will be treated for United States federal income tax purposes as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Accordingly, no gain or loss will be recognized by Bradley as a result of the Merger. See "The Merger--Material Federal Income Tax Consequences" and "The Merger Agreement--Conditions to the Merger."
If certain detailed conditions imposed by the REIT provisions of the Code are met, entities such as Bradley and Tucker that invest primarily in real estate and that otherwise would be treated for federal income tax purposes as corporations generally are not taxed at the corporate level on their "real estate investment trust taxable income" that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" on earnings (i.e., taxation at both the corporate and stockholder levels) that generally results from the use of corporations. Prior to the consummation of the Merger, Bradley and Tucker each has operated in a manner intended to allow it to qualify as a REIT. Bradley intends to operate following the Merger in a manner so that Bradley will continue to qualify as a REIT. If Bradley fails to qualify as a REIT in any taxable year, Bradley will be subject to federal income taxation as if it were a domestic corporation, and Bradley could be subject to potentially significant tax liabilities which could reduce or eliminate cash available to distribute to stockholders. Unless entitled to relief under certain Code provisions, Bradley also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. Moreover, under certain circumstances, Bradley's qualification as a REIT following the Merger could depend on Tucker's qualification as a REIT for periods prior to the Merger, and in any event the liabilities that Bradley will assume in the Merger would include Tucker's liability for any unpaid taxes, including taxes resulting if Tucker failed to qualify as a REIT, for any period prior to the Merger. At the closing of the Merger, Goodwin, Procter & Hoar will render opinions regarding (i) Bradley's qualification as a REIT for periods prior to the Merger, and (ii) Bradley's ability to qualify as a REIT following the Merger, a form of which has been filed as an exhibit to this Joint Proxy Statement/Prospectus. Mayer, Brown & Platt will render an opinion regarding Tucker's qualification as a REIT for the taxable year ended December 31, 1995 and for the short tax year ending at the date of the closing of the
Merger. Coopers & Lybrand L.L.P. will render an opinion regarding Tucker's qualification as a REIT for the taxable years ended December 31, 1993 and December 31, 1994. Such opinions will be based on representations from management regarding Tucker's and Bradley's compliance with the requirements for qualification as a REIT and are not binding on the Internal Revenue Service (the "IRS"). Accordingly, no assurance can be given that the IRS cannot challenge the status of Bradley as a REIT following the Merger. See "The Merger--Material Federal Income Tax Consequences--Qualification of Bradley as a REIT Following the Merger."
In the event the Merger is not consummated for any reason, Bradley will continue to pursue its business objectives of (i) maximizing FFO and cash available for distribution to holders of Bradley Common Stock, (ii) increasing distributions per share of Bradley Common Stock, (iii) increasing the value of its properties by continuing its growth through the active management and expansion of existing shopping centers and selective development and acquisition of new shopping centers, and (iv) holding its properties for long- term investment. In addition, Bradley may seek other acquisition opportunities and additional debt or equity financing.
In the event the Merger is not consummated for any reason, Tucker will continue to pursue its business objectives of maximizing the value of its properties and reducing overhead to increase its net cash flow. Tucker would also seek to reduce the amount of its indebtedness through potential sales of properties and improved cash flow. In addition, Tucker may seek another strategic combination. The Tucker Board of Directors believes there are no feasible alternatives to the Merger available to Tucker at the present time that are likely to significantly improve the profitability of Tucker's existing operations or result in greater stockholder value.
Bradley will account for the Merger as a purchase in accordance with Accounting Principles Board Opinion No. 16. See "The Merger--Accounting Treatment."
All shares of Bradley Common Stock received by Tucker stockholders in the Merger will be freely transferable, except that shares of Bradley Common Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of Tucker at the time of the Special Meeting of Tucker stockholders may be resold by them only in certain permitted circumstances. See "The Merger--Certain Resale Restrictions."
NEW YORK STOCK EXCHANGE LISTING
It is a condition to Tucker's and Bradley's obligations to consummate the Merger that, prior to the Effective Time, Bradley obtain the approval for the listing of the shares of Bradley Common Stock issuable in the Merger on the NYSE, subject to official notice of issuance. See "The Merger--New York Stock Exchange Listing" and "The Merger Agreement--Conditions to the Merger."
Under the Maryland General Corporation Law ("MGCL"), stockholders of Tucker and Bradley are not entitled to dissenters' rights in connection with the Merger. See "The Merger--Dissenters' Rights."
In considering whether to approve the Merger and the Merger Agreement, stockholders of Bradley and Tucker should consider, in addition to the other information in this Joint Proxy Statement/Prospectus, the matters discussed under "Risk Factors." Such matters include:
. Possible adverse consequences to the stockholders of Bradley as a result of (i) the increase of the amount of total debt payable by the Surviving Company to approximately $220.5 million after the Merger as compared to $34.7 million for Bradley as of September 30, 1995; (ii) the increase in the Surviving Company's pro forma ratio of debt to Total Market Capitalization to approximately 46% after the Merger as compared to 18% for Bradley as of September 30, 1995; and (iii) the increase in the amount of the Surviving Company's adjustable interest rate debt to approximately $82.4 million after the Merger as compared to $9.8 million for Bradley as of September 30, 1995.
. Risks associated with the Surviving Company's potential inability to refinance indebtedness when due on reasonable terms and conditions, including approximately $100,000,000 of indebtedness relating to the Tucker REMIC Note which matures in September 2000.
. Restrictions on the ability of the Surviving Company to dispose of properties collateralizing the Tucker REMIC Note or to prepay the Tucker REMIC Note. Pursuant to the terms of the Tucker REMIC Indenture, prior to October 1997, the principal amount of the Tucker REMIC Note cannot be prepaid and the Tucker properties securing the Tucker REMIC Note cannot be sold. If the Surviving Company wishes either to prepay principal amounts of the Tucker REMIC Note or to sell any of the properties collateralizing the Tucker REMIC Note after such date, it will incur significant prepayment penalties. See "Risk Factors--Restrictions on Ability of Surviving Company to Dispose of Properties." The Amended TOP Partnership Agreement also contains certain restrictions on the sale of properties held by TOP. See "The Merger Agreement--Amended TOP Partnership Agreement."
. Reduction in dividends per share to Tucker stockholders following consummation of the Merger. Assuming the Surviving Company continues to make regular quarterly distributions at Bradley's current rate of $.33 per share, each stockholder of Tucker will receive an equivalent quarterly dividend payment of $.219 per share (assuming an Exchange Ratio of .665) or $.226 per share (assuming an Exchange Ratio of .686), as compared to Tucker's most recent quarterly dividend of $.25 per share.
. Possible adverse consequences to Tucker's stockholders associated with a decline in the price of Bradley Common Stock between the date of this Joint Proxy Statement/Prospectus and the Effective Time.
. Risks associated with a possible reduction in the price of Bradley Common Stock following the Effective Time, due to future sales of the Surviving Company's common stock or the potential for sales of the Surviving Company's common stock by current Tucker stockholders.
. Possible conflicts of interests due to the fact that certain members of the Board of Directors and management of Tucker have certain interests in, and will receive certain benefits from, the Merger that are separate from the interests of and benefits to stockholders of Tucker generally. See "The Merger--Conflicts of Interest Arising from Benefits to Certain Officers and Directors of Tucker."
. Certain differences between the rights of stockholders of Tucker under Tucker's Articles of Amendment and Restatement (the "Tucker Charter") and Tucker's Bylaws (the "Tucker Bylaws") and the rights of stockholders of Bradley under the Bradley Charter and the Bradley Bylaws. See "Comparison of Stockholder Rights."
. Possible payment of a termination fee and expenses by Tucker to Bradley. If the Merger Agreement were to be terminated under certain circumstances and/or Tucker were to enter into an acquisition agreement with a third party under certain circumstances, Tucker would be required to pay Bradley a termination fee of $3,000,000 plus reimbursement of Bradley's out-of-pocket expenses up to $2,000,000. If the Merger Agreement is terminated in certain other circumstances, Tucker will be required to reimburse Bradley for its out-of-pocket expenses up to $2,000,000.
EFFECTIVE TIME OF THE MERGER
In accordance with the MGCL, the Merger will become effective upon the acceptance for record of the Articles of Merger by the State Department of Assessments and Taxation of Maryland. Subject to the fulfillment (or waiver) of the other conditions to the obligations of Bradley and Tucker to consummate the Merger, it is currently expected that the Merger will be consummated as soon as practicable following the approval by the stockholders of Bradley and Tucker of the Merger and the Merger Agreement at their respective Special Meetings of Stockholders. See "The Merger Agreement--Effective Time of the Merger."
EXCHANGE OF TUCKER STOCK CERTIFICATES
Promptly after the Effective Time, a designated exchange agent (the "Exchange Agent") will mail a letter of transmittal and instructions to each holder of record of a certificate representing shares of Tucker Common Stock (a "Certificate") as of the Effective Time for use in effecting the surrender of the Certificate in exchange for certificates representing shares of Bradley Common Stock and cash in lieu of fractional shares. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate will be entitled to receive in exchange therefor (i) a certificate representing the number of whole shares of Bradley Common Stock to which such holder shall be entitled, and (ii) a check representing the amount of cash in lieu of fractional shares, if any, plus the amount of any dividends or distributions, if any, as provided in the Merger Agreement, after giving effect to any required withholding tax, and the Certificate so surrendered will be canceled. Certificates should not be surrendered until the letter of transmittal and instructions are received. See "The Merger Agreement--Exchange of Tucker Stock Certificates."
The respective obligations of Bradley and Tucker to effect the Merger and the other transactions contemplated in the Merger Agreement are subject to the fulfillment or waiver of certain conditions at or prior to the Effective Time including, among others: (a) approval of the Merger and the Merger Agreement by the requisite vote of stockholders of Tucker and Bradley; (b) receipt of various third-party consents, including the consent (the "Tucker REMIC Consent") of the Indenture Trustee under the Tucker REMIC Indenture and the consent of each of the lenders under Bradley's and Tucker's credit agreements; (c) execution by Tucker and all of the limited partners of TOP of the Amended TOP Partnership Agreement; (d) receipt by Bradley of a letter from Coopers & Lybrand L.L.P., independent public accountants for Tucker, certifying, among other things, that for federal income tax purposes, Tucker will not have any accumulated or current earnings or profits immediately prior to the Effective Time; and (e) receipt by Bradley of a private letter ruling from the IRS to the effect that following the consummation of the Merger, each of TFC and TPI will qualify as a "qualified REIT subsidiary" of Bradley under Section 856(i) of the Code. See "The Merger Agreement--Conditions to the Merger."
The Merger Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after approval of the Merger and the Merger Agreement, by the stockholders of Tucker and Bradley, in a number of circumstances, including, among others: (a) by the mutual written consent of Tucker and Bradley; (b) by either Tucker or Bradley if (i) the Merger Agreement and the transactions contemplated thereby shall have failed to receive the requisite vote for approval by the stockholders of Bradley or Tucker upon the holding of a duly convened stockholder meeting, or (ii) the Merger shall not have been consummated on or before June 30, 1996 (other than due to the failure of the party seeking to terminate the Merger Agreement to perform its obligations under the Merger Agreement required to be performed by it at or prior to the Effective Time); (c) by action of Tucker if (i) the Board of Directors of Tucker recommends to Tucker's stockholders approval or acceptance of an Acquisition Proposal (as defined below in "The Merger Agreement--No Solicitation of Transactions") by a person other than Bradley, but only in the event that the Board of Directors of Tucker, after consultation with and based upon the advice of Mayer, Brown & Platt or another nationally recognized law firm, has determined in good faith that such action is necessary for the Board of Directors of Tucker to comply with its fiduciary duties to its stockholders under applicable law, or (ii) the Board of Directors of Bradley recommends to Bradley's stockholders approval or acceptance of a proposal by a person other than Tucker to acquire 50% or more of the assets or stock of Bradley, by way of merger, tender offer, exchange offer or similar transaction; or (d) by action of Bradley if the Board of Directors of Tucker shall have recommended that stockholders of Tucker accept or approve an Acquisition Proposal by a person other than Bradley. See "The Merger Agreement-- Termination."
If (a) Bradley terminates the Merger Agreement because (i) the Board of Directors of Tucker has recommended that stockholders of Tucker accept or approve an Acquisition Proposal by a person other than Bradley (or Tucker or its Board has resolved to do such), or (ii) any representation, warranty, covenant or agreement on the part of Tucker set forth in the Merger Agreement has been willfully breached; or (b) Tucker terminates the Merger Agreement because the Board of Directors of Tucker, after consultation with and based upon the advice of Mayer, Brown & Platt or another nationally recognized law firm, has determined in good faith that its fiduciary duties to its stockholders under applicable law require it to recommend to its stockholders approval or acceptance of an Acquisition Proposal by a person other than Bradley, then Tucker shall pay to Bradley an amount (the "Termination Amount") in cash equal to the sum of $3,000,000 plus Bradley's out-of-pocket costs and expenses in connection with the Merger Agreement and the transactions contemplated thereby, up to $2,000,000.
If Bradley terminates the Merger Agreement because (i) the Board of Directors of Tucker has failed to make, or has withdrawn, amended, modified or changed its approval or recommendation of the Merger Agreement or any of the transactions contemplated thereby; (ii) Tucker has failed as soon as practicable to mail this Joint Proxy Statement/Prospectus to its stockholders or to include the recommendation of its Board of Directors of the Merger Agreement and the transactions contemplated thereby in this Joint Proxy Statement/Prospectus; (iii) Tucker or its Board of Directors has resolved to do either (i) or (ii) above; or (iv) any representation, warranty, covenant or agreement on the part of Tucker set forth in the Merger Agreement has been breached or become untrue, as the case may be, and is incapable of being satisfied by June 30, 1996 (except for a termination because of a willful breach by Tucker in which case the previous paragraph will apply), Tucker shall pay all of Bradley's out-of-pocket costs and expenses in connection with the Merger Agreement and the transactions contemplated thereby, up to $2,000,000 ("Expenses").
If at any time within one year after termination of the Merger Agreement, unless such termination was pursuant to certain events or circumstances specified in the Merger Agreement, Tucker enters into an agreement relating to an Acquisition Proposal with a person other than Bradley or Tucker's Board of Directors recommends or resolves to recommend to Tucker's stockholders approval or acceptance of an Acquisition Proposal with a person other than Bradley, then, upon the entry into such agreement or the making of such recommendation or resolution, Tucker shall pay to Bradley the Termination Amount, which amount shall be reduced by any monies previously paid by Tucker to Bradley pursuant to the previous paragraphs. See "The Merger Agreement--Termination Amount and Expenses."
The Special Meeting of Bradley's stockholders will be held at , Boston, Massachusetts, on February , 1996, at 10:00 a.m., Eastern time (including any and all adjournments and postponements thereof, the "Bradley Special Meeting"). At the Bradley Special Meeting, holders of Bradley Common Stock will consider and vote upon a proposal to approve the Merger and the Merger Agreement. This proposal must be approved by the affirmative vote of the holders of a majority of the outstanding shares of Bradley Common Stock entitled to vote thereon. Holders of Bradley Common Stock are entitled to one vote per share. Only holders of Bradley Common Stock at the close of business on January , 1996 (the "Bradley Record Date") will be entitled to notice of and to vote at the Bradley Special Meeting. As of the Bradley Record Date, directors and executive officers of Bradley, all of whom have indicated that they will vote all of their shares of Bradley Common Stock for approval of the Merger and the Merger Agreement, and their affiliates were owners of approximately 64,000 shares of Bradley Common Stock, representing less than 1% of the outstanding shares of Bradley Common Stock. See "The Meetings of Stockholders--Bradley Special Meeting."
Bradley stockholders as of the Bradley Record Date may grant proxies by completing, dating, signing and returning the proxy card accompanying this Joint Proxy Statement/Prospectus. All shares of Bradley Common Stock represented by properly executed proxies will, unless such proxies have been previously revoked, be voted in accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF BRADLEY COMMON STOCK WILL BE VOTED IN FAVOR OF THE MERGER AND THE MERGER AGREEMENT. A stockholder who has given a proxy may revoke it at any time prior to its exercise by giving written notice thereof to the Secretary of Bradley, by signing and returning a later-dated proxy or by voting in person at the Bradley Special Meeting; however, mere attendance at the Bradley Special Meeting will not in and of itself have the effect of revoking the proxy.
THE BOARD OF DIRECTORS OF BRADLEY HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT BRADLEY STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. SEE "THE MERGER--BACKGROUND OF THE MERGER" AND "--REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF BRADLEY."
The Special Meeting of Tucker's stockholders will be held at , Chicago, Illinois, on February , 1996, at 9:00 a.m., Central time (including any and all adjournments and postponements thereof, the "Tucker Special Meeting"). At the Tucker Special Meeting, holders of Tucker Common Stock will consider and vote upon a proposal to approve the Merger and the Merger Agreement. This proposal must be approved by the affirmative vote of the holders of two-thirds of the outstanding shares of Tucker Common Stock entitled to vote thereon. Holders of Tucker Common Stock are entitled to one vote per share. Only holders of Tucker Common Stock at the close of business on January , 1996 (the "Tucker Record Date") will be entitled to notice of and to vote at the Tucker Special Meeting. As of the Tucker Record Date, directors and executive officers of Tucker, all of whom have indicated that they will vote all of their shares of Tucker Common Stock for approval of the Merger and the Merger Agreement, and their affiliates were beneficial owners of 112,583 shares of Tucker Common Stock, representing approximately 1% of the outstanding shares of Tucker Common Stock. See "The Meetings of Stockholders--Tucker Special Meeting."
Tucker stockholders as of the Tucker Record Date may grant proxies by completing, dating, signing and returning the proxy card accompanying this Joint Proxy Statement/Prospectus. All shares of Tucker Common Stock represented by properly executed proxies will, unless such proxies have been previously in accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF TUCKER COMMON STOCK WILL BE VOTED IN FAVOR OF THE MERGER AND THE MERGER AGREEMENT. A stockholder who has given a proxy may revoke it at any time prior to its exercise by giving written notice thereof to the Secretary of Tucker, by signing and returning a later-dated proxy or by voting in person at the Tucker Special Meeting; however, mere attendance at the Tucker Special Meeting will not in and of itself have the effect of revoking the proxy.
THE BOARD OF DIRECTORS OF TUCKER HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT TUCKER STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. SEE "THE MERGER--BACKGROUND OF THE MERGER," "--REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF TUCKER" AND "--CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN OFFICERS AND DIRECTORS OF TUCKER."
The rights of stockholders of Tucker, a Maryland corporation, currently are governed by Maryland law, the Tucker Charter and the Tucker Bylaws. Upon completion of the Merger, stockholders of Tucker will become stockholders of Bradley, a Maryland corporation, and their rights as stockholders of Bradley will be governed by Maryland law, the Bradley Charter and the Bradley Bylaws.
Certain differences between the rights of stockholders of Tucker and the rights of stockholders of Bradley include the following: (i) the affirmative vote of two-thirds of the outstanding shares of Tucker Common Stock is required to amend the Tucker Charter or to approve a merger, consolidation, share exchange or sale of all or substantially all of the assets of Tucker, whereas the affirmative vote of a majority of the outstanding shares of Bradley Common Stock is required for comparable actions involving Bradley; (ii) the Bradley Charter provides for three classes of directors, with the term of office of one class expiring each year, whereas the Tucker Charter provides that all of its directors are elected each year at the annual meeting of stockholders; (iii) the holders of not less than 10% of the outstanding shares of Tucker Common Stock may call a special meeting of Tucker's stockholders, whereas the holders of not less than 25% of the outstanding shares of Bradley Common Stock may call a special meeting of Bradley's stockholders; (iv) the Tucker Board of Directors has exempted certain transactions from the Maryland business combination statute (including the Merger), whereas Bradley has not made any such exemptions (except that Bradley's Board of Directors has exempted the Merger from such statute); (v) the Bradley Charter generally limits any holder from acquiring more than 9.8% of the value of all outstanding capital stock of Bradley while the Tucker Charter generally limits any holder from acquiring more than 7% of the value of the issued and outstanding stock of Tucker (in the case of Bradley, this ownership limitation does not apply to shares of capital stock acquired pursuant to certain all cash tender offers for all of the outstanding shares of capital stock); and (vi) the holders of Tucker Common Stock may only amend certain provisions of the Tucker Bylaws, whereas the holders of Bradley Common Stock may amend any provision of the Bradley Bylaws. See "Comparison of Stockholder Rights."
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth financial information for Bradley on a historical and on a pro forma basis and should be read in conjunction with, and are qualified in their entirety by, the respective historical financial statements and notes thereto of Bradley and Tucker incorporated by reference into this Joint Proxy Statement/Prospectus. The financial information presented below includes the accounts of Bradley (including its predecessor Bradley Real Estate Trust) and, for the pro forma information, the accounts of Tucker and of its subsidiaries whose accounts are combined and consolidated with the Tucker accounts.
The stock price used to determine the purchase consideration paid by Bradley in the pro forma financial statements is $14.125 per share, which represents an estimated Closing Price based upon the estimated average closing prices of Bradley Common Stock on the NYSE over the 20 trading days prior to the fifth day preceding the date of the original filing of this Joint Proxy Statement/Prospectus with the Commission on December 7, 1995.
During the period from January 1, 1994 to September 30, 1995, Bradley acquired three properties, sold one property, effected a $125,000,000 shelf registration statement, acquired the REIT advisory business of its long-standing external advisor, completed a public offering of 2,500,000 shares of Bradley Common Stock (the "July Offering") and repaid certain fixed rate mortgage debt.
In March 1994, Bradley purchased the 429,000 square foot Rivercrest Center in Crestwood, Illinois ("Rivercrest") for $24,500,000. The purchase of Rivercrest was financed through borrowings under Bradley's $65,000,000 secured revolving line of credit with The First National Bank of Boston, lead lender with Fleet National Bank and Wells Fargo Realty Advisors Funding, Incorporated (the "Bradley Line of Credit"). In November 1994, Bradley acquired Westwind Plaza, an 88,000 square foot community shopping center located in Minnetonka, Minnesota ("Westwind"), for $7,500,000. Westwind was purchased with the assumption of $5,000,000 of mortgage debt, with the balance paid through a tax- deferred exchange from the sale of Spruce Tree Centre, a mixed-use office/retail property in St. Paul, Minnesota ("Spruce Tree"). In April 1995, Bradley acquired St. Francis Plaza, a 30,000 square foot shopping center located in Santa Fe, New Mexico ("St. Francis Plaza"), for $5,200,000. St. Francis Plaza was purchased with the assumption of approximately $2,100,000 of mortgage debt and the cash proceeds from the sale of 182,500 shares of Bradley Common Stock to the former owner of St. Francis Plaza.
On January 31, 1995, following stockholder approval, Bradley acquired the REIT advisory business of its long-standing external advisor and thereby became a self-administered REIT. The acquisition, pursuant to which Bradley issued 325,000 shares of Bradley Common Stock to the owners of the advisor, resulted in the termination of an advisory arrangement extending through August 1999.
On July 6, 1995, Bradley completed the July Offering at a price of $16 per share. Net proceeds from the July Offering were approximately $37,405,000, of which $32,600,000 was used to pay down the Bradley Line of Credit, $4,712,000 was used to pay off the non-recourse mortgages assumed in November 1994 upon the acquisition of Westwind and the balance was used for general business purposes.
In June 1994, Tucker acquired the Pavilion at Mequon, a community shopping center aggregating approximately 212,000 square feet of gross leasable area located in Mequon, Wisconsin (the "Mequon Pavilion"). The Mequon Pavilion was purchased for $18,300,000 which was financed through a $13,500,000 mortgage note and borrowings for the balance under the $50,000,000 collateralized revolving line of credit with The First National Bank of Boston, lead lender with Mellon Bank, N.A. (the "Tucker Line of Credit").
The unaudited pro forma operating and other data are presented as if the Bradley and Tucker acquisitions, disposition and capital transactions, described above, and the Merger had been consummated on January 1, 1994, with Bradley qualifying as a REIT, distributing all of its taxable income and, therefore, incurring no federal income tax expense during the period from January 1, 1994 to September 30, 1995. The Merger has been accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16.
The unaudited pro forma operating and other data are presented for comparative purposes only and are not necessarily indicative of what the actual results of operations of Bradley would have been for the periods presented, nor does such data purport to represent the results to be achieved in future periods.
See footnotes on page 17.
See footnotes on page 17.
(1) Pro forma data includes operating revenues and expenses for the nine months ended September 30, 1995 and for the year ended December 31, 1994 for the Bradley and Tucker properties acquired between January 1, 1994 and September 30, 1995 for the period during which Bradley and Tucker did not own them. For the nine months ended September 30, 1995 and the year ended December 31, 1994, Bradley pro forma mortgage and other interest has been increased by approximately $554,000 and $738,000, respectively, for the borrowings estimated for payment of fees and expenses related to the Merger. Bradley pro forma depreciation and amortization for the nine months ended September 30, 1995 and the year ended December 31, 1994 has been decreased by approximately $4,356,000 and $4,644,000, respectively, to give effect to recording the acquisition of Tucker's properties at Bradley's purchase price. Bradley pro forma administrative and general expense for the nine months ended September 30, 1995 and the year ended December 31, 1994 has been decreased by approximately $1,050,000 and $1,400,000, respectively, for estimated cost savings which will be achieved as a result of the Merger.
(2) The Exchange Ratio used in the pro forma financial statements was .686 of a share of Bradley Common Stock per share of Tucker Common Stock. If the Exchange Ratio was .665, then pro forma net income per share for the nine months ended September 30, 1995 and for the year ended December 31, 1994 would have been $.78 and $1.28, respectively; pro forma distributions per share would have been $1.02 and $1.43, respectively; and pro forma weighted average number of shares outstanding would have been 18,400,139 and 18,400,139, respectively.
(3) Bradley generally considers FFO to be an appropriate supplemental measure of the performance of an equity REIT because it is predicated on a cash flow analysis, as opposed to a measure predicated on generally accepted accounting principles, which gives effect to non-cash items such as depreciation. FFO, as defined by the National Association of Real Estate Investment Trusts, and as followed by Bradley represents net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. Since the definition of FFO is a guideline, computation of FFO may vary from one REIT to another. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of Bradley's operating performance or as an alternative to cash flow as a measure of liquidity. In addition, FFO is not necessarily indicative of cash available to fund cash needs.
(4) Depreciation and amortization added back to net income in the calculation of FFO is net of depreciation and amortization allocated to minority interest of approximately $164,000 and $410,000 for the nine months ended September 30, 1995 and the year ended December 31, 1994, respectively.
(5) The pro forma balance sheet was prepared as if the Merger had been consummated on September 30, 1995.
The following tables set forth financial information for Tucker which should be read in conjunction with, and is qualified in its entirety by, the historical financial statements and notes thereto of Tucker incorporated by reference into this Joint Proxy Statement/Prospectus.
(1) Operating data for 1993 includes the results of the Predecessor Business through October 11, 1993 (the date of the initial public offering of Tucker Common Stock) plus the results of Tucker thereafter.
The following table sets forth Bradley's and Tucker's historical per share data, unaudited pro forma per share data giving effect to the Merger using the purchase method of accounting and the equivalent pro forma combined per share amounts of Tucker. The pro forma combined data are not necessarily indicative of actual financial position or future operating results or that which would have occurred or will occur upon consummation of the Merger.
(A) The pro forma combined per share data for Bradley and Tucker for the nine months ended September 30, 1995 and the year ended December 31, 1994 have been prepared as if the Bradley capital transactions occurring between January 1, 1994 and September 30, 1995 and the Merger had occurred prior to the beginning of the period presented, resulting in weighted average shares outstanding of 18,627,533 for both periods. The pro forma combined book value per share for Bradley and Tucker has been prepared assuming that in the Merger each share of Tucker Common Stock is converted into .686 of a share of Bradley Common Stock, resulting in total outstanding shares of Bradley Common Stock of 18,654,826 at September 30, 1995. Assuming that each share of Tucker Common Stock is converted into .665 of a share of Bradley Common Stock, the pro forma combined book value per share would be $13.64 at September 30, 1995 (based upon 18,427,432 shares outstanding) and $13.87 at December 31, 1994 (based upon 18,405,362 shares outstanding).
(B) The equivalent pro forma combined per share amounts of Tucker are calculated by multiplying pro forma Net Income per share of Bradley Common Stock, pro forma Cash Distributions/Dividends per share of Bradley Common Stock and pro forma Book Value per share of Bradley Common Stock by an assumed Exchange Ratio of .686. If the Exchange Ratio was .665, then equivalent pro forma Net Income per share for the nine months ended September 30, 1995 and for the year ended December 31, 1994 would have been $.52 and $.85, respectively; equivalent pro forma Cash Distributions/Dividends per share would have been $.68 and $.95, respectively; equivalent pro forma Book Value per share would have been $9.07 and $9.22, respectively; and equivalent pro forma number of shares outstanding would have been 7,200,808 and 7,200,808, respectively.
(C) Bradley currently pays a quarterly distribution of $.33 per share. Bradley currently intends to continue to pay such regular quarterly distribution. Future distributions by Bradley will be at the discretion of its Board of Directors and will depend on certain factors. See "--Distribution and Dividend Policy."
The Bradley Common Stock has traded on the NYSE (symbol "BTR") since October 18, 1994 and before that date traded for many years on the American Stock Exchange. The Tucker Common Stock has traded on the NYSE (symbol "TUC") since October 5, 1993. The table below sets forth, for the calendar quarters indicated, the high and low sales prices per share reported by the NYSE Composite Tape or on the American Stock Exchange, as the case may be, and dividends paid for the Bradley Common Stock and the Tucker Common Stock (adjusted in the case of Bradley for a reverse stock split in 1994).
The following table sets forth the last reported sales prices per share of Bradley Common Stock and Tucker Common Stock (i) on September 8, 1995, the last trading day preceding public announcement that Bradley and Tucker were negotiating a possible acquisition of Tucker by Bradley, (ii) on October 27, 1995, the last trading day preceding public announcement of the terms of the Merger, and (iii) on January , 1996, the most recent date for which prices were available prior to printing this Joint Proxy Statement/Prospectus.
BECAUSE THE MARKET PRICE OF BRADLEY COMMON STOCK IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE BRADLEY COMMON STOCK THAT HOLDERS OF TUCKER COMMON STOCK WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE PRIOR TO AND FOLLOWING THE MERGER. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR BRADLEY COMMON STOCK AND TUCKER COMMON STOCK.
Bradley currently pays a regular quarterly distribution of $.33 per share of Bradley Common Stock (which, annualized, equals $1.32 per share).
Further distributions by Bradley will be at the discretion of its Board of Directors and will depend on the actual FFO of Bradley, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. However, Bradley currently intends to continue to pay regular quarterly distributions of $.33 per share of Bradley Common Stock. Management believes that based in part on unaudited pro forma per share data after giving effect to the Merger, there will be sufficient cash available to make such distributions. Assuming the Surviving Company continues to make regular quarterly distributions at Bradley's current rate of $.33 per share of Bradley Common Stock, each stockholder of Tucker would be entitled to receive a quarterly distribution equivalent to $.219 per share of Tucker Common Stock (assuming an Exchange Ratio of .665) or $.226 per share of Tucker Common Stock (assuming an Exchange Ratio of .686).
Bradley anticipates that cash available for distribution will exceed earnings and profits due to non-cash expenses, primarily depreciation and amortization, to be incurred by Bradley. Distributions by Bradley to the extent of its current or accumulated earnings and profits for federal income tax purposes, other than capital gain dividends, will be taxable to stockholders as ordinary dividend income. Any dividends designated by Bradley as capital gain dividends generally will give rise to capital gain for stockholders. Distributions in excess of Bradley's current or accumulated earnings and profits will be treated as a non-taxable reduction of a stockholder's basis in its shares of Bradley Common Stock to the extent thereof, and thereafter as capital gain. Distributions treated as non-taxable reductions in basis will have the effect of deferring taxation until the sale of a stockholder's shares of Bradley Common Stock or future distributions in excess of the stockholder's basis in the shares of Bradley Common Stock.
In order to maintain its qualification as a REIT, Bradley will be required to make annual distributions to its stockholders in an amount equal to at least 95% of its taxable income (excluding net capital gains). In the event that cash available for distribution is insufficient to meet these distribution requirements, Bradley could be required to borrow the amount of the deficiency or sell assets to obtain the cash necessary to make the distributions required to retain REIT status.
Bradley maintains a Dividend Reinvestment and Share Purchase Plan pursuant to which stockholders of record may elect to reinvest cash distributions and to make limited additional cash payments (minimum $100, maximum $2,500 per quarter by any one stockholder of record) to purchase newly issued shares of Bradley Common Stock at 95% of the current market value. Bradley may suspend or amend such plan at any time. This Joint Proxy Statement/Prospectus does not constitute an offer of any shares of Bradley Common Stock that may be issued by Bradley in connection with a distribution reinvestment program, and such shares may only be purchased pursuant to a separate prospectus contained in an effective registration statement.
Effective the second quarter of 1995, the Board of Directors of Tucker reduced Tucker's quarterly cash dividend from $.36 per share to $.25 per share. Tucker's quarterly cash dividend had previously been reduced from $.38 per share to $.36 per share, effective the fourth quarter of 1994. Annualized, the quarterly dividend of $.25 per share equals $1.00 per share of Tucker Common Stock.
In considering whether to approve the Merger and the Merger Agreement, stockholders of Bradley and Tucker should consider, in addition to the other information in this Joint Proxy Statement/Prospectus, the material discussed in this section.
SUBSTANTIAL DEBT OBLIGATIONS AND TERMS OF DEBT
The Surviving Company's pro forma debt obligations after giving effect to the Merger will aggregate approximately $220.5 million as compared to $34.7 million for Bradley as of September 30, 1995. The pro forma ratio of debt to Total Market Capitalization of the Surviving Company will be approximately 46% as compared to 18% for Bradley as of September 30, 1995. This increase in the Surviving Company's leverage and its pro forma ratio of debt to Total Market Capitalization could increase the risk of default under its indebtedness. Failure to pay the debt obligations when due could result in the Surviving Company losing its interest in the properties collateralizing such obligations. Certain of Tucker's and Bradley's credit agreements provide that a default with respect to any other indebtedness of such company shall cause an event of default under that credit agreement and accelerate the company's obligations thereunder.
Bradley believes that the ratio of debt to Total Market Capitalization is an important factor to consider in evaluating a REIT's debt level because this ratio is one indicator of a company's ability to borrow funds. Bradley believes that using the ratio of debt to book value of assets is not as reliable an indicator of a REIT's debt level because the book value of a REIT's assets indicates only the depreciated value of the REIT's property without consideration of the market value of such assets at a particular point in time. The Total Market Capitalization of a company, however, is more variable than the book value because it is dependent on the current stock price of a company. In addition to Total Market Capitalization, Bradley also reviews debt service coverage ratios in making decisions regarding the incurrence of debt. In making such decisions, Bradley also considers, among other things, debt to estimated market value of the assets, the purchase price of properties to be acquired with debt refinancing, the estimated market value of the properties upon refinancing, and the ability of particular properties and Bradley as a whole to generate cash flow to cover expected debt service.
In particular, the maturity of the $100 million Tucker REMIC Note in September 2000 may increase the Surviving Company's risk of default on its indebtedness. Prior to the date hereof, each of Tucker and Bradley and their predecessors have been able to refinance debt when it has become due on terms which they believe to be commercially reasonable. There can be no assurance that the Surviving Company will continue to be able to repay or to refinance its indebtedness relating to the Tucker REMIC Note or any of its other indebtedness on commercially reasonable or any other terms.
The Surviving Company's pro forma debt obligations subject to floating interest rates at September 30, 1995, after giving effect to the Merger, will aggregate approximately $82.4 million at a weighted average interest rate of approximately 8.266% per annum as compared to $9.8 million at a weighted average interest rate of approximately 8.065% per annum for Bradley as of September 30, 1995. To the extent the Surviving Company's exposure to increases in interest rates is not eliminated through interest rate protection or cap agreements, such increases will adversely affect the Surviving Company's net income, FFO and cash available for distribution and may affect the amount of distributions it can make to its stockholders and holders of TOP Units.
The Bradley Line of Credit requires that Bradley maintain interest rate protection, at a rate satisfactory to the lead lender, with respect to at least $30 million of indebtedness. As required, Bradley entered into an interest rate protection agreement in January 1994 with its lead lender, which has the effect of limiting the interest rate with respect to $30 million of indebtedness to a rate of not more than 8.7% through January 28, 1996 and 8.9% thereafter through January 28, 1997. Bradley is currently in discussions with its lead lender regarding the replacement of the Bradley Line of Credit with a $150 million unsecured revolving credit facility. Bradley anticipates that this new credit facility will also require Bradley to obtain interest rate protection for an amount in excess of the amount currently required under the Bradley Line of Credit, which amount could be up to $100 million. There can be no assurance that such an interest rate protection agreement will be available at that time. If an interest rate protection agreement is required and obtained, there can be no assurance that the parties to such interest rate protection agreements will honor their obligations or that such interest rate caps will be effective. Furthermore, if an interest rate cap is obtained for a period which expires prior to the expiration of the new credit facility, there can be no assurance that the Surviving Company will be able to enter into similar agreements.
The foregoing risks associated with the debt obligations of the Surviving Company may adversely affect the market price of Bradley Common Stock and may inhibit the Surviving Company's ability to raise capital and issue equity in both the public and private markets following the consummation of the Merger.
RESTRICTIONS ON ABILITY OF SURVIVING COMPANY TO DISPOSE OF PROPERTIES
Pursuant to the terms of the Tucker REMIC Indenture, prior to October 1997, principal payments on the Tucker REMIC Note cannot be made and the properties collateralizing the Tucker REMIC Note cannot be sold. If the Surviving Company wishes either to prepay all or part of the $100 million principal of the Tucker REMIC Note or to sell any of the properties collateralizing the Tucker REMIC Note after such date, it will incur significant prepayment penalties. The prepayment of principal of the Tucker REMIC Note requires an additional payment of the greater of either (i) 1% of the amount of principal being prepaid or (ii) the product of (A) the difference between the outstanding principal balance of the Tucker REMIC Note before prepayment and the present value of all remaining interest and principal payments thereon and (B) the amount of principal being prepaid divided by the outstanding principal balance of the Tucker REMIC Note. After October 1997, in order to release any of the properties collateralizing the Tucker REMIC Note from the lien so that such properties may be sold, the Tucker REMIC Indenture requires that certain additional conditions be met, including that (i) the aggregate amount of principal repaid on the Tucker REMIC Note equal at least 125% of the amount of principal allocated to the property to be released and (ii) certain debt service coverage ratios continue to be satisfied.
Pursuant to the terms of the Amended TOP Partnership Agreement, for a period of 24 months after the Effective Time, the general partner of TOP may not elect to dissolve TOP or sell all or substantially all of the assets of TOP without the consent of a majority in interest of the limited partners, except in connection with the merger or other business combination of the general partner or its affiliates. Thus, Bradley is restricted from disposing of all or substantially all of the properties held by TOP. See "The Companies-- Surviving Company" for information regarding these properties.
REDUCTIONS IN DIVIDENDS PER SHARE FOR TUCKER STOCKHOLDERS FOLLOWING
Assuming the Surviving Company continues to make regular quarterly distributions at Bradley's current rate of $.33 per share following consummation of the Merger, each Tucker stockholder will receive an equivalent quarterly dividend payment of $.219 per share (assuming an Exchange Ratio of .665) or $.226 per share (assuming an Exchange Ratio of .686), as compared to Tucker's most recent quarterly dividend of $.25 per share.
The relative stock prices of Bradley Common Stock and Tucker Common Stock at the Effective Time may vary significantly from the prices as of the date of execution of the Merger Agreement, the date hereof or the date on which stockholders vote on the Merger and the Merger Agreement, due to changes in the business, operations and prospects of Bradley or Tucker, market assessments of the likelihood that the Merger will be consummated and the timing thereof, general market and economic conditions and other factors such as market perception of REIT stocks, retail stocks and REIT retail stocks generally. There can be no assurance that the price of Bradley Common Stock will not decline between the date of this Joint Proxy Statement/Prospectus and the Effective Time. A change in the stock price of Bradley Common Stock will change the Exchange Ratio as follows. If the Closing Price of Bradley Common Stock is $16.00 or more, each share of Tucker Common Stock will be exchanged for .665 of a share of Bradley Common Stock. If the Closing Price is between
$16.00, the Exchange Ratio will be determined by dividing $10.64 by the Closing Price. If the Closing Price is $15.50 or less, the Exchange Ratio will be .686 of a share of Bradley Common Stock. In considering whether to approve the Merger and the Merger Agreement, stockholders of Bradley and Tucker should consider the risks associated with a potential change in the stock price of Bradley Common Stock between the date of this Joint Proxy Statement/Prospectus and the Effective Time.
SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT PRICE OF BRADLEY
Except for shares issued to affiliates of Tucker, all of the shares of Bradley Common Stock to be issued to Tucker stockholders in connection with the Merger (approximately 7,125,941 shares assuming an Exchange Ratio of .665 or 7,170,972 shares assuming an Exchange Ratio of .686) will be freely transferable. In addition, in certain circumstances, holders of TOP Units will receive upon redemption of their TOP Units approximately 305,113 shares (assuming an Exchange Ratio of .665) or 314,749 shares (assuming an Exchange Ratio of .686) of Bradley Common Stock, which will be freely transferable following such redemption. Sales of a substantial number of shares of Bradley Common Stock by current Tucker stockholders and unitholders following the consummation of the Merger, or the perception that such sales could occur, could adversely affect the market price for shares of Bradley Common Stock after the Merger.
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN TUCKER DIRECTORS AND
In considering the recommendation of the Boards of Directors of Tucker and Bradley to approve the Merger and the Merger Agreement, stockholders should be aware that conflicts of interest exist because certain members of the management and the Board of Directors of Tucker have certain interests in, and will receive benefits from, the Merger that are separate from the interests of, and benefits to, stockholders of Tucker. Generally, such benefits may have resulted in conflicts of interest for such recipients in negotiating the Merger and may result in conflicts of interest with respect to such recipients in determining whether Tucker should consummate the Merger. Tucker stockholders that are not directors or officers of Tucker will not receive these benefits. See "The Merger--Conflicts of Interest Arising from Benefits to Certain Officers and Directors of Tucker."
DIFFERENCES BETWEEN RIGHTS OF TUCKER STOCKHOLDERS AND BRADLEY STOCKHOLDERS AND POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS
The rights of stockholders of Tucker, a Maryland corporation, currently are governed by Maryland law, the Tucker Charter and the Tucker Bylaws. Upon completion of the Merger, stockholders of Tucker will become stockholders of Bradley, a Maryland corporation, and their rights as stockholders of Bradley will be governed by Maryland law, the Bradley Charter and the Bradley Bylaws.
Certain differences between the rights of stockholders of Tucker and the rights of stockholders of Bradley include the following: (i) the affirmative vote of two-thirds of the outstanding shares of Tucker Common Stock is required to amend the Tucker Charter or to approve a merger, consolidation, share exchange or sale of all or substantially all of the assets of Tucker, whereas the affirmative vote of a majority of the outstanding shares of Bradley Common Stock is required for comparable actions involving Bradley; (ii) the Bradley Charter provides for three classes of directors, with the term of office of one class expiring each year, whereas the Tucker Charter provides that all of its directors are elected each year at the annual meeting of stockholders; (iii) the holders of not less than 10% of the outstanding shares of Tucker Common Stock may call a special meeting of Tucker's stockholders, whereas the holders of not less than 25% of the outstanding shares of Bradley Common Stock may call a special meeting of Bradley's stockholders; (iv) the Tucker Board of Directors has exempted certain transactions from the Maryland business combination statute (including the Merger), whereas Bradley has not made any such exemptions (except that Bradley's Board of Directors has exempted the Merger from such statute); (v) the Bradley Charter generally limits any holder from acquiring more than 9.8% of the value of all outstanding capital stock of Bradley while the Tucker Charter generally limits any holder from acquiring more than 7% of the value of the issued and outstanding stock of Tucker (in the case of Bradley, this ownership limitation does not apply to shares of capital stock acquired pursuant to certain all cash tender offers for all of the outstanding shares of capital stock); and (vi) the holders of Tucker Common Stock may only amend certain provisions of the Tucker Bylaws, whereas the holders of Bradley Common Stock may amend any provision of the Bradley Bylaws. See "Comparison of Stockholder Rights."
Certain of the provisions described above could have a potential anti- takeover effect on the Surviving Company. The staggered Board provision in the Bradley Charter prevents stockholders from voting on the election of more than one class of directors at each annual meeting of stockholders and thus, may have the effect of keeping the members of the Board of Directors of the Surviving Company in control for a longer period of time. The staggered Board provision and the provision in Bradley's By-laws requiring holders of not less than 24.9% of the outstanding shares of Bradley Common Stock to call a special meeting of stockholders may have the effect of making it more difficult for a third party to acquire control of Bradley without the consent of its Board of Directors, including certain acquisitions which stockholders may deem to be in their best interest.
SUBSTANTIAL EXPENSES AND PAYMENTS IF MERGER FAILS TO OCCUR
No assurance can be given that the Merger will be consummated. If the Merger is not consummated, Tucker and Bradley will have incurred substantial expenses in connection with the transaction. If the Merger Agreement is terminated under certain circumstances, Tucker shall be required to pay Bradley the Termination Amount of $3,000,000 plus Bradley's out-of-pocket expenses, up to $2,000,000. If the Merger Agreement is terminated in certain other circumstances, Tucker will be required to reimburse Bradley for its Expenses, up to $2,000,000. See "The Merger Agreement--Termination Amount and Expenses."
Dependence on Midwestern Region and Retail Industry
A substantial percentage of the Surviving Company's properties will be located in the Midwestern region of the United States and such properties consist predominantly of community shopping centers. The Surviving Company's performance therefore will be linked to economic conditions in the Midwest and in the market for retail space generally. The market for retail space has been adversely affected by the ongoing consolidation in the retail sector, the adverse financial condition of certain large companies in this sector and the excess amount of retail space in certain markets. To the extent that these conditions impact the market rents for retail space, they could result in a reduction of net income, FFO and cash available for distribution and thus affect the amount of distributions the Surviving Company can make to its stockholders.
In addition, the Surviving Company will predominantly own and operate retail shopping centers catering to retail tenants. To the extent that the investing public has a negative perception of the retail sector, the value of shares of common stock of the Surviving Company may be negatively impacted, thereby resulting in such shares trading at a discount below the inherent value of the assets of the Surviving Company as a whole.
Financial Condition and Bankruptcy of Tenants
Since substantially all of Bradley's and Tucker's income has been, and substantially all of the Surviving Company's income will continue to be, derived substantially from rental income from retail shopping centers, the Surviving Company's net income, FFO and cash available for distribution would be adversely affected if a significant number of the Surviving Company's tenants were unable to meet their obligations to the Surviving Company or if the Surviving Company were unable to lease on economically favorable terms a significant amount of space in its shopping centers. In addition, in the event of default by a tenant, the Surviving Company may experience delays and incur substantial costs in enforcing its rights as landlord.
At any time, a tenant of the Surviving Company's properties may seek the protection of the bankruptcy laws, which could result in the rejection and termination of the tenant lease. Such an event could cause a reduction of net income, FFO and cash available for distribution and thus affect the amount of
Surviving Company can make to its stockholders. No assurance can be given that any present tenant which has filed for bankruptcy protection will continue making payments under its lease or that other tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will continue to make rental payments in a timely manner. In addition, a tenant may, from time to time, experience a downturn in its business, which may weaken its financial condition and result in a reduction or failure to make rental payments when due. If a lessee or sublessee defaults in its obligations to the Surviving Company, the Surviving Company may experience delays in enforcing its rights as lessor or sublessor and may incur substantial costs and experience significant delays associated with protecting its investment, including costs incurred in renovating and releasing the property.
Potential Negative Effect of One North State Property
On a pro forma basis, for the nine months ended September 30, 1995, $10.6 million or 16% of the total revenue of the Surviving Company is derived from rents and expense reimbursements from tenants of Tucker's One North State property, which is a "mixed use" property located in downtown Chicago. The total charges currently being paid by certain of this property's tenants may be in excess of current market rates. The leases of these tenants begin to expire in 2001. One office tenant, however, has the option exercisable on or beforeMarch 31, 1996 to terminate its lease, effective as of April 1, 1998, upon payment of a $1.8 million cancellation fee. This tenant has indicated that it will move out of this space prior to the expiration of its lease, but has not yet determined whether or not it will exercise its early termination right. Pursuant to the terms of the Tucker REMIC Indenture, this termination fee is required to be paid into a reserve account which can be used, for among other things, to pay for tenant alterations, leasing commissions and other lease inducements directly related to this space. Any unused amount of this reserve account must be used to repay the principal amounts owed under the Tucker REMIC Note. The inability of the Surviving Company to lease such property, or a significant reduction in the amount of rent and expense reimbursements paid by the tenants of such property, could have an adverse impact on the operating results of the Surviving Company.
Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to use such property as collateral in its borrowings. All of the properties of Tucker and Bradley have been subjected to Phase I or similar environmental audits (which involve inspection without soil sampling or ground water analysis) by independent environmental consultants. Except as described below, these environmental audit reports have not revealed any potential significant environmental liability, nor is management of Bradley or Tucker aware of any environmental liability with respect to the properties that such management believes would have a material adverse effect on the Surviving Company's business, assets or results of operations. No assurance can be given that existing environmental studies with respect to the properties reveal all environmental liabilities or that any prior owner of any such property did not create any material environmental condition not known to Bradley or Tucker.
Phase II site assessments of Tucker's Commons of Chicago Ridge property have disclosed the presence of contaminants in fill material and soil at the property that could be associated with the property's former use as a landfill and as the former site of an asphalt plant and storage tanks for petroleum products (which storage tanks have been removed from the property), but not at such levels as would require reporting to environmental agencies. These Phase II site assessments also disclosed the presence in the groundwater of contaminants similar to those detected in the soil samples. Environmental assessments of the property have also detected methane gas, probably associated with the former use of the property as a landfill. A regular maintenance program has been implemented by Tucker to control the migration and effect of the methane gas. There can be no assurance that an environmental regulatory agency such as the Illinois Environmental Protection Agency will not in the future require further investigation to determine the source and vertical and horizontal extent of the contamination. If any such investigation is required and confirms the existence of contaminants at the levels disclosed in the Phase II site assessments, it is possible that the relevant agency could require the Surviving Company to take action to address the contamination, which action could range from ongoing monitoring to remediation of the contamination. Based on the information currently available, the managements of Tucker and Bradley do not believe that the cost of responding to such contamination would be material to the Surviving Company.
In connection with the execution of the Merger Agreement, Bradley, TOP and, if the Merger is consummated, the Management Directors have agreed to share the cost of having an outside consultant conduct a new Phase II investigation of the soil and groundwater of the Commons of Chicago Ridge property and to prepare a report recommending what actions the Surviving Company should take with respect to such matters. It is currently anticipated that this outside consultant will be engaged immediately following the consummation of the Merger. In the event that Bradley decides to implement any of the recommendations of such consultant (the "Recommended Work"), TOP and the Management Directors have each agreed to each pay fifty percent of the costs of the Recommended Work, with the Management Directors' aggregate liability for the Recommended Work limited to a maximum of $200,000. After the consummation of the Merger, Bradley will hold 95.9% of the outstanding TOP Units and, as a consequence, will be responsible for 95.9% of TOP's share of the costs of the Recommended Work. Based on the information currently available, neither the managements of Bradley and Tucker nor the Management Directors believe that the Surviving Company's aggregate liability for the Recommended Work will have a material effect on the financial condition or liquidity of the Surviving Company. See "The Merger Agreement--Amended TOP Partnership Agreement."
At the time of Tucker's initial public offering, the Management Directors agreed to indemnify Tucker and TOP against certain potential environmental liabilities and expenses relating to the Commons of Chicago Ridge property. These indemnification obligations will be amended in certain respects by the Amended TOP Partnership Agreement. As amended, the Management Directors generally have agreed to indemnify the Surviving Company, TOP and its subsidiaries and affiliates against all claims, losses, costs and expenses incurred by such parties arising out of any administrative, regulatory or judicial action, suit, investigation or proceeding in connection with any applicable environmental health or safety law regarding hazardous substances, materials, wastes or petroleum products, or any common law right of action regarding such substances, materials, wastes or products, whether brought by a governmental or regulatory authority or by a third party, that is initiated on or before October 4, 2003 with respect to conditions or acts at the Commons of Chicago Ridge which existed prior to October 4, 1993. In connection with this indemnification obligation, Bradley has agreed to keep the Management Directors reasonably informed of various activities relating to the property and to consult with the Management Directors with respect to any potential claims, settlements and remediation which could trigger the indemnification obligations of the Management Directors. Regardless of such indemnification, based on the information currently available, the managements of Tucker and Bradley do not believe that the environmental liabilities and expenses relating to the Commons of Chicago Ridge property would have a material effect on the liquidity or financial condition of the Surviving Company.
The Management Directors' indemnification obligations currently are secured by 102,308 shares of Tucker Common Stock and 427,339 TOP Units acquired by the Management Directors in connection with Tucker's initial public offering and, upon consummation of the Merger, will be secured by 70,183 shares of Bradley Common Stock (into which their respective shares of Tucker Common Stock will be exchanged) and 293,154 TOP Units held or otherwise beneficially owned by each of the Management Directors and their family members as of the Effective Time (in each case assuming an Exchange Ratio of .686; an Exchange Ratio of .665 would yield 68,034 shares of Bradley Common Stock and 284,180 TOP Units, respectively). After the Effective Time, the TOP Units generally will be exchangeable for cash or shares of Bradley Common Stock (subject to certain rights of Bradley), and all such shares of Bradley Common Stock may be transferred at any time, subject to compliance with applicable federal securities laws. Accordingly, there can be no assurance that the Management Directors will hold any shares of Bradley Common Stock or TOP Units at the time, if ever, when Bradley attempts to realize this security interest or that the shares of Bradley Common Stock or TOP Units held by the Management Directors will be sufficient to cover their indemnification obligations.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT AND OTHER TAX RISKS RELATING TO OPERATION OF BRADLEY AFTER THE EFFECTIVE TIME
Bradley (including its predecessor, Bradley Real Estate Trust) believes that it has operated in a manner that permits it to qualify as a REIT under the Code for each taxable year since its formation in 1961. Although management of Bradley believes that Bradley is organized and is operating in such a manner, no assurance can be given that Bradley will be able to continue to operate in a manner so as to qualify or remain so qualified. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations and the determination of various factual matters and circumstances not entirely within Bradley's control. For example, in order to qualify as a REIT, at least 95% of Bradley's gross income in any year must be derived from qualifying sources and Bradley must make distributions to stockholders aggregating annually at least 95% of its REIT taxable income (excluding net capital gains). In addition, no assurance can be given that new legislation, new regulations, administrative interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. Bradley, however, is not aware of any currently pending tax legislation that would adversely affect its ability to continue to operate as a REIT.
If Bradley fails to qualify as a REIT, Bradley will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at corporate rates. In addition, unless entitled to relief under certain statutory provisions, Bradley will also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce the net earnings of Bradley available for investment or distribution to stockholders because of the additional tax liability to Bradley for the year or years involved. In addition, distributions would no longer be required to be made. To the extent that distributions to stockholders would have been made in anticipation of Bradley's qualifying as a REIT, Bradley might be required to borrow funds or to liquidate certain of its investments to pay the applicable tax. The failure to qualify as a REIT would also constitute a default under certain debt obligations of Bradley.
Tucker believes that, since its formation, it has operated so as to qualify as a REIT under the Code. The failure of Tucker to qualify as a REIT would have consequences generally similar to the consequences of any failure by Bradley to qualify as a REIT, as described above. If Tucker has failed to qualify as a REIT in any year in which it elected so to qualify and consequently becomes liable to pay taxes as a regular non-REIT corporation, the liabilities of Tucker that Bradley will assume upon effectiveness of the Merger will include such tax liability. Moreover, if it were subsequently determined that Tucker had earnings and profits as determined for federal income tax purposes (notwithstanding the requirement in the Merger Agreement that Tucker distribute all earnings and profits prior to the Merger) or if former stockholders of Tucker acquired 50% or more in value of the shares of Bradley Common Stock as a result of or following the Merger, Tucker's failure to qualify as a REIT also could disqualify Bradley as a REIT.
Bradley's acquisition of Tucker's general partner interest in TOP and Tucker's indirect interests in the subsidiary partnerships of TOP involves special tax considerations, including the qualification of each such partnership as a "partnership" for federal income tax purposes, which may adversely impact Bradley's ability to qualify as a REIT following the Merger. See "The Merger--Material Federal Income Tax Consequences--Tax Aspects of Bradley's Investment in TOP."
The failure to qualify as a REIT would have a material adverse effect on an investment in Bradley as the taxable income of Bradley would be subject to federal income taxation at corporate rates, and, therefore, the amount of cash available for distribution to its stockholders would be reduced or eliminated.
All of the properties owned by Bradley and by Tucker are located in developed areas. There are numerous other retail properties and real estate companies within the market area of each such property which will compete with the Surviving Company for tenants and development and acquisition competitive retail properties and real estate companies in such areas could have a material effect on (i) the Surviving Company's ability to rent space at the properties and the amount of rents currently charged and (ii) development and acquisition opportunities. The Surviving Company will compete for tenants and acquisitions with others who may have greater resources than the Surviving Company.
In order to maintain its qualification as a REIT, not more than 50% in value of the outstanding shares of the Surviving Company may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code). To minimize the possibility that Bradley will fail to qualify as a REIT under this test, the Bradley Charter (which will continue as the charter of the Surviving Company) authorizes the directors to take such action as may be required to preserve its qualification as a REIT and generally limits the ownership of shares of Bradley Common Stock by any particular stockholder to 9.8% of the value of the outstanding shares of Bradley Common Stock. The Tucker Charter contains comparable ownership limits, which generally prohibit any particular stockholder from owning more than 7% of the value of the outstanding shares of Tucker Common Stock. See "Comparison of Stockholder Rights--Restrictions on the Ownership, Transfer or Issuance of Shares."
The ownership limits in the Bradley Charter, as well as Bradley's authority to issue preferred stock and other provisions in the Bradley Charter and the Bradley Bylaws, may delay, defer or prevent a change in control of Bradley and may also (i) deter certain tender offers for the shares of Bradley Common Stock, which might be attractive to certain stockholders, or (ii) limit the opportunity for stockholders to receive a premium for their shares of Bradley Common Stock that might otherwise exist if an investor were attempting to assemble a block of shares in excess of 9.8% of the value of the outstanding shares of Bradley Common Stock, or otherwise effect a change in control of Bradley. No change in the ownership limits of Bradley Common Stock will be effected as a result of the Merger.
Under the MGCL, stockholders of Bradley and Tucker do not have dissenters' rights in connection with the Merger.
Bradley is one of the nation's oldest continuously qualified REITs under the Code. Originally organized in 1961 as a Massachusetts business trust under the name Bradley Real Estate Trust, Bradley was reorganized as a Maryland corporation in October 1994. Bradley focuses on the ownership and operation of community shopping centers, primarily in the Midwestern and the Northeastern regions of the United States. Bradley's objective is to enhance the operating performance and value of its portfolio through renovation, expansion and leasing strategies designed to meet the needs of an evolving retail marketplace. Bradley also seeks to create value through the acquisition of properties which can benefit from Bradley's expertise in shopping center management, renovation and expansion. Bradley currently owns fifteen shopping centers, one retail/office building and the land under a retail/office tower. In total, Bradley's existing properties encompass approximately 3.1 million rentable square feet (of which approximately 3.0 million square feet is rentable retail space), leased to over 300 tenants. Bradley's existing portfolio was 94% leased as of September 30, 1995.
Bradley is the borrower under the Bradley Line of Credit, a $65,000,000 revolving credit agreement with three lenders, which is secured by a blanket mortgage on six of Bradley's properties. The current interest rates available to Bradley under the Bradley Line of Credit are (i) the higher of (x) the rate announced by the lead lender as its "base rate" or (y) one half of one percent (.5%) above the overnight federal funds effective rate published by the Board of Governors of the Federal Reserve System and (ii) the adjusted LIBOR rate therein) plus one and seven-eighths percent (1.875%). The Bradley Line of Credit has a maturity date of December 31, 1996. The Bradley Line of Credit contains certain covenants which Bradley believes are customary for agreements of this type. Among other provisions, the covenants require the lenders' consent to the incurrence of additional indebtedness, the signing of certain leases, the sale and purchase of assets, and the maintenance of certain financial standards including minimum net worth and debt service coverage requirements. Consent of the lenders to the Merger will be required if a new facility is not in place at or prior to the Effective Time.
Tucker believes that it is a leader in the Midwest in the development, acquisition and long-term ownership of community shopping centers. Headquartered in Northbrook, Illinois, Tucker owns and manages more than 4.3 million square feet of income-producing properties. The properties are located primarily in Chicago and other areas of the Midwest, with tenants primarily selling value-oriented merchandise.
Tucker is a Maryland corporation, formed on May 28, 1993, which elected to qualify as a REIT under the Code following the public offering of Tucker Common Stock in October 1993. Tucker is a fully integrated real estate management and development company and was established to continue the business of the Predecessor Business as an owner, manager and developer of shopping centers. TTC was founded in 1976 by Kenneth L. Tucker. Prior to their acquisition by Tucker, nine of the properties owned or controlled by Tucker were owned by entities in which principals of TTC had substantial interests.
All of Tucker's real estate properties are held by, and all of its operations are conducted through, TOP and its subsidiaries. TOP was formed for the purpose of acquiring, operating and expanding the business of Tucker and certain of its affiliates. Tucker is the sole general partner of TOP and owns 95.9% of the outstanding TOP Units. The limited partners of TOP, including the Management Directors, were equity holders of the entities which previously owned the properties transferred to TOP in connection with Tucker's initial public offering in October 1993. The TOP Units are exchangeable, subject to certain limitations imposed to protect Tucker's status as a REIT, into shares of Tucker Common Stock on the basis of one TOP Unit for one share of Tucker Common Stock.
TFP, which owns six of the Tucker properties, was created to facilitate the refinancing of indebtedness encumbering certain of the Tucker properties through a loan to TFP from a trust qualifying as a REMIC for federal income tax purposes. TOP is the 99% general partner of TFP, and TFC, a wholly-owned subsidiary of Tucker, is the 1% general partner of TFP. Upon completion of Tucker's initial public offering, TFP issued mortgage notes in an aggregate principal amount of $100,000,000 (the "Original Mortgage Notes") to finance these six properties. Net proceeds to Tucker from this issuance were approximately $97,400,000. In June 1994, TFP exchanged the Original Mortgage Notes for the Tucker REMIC Note which was issued pursuant to the Tucker REMIC Indenture. At the same time, Kidder, Peabody Acceptance Corporation I sold six classes of pass-through certificates evidencing the entire beneficial ownership of interest of the Tucker REMIC, a trust consisting solely of the Tucker REMIC Note and related instruments evidencing the Tucker REMIC's security interest in the related collateral. The Tucker REMIC Note matures in one balloon payment in September 2000 and bears interest at a fixed-rate of 7.3% per annum, with monthly interest-only payments required. The Tucker REMIC Note is recourse only to the assets of TFP and is collateralized by first mortgage liens on each of the properties owned by TFP (Commons of Crystal Lake, Heritage Square, Sheridan Village, Speedway SuperCenter, Washington Lawndale Commons and One North State) and by an assignment of all of the TFP's interest in the rents and the leases at each of these properties.
Pursuant to the Merger Agreement, at the Effective Time, Tucker will merge with and into Bradley and the separate corporate existence of Tucker will cease. Bradley will be the Surviving Company and the former Tucker stockholders will become Bradley stockholders with all of the rights and privileges attendant thereto. As a result of the Merger, Bradley will succeed to Tucker's partnership interest in TOP and its equity interest in TFC. Immediately following the Merger, the following subsidiaries or affiliates of Tucker will remain in existence and will become subsidiaries or affiliates of Bradley, as applicable: TOP, TFC, TFP, TMC, Tucker Management Limited Partnership, Williamson Square Associates Limited Partnership and TPI.
The corporate structure of the Surviving Company following the Merger is expected to be as follows:
Following the consummation of the Merger, Bradley and Tucker believe that the Surviving Company will be one of the largest owners and operators of community shopping centers in the Midwestern region of the United States. The Surviving Company will own 31 community shopping centers encompassing approximately 7.3 million square feet of rentable retail space in eleven states. Set forth below is a property chart which contains certain information concerning the shopping centers to be owned by the Surviving Company following the consummation of the Merger. Properties indicated by an asterisk (*) are currently owned by the Tucker entity identified in the applicable footnote.
(1) Major tenants are defined as tenants occupying 15,000 square feet or more of the rentable square footage with the exception of 585 Boylston Street and St. Francis Plaza. In some cases, the named tenant occupies the premises as a sublessee. Bradley views "anchor" tenants as a subset of the major tenants at each property, generally consisting of those tenants which also represent more than 15% of the property's rentable square footage.
(2) The property was previously acquired by the Predecessor Business in the year indicated and was acquired by Tucker in connection with its initial public offering in 1993.
(3) Currently owned by TOP. The amount of rentable square feet at Rollins Crossing does not include approximately 190,000 square feet which is owned by K-Mart Corp.
(4) Currently owned by TFP. The amount of rentable square feet at Commons of Crystal Lake does not include approximately 81,000 square feet which is owned by Metropolitan Life and leased to an anchor tenant.
(5) Currently owned by Williamson Square Associates Limited Partnership, of which TOP is the 60% general partner.
(6) This tenant has the option exercisable on or before March 31, 1996 to terminate its lease, effective as of April 1, 1998, upon payment of a $1.8 million cancellation fee. This tenant has indicated that it will move out of its space prior to the expiration of its lease, but has not yet determined whether or not it will exercise its early termination right. See "Risk Factors--Real Estate Investment Considerations."
Bradley has entered into a nonbinding letter of intent with Brookfield Development, Inc., the current groundlessee, regarding the proposed sale by Bradley of its interest in 501-529 Nicollet Avenue, Minneapolis, Minnesota. The sale price, subject to standard closing adjustments, is $12,900,000. If consummated, the sale would result in a gain to Bradley of approximately $9,182,000 for financial reporting purposes and $10,800,000 for federal income tax purposes. For federal income tax purposes, however, Bradley intends to structure the transaction in part as a tax deferred "like-kind" exchange under the Code. In that regard, Bradley intends to identify Brookdale Square Shopping Center, a 185,000 square foot community shopping center located in Brooklyn Center, Minnesota ("Brookdale"), as the replacement property in the exchange. The purchase price for Brookdale, subject to standard closing adjustments, is $8,750,000. Brookdale is currently owned by a major insurance company whose asset disposition team has agreed upon the business terms which to its corporate office. To the extent that the sales proceeds from 501-529 Nicollet Avenue exceed the purchase price of Brookdale, Bradley intends to apply such excess to reduce the Bradley Line of Credit. Bradley presently anticipates that the sale of 501-529 Nicollet Avenue will occur prior to the closing of the Merger, and that the acquisition of Brookdale will occur concurrently with or shortly after the sale. No assurance can be given that the transactions will be completed or that if 501-529 Nicollet Avenue is sold and Brookdale is not acquired that Bradley will be able to identify and acquire replacement property that would result in deferral of the taxable gain on the sale of 501-529 Nicollet Avenue. Brookdale is currently approximately 85% leased, and its major tenants include Circuit City, Office Depot, Drug Emporium, United Artists and Brookdale Cinema. Bradley intends to distribute to its stockholders the amount of any taxable gain recognized from such disposition to the extent not offset with deductions from other sources.
The current executive officers and directors of Bradley will manage the business and affairs of the Surviving Company following the consummation of the Merger. For information concerning these persons, see "Management of the Surviving Company." Following the Merger, the Surviving Company will employ most of Tucker's property management personnel. Given the strength of Tucker's property-level operational personnel and systems, Bradley's management believes the Merger will broaden its existing property management capabilities and allow the Surviving Company to internalize its property management and leasing functions.
Bradley is currently in discussions with the lead lender under the Bradley Line of Credit regarding replacing this facility with a $150 million unsecured revolving credit facility. Bradley anticipates that the new credit facility will be available for the acquisition, development, renovation and expansion of new and existing properties (including, but not limited to, capital improvements, tenant improvements, and leasing commissions), and other working capital purposes. It is anticipated that the interest rates available under the new credit facility will be more favorable than those currently available under the Bradley Line of Credit and may become even more favorable in the event the Surviving Company (x) meets certain loan to value tests or (y) receives an investment grade unsecured debt rating. Bradley anticipates that the new credit facility will contain financial and other covenants which are consistent with similar unsecured lines of credit for comparable publicly- traded REITs. Bradley believes that the increased size, lower interest rate and unsecured nature of the new credit facility will increase the Surviving Company's financial flexibility and prospects for obtaining an investment grade debt rating. It is currently contemplated that the new credit facility will become effective simultaneously with the closing of the Merger. While discussions regarding a new credit facility are ongoing, there can be no assurance that such a credit facility will be obtained, or if obtained, when it will become effective or become available. If this new credit facility cannot be obtained, consent to the Merger would be required from the existing revolving credit lenders to Bradley and Tucker and an extension of the Tucker credit agreement would be required. See "The Merger Agreement--Conditions to the Merger." For a discussion of the current Bradley Line of Credit, see "-- Bradley."
The Boards of Directors of each of Bradley and Tucker have approved the Merger and the Merger Agreement, a copy of which is attached hereto as Annex A, pursuant to which, upon fulfillment (or waiver) of the conditions set forth therein, (i) Tucker will be merged with and into Bradley, with Bradley being the Surviving Company in the Merger, and (ii) each issued and outstanding share of Tucker Common Stock will be converted into the right to receive a percentage of a share of Bradley Common Stock to be determined as follows. If the Closing Price of Bradley Common Stock is $16.00 or more, each share of Tucker Common Stock will be exchanged for .665 of a share of Bradley Common Stock. If the Closing Price is between $15.50 and $16.00, the Exchange Ratio will be determined by dividing $10.64 by the Closing Price. If the Closing Price is $15.50 or less, the Exchange Ratio will be .686 of a share of Bradley Common Stock. The Closing Price for Bradley Common Stock for the 20 trading days ended January , 1996 was $ .
As a result of the Merger and without any action on the part of the holder thereof, at the Effective Time, all shares of Tucker Common Stock will cease to be outstanding, will be canceled and retired and will cease to exist. Each holder of a Certificate will thereafter cease to have any rights with respect to such shares of Tucker Common Stock, except the right to receive shares of Bradley Common Stock and cash in lieu of fractional shares of Bradley Common Stock upon the surrender of such Certificate. Promptly after the Effective Time, the Exchange Agent will mail a letter of transmittal and instructions to each holder of a Certificate as of the Effective Time for use in effecting the surrender of the Certificate in exchange for certificates representing shares of Bradley Common Stock and cash in lieu of fractional shares. See "The Merger Agreement--Exchange of Tucker Stock Certificates."
In early October 1994, Kenneth L. Tucker, President of Tucker, contacted E. Lawrence Miller, President of Bradley, concerning a possible business combination between the two companies. Preliminary discussions concerning a possible merger continued between the members of senior management of both companies during October and November 1994. On November 16, 1994, the parties executed a mutual confidentiality agreement which provided that each party would not disclose and would keep confidential all non-public due diligence materials provided to it by the other party. In early December 1994, discussions between the parties terminated before they reached a substantive stage and before the exchange of any non-public due diligence materials.
On December 15, 1994, the Tucker Board of Directors announced a reduction in its quarterly dividend payment from $.38 to $.36 per share. This dividend reduction was the result of several factors, including higher interest rates, higher than anticipated general and administrative expenses and lower than anticipated fee income from third-party property management and leasing.
In December 1994, following the reduction of the quarterly dividend and the termination of its negotiations with Bradley, Tucker entered into discussions on an exclusive basis with another public company concerning a possible business combination. On January 31, 1995, the Tucker Board authorized the engagement of, and on February 17, 1995, Tucker formally engaged, PaineWebber to provide investment banking advice in connection with a possible business combination involving this company or any other publicly-traded real estate company. In addition, on January 31, 1995, the Tucker Board also authorized the engagement of Richard S. Ellwood & Co. as a consultant to advise Tucker during its investigation and consideration of strategic alternatives. In late March 1995, the negotiations with this public company terminated.
On March 1, 1995, Tucker announced that its FFO for the quarter ended December 31, 1994 was $.35 per share (compared to $.44 per share for the previous quarter) and that it had failed to meet its overall FFO goals for fiscal 1994. Due to the announced reduction in FFO, Tucker's high leverage and the decrease in Tucker's stock price over the previous several months, Tucker's ability to raise capital in the public markets on acceptable terms was limited.
Following this announcement and the termination of discussions with the other public company in late March, the Board of Directors of Tucker directed its management, with the assistance of PaineWebber, to prepare a Confidential Information Memorandum for distribution to a select group of publicly-traded REITs, including Bradley. In connection with this distribution, these companies were asked to submit indications of interest concerning a possible business combination with Tucker by May 26, 1995. During this period, Tucker also engaged Kemper Securities, Inc. to explore a possible business combination with a privately-held real estate company.
On May 26, 1995, Bradley indicated its interest in pursuing a transaction in which each outstanding share of Tucker Common Stock would be exchanged for .828 of a share of Bradley Common Stock (with increases or decreases in the exchange ratio to assure that Tucker's stockholders would receive Bradley Common Stock having a market value not less than $12.25 and not greater than $13.25), subject to Bradley's due diligence and to certain other conditions. Tucker also received indications of interest at lower indicated values from two other publicly-traded REITs. Based on this review, the Tucker Board concluded that Bradley's indication of interest was the most favorable and authorized negotiations with Bradley in an effort to increase Bradley's indicated price and to remove the conditions to Bradley's indication of interest. Bradley refused to increase its indicated price or to remove any condition, and the negotiations between Bradley and Tucker terminated on June 8, 1995.
On June 15, 1995, Tucker publicly announced that it was reducing its quarterly dividend from $.36 to $.25 per share, and that it had hired PaineWebber to help it explore strategic alternatives to maximize stockholder value. On the date of the announcement, Tucker's stock price decreased by $2.12 per share. As a result of this announcement, several companies expressed interest in a transaction with Tucker. As part of its solicitation process, Tucker delivered the Confidential Information Memorandum (and other due diligence materials) to certain of these parties. Tucker requested that these parties, along with Bradley and the private real estate company with whom Kemper Securities, Inc. was exploring a possible business combination, submit indications of interest by July 14, 1995. The Tucker Board understood that the selected bidder or bidders would perform additional due diligence before signing a definitive merger agreement.
Five indications of interest were received on or prior to July 14, 1995, including one indication of interest from a public REIT which had not previously received Tucker's Confidential Information Memorandum. These indications of interest consisted of two proposals by private real estate companies for cash acquisitions of Tucker and two proposals from public REITs (including Bradley) for stock-for-stock acquisitions of Tucker, and one additional proposal from a public REIT (the "Alternative REIT Acquiror"), which proposed consideration in cash or stock, at Tucker's option. All of the proposals were conditioned on the acquiring party having the right to conduct extensive additional due diligence and to negotiate exclusively with Tucker for at least 30 days. The two cash proposals from private real estate companies were conditioned on the bidders obtaining financing for the acquisition.
In its bid, Bradley proposed a transaction in which each outstanding share of Tucker Common Stock would be converted into the right to receive between .79 and .83 of a share of Bradley Common Stock depending on the trading price of Bradley Common Stock during the ten trading days preceding the closing of this transaction. Such a transaction would have had a market value of approximately $12.65 per share of Tucker Common Stock, based on the closing price of $16.00 per share of Bradley Common Stock on July 14, 1995. The market value of the transaction could have increased to $13.00 per share with increases in the market value of Bradley Common Stock. As a condition to proceeding with a potential transaction, Bradley insisted that Tucker sign an agreement which (a) generally would restrict Tucker from conducting discussions or negotiations with any other party for 30 days; and (b) would require Tucker to reimburse Bradley for its out-of-pocket expenses (up to a maximum of $325,000) in the event that (i) Tucker wished to pursue an acquisition proposal with another party, or (ii) Bradley decided not to enter into a definitive merger agreement because, in the course of its due diligence, Bradley discovered that the Confidential Information Memorandum contained false or misleading information or that the operations of Tucker deviated materially from the information presented in the Confidential Information Memorandum. Bradley's indication of interest also provided that it would expire on July 21, 1995.
On July 17 and 18, 1995, the Tucker Board met to review the indications of interest. The high end of the range of values of all but one of the other offers received by Tucker offered greater consideration to Tucker's stockholders than the Bradley offer. The two cash bids from the privately-held real estate companies, on their face, purported to offer the highest potential acquisition prices. Both such cash bids, however, were subject to financing conditions. The Board sought information on the firmness of these parties' financing arrangements and the likelihood that they ultimately would be able to finance a transaction with Tucker. The Board rejected one cash offer, which purported to have a value of $13.50 per share of Tucker Common Stock, after management informed them that the bidder intended to finance the transaction through a private placement of equity, that the success of such a private placement could not be assured and, if successful, could not be completed for approximately four months. PaineWebber expressed reservations, based on its knowledge of the market for such securities, about the likelihood of success of such a private placement. With regard to the remaining privately-held cash bidder that indicated interest in a transaction for between $13.75 and $14.50 per share of Tucker Common Stock, management advised the Board that, to date, this bidder did not have firm financing commitments and had not been able to provide management or PaineWebber with any assurance as to when such commitments could be obtained (if at all). After considering the foregoing, the Board requested that management and PaineWebber attempt to have this bidder accelerate its due diligence activities and provide additional information to the Board by July 24, 1995 concerning its respective ability to obtain financing.
In its consideration of the three acquisition proposals from publicly-traded REITs, the Tucker Board noted that one party had submitted its proposal for a stock-for-stock transaction with an indicated market value of between $12.50 and $13.375 per share without reviewing any of Tucker's confidential material, and thus its bid was likely to be reduced during the due diligence process. PaineWebber informed the Board that while this company primarily owned retail properties, a significant portion of such properties were not shopping centers. PaineWebber also informed the Board that this company was highly leveraged, its stock traded at a relatively low multiple and thus it had a high implicit cost of funds. Because this company was proposing a stock-for- stock merger, the Tucker Board realized that the combined company would also be highly leveraged and would thus potentially face many of the same issues as Tucker did with respect to accessing the capital markets. Therefore, the stock of the combined company following the merger was likely not to be viewed as favorably as Bradley's stock by Tucker's stockholders. Thus, after consultation with PaineWebber, the Board concluded that it was unlikely that this company would ultimately enter into an acquisition agreement which was in the best interests of Tucker's stockholders. The Tucker Board noted that, while the upper range of the bid submitted by the Alternative REIT Acquiror was approximately equal in market value to Bradley's bid, the range presented by the Alternative REIT Acquiror (between $11.00 and $13.00 per share of Tucker Common Stock) was substantial. The Alternative REIT Acquiror indicated that it would value the transaction strictly as an asset purchase (i.e., without premium to stockholders resulting from any "franchise value") and that it would take approximately three weeks to make a more definitive offer. Thus, the Board concluded that the Alternative REIT Acquiror was likely to reduce its bid during the due diligence process.
In considering Bradley's indication of interest at its July 17th and 18th meetings, the Board noted that Bradley had recently completed a public offering of its common stock and had a debt to Total Market Capitalization ratio of approximately 16%. PaineWebber informed the Board that Bradley has a quality institutional investor base and relatively high FFO multiple compared to other retail REITs of Bradley's size. The Board also noted that the two companies are of similar size and have similar properties located primarily in the Midwest. The Board also believed that, given the similarities between the two companies, the Merger would provide the Surviving Company with substantial potential savings in general and administrative expenses and opportunities for synergies through the potential enhancement of its property level operational systems. Thus, the Board believed that a stock-for-stock transaction with Bradley would be a strategic combination rather than a mere sale of Tucker and thus provided greater potential value for Tucker's stockholders.
In its deliberations, the Board considered the possibility of giving all of the parties additional time to complete their due diligence and to allow them to submit firm bids which were not subject to either financing or due diligence conditions. The Board believed that Bradley would continue to participate in the bidding process for an additional week or so while the Board was evaluating and negotiating these bids. However, the Board believed that it was unlikely that Bradley would participate in yet another bidding process for Tucker or devote any further significant time, effort or expense to a transaction with Tucker without an exclusivity agreement. Thus, the Board authorized PaineWebber and management to continue discussions with Bradley concerning the terms of its bid and to attempt to have the privately-held cash bidder and the Alternative REIT Acquiror accelerate their respective due diligence activities and solidify their financing arrangements.
The Tucker Board met by telephone on July 21, 1995 to receive an update on the status of negotiations with the various parties. In this meeting, management reported that the remaining privately-held cash bidder had indicated to Tucker that it needed additional time to complete its due diligence and based on issues raised in its evaluation to date, its acquisition price would be at or below the low end of the range specified in its original bid. Further, although this cash bidder indicated that it believed its proposed financing sources ultimately would be willing to provide debt and equity financing for the transaction, it appeared that no meaningful progress had been made with respect to obtaining firm financing commitments. PaineWebber reported to the Board that the Alternative REIT Acquiror had not made a more definitive proposal. As a result of these discussions, Tucker's Board approved further negotiations with Bradley concerning a business combination on the terms of Bradley's indication of interest and authorized the execution of an exclusivity agreement with Bradley for a period of 30 days. Tucker and Bradley executed this agreement on July 25, 1995 (the "Exclusivity Agreement").
Following July 25, 1995, the senior management of Bradley conducted due diligence concerning Tucker and its properties. As a result of such due diligence, on August 7, 1995, Bradley informed Tucker that it would only proceed with a transaction pursuant to which each share of Tucker Common Stock would be exchanged for .717 of a share of Bradley Common Stock. Based on the closing price for Bradley Common Stock on August 7, 1995 of $16.25 per share, Bradley's proposal had decreased the market value of the transaction to approximately $11.65 per share of Tucker Common Stock. Bradley also requested an extension of the time period under the Exclusivity Agreement in order to continue its due diligence. On August 9, 1995, the Tucker Board met to discuss the revised Bradley offer. PaineWebber contacted two specific former bidders, including the Alternative REIT Acquiror, and neither indicated any desire to make a more favorable bid. The Board considered the proposal previously made by the Alternative REIT Acquiror, but concluded that, given the opportunity to conduct extensive additional due diligence (as Bradley had conducted), the Alternative REIT Acquiror was likely to reduce its offer to a price no greater (and potentially lower) than Bradley was currently proposing. Further, a refusal to extend the Exclusivity Agreement would likely result in the termination by Bradley of its discussions with Tucker. The Board concluded that it would not be useful to approach any of the privately-held real estate companies that previously had proposed cash acquisitions of Tucker because they would still have to obtain financing for a transaction and their ability to raise such financing was uncertain. The Board decided that, in the absence of another offer which would result in a higher value for Tucker's stockholders, Tucker would continue discussions with Bradley and agree to an extension of the Exclusivity Agreement. On August 24, 1995, after negotiations between the parties, Bradley and Tucker executed an amendment to the Exclusivity Agreement which provided, among other things, that the parties would continue good faith negotiations concerning a business combination on the terms of the revised Bradley offer and extend the exclusive negotiation period through September 30, 1995.
In its deliberations, the Tucker Board noted that the Management Directors might have conflicts of interest in addressing potential employment or severance arrangements. The Tucker Board also noted that the Management Directors have substantial equity interests in Tucker and TOP. The Tucker Board determined that any arrangements involving the Management Directors which were not part of the consideration to all stockholders would require the approval of the other Directors who did not have a financial interest in such arrangements. The Board designated the non-management directors, Messrs. Hart, Homer, Masotti and Smith, as the Tucker Special Committee to evaluate and negotiate on behalf of Tucker any compensation, severance and other arrangements or transactions involving the Management Directors. In September 1995, the Tucker Board approved the engagement by the Tucker Special Committee of the law firm of Rudnick & Wolfe as independent counsel to the Tucker Special Committee.
On August 28, 1995, Kenneth Tucker delivered to PaineWebber for transmission to the Tucker Special Committee a proposal regarding severance compensation and the following other items in the event a change in control transaction were to be consummated: (a) Mr. Tucker requested severance payments for various employees to be paid at Closing, including severance payments for the Management Directors of $675,000 (three times his annual compensation) for Kenneth Tucker, $450,000 (two times his annual compensation) for Richard Tucker and $200,000 (annual compensation) for Harold Eisenberg; (b) a Consulting Agreement for Kenneth Tucker for between $225,000 and $375,000 per year; (c) a purchase by the Company of artwork owned by Kenneth Tucker for $100,000 pursuant to the terms of a pre-existing contract between Tucker and Kenneth Tucker; (d) a continuation of the stock options held by certain executives, including the Management Directors, with a reset of the exercise price to permit the purchase of Bradley shares at a price of $22; (e) a restructuring of the TOP Partnership Agreement to provide for a 5 to 7 year period during which certain properties held by the TOP could not be sold; (f) a release of the Management Directors' personal environmental guarantees with respect to the Commons of Chicago Ridge property; (g) health insurance coverage for Kenneth and Richard Tucker for one year at Tucker's expense and thereafter at their own expense payable at the Surviving Company's direct costs; (h) the purchase by Kenneth and Richard Tucker of the furniture and artwork in their respective offices for an amount to be negotiated; (i) payment by Tucker of the lease payments on Kenneth Tucker's company car through April 1996; and (j) use by Kenneth and Richard Tucker of their offices and secretaries for one year, with use of the office to be at Bradley's discretion. In addition, because Bradley did not have significant development expertise, Kenneth and Richard Tucker proposed that they be allowed to pursue a development relationship with the Surviving Company subsequent to the Merger with respect to certain properties for which Tucker had development rights.
On August 31, 1995, The Tucker Special Committee met to consider Kenneth Tucker's proposal. At this meeting, the Tucker Special Committee met with PaineWebber and counsel to discuss severance policies generally and the severance arrangements that had been provided in other recent REIT mergers. The Tucker Special Committee met on September 13, 1995 to begin preparation of a response. In light of the Tucker's past performance, the Tucker Special Committee decided that the severance proposals could not be justified and that severance arrangements should be authorized to the extent reasonably necessary to assure an orderly transition of management. The Tucker Special Committee asked PaineWebber to report on the terms of any consulting arrangement that Bradley would consider with Kenneth Tucker. The Tucker Special Committee continued to work with PaineWebber to complete the response to Kenneth Tucker's proposal at meetings on September 22 and September 25, 1995.
Following the execution of the amendment to the Exclusivity Agreement, Bradley, Tucker and their respective representatives conducted extensive due diligence on each other and began work on definitive documentation for the transaction. On September 11, 1995, Bradley and Tucker issued a joint press release indicating that the parties were involved in negotiations concerning a possible business combination. On September 14, 1995, Bradley's attorneys circulated to all parties the initial drafts of a proposed Merger Agreement and the proposed Amended TOP Partnership Agreement.
In early September 1995, Bradley engaged Alex. Brown to provide investment banking advice in connection with the proposed Tucker transaction and, if requested, to render a fairness opinion with respect to such transaction. Alex. Brown and Bradley subsequently executed a formal engagement letter concerning such activities on September 15, 1995. Following its engagement, Alex. Brown and senior management of Bradley conducted additional financial due diligence concerning Tucker and its properties. As a result of this financial due diligence, on September 22, 1995, Bradley informed PaineWebber that it would only proceed with a transaction in which each share of Tucker Common Stock would be converted into the right to receive .646 of a share of Bradley Common Stock. Based on the closing price of Bradley Common Stock on September 22, 1995 of $16.375 per share, the market value of Bradley's revised proposal was approximately $10.58 per share of Tucker Common Stock. On September 22, 1995, during a telephonic meeting of the Tucker Special Committee, PaineWebber informed the Special Committee of the revised Bradley exchange ratio proposal and that Bradley had said that the revision was due to significant concerns with respect to specific properties. Although the Tucker Special Committee did not take any formal action with respect to the revised exchange ratio, the consensus of the Tucker Special Committee was that an exchange ratio of .646 was inadequate, and that PaineWebber should continue negotiating with Bradley through the upcoming weekend to increase the exchange ratio. Extensive negotiations concerning the proposed exchange ratio then continued between PaineWebber and Bradley. As a result of these negotiations, Bradley agreed to increase its exchange ratio so that each share of Tucker Common Stock would be converted into the right to receive .665 of a share of Bradley Common Stock. Bradley also agreed that (i) if the Closing Price of Bradley Common Stock was between $15.50 and $16.00, the exchange ratio would be determined by dividing $10.64 by the Closing Price, and (ii) if the Closing Price of a share of Bradley Common Stock was $15.50 or less, the exchange ratio would then be .686 of a share of Bradley Common Stock. In connection with making this proposal, Bradley also demanded an extension of the period under the Exclusivity Agreement.
On September 25, 1995, the Tucker Special Committee and Kenneth Tucker held a telephonic meeting with PaineWebber to review, among other things, the status of negotiations with Bradley. PaineWebber informed those participating in the meeting of the revised proposal which arose from the weekend's negotiations and that Bradley had scheduled a meeting of the Bradley Board of Directors for the following day at which the Bradley Board would be asked to consider the terms of the revised proposal. Because the entire Tucker Board of Directors was not present, the members of the Tucker Board present did not take any action with respect to the transaction or the exchange ratio. The consensus of the Tucker Board members present was that there were no other alternatives available to Tucker that were likely to be more favorable and that PaineWebber should not communicate anything to Bradley which would discourage its Board from considering the revised proposal. PaineWebber thereafter informed Bradley that, because the Tucker Board had not yet acted, PaineWebber could not assure Bradley that the revised terms would be acceptable. However, PaineWebber believed that, based on its discussions to date with the Tucker directors present at such meeting, there was a likelihood that the Tucker Board of Directors would approve the revised terms of the transaction.
After its discussions regarding the status of negotiations with Bradley at its September 25, 1995 meeting, the Tucker Special Committee, with PaineWebber, completed a proposed response to Kenneth Tucker's proposal for severance and other matters to be presented to Kenneth Tucker by PaineWebber. The Tucker Special Committee agreed that issues relating to the TOP, the environmental indemnity with respect to the Commons of Chicago Ridge and a development relationship between the Tuckers and Bradley were premature for discussion because Bradley had prepared a draft of the Amended and Restated TOP Partnership Agreement for consideration by the limited partners in which the position taken by Bradley on those issues was in conflict with the proposal by Kenneth Tucker and Bradley had not yet discussed in any detail a development relationship with the Tuckers. The Tucker Special Committee then decided to approve the following severance arrangements, and thereby rejected any other severance proposals: (a) severance for Kenneth Tucker of $225,000, and, if final terms could be agreed with Bradley, a three-year consulting agreement at $135,000 per year; (b) severance for all other employees terminated within six months after the Effective Time equal to four weeks of salary plus two weeks of salary for each year of service at Tucker or the Predecessor Business; (c) all stock options would expire thirty days after the Effective Time in accordance with the terms of the options; (d) the Surviving Company would be obligated to pay for health insurance for executive officers for one year after the Effective Time, but each such officer would be obligated to pay any amount in excess of 200% of the Company's current cost; (e) Kenneth Tucker would have to pay his own costs after the Effective Time for his auto lease; and (f) the Tucker Special Committee rejected any obligation of the Surviving Company to provide secretaries or office space to Kenneth or Richard Tucker. In connection with the foregoing, Kenneth Tucker agreed to waive his rights to payment under the pre-existing contract regarding artwork.
On September 26, 1995, the Board of Directors of Bradley met to consider the proposed transaction with Tucker. At this meeting, Bradley's senior management, together with its legal and financial advisors, reviewed with the Board of Directors the current operations and properties of Bradley and Tucker, the background of the proposed merger, a summary of due diligence findings, and certain financial and valuation analyses of the transaction. Bradley's senior management also discussed with the Board of Directors the strategic rationale for the transaction and the potential benefits of the Merger to Bradley and its stockholders. These included, among others, management's belief that (i) the Surviving Company would become one of the largest owners and operators of community shopping centers in the Midwest with 31 community shopping centers aggregating 7.3 million square feet of rentable retail space; (ii) the Total Market Capitalization of the Surviving Company would be significantly greater than that of Bradley; (iii) the Merger would be accretive to the Surviving Company's net income per share, FFO per share and cash available for distribution per share in 1996 and 1997; and (iv) the Merger would improve Bradley's property level management capabilities, enhance the relationship with existing and proposed tenants, improve access to the public debt and equity markets, and increase the likelihood of access to unsecured investment grade debt. Bradley's management also discussed with the Board the potential negative effects of the Merger, including among others, that (i) the Surviving Company's debt obligations after the Merger would be significantly greater than those of Bradley; (ii) Tucker's REMIC would greatly restrict the ability of the Surviving Company to sell properties collateralizing the REMIC or to make principal payments prior to the maturity of the REMIC in 2001; and (iii) various risks relating to the One North State property. Management also discussed with the Board the possible alternatives to the Tucker transaction, including continuing Bradley's growth through expansion of existing shopping centers and selected development and acquisition of new shopping centers and seeking other acquisition opportunities or seeking additional equity or debt financing. Bradley's legal counsel also discussed with its Board, among other things, the terms of the legal documentation relating to the Merger, certain environmental issues relating to Tucker's Commons of Chicago Ridge property and the timetable for completion of the transaction. Alex. Brown also made a presentation to the Board concerning its financial analyses of the proposed transaction and stated that it believed it would be able to provide a fairness opinion on the proposed exchange ratio, based upon the transaction as then negotiated and upon the facts and circumstances as they existed at the time, subject to certain assumptions, factors and limitations. Following these presentations and discussions of the issues raised by these presentations, the Board authorized management to proceed with the acquisition of Tucker and the negotiation of definitive documentation with respect to the transaction.
On October 3, 1995, the Tucker Board met to discuss the new proposal and to decide whether or not to proceed with the transaction with Bradley. PaineWebber made a presentation at this meeting concerning the feasibility of reviving negotiations with previous suitors. PaineWebber reviewed the process followed by the Tucker Board to date, noting that Tucker and its financial advisors had contacted over 12 prospective buyers and had received seven indications of interest at various times. PaineWebber then reviewed the prospective buyers that, at various times, had expressed an interest in a business combination with Tucker. PaineWebber reported that it had contacted the Alternative REIT Acquiror who did not indicate an interest in resuming discussions. PaineWebber also reported to the Tucker Board that it believed Bradley would terminate discussions with Tucker if Tucker refused to sign the extension to the Exclusivity Agreement. The Tucker Board also concluded that it would not be useful to approach any of the cash bidders because such persons would still need to raise financing for a transaction. Therefore, the Board determined that because there was no other firm transaction which could provide greater value to its stockholders, it was too risky to take a chance of losing the Bradley transaction. As a result, on October 3, 1995, the parties executed a second amendment to the Exclusivity Agreement which extended the exclusive negotiation period to October 31, 1995.
Immediately after the Tucker Board meeting on October 3, 1995, and at subsequent meetings on October 12 and October 23, 1995, the Tucker Special Committee met to discuss the severance arrangements and other compensation arrangements for the Management Directors as well as for the employees of Tucker generally. The Tucker Special Committee approved a general policy for Tucker employees of severance pay equal to six weeks' base salary plus two weeks' base salary for each full year of regular full-time employment; this policy was adopted for all officers and employees, except for William Karnes, who had an existing employment agreement, and Kenneth Tucker, for whom the Tucker Special Committee approved an aggregate severance payment of $225,000. In addition, the Tucker Special Committee approved the terms of a proposed consulting agreement between Bradley and Kenneth Tucker. See "The Merger-- Conflicts of Interest Arising from Benefits to Certain Officers and Directors of Tucker." The Tucker Special Committee also approved reimbursements by Tucker on behalf of the limited partners of TOP, including the Management Directors, for counsel and other advisors to the limited partners, of up to an aggregate of $20,000, in order to facilitate a more orderly and expeditious discussion with Bradley of the proposed Amended TOP Partnership Agreement.
After the execution of the second amendment to the Exclusivity Agreement on October 3, 1995, the parties, primarily through their legal counsel and financial advisors, focused on negotiating the terms of the Merger Agreement and the related documentation. The negotiations initially focused on, among other things, the actions which the parties could take between the execution of the Merger Agreement and the closing, including the manner in which Tucker's Board could address and consider any subsequent acquisition proposal, the payment of dividends, the indemnification which would be provided to Tucker's directors after the transaction, the conditions to closing the transaction, the termination rights of the various parties, and the amount of the termination fee to be paid to the parties and the conditions under which such termination fee would be paid. In the initial discussions, Bradley requested that it receive a termination fee of $4,000,000 plus reimbursement for out-of-pocket expenses up to $2,000,000 if any one of several specified events occurred following the execution of the Merger Agreement. Tucker sought to reduce the termination fee to $1,500,000 (plus reimbursement for reasonable out-of-pocket expenses), to limit the number of circumstances in which it would be paid and to make the provision mutual so that Tucker would receive a termination fee from Bradley under certain circumstances.
In these initial discussions, Bradley requested that its obligations to consummate the transaction be conditioned on, among other things, a receipt of a favorable environmental report with respect to one of Tucker's properties. Tucker refused to agree to such a condition and instead requested that such report be completed prior to the execution of the Merger Agreement. After extensive negotiations, Bradley agreed to conduct such study prior to executing the Merger Agreement. As a result, however, the parties understood that the execution of the definitive Merger Agreement would have to be delayed until late October when this study would be completed.
The final negotiations concerning the Merger Agreement centered primarily on the covenants of the parties between signing of the definitive acquisition documents and closing, conditions to closing the transaction and the amount of the termination fee and the circumstances in which it would be paid. Following extensive negotiations, Bradley agreed to reduce the amount of the termination fee to $3,000,000 plus reimbursement of out-of-pocket expenses up to $2,000,000. It was also agreed that this fee only would be paid in certain limited circumstances. See "The Merger Agreement--Termination Amount and Expenses." If the Merger Agreement was terminated in certain other circumstances, the parties agreed that Bradley only would be reimbursed for its out-of-pocket expenses up to $2,000,000. In exchange for these changes, Tucker agreed to waive its request that it receive a termination fee or expense reimbursement. In these negotiations, the parties also agreed that, in addition to the other conditions set forth in the Merger Agreement, Bradley's obligation to close the Merger would be conditioned on: (i) receipt of estoppel certificates with respect to certain leases; (ii) the consent of all of the limited partners of TOP to the amendment and restatement of the TOP Partnership Agreement; and (iii) the consent of certain third parties including the Indenture Trustee for the Tucker REMIC. See "The Merger Agreement--Conditions to the Merger."
During this period, Tucker and Bradley negotiated the proposed terms of the Amended TOP Partnership Agreement with the Management Directors acting on behalf of the limited partners of TOP. Bradley's initial draft of the Amended TOP Partnership Agreement made changes to the existing agreement which were designed to limit the influence and control of the limited partners, to cause TOP to operate more like a Bradley subsidiary controlled by Bradley and to expand certain environmental indemnities given by the Management Directors at the time of Tucker's initial public offering in 1993. The Management Directors' comments focused on, among other things, the ability of the limited partners to approve further issuances of TOP Units and transactions involving the Surviving Company or TOP, the allocation of taxable income among the partners of TOP, the continuing indemnification obligations of the Management Directors with respect to certain environmental matters relating to TOP's Commons of Chicago Ridge property, the right of the limited partners to convert their TOP Units into Bradley Common Stock and the request of the limited partners that, in exchange for certain concessions, they be granted registration rights from Bradley upon the conversion of their TOP Units to Bradley Common Stock.
On October 20, 1995, Bradley's Board of Directors held a special meeting to approve the transaction. At such meeting, senior management of Bradley and its legal and financial advisors updated the Board on the events since its September 26th meeting, including the terms of the proposed Merger Agreement and the proposed Amended TOP Partnership Agreement. Legal counsel also gave a presentation to the Board on the timetable concerning the execution of definitive documentation relating to the transaction and certain disclosure issues relating thereto. Alex. Brown then reviewed with the Board its financial analysis of the transaction and then rendered its oral fairness opinion to the Board of Directors that, as of such date, based upon the facts and circumstances as they existed at the time, and subject to certain assumptions, factors and limitations set forth in such opinion, the Exchange Ratio was fair, from a financial point of view, to Bradley's stockholders. Following such discussions, the Board of Directors of Bradley unanimously approved the Merger, the proposed Merger Agreement and the transactions contemplated thereby.
On October 23, 1995, Tucker's Board of Directors held a special meeting to receive an update on the status of the merger discussions with Bradley. At such meeting, Tucker's legal advisors gave the Board a presentation on the terms of the proposed Merger Agreement and the Amended TOP Partnership Agreement. The Board also reviewed alternatives to the Merger and concluded that a transaction with Bradley would result in greater long-term value for Tucker's stockholders than remaining independent.
Following the October 23rd meeting, the Management Directors, as limited partners of TOP, concluded their negotiations with Bradley and Tucker on the Amended TOP Partnership Agreement. Following extensive discussions, the Management Directors agreed that the limited partners would relinquish any control or approval rights that they have under the TOP Partnership Agreement in exchange for limitations on the dissolution, merger or sale of all or substantially all of the assets of TOP during the 24-month period following consummation of the Merger. The limited partners also agreed to permit Bradley, as general partner, to issue additional TOP Units under certain conditions, but received from Bradley registration rights for their TOP Units. See "The Merger Agreement--Amended TOP Partnership Agreement." With regard to the environmental indemnity concerning the Commons of Chicago Ridge, Bradley provided Tucker and the Management Directors with a copy of an environmental report on the property which had been prepared by the outside consultant. Extensive negotiations then followed concerning the results of this report and the remediation work which was recommended by this consultant. Following these discussions, the parties agreed to hire a new consultant and to share the cost of the consultant's report on this property. It was agreed that if the new consultant recommended any remediation efforts which Bradley wished to implement, TOP and the Management Directors would each pay fifty percent of the cost of such remediation, with the Management Directors aggregate liability limited to a maximum of $200,000.
On October 29, 1995, the Tucker Board of Directors met to consider the proposed merger transaction with Bradley. At this meeting, PaineWebber rendered its oral fairness opinion to the Board of Directors that, as of such date, based upon the facts and circumstances as they existed at the time, and subject to certain assumptions, factors and limitations, the proposed Exchange Ratio was fair, from financial point of view, to Tucker's stockholders. Following such discussion, the Board of Directors of Tucker unanimously approved the Merger, the proposed Merger Agreement, the proposed Amended TOP Partnership Agreement and the transactions contemplated thereby. In addition, the Special Committee approved the proposed Amended TOP Partnership Agreement and the terms of the severance and consulting agreements with members of management.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF TUCKER
At a special meeting of Tucker's Board of Directors held on October 29, 1995, Tucker's management and representatives of PaineWebber made presentations concerning the business and prospects of Tucker and Bradley, and the potential combination of Tucker and Bradley. The Tucker Board of Directors also reviewed the terms of the Merger Agreement with Tucker's management and Tucker's financial and legal advisors. BY UNANIMOUS VOTE, THE TUCKER BOARD OF DIRECTORS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, TUCKER AND ITS STOCKHOLDERS, APPROVED AND ADOPTED THE MERGER AND THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND RESOLVED TO RECOMMEND THAT TUCKER'S STOCKHOLDERS APPROVE THE MERGER AND THE MERGER AGREEMENT.
The Tucker Board of Directors believes that the Merger provides an opportunity for Tucker's stockholders to become equity holders in a REIT with greater potential than Tucker for long-term appreciation. The Tucker Board of Directors also believes that the Merger will combine complementary assets of while enabling the Tucker portfolio to benefit from the reputation of Bradley's experienced management team. The Tucker Board of Directors also believes that the Surviving Company will benefit from Tucker's field management capabilities. In addition, the Tucker Board of Directors believes that, to the extent operations of Tucker and Bradley are integrated following the Merger, cost reductions and other efficiencies will be possible. The material factors considered by Tucker's Board of Directors in approving the Merger are described below.
In making its determination with respect to the Merger, the Tucker Board of Directors considered the following factors which were material to its decision:
(i) information relating to the financial performance, condition, business operations and prospects of Tucker and Bradley and current industry, economic and market conditions. In this regard, the Board of Directors placed special emphasis on, and viewed as favorable to its determination, interim 1995 historical and projected full year 1995 and 1996 financial information for both Tucker and Bradley. The Tucker Board believed that Tucker's capital structure was too highly leveraged. The Tucker Board of Directors also considered the decline in Tucker's FFO and cash available for distribution which has been caused by, among other things, Tucker's high leverage and difficulty in accessing capital markets.
(ii) possible alternatives to the Merger for enhancing stockholder value, such as improving the profitability of Tucker's existing property portfolio, raising additional capital and acquiring new properties. In this regard, the Board of Directors agreed that, at that time, there were no feasible alternatives that were available to Tucker that were as likely in the near term to significantly improve the profitability of Tucker's existing operations, and that Tucker, as a stand-alone entity, would experience difficulty in accessing the capital markets on acceptable terms.
(iii) the Tucker Board believed that the Merger was the best offer reasonably available for Tucker's stockholders. The Board believed that there were no other prospective purchasers that both had the financial ability to complete the transaction and would be willing to pay an aggregate consideration greater than that to be paid by Bradley in the Merger. In particular, Tucker and its financial advisors had contacted over 12 prospective buyers and had received seven indications of interest at various times. Certain proposals purported to offer consideration nominally higher than that to be paid in the Merger, however, all of the parties making such proposals insisted on performing additional due diligence before finalizing the amount of the merger consideration. Certain proposals for a cash purchase price were also subject to the uncertain ability of the purchaser to raise financing. In the case of other proposed stock transactions, the Tucker Board believed that none of the other proposals would result in the type of operating synergies and potential for long-term appreciation offered by a combination with Bradley.
(iv) the anticipated cost savings and operating efficiencies available to the Surviving Company from the Merger, particularly in the reduction of overhead expenses. The Tucker Board did not attempt to quantify those savings with precision; however, Tucker notes that Bradley has estimated that a total of $1.4 million of corporate level general administrative expenses may be reduced as a result of the Merger. See "Unaudited Pro Forma Combined Financial Statements."
(v) the companies' stock price multiples relative to each other and to the multiples of comparable REITs (see "--Opinion of Tucker's Financial Advisor"). In particular, the Board viewed as favorable to its determination the fact that Bradley's stock price multiple of 9.5x was higher than the corresponding multiple of 7.1x, for Tucker based on their respective closing stock prices as of October 25, 1995 and FFO calculations for the twelve month period ended June 30, 1995. In addition, the Board believed that there was little that Tucker could do in the reasonably foreseeable future that would be likely to significantly increase Tucker's stock price multiple. The Board viewed Bradley's higher stock price multiple as favorable to its determination because such higher multiple suggested that the Surviving Company's multiple could exceed the multiple of Tucker on a stand-alone basis.
(vi) the terms of the Merger Agreement, including the Exchange Ratio and the equity interest in the Surviving Company to be received by Tucker's stockholders. In this regard, the Board of Directors noted that the Exchange Ratio had been determined through arms-length negotiations and fairly reflected the current market price of the common stock of the two companies. See "Summary--Comparative Market Data."
(vii) the fact that, based on the analysis of Paine Webber, the Merger will be accretive to Bradley's net income per share, FFO per share and cash available for distribution per share, and thereby will increase the likelihood of an increase in the value of the Bradley Common Stock to be received by the Tucker stockholders in the Merger. See "--Opinion of Tucker's Financial Advisor." The Unaudited Pro Forma Combined Financial Statements contained herein illustrate the effect of the Merger on FFO for the nine months ended September 30, 1995.
(viii) the structure of the Merger. In this regard, the Board of Directors placed special emphasis on, and viewed as favorable to its determination, the fact that the Merger, as a "stock-for-stock" rather than a "cash-for-stock" transaction, will provide an opportunity for Tucker's stockholders to share in any future appreciation of the Surviving Company, as well as the fact that the Merger is intended to enable Tucker's stockholders to convert their shares of Tucker Common Stock into shares of Bradley Common Stock on a tax-free basis.
(ix) the similarities between the two companies. In this regard, the Board noted that Bradley and Tucker are of comparable size, both are focused primarily in the retail sector and the properties of both are concentrated in the Midwest. The Surviving Company will have a strong grocery store, drug store and value-oriented retail tenant base, becoming a leading owner and operator of community shopping centers in the Midwest.
(x) the complementary strengths of the two companies, including Tucker's property management and leasing capabilities and superior property level operational systems and Bradley's property acquisition and capital markets expertise.
(xi) benefits for the Surviving Company's stockholders from the larger Surviving Company, including the Board's expectation that, in the future, the Surviving Company will have improved access to capital markets for future growth. In this regard, the Board noted that Bradley is significantly less highly leveraged than Tucker, and that the Surviving Company will have more conservative leverage ratios than Tucker.
(xii) the fact that the Surviving Company will have an increased number of properties and increased gross leasing area which will allow it to better attract national tenants and to obtain increased negotiating leverage with tenants.
(xiii) the Total Market Capitalization of the Surviving Company will be larger than Tucker's current Total Market Capitalization, providing Tucker's stockholders with enhanced liquidity.
(xiv) the opinion, analyses and presentations of PaineWebber described below under "--Opinion of Tucker's Financial Advisor," including the opinion of PaineWebber to the effect that, as of the date of such opinion, and based upon and subject to certain matters stated therein, the Exchange Ratio was fair from a financial point of view to the holders of Tucker Common Stock. In this respect, while the Tucker Board of Directors did not explicitly adopt PaineWebber's financial analyses, the Tucker Board of Directors placed special emphasis on such analyses in its overall evaluation of the Merger and viewed such analyses as favorable to its determination. The Board viewed PaineWebber's opinion as favorable to its determination because PaineWebber is an internationally recognized investment banking firm with experience in the valuation of businesses and their securities in connection with mergers and acquisitions and in providing advisory services and raising capital for companies in the real estate industry.
The Tucker Board also considered the following potentially negative factors in its deliberations concerning the Merger:
(i) the fact that, because the Exchange Ratio is fixed when the price of Bradley Common Stock falls below $15.50, a decline in the value of Bradley Common Stock below $15.50 would reduce the value of the consideration to be received by Tucker's stockholders in the Merger. In particular, the Board considered that, at Bradley's closing stock price as of October 27, 1995 of $15.00 per share, the transaction had a current value to Tucker stockholders of $10.29 per share while Tucker's share price on October 27, 1995 was $10.38 per share;
(ii) the decline in Bradley's stock price immediately preceding the execution of the Merger Agreement. In this regard, the Board considered the fact that there had been a general decline in retail and related
(iii) the various conditions to Bradley's obligations to consummate the Merger. See "The Merger Agreement--Conditions to the Merger;"
(iv) the risk that the anticipated benefits of the Merger may not be
(v) the fact that under the terms of the Merger Agreement, Tucker and its directors, officers, employees, agents and representatives would be prohibited from initiating, soliciting, encouraging, participating in negotiations or otherwise facilitating a proposal of an acquisition by or business combination with any other party unless, among other things, the Tucker Board determines, based on the advice of counsel, that such action is required for the Tucker Board to comply with its fiduciary duties to stockholders under applicable law, and the possibility that Tucker may be required, if the Merger Agreement is terminated under certain circumstances, to pay Bradley a termination fee of $3,000,000 and to reimburse Bradley for up to $2,000,000 of its out-of-pocket expenses incurred in connection with the Merger. The Tucker Board recognized that the inclusion of such provisions in the Merger Agreement would render it unlikely that a more attractive offer for the acquisition of Tucker would be presented to Tucker and its stockholders; however, the Board believed that, based on its efforts to find a buyer for Tucker, the Merger Agreement represents the best offer reasonably available to Tucker and its stockholders.
The Tucker Board of Directors realized that the leverage of the Surviving Company would be greater than Bradley's existing leverage; however, the Board did not view this as a negative factor because the increase in leverage would result from the fact that Tucker is more highly leveraged than Bradley and that the Surviving Company would be less highly leveraged than Tucker.
The Tucker Board of Directors also was aware of the provisions of the Merger Agreement affording indemnification and directors' insurance to the directors of Tucker for actions and omissions of such persons occurring prior to the Effective Time. These provisions were important to the Tucker Board, however, this factor did not affect the Tucker Board's evaluation or recommendation of the transaction because such provisions are customary in agreements relating to business combinations.
In view of the wide variety of factors considered by the Tucker Board of Directors, the Tucker Board of Directors did not quantify or otherwise attempt to assign relative weights to the specific factors considered in making its determination. However, in the view of Tucker's Board of Directors, the potentially negative factors considered by it were not sufficient, either individually or collectively, to outweigh the positive factors considered by the Board of Directors in its deliberations relating to the Merger.
The Tucker Board of Directors was aware of PaineWebber's potential long or short positions in Tucker's securities and that PaineWebber had also provided financial advisory services and investment banking services in the past for Bradley (as well as for other public companies which participated in the solicitation process), including on Bradley's July Offering. The Tucker Board did not view these facts as unfavorable to the Board's determination or the Board's special emphasis on PaineWebber's analyses and opinion. The Board was also aware that a substantial portion of PaineWebber's compensation would be contingent upon consummation of the Merger and did not view such contingency as unfavorable to the Board's determination or the Board's special emphasis on PaineWebber's analyses and opinion. The reasons that the Board did not view such potential conflicts of PaineWebber unfavorably were (i) the Board's belief that PaineWebber would adhere to high standards of professionalism in connection with its engagement; (ii) the fact that contingent fees for financial advisors are common in merger and acquisition transactions; and (iii) the fact that such financial advisors frequently conduct securities trading operations as an integral part of their businesses and, accordingly, frequently retain the right to effect trades in the securities of the clients to which they are providing merger and acquisition advisory services. In addition, the Board was aware that certain members of the management of Tucker and the Board of Directors of Tucker have certain interests in the Merger that interests of stockholders of Tucker generally. See "--Conflicts of Interest Arising from Benefits to Certain Officers and Directors of Tucker." On balance, the Board viewed such interests as neutral to its determination because of the Board's belief that such interests were reasonable under all of the circumstances.
As discussed in "Background of the Merger," the Tucker Board appointed the Tucker Special Committee to evaluate and negotiate on behalf of Tucker any compensation, severance and other arrangements or transactions involving Tucker's management which would not be available to all of Tucker's stockholders. The Tucker Special Committee was not empowered to negotiate any other matters relating to the Merger. The Tucker Special Committee retained Rudnick & Wolfe as its independent counsel and received the advice of PaineWebber, Tucker's investment banking advisor. At the October 29, 1995 Tucker Board meeting, the Tucker Special Committee approved the terms of the compensation, severance and consulting arrangements with members of management and the terms of the Amended TOP Partnership Agreement.
The Tucker Special Committee paid particular attention to the Severance Agreement and Consulting Agreement of Kenneth Tucker. In particular, the Tucker Special Committee noted that the amounts to be paid under the Severance Agreement were larger than the amounts payable to other employees and that no other employee would have a consulting arrangement. The Tucker Special Committee considered the amounts payable to Kenneth Tucker under the Severance Agreement and the Consulting Agreement to be reasonable for a chief executive officer. The Tucker Special Committee did not see a conflict of interest in approving the severance arrangements for William M. Karnes, who had a pre- existing employment arrangement, or Norris Eber, both of whom were not directors, or Tucker's Severance Plan, which would be available to all employees. The Tucker Special Committee did not view the severance arrangements of Richard Tucker and Harold Eisenberg to be materially different in amount from the amounts they would have received under the Severance Plan. The Tucker Special Committee viewed all such severance arrangements as beneficial because such arrangements would help assure the continuity of Tucker's management and employees through the consummation of the Merger. The Tucker Special Committee evaluated the proposed transactions with management within the context of the Merger taken as a whole, and not in isolation, because such transactions would not have been considered absent Bradley's indication to Tucker that many Tucker employees, including members of Tucker management, would be terminated as a result of the Merger.
In the event the Merger is not consummated for any reason, Tucker will continue to pursue its business objectives of maximizing the value of its properties and reducing overhead to increase its net cash flow. Tucker would also seek to reduce the amount of its indebtedness through potential sales of properties and improved cash flow. In addition, Tucker may seek another strategic combination. The Tucker Board of Directors believes there are no feasible alternatives to the Merger available to Tucker at the present time that are likely to significantly improve the profitability of Tucker's existing operations or result in greater stockholder value.
OPINION OF TUCKER'S FINANCIAL ADVISOR
Tucker originally retained PaineWebber to render financial advisory services in connection with a possible business combination with another public real estate company. Tucker has requested PaineWebber to render an opinion as to whether the Exchange Ratio is fair, from a financial point of view, to the holders of Tucker Common Stock. PaineWebber was not requested to, and did not make, any recommendation to the Board of Directors of Tucker as to the Exchange Ratio to be provided for in the Merger, which Exchange Ratio was determined through negotiations between Tucker and Bradley. The Tucker Board engaged Kemper Securities, Inc. to explore a possible business combination with a particular privately-held real estate company.
The Board of Directors of Tucker retained PaineWebber to act as its advisor based upon PaineWebber's prominence as an investment banking and financial advisory firm with experience in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and valuations for corporate purposes especially with respect to
REITs and other real estate companies. The Tucker Board of Directors did not consider any financial advisor besides PaineWebber with respect to the solicitation of publicly-traded REITs and other publicly-traded real estate companies.
On October 29, 1995, PaineWebber delivered its oral opinion to the Board of Directors of Tucker, which was confirmed in writing on January , 1996 (the "PaineWebber Opinion"), to the effect that, as of the date of such opinion, based on PaineWebber's review and subject to the limitations described below, the Exchange Ratio is fair, from a financial point of view, to the holders of Tucker Common Stock. The PaineWebber Opinion does not constitute a recommendation to any stockholder of Tucker as to how any such stockholder should vote on the Merger. Additionally, the PaineWebber Opinion does not address the relative merits of the Merger and any other transactions or business strategies discussed by the Board of Directors of Tucker as alternatives to the Merger.
TUCKER STOCKHOLDERS ARE URGED TO READ THE PAINEWEBBER OPINION (A COPY OF WHICH WILL BE ATTACHED AS ANNEX B TO THIS JOINT PROXY STATEMENT/PROSPECTUS) CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED AND THE FACTORS CONSIDERED BY PAINEWEBBER.
In rendering its opinion, PaineWebber has, among other things: (i) reviewed, among other public information, the prospectus used by Tucker in the initial public offering of the Tucker Common Stock in October 1993, Tucker's Forms 10- K and related financial information for the fiscal years ended December 31, 1993 and December 31, 1994 and Tucker's Form 10-Q and the related unaudited financial information for the six months ended June 30, 1995; (ii) reviewed, among other public information, Bradley's Forms 10-K, Prospectus Supplement filed on June 29, 1995, Prospectus filed on June 30, 1993 and related financial information for the three fiscal years ended December 31, 1994 and the related unaudited financial information for the six months ended June 30, 1995; (iii) reviewed certain information, including financial forecasts, related to the business, earnings, cash flow, assets and prospects of Tucker and Bradley, furnished to PaineWebber by Tucker and Bradley, respectively; (iv) conducted discussions with members of the senior management of Tucker and Bradley concerning their respective businesses and prospects; (v) reviewed the historical market prices and trading activities for Tucker Common Stock and Bradley Common Stock and compared such prices and trading histories with those of certain other publicly-traded companies which PaineWebber deemed to be relevant; (vi) compared the financial position and results of operations of Tucker and Bradley with those of certain other publicly-traded companies which PaineWebber deemed to be relevant; (vii) reviewed the Merger Agreement; (viii) reviewed the Amended TOP Partnership Agreement; and (ix) reviewed such other financial studies and analyses and performed such investigations and took into account such other matters as PaineWebber deemed appropriate, including its assessment of general economic, market and monetary conditions.
In preparing its opinion, PaineWebber relied, without independent verification, on the accuracy and completeness of all information that was publicly available, supplied or otherwise communicated to PaineWebber by Tucker and Bradley. PaineWebber assumed that the financial forecasts examined by it were reasonably prepared and reflected the best currently available estimates and good faith judgments of the managements of Tucker and Bradley as to the future performance of Tucker and Bradley, respectively. PaineWebber also assumed, with the consent of Tucker, that (i) the Merger will be accounted for under the purchase method of accounting; (ii) the Merger will be a tax-free reorganization; and (iii) any material liabilities (contingent or otherwise, known or unknown) of Tucker and Bradley are as set forth in the consolidated financial statements of Tucker and Bradley, respectively. PaineWebber has not made an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Tucker or Bradley, nor has PaineWebber been furnished with any such evaluations or appraisals. The PaineWebber Opinion is based upon economic, monetary and market conditions existing on the date thereof. Furthermore, PaineWebber has expressed no opinion as to the price or trading range at which the shares of Bradley Common Stock will trade in the future.
The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. Accordingly, PaineWebber believes that its analysis must be considered as a whole and that considering any portion of the analysis and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete picture of the process underlying the PaineWebber Opinion. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. In addition, analyses relating to the values of businesses do not purport to be appraisals or to reflect the prices at which businesses may actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty and neither Tucker nor PaineWebber assumes responsibility for the accuracy of such analyses or estimates. The following paragraphs summarize the significant quantitative and qualitative analyses performed by PaineWebber in arriving at the PaineWebber Opinion.
Capitalization Rate Valuation Analysis. In general, PaineWebber applied capitalization rates to the projected 1996 Net Operating Income (defined as revenues less property operating expenses, before interest expense and depreciation) of each of the Tucker properties, adjusted for assumed management costs and a reserve for capital expenditures. In the case of the Commons of Chicago Ridge, projected 1997 Net Operating Income was used in light of the current anchor tenant vacancy. In the case of Meadows Town Mall, projected 1997 Net Operating Income was used in light of expected significant redevelopment of the property in 1996. For both properties, projected 1997 Net Operating Income was greater than projected 1996 Net Operating Income. In the case of Rollins Crossing, a property currently under development, projected stabilized 1998 Net Operating Income was used. PaineWebber applied capitalization rates of 10.0%-12.5% to each of the properties, with the exception of Rollins Crossing where a capitalization rate of 15.0% was used, primarily to account for development and lease-up risk. The resulting total value reflected an overall capitalization rate of 10.97% on the total blended Net Operating Income used (adjusted for assumed management costs and a reserve for capital expenditures). PaineWebber noted that this translated into a capitalization rate of approximately 9.75% on projected 1996 Net Operating Income for all properties (adjusted for assumed management costs and a reserve for capital expenditures). PaineWebber derived a valuation range reflecting a 25 basis point discount and premium to the value calculated using the 10.97% capitalization rate on the blended total Net Operating Income. This valuation range produced equity values for Tucker of $9.94 to $11.12 per share. Based on the Bradley October 25, 1995 closing stock price of $15.25, the implied exchange ratio is .652 to .729. PaineWebber noted that the range of possible Exchange Ratios (i.e., between .665 and .686) falls within the implied exchange ratio range. Accordingly, PaineWebber noted that this analysis supported its conclusion.
Selected Comparable Public Companies Analysis. Using publicly available information, PaineWebber compared selected historical and projected financial, operating and stock market performance data of Tucker and Bradley to the corresponding data of certain publicly-traded companies that PaineWebber considered comparable to each (the "Tucker Comparables" and the "Bradley Comparables," respectively). The Tucker Comparables represented relatively highly-leveraged community shopping center REITs (as implied by the ratio of debt to Total Market Capitalization, defined as the ratio of (a) outstanding debt to (b) outstanding debt plus the market value of outstanding common stock) that had been predominately brought public since 1992. These companies consisted of Kranzco Realty Trust, Mark Centers Trust, Mid-America Realty Investments and Saul Centers, Inc. The Bradley Comparables represented relatively low-leveraged community shopping center REITs that were considered by the investment community generally to have stronger growth prospects. These companies consisted of Developers Diversified Realty Corporation, Federal Realty Trust, IRT Property Company, JDN Realty Corporation and Weingarten Realty Investors.
PaineWebber derived a range of per share values for Tucker by applying Tucker's FFO per share for three selected time periods to the corresponding FFO multiple for the Tucker Comparables for those same periods. The three periods selected were the twelve months ended June 30, 1995, the year ended December 31, 1995 and the year ended December 31, 1996. Tucker's FFO for the twelve months ended June 30, 1995 reflected its actual results, while the FFO for the years ended December 31, 1995 and 1996 reflected Tucker management's expected results. The median FFO multiple for the twelve months ended June 30, 1995 reflected the actual FFO results of the Tucker Comparables, while the median FFO multiple for the year ended December 31, 1995 and the year ended December 31, 1996 reflected the First Call FFO estimates for the Tucker Comparables for those respective periods. In calculating the FFO multiple for the three selected periods, the October 25, 1995 closing stock prices of the Tucker Comparables were used. Based on this analysis, PaineWebber derived values of $11.13, $10.45 and $10.39 for the twelve months ended June 30, 1995, the year ended December 31, 1995 and the year ended December 31, 1996, respectively. Based on the Bradley October 25, 1995 closing stock price of $15.25, PaineWebber derived an implied range of exchange ratios of .681 to .730. PaineWebber noted that the range of possible Exchange Ratios (i.e., .665 to .686) includes values toward the low end of the implied exchange ratio range. Accordingly, PaineWebber noted that this analysis supported its conclusion.
With respect to Bradley and the Bradley Comparables, PaineWebber compared Bradley's FFO multiple to the median FFO multiple for the Bradley Comparables for three selected time periods. The three periods selected were the twelve months ended June 30, 1995, the year ended December 31, 1995 and the year ended December 31, 1996. For Bradley and the Bradley Comparables, the FFO multiples for the twelve months ended June 30, 1995 were based on actual FFO performance, while the FFO multiples for Bradley and the Bradley Comparables for the year ended December 31, 1995 and the year ended December 31, 1996 were based on First Call FFO estimates for those periods. In calculating the FFO multiple for the three selected periods, the October 25, 1995 closing stock prices of Bradley and its comparable companies were used. PaineWebber noted that Bradley's 9.5x multiple of latest twelve months FFO, 9.3x multiple of 1995 FFO and 8.8x multiple of 1996 FFO is below the median of the Bradley Comparables (11.5x, 11.4x, and 10.4x, respectively). PaineWebber concluded from this analysis that it was not inappropriate to rely on Bradley's closing stock price of October 25, 1995 in that such closing stock price was not higher--and might be considerably lower--than the stock price to be expected for Bradley in relation to the Bradley Comparables.
Adjusted Capital Structure Valuation Analysis. PaineWebber derived an implied range of Tucker share prices based on a hypothetical equity transaction that would allow Tucker to achieve a ratio of debt to Total Market Capitalization similar to community shopping center REITs considered by the investment community to have conservative capital structures (i.e., 25% to 35%). The analysis was based on adjustments to Tucker management's projected 1996 FFO estimates related to the reduction of debt and increase in number of shares resulting from the hypothetical equity offering. In addition, PaineWebber assumed that Tucker's FFO multiple improved to the range of 8.0x to 10.0x as a result of the improved capital structure.
The analysis resulted in a range of adjusted equity valuations of $8.83 to $11.57 per share. Based on this analysis and the Bradley October 25, 1995 closing stock price of $15.25, PaineWebber derived an implied range of exchange ratios of .579 to .759. PaineWebber noted that the range of possible Exchange Ratios (i.e., .665 to .686) falls within the implied exchange ratio range. Accordingly, PaineWebber noted that this analysis supported its conclusion.
Pro Forma Merger Analysis. PaineWebber performed an analysis of the effect of the Merger on Bradley's FFO per share for the projected years ended December 31, 1995 through December 31, 1998, which assumed that the Merger had been consummated on January 1, 1995. PaineWebber combined the projected operating results of Tucker (based on Tucker's internal estimates) with the corresponding projected operating results of Bradley (based on Bradley's internal estimates) to arrive at the combined company projected FFO. PaineWebber assumed an Exchange Ratio of .686 and approximately $500,000 in annual synergistic savings from the Merger, arising primarily from savings in duplicative public company and general and administrative expenses. PaineWebber then compared the combined company FFO per share to Bradley's stand-alone FFO to determine the projected pro forma impact of the Merger on Bradley's FFO per share. This analysis indicated that the pro forma impact of the Merger was accretive to Bradley's FFO per share in 1996, 1997 and 1998.
While PaineWebber noted that this accretion to Bradley's projected FFO per share was substantial, PaineWebber also noted that the Merger resulted in a substantial increase in Bradley's ratio of debt to Total Market Capitalization. Specifically, PaineWebber noted that this ratio would increase, on a pro forma basis, from approximately 17% to approximately 42% as a result of the Merger, based on the market value of Bradley's shares on October 25, 1995 and the debt outstanding of Tucker and Bradley on June 30, 1995. PaineWebber noted that a significant reduction in this ratio (by means of a common equity offering or other equity financing) would be likely to significantly reduce the accretive impact of the Merger.
Stock Trading History. PaineWebber reviewed the history of trading prices and volume for Tucker Common Stock and Bradley Common Stock, both separately and in relation to the Standard & Poor's 500 Index and the PaineWebber REIT Index. The PaineWebber REIT Index includes 92 equity REITs representing every property category, including retail, multifamily, commercial, mixed and lodging. In addition, PaineWebber reviewed the historical implied exchange ratio between Tucker and Bradley and compared this to the Exchange Ratio. PaineWebber noted that the Exchange Ratio range of .665 to .686 falls within the historical exchange ratio range as implied by the recent stock performance of both companies.
Discounted Equity Valuation Analysis. PaineWebber analyzed Tucker based on a discounted cash flow analysis using Tucker's three-year projections of FFO and cash flow distributions. PaineWebber derived a range of values per share by calculating the present value of the three years of projected per share distributions and a terminal equity value. PaineWebber assumed that the range of discount rates used of 13% to 17% was representative of the risks inherent in the ownership of Tucker Common Stock. The terminal equity value was calculated using Tucker's projected FFO per share in the third year and a range of FFO multiples from 7.0x to 8.0x, which multiples were consistent with the historical trading levels of Tucker's shares. Based on this analysis and the Bradley October 25, 1995 closing stock price of $15.25, PaineWebber derived a range of possible equity values of $9.82 to $11.99 per share, which implied a range of exchange ratios between .644 and .786. PaineWebber noted that the range of possible Exchange Ratios (i.e. .665 to .686) falls within the implied exchange ratio range. Accordingly, PaineWebber noted that this analysis supported its conclusion.
Contribution Analysis. PaineWebber reviewed Tucker's and Bradley's financial contribution to the combined entity on a projected pro forma basis. On a pro forma basis, Tucker's stockholders are retaining 40.1% to 40.9% (using the Exchange Ratio range of between .665 to .686) of the ownership in the combined company. Based on Tucker management's financial projections for 1996 through 1998 and Bradley management's financial projections for the same period, Tucker would contribute on average 48.2% of the FFO of the combined company and 57.0% of the property-level Net Operating Income of the combined company. While PaineWebber noted that Tucker stockholders will receive a lesser percentage of the stock of the combined entity than would theoretically be indicated by Tucker's contribution of FFO or property-level net operating income, PaineWebber also noted that the contribution analysis is impacted by the level of debt on Tucker's and Bradley's balance sheets. Specifically, the greater the percentage of debt in a company's capital structure, the greater that company's FFO (assuming its cost of debt is less than its cost of equity, which generally is true and is true for Tucker). On a pro forma basis, based on the June 30, 1995 balance sheet of each company, Tucker's ratio of debt to Total Market Capitalization was 59.4% while Bradley's ratio of debt to Total Market Capitalization was 16.6%.
Comparative Merger Analysis. Using public information, PaineWebber compared selected financial, operating and stock market performance data of Tucker with that of certain REITs that have recently consummated merger or acquisition transactions. These transactions consisted of Wellsford Residential Property Trust's acquisition of Holly Residential Properties, Inc., Horizon Outlet Centers, Inc.'s acquisition of McArthur/Glen Realty Corp., and Mid-America Apartment Communities Inc.'s acquisition of America First REIT Inc. PaineWebber noted that there were no directly comparable merger or acquisition transactions and, therefore, did not consider this analysis as particularly meaningful in reaching its conclusion.
Pursuant to an engagement letter dated February 17, 1995, PaineWebber will receive a fee of $250,000 upon delivery of the PaineWebber Opinion and its inclusion in this Joint Proxy Statement/Prospectus. In addition, PaineWebber will receive a fee equal to 1.3% of the total consideration received by Tucker's stockholders in the Merger (excluding from such consideration any assumption by Bradley of Tucker's outstanding indebtedness), less the $250,000 to be paid in connection with the delivery of the PaineWebber Opinion.
estimated to total approximately $1.4 million. PaineWebber will also be reimbursed for certain of its expenses, in an amount not to exceed $75,000. Tucker has also agreed to indemnify PaineWebber, its affiliates and each of its directors, officers, employees, agents, consultants and attorneys, and each person or firm, if any, controlling PaineWebber or any of the foregoing, against certain liabilities, including liabilities under federal securities law.
In the past, PaineWebber and its affiliates have provided financial advisory services and investment banking services to Tucker and received fees for the rendering of these services. PaineWebber has in the past provided financial advisory services and investment banking services to Bradley (including, without limitation, acting as managing underwriter for the July Offering of Bradley Common Stock) and has received fees for such services. In the ordinary course of PaineWebber's business, PaineWebber may actively trade the securities of Tucker and Bradley for its own account and for the accounts of its customers and, accordingly, PaineWebber may at any time hold long or short positions in such securities.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF BRADLEY
The Board of Directors of Bradley believes that the Merger is fair to and in the best interests of Bradley and its stockholders. ACCORDINGLY, THE BOARD OF DIRECTORS OF BRADLEY HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS APPROVE THE MERGER AND THE MERGER AGREEMENT. In reaching this determination, the Board of Directors of Bradley consulted with Bradley management, as well as its financial advisors, legal counsel and accountants, and considered a number of factors. The material factors considered by Bradley's Board of Directors in reaching the foregoing conclusions are described below.
The factors which the Board deemed favorable in recommending that the Bradley stockholders approve the Merger are its belief that:
(i) The Merger will result in the Surviving Company becoming one of the leading owners and operators of community shopping centers in the Midwest; it will own 31 community shopping centers encompassing approximately 7.3 million square feet of rentable retail space in eleven states. See "The Companies--Surviving Company."
(ii) The Merger will enhance the Surviving Company's position relating to leasing. Given Tucker's significant tenant base, the Merger will provide the Surviving Company with a broader and more diverse group of tenants, will expand the geographic focus of the Surviving Company's portfolio and will increase the gross leasing area, reducing the potential impact on the Surviving Company of the loss of any tenants and enhancing the Surviving Company's ability to attract national tenants and to obtain increased negotiating leverage with tenants.
(iii) The Merger will be accretive to the Surviving Company's net income per share, FFO per share and cash available for distribution per share in 1996 and 1997. The Unaudited Pro Forma Combined Financial Statements contained herein illustrate the effect of the Merger on FFO for the nine months ended September 30, 1995. On a pro forma basis, net income per share is $.78 for the nine months ended September 30, 1995, instead of $.62 on a historical basis. See "Unaudited Pro Forma Combined Financial Statements."
(iv) The Total Market Capitalization of the Surviving Company as of September 30, 1995 would be approximately $484.0 million, which would be considerably greater than Bradley's Total Market Capitalization of $193.2 million on such date. Based in part on discussions with advisors, investment banking firms and lenders, the Board of Directors believes that this increased Total Market Capitalization will provide Bradley's stockholders with enhanced liquidity and will make shares of Bradley Common Stock a more attractive investment for institutional investors, thereby enhancing Bradley's ability to raise additional equity in the future. The Board of Directors believes that the greater Total Market Capitalization will also make it possible for the Surviving Company to secure debt financing from sources such as the investment grade debt market, convertible debt market and private placement markets at potentially lower interest costs and more flexible terms than those currently obtained by either Bradley or Tucker.
(v) The Merger will enhance the ability of the Surviving Company to improve the terms of its revolving credit agreement, including increasing the amount available for borrowing under such line and obtaining such financing on an unsecured basis. See "The Companies--Surviving Company."
(vi) The Merger will lead to on-going operating synergies and additional cost savings, initially estimated to be approximately $1.4 million per annum prior to the offset of costs associated with the Merger (which costs are estimated to be approximately $8.5 million). See "Unaudited Pro Forma Combined Financial Statements." The opportunities for economies of scale and operating efficiencies should result in significant savings for annual general and administrative costs and property operating costs, particularly due to the integration of office facilities, information systems, support functions and the combined purchasing power of the two companies.
(vii) The Merger will broaden Bradley's property management capabilities. While the current executive officers and directors of Bradley will manage the business and affairs of the Surviving Company, Bradley currently intends to continue to employ most of Tucker's property management personnel following the consummation of the Merger. Given the strength of Tucker's property-level operational personnel and systems, Bradley's management believes the Merger will broaden its existing property management capabilities and allow the Surviving Company to internalize its property management and leasing functions.
(viii) The Merger can be effectuated through the issuance of Bradley Common Stock, rather than through the use of cash or a public offering of equity or debt securities, which the Board of Directors viewed as favorable.
(ix) The opinion of Alex. Brown to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to Bradley's stockholders.
(x) Under generally accepted accounting principles, the Merger will be accounted for as a purchase and for federal income tax purposes, will generally be a tax-free transaction, which the Board of Directors viewed as favorable because no gain or loss will be recognized by Bradley, Tucker or any stockholder of Tucker who receives Bradley Common Stock in exchange for Tucker Common Stock (except with respect to any cash received in lieu of a fractional interest in Bradley Common Stock).
The Board also considered the following potentially negative factors in its deliberations concerning the Merger:
(i) The significant transaction costs involved in connection with consummating the Merger (estimated at approximately $8.5 million) and the substantial management time and effort required to effectuate the Merger and to integrate the businesses of Bradley and Tucker. See "Unaudited Pro Forma Combined Financial Statements."
(ii) The Surviving Company's debt obligations after the Merger will increase significantly (aggregating approximately $220.5 million as compared to $34.7 million for Bradley as of September 30, 1995). The significant increase in the Surviving Company's ratio of debt to Total Market Capitalization to approximately 46% as compared to 18% for Bradley as of September 30, 1995 could increase the risk of default by the Surviving Company on its indebtedness, adversely affect the market for the Surviving Company's common stock or inhibit the Surviving Company's ability to raise capital and issue equity in both the public and private markets. See "Risk Factors--Substantial Debt Obligations and Terms of Debt."
(iii) Pursuant to the terms of the Tucker REMIC Indenture, principal payments on the Tucker REMIC Note cannot be made and the properties collateralizing the Tucker REMIC Note cannot be sold prior to October 1997, and, thereafter, only upon the payment of significant prepayment penalties. See "Risk Factors--Restrictions on Ability of Surviving Company to Dispose of Properties."
(iv) Tucker's One North State property is a "mixed use" property with a significant office component. In addition, the tenants at Tucker's One North State property, which account for 16% of the total revenue of the Surviving Company on a pro forma basis for the nine months ended September 30, 1995, pay total charges which may be in excess of current market rates. The leases of these tenants begin to expire in 2001
although one office tenant has the option exercisable on or before March 31, 1996 to terminate its lease, effective as of April 1, 1998, upon payment of a $1.8 million cancellation fee. The inability of the Surviving Company to lease such property, or a significant reduction in the amount of rent and expense reimbursements paid by the tenants of such property, could have an adverse impact on the operating results of the Surviving Company. See "Risk Factors--Real Estate Investment Considerations--Potential Negative Effect of One North State Property."
(v) The benefits of the transaction to be received by certain officers and directors of Tucker. See "The Merger--Conflicts of Interest Arising from Benefits to Certain Officers and Directors of Tucker."
(vi) The risk that the anticipated benefits of the Merger might not be fully realized.
The Bradley Board believes that the potentially negative factors discussed above represent the material potential risks and adverse consequences to Bradley's existing stockholders which could occur as a result of the Merger.
In view of the wide variety of factors considered by the Bradley Board of Directors, the Bradley Board of Directors did not quantify or otherwise attempt to assign relative weights to the specific factors considered in making its determination. However, in the view of Bradley's Board of Directors, the potentially negative factors considered by it were not sufficient, either individually or collectively, to outweigh the positive factors considered by the Board of Directors in its deliberations relating to the Merger.
In the event the Merger is not consummated for any reason, Bradley will continue to pursue its business objectives of (i) maximizing FFO and cash available for distribution to holders of Bradley Common Stock, (ii) increasing distributions per share of Bradley Common Stock, (iii) increasing the value of its properties by continuing its growth through the active management and expansion of existing shopping centers and selective development and acquisition of new shopping centers, and (iv) holding its properties for long- term investment. In addition, Bradley may seek other acquisition opportunities and additional debt or equity financing.
OPINION OF BRADLEY'S FINANCIAL ADVISOR
In early September 1995, Bradley engaged Alex. Brown to provide certain investment banking advice and services in connection with the possible acquisition of Tucker, including rendering its opinion as to the fairness, from a financial point of view, of the Exchange Ratio to Bradley's stockholders. A letter agreement confirming the terms of such agreement was entered into between Bradley and Alex. Brown on September 15, 1995.
At the September 26, 1995 meeting of the Bradley Board of Directors, representatives of Alex. Brown made a presentation with respect to the Merger and stated that Alex. Brown believed it would be able to provide a fairness opinion on the Exchange Ratio, based upon the transaction as then negotiated and upon the facts and circumstances as they existed at the time, subject to certain assumptions, factors and limitations.
At the October 20, 1995 meeting of the Bradley Board of Directors, representatives of Alex. Brown amended and supplemented its September 26, 1995 presentation with respect to the Merger and rendered an oral opinion to the Board of Directors, subsequently confirmed in writing on October 30, 1995, that, as of such date, based upon the facts and circumstances as they existed at the time, and subject to certain assumptions, factors and limitations set forth in such opinion, the Exchange Ratio was fair, from a financial point of view, to Bradley's stockholders. No limitations were imposed upon Alex. Brown with respect to the investigations made or procedures followed by it in rendering its opinion.
THE FULL TEXT OF ALEX. BROWN'S WRITTEN OPINION DATED OCTOBER 30, 1995, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. BRADLEY STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY. ALEX. BROWN DID NOT RECOMMEND TO BRADLEY THAT ANY
EXCHANGE RATIOS CONSTITUTED THE APPROPRIATE EXCHANGE RATIO FOR THE MERGER. ALEX. BROWN'S OPINION IS ADDRESSED TO THE BOARD OF DIRECTORS OF BRADLEY, ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO TO BRADLEY'S STOCKHOLDERS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY BRADLEY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE BRADLEY SPECIAL MEETING. THE OPINION WAS RENDERED TO THE BOARD OF DIRECTORS OF BRADLEY FOR ITS CONSIDERATION IN DETERMINING WHETHER TO APPROVE THE MERGER AND THE MERGER AGREEMENT. THE DISCUSSION OF THE OPINION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In rendering such opinion, Alex. Brown (i) reviewed the Merger Agreement and certain related documents; (ii) reviewed certain publicly available financial information concerning Bradley and Tucker and certain internal financial analyses and other information furnished to it by Bradley and Tucker; (iii) held discussions with members of the senior managements of Bradley and Tucker regarding the business and prospects of Bradley and Tucker; (iv) reviewed the historical reported prices and trading information for Bradley Common Stock and Tucker Common Stock; (v) compared certain financial and stock market information for Tucker and Bradley with similar information for certain other companies whose securities are publicly-traded; (vi) reviewed the financial terms of certain recent business combinations; and (vii) performed such other studies and analyses and considered such other factors as it deemed comparable, in whole or in part.
In conducting its review and arriving at its opinion, Alex. Brown assumed, without independent verification, the accuracy and completeness of the information that it reviewed and relied upon for purposes of rendering its opinion. With respect to the financial projections of Bradley and Tucker and other information relating to the prospects of Bradley and Tucker provided to Alex. Brown by each company, Alex. Brown assumed that such projections and other information were reasonably prepared and reflected the currently available judgments and estimates of the respective managements of Bradley and Tucker as to the likely future financial performances of their respective companies and of the combined entity. Although Alex. Brown made the foregoing assumptions concerning the financial projections and other information, in the course of its due diligence, Alex. Brown reviewed certain of these assumptions with the respective managements of Bradley and Tucker to confirm that the assumptions appeared to have a reasonable basis. The financial projections of Bradley and Tucker that were provided to Alex. Brown were utilized and relied upon by Alex. Brown in both the Pro Forma Combination Analysis and the Contribution Analysis summarized below. Alex. Brown also assumed that (i) the Merger will be accounted for under the purchase method of accounting; (ii) the Merger will be a tax-free reorganization; and (iii) any material liabilities (contingent or otherwise, known or unknown) of Tucker and Bradley are as set forth in the consolidated financial statements of Tucker and Bradley, respectively. In addition, Alex. Brown did not make and it was not provided with an independent evaluation or appraisal of the assets of Bradley or Tucker, nor did it make any physical inspection of the properties or assets of Bradley or Tucker. Alex. Brown's opinion is based on market, economic and other conditions as they existed and could be evaluated as of the date of the opinion letter. Such conditions include, without limitation, the condition of the U.S. stock markets, particularly in the real estate sectors, and the current level of economic activity.
The following is a summary of the material analyses undertaken by Alex. Brown in connection with rendering its fairness opinion to the Board of Directors of Bradley. For purposes of its analyses, Alex. Brown assumed the Exchange Ratio set forth in the Merger Agreement. In connection with its analyses, Alex. Brown delivered certain written materials (the "Alex. Brown Report") to the Board of Directors of Bradley.
Discounted Cash Flow Analysis. Alex. Brown analyzed the financial terms of the Merger using a discounted cash flow approach. The discounted cash flow approach assumes, as a basic premise, that the intrinsic value of any business is the current value of the future cash flow that the business will generate for its owners. To establish a current value under this approach, future cash flow must be estimated and an appropriate discount rate determined. Alex. Brown used projections and other information provided by the managements of Bradley and Tucker to estimate the free cash flows, defined as total revenues minus property operating and maintenance expenses, property management expenses, real estate taxes and capital expenditures ("Free Cash Flows") for the years ended 1996 through 2005, inclusive, using discount rates ranging from 10.00% to 13.00% and terminal value capitalization rates applied to 2005 projected Free Cash Flow ranging from 9.00% to 11.50%. Alex. Brown's calculations resulted in a range of values from $250,492,000 to $330,915,000 for Tucker's real estate, on an unleveraged basis, based upon Tucker's projected Free Cash Flow, with the imputed value of Tucker's real estate being approximately $283,400,000 under the terms of the Merger.
Alex. Brown also applied a discounted cash flow analysis to Tucker's projected FFO, defined as net income, excluding extraordinary gains or losses, plus depreciation from real estate assets, and funds available for distribution, defined as FFO less capital expenditures, tenant improvements and commissions ("Funds Available for Distribution"), using discount rates ranging from 11.50% to 14.25% and terminal value capitalization rates applied to 2005 FFO and Funds Available for Distribution, as the case may be, ranging from 9.00% to 11.50%. Alex. Brown's calculations resulted in the following ranges of values for Tucker: based on a discounted cash flow analysis of Tucker's projected FFO of $129,933,000 to $167,043,000; and, based on a discounted cash flow analysis of Tucker's projected Funds Available for Distribution of $101,191,000 to $131,319,000. Based upon the terms of the Merger, Tucker's imputed value is $116,100,000.
Pro Forma Combination Analysis. Alex. Brown reviewed the effects of the Merger on Bradley's projected FFO for 1995 and 1996, calculated on a pro forma basis as if the Merger had been completed on January 1, 1995 and after giving effect to the synergies which Bradley anticipates realizing. Based on such analysis, Alex. Brown observed that the Merger would be accretive to Bradley's FFO per share on a pro forma basis in 1995 and 1996. Alex. Brown determined that the pro forma contribution analysis supported its conclusions.
Contribution Analysis. Alex. Brown also analyzed the relative contributions of Bradley and Tucker to certain pro forma projected income statement and balance sheet information (excluding the effect of any synergies which may be realized from the Merger). The analysis indicated that on a pro forma combined basis, based on projected performance for 1996, Bradley and Tucker, respectively, would account for approximately 43% and 57% of the Surviving Company's revenues; 44% and 56% of the Surviving Company's net operating income; 77% and 23% of the Surviving Company's net income; 57% and 43% of the Surviving Company's FFO; 51% and 49% of the Surviving Company's funds available for distribution; 37% and 63% of the Surviving Company's real estate assets (at cost); and 59% and 41% of the Surviving Company's outstanding common stock. Alex. Brown observed that Tucker's pro forma contribution to the combined company's FFO slightly exceeded the proportion of Bradley Common Stock to be received by Tucker stockholders in the Merger and thus supported its conclusions.
Selected Transactions Analysis. Alex. Brown reviewed the financial terms, to the extent publicly available, of six pending and completed mergers and acquisitions between publicly-traded REITs (the "Selected Transactions"). Alex. Brown calculated various financial multiples and the premium over market value based on certain publicly available information for each of the Selected Transactions and compared them to corresponding financial multiples for the Merger and the consideration to be issued to Tucker stockholders in the Merger based on the Exchange Ratio of .686 (the "Tucker Consideration"). Under this approach, Alex. Brown considered the following acquisitions: (i) Health Equity Properties, Incorporated acquisition by Omega Healthcare Investors, Inc., (ii) Holly Residential Properties, Inc. acquisition by Wellsford Residential Property Trust, (iii) Security Capital Pacific Incorporated acquisition by Property Trust of America, (iv) America First REIT, Inc. acquisition by Mid- America Apartment Communities, Inc., (v) McArthur/Glen Realty Corp. acquisition by Horizon Outlet Centers, Inc., and (vi) Real Estate Investment Trust of California acquisition by BRE Properties, Inc. Alex. Brown noted the multiple of the equity purchase price to last twelve months' FFO was 7.0x for the Tucker Consideration versus a range of 8.0x to 16.2x, with a mean of 12.7x, for the Selected Transactions. Alex. Brown further noted that the multiples of adjusted purchase price (equity purchase price adjusted for debt and cash) to last twelve months' revenues, net operating income, earnings before interest, taxes, depreciation and amortization ("EBITDA") and total real estate assets (at cost) were as follows: based upon the ratio of adjusted purchase price to revenues, 5.6x for the Tucker Consideration versus a range of 5.9x to 8.6x, with a mean of 7.2x, for the
Selected Transactions; based upon the ratio of adjusted purchase price to net operating income, 8.9x for the Tucker Consideration versus a range of 9.7x to 24.3x, with a mean of 13.0x, for the Selected Transactions; based upon the ratio of adjusted purchase price to EBITDA, 9.8x for the Tucker Consideration versus a range of 7.7x to 16.7x, with a mean of 11.9x, for the Selected Transactions; and, based upon the ratio of adjusted purchase price to total real estate assets (at cost), .9x for the Tucker Consideration versus a range of .6x to 1.4x, with a mean of 1.1x, for the Selected Transactions. Alex. Brown also noted that the Selected Transactions were effected at a range of premia to the target's stock price one day prior to public announcement of the acquisition of .6% to 46.3%, with the Tucker Consideration at 4.9% (based upon the closing prices of Bradley Common Stock and Tucker Common Stock on September 8, 1995, the last trading day prior to the public announcement of negotiations between Bradley and Tucker). Alex. Brown noted that the multiples and the premium based upon the Tucker Consideration were below or within the ranges of multiples and premia implied by the Selected Transactions.
Selected Public Companies Analysis. Alex. Brown also compared certain financial information relating to Bradley and Tucker to certain corresponding information from a group of sixteen REITs engaged primarily in the acquisition, operation and management of retail shopping centers. Alex. Brown considered the following companies: Alexander Haagen Properties Inc., Developers Diversified Realty Corporation, Federal Realty Investment Trust, Glimcher Realty Trust, IRT Property Company, JDN Realty Corporation, JP Realty, Inc., Kimco Realty Corporation, Kranzco Realty Trust, Mark Centers Trust, New Plan Realty Trust, Regency Realty Corporation, Saul Centers, Inc., Vornado Realty Trust, Weingarten Realty Investors and Western Investment Real Estate Trust (the "Public Companies"). Alex. Brown noted the multiple of the equity purchase price (equity market capitalization for the Public Companies) to last twelve months' FFO was 7.0x for the Tucker Consideration versus a range of 5.6x to 15.8x, with a mean of 10.9x, for the Public Companies. Alex. Brown further noted that the multiples of adjusted purchase price (total market capitalization, defined as equity market capitalization plus debt, for the Public Companies) to last twelve months' revenues, net operating income, EBITDA and total real estate assets (at cost) were as follows: based upon the ratio of adjusted purchase price to revenues, 5.6x for the Tucker Consideration versus a range of 5.7x to 12.0x, with a mean of 8.6x, for the Public Companies; based upon the ratio of adjusted purchase price to net operating income, 8.9x for the Merger versus a range of 7.7x to 17.2x, with a mean of 12.0x, for the Public Companies; based upon the ratio of adjusted purchase price to EBITDA, 9.8x for the Tucker Consideration versus a range of 9.1x to 16.5x, with a mean of 11.9x for the Public Companies; and, based upon the ratio of adjusted purchase price to total real estate assets (at cost), .9x for the Tucker Consideration versus a range of .8x to 3.1x, with a mean of 1.3x, for the Public Companies. Alex. Brown noted that the multiples based upon the Tucker Consideration were below or within the ranges of multiples implied by the Public Companies.
Additionally, Alex. Brown compared, among other things, the debt to Total Market Capitalization ratios (ratio of total debt from the most recent Form 10-Q to Total Market Capitalization as of October 27, 1995), fiscal year 1996 estimated dividend payout ratios and equity market capitalization as a multiple of fiscal year 1996 estimated FFO of Bradley, prior to the Merger and pro forma after the Merger (based upon projections and other information provided by the respective managements of Bradley and Tucker), with the corresponding ratios of the Public Companies. The ranges of debt to Total Market Capitalization ratios, payout ratios and equity market capitalization multiples for the Public Companies were as follows: based upon the ratios of debt to Total Market Capitalization, a range of 10% to 74%, with a mean of 41%, for the Public Companies, versus 42% for Bradley after the Merger; based upon 1996 estimated dividend payout ratios, a range of 63% to 93%, with a mean of 82%, for the Public Companies, versus 75% for Bradley after the Merger (assuming no synergies); and, based upon 1996 estimated FFO multiples, a range of 6.2x to 13.9x, with a mean of 9.4x, for the Public Companies, versus 8.5x for Bradley after the Merger (assuming no synergies). Alex. Brown noted that the ratios and multiples based upon the estimated financial characteristics of Bradley (pro forma after the Merger) were within the ranges of multiples and ratios implied by the Public Companies.
Stock Trading History. Alex. Brown also reviewed the history of the trading prices and volume for Bradley Common Stock and Tucker Common Stock for the period commencing October 27, 1994 through October 27, 1995. In addition, Alex. Brown noted the distribution of Tucker trading volume by price range for that period. Alex. Brown reviewed the historic exchange ratio between the Bradley Common Stock and the Tucker Common Stock since Tucker's initial public offering. Each of these analyses reflected the general decline in Tucker's stock price throughout the period.
No transaction or company used in the Selected Transactions Analysis or the Selected Public Companies Analysis is identical to the Merger, Bradley or Tucker. Accordingly, such analyses must take into account differences in the financial and operating characteristics of the companies considered in the Selected Transactions Analysis and the Selected Public Companies Analysis and other factors that could affect the acquisition value and public trading value of the Selected Transactions and Public Companies, respectively.
The foregoing summary describes all of Alex. Brown's material analyses and factors. The preparation of a fairness opinion is a complex process that involves determination of the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Alex. Brown believes that its analyses and summary set forth above must be considered as a whole and that selecting portions of its analyses, without considering all analyses, or selecting portions of the foregoing summary, without considering all factors and analyses, would create an incomplete view of the process underlying the analyses performed and factors considered as set forth in its opinion and the Alex. Brown Report. In performing its analyses, Alex. Brown considered general economic, market and financial conditions and other matters, many of which are beyond the control of Bradley and Tucker. The analyses performed by Alex. Brown are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by such analyses. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. Additionally, analyses relating to the value of a business do not purport to be appraisals or to reflect the prices at which the business actually may be sold. Furthermore, Alex. Brown has expressed no opinion as to the prices at which shares of Bradley Common Stock may trade at any future time.
Pursuant to the letter agreement dated September 15, 1995, between Bradley and Alex. Brown, if the Merger is consummated, Bradley has agreed to pay Alex. Brown a fee ("Financial Advisory Fee") of $500,000 for acting as its financial advisor in connection with the Merger. Bradley also has agreed to pay Alex. Brown $300,000 for rendering its opinion, which will be credited against any Financial Advisory Fee. In addition, Bradley has agreed to pay Alex. Brown $100,000 for each additional fairness opinion requested in connection with any material amendments or revisions to the Merger Agreement. Bradley also has agreed to reimburse Alex. Brown for its reasonable out-of-pocket expenses (not exceeding $50,000) incurred in connection with rendering financial advisory services, including fees and disbursements of its legal counsel. Bradley has agreed to indemnify Alex. Brown and its directors, officers, agents, employees and controlling persons, for certain costs, expenses, losses, claims, damages and liabilities related to or arising out of its rendering of services under its engagement as financial advisor.
The Board of Directors of Bradley retained Alex. Brown to act as its financial advisor based upon Alex. Brown's qualifications, reputation, experience and expertise, particularly with respect to REITs and other real estate companies. Alex. Brown is an internationally recognized investment banking firm and, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for corporate and other purposes. Alex. Brown may actively trade the equity securities of Bradley and Tucker for its own account and for the account of its customers and accordingly may at any time hold a long or short position in such securities. In addition, Alex. Brown has acted as a co- managing underwriter of the July Offering of Bradley Common Stock. Alex. Brown regularly publishes research reports regarding the real estate industry and the businesses and securities of Bradley and other publicly-traded companies in the real estate industry.
CONFLICTS OF INTEREST ARISING FROM BENEFITS TO CERTAIN OFFICERS AND DIRECTORS
In considering the recommendation of the Boards of Directors of Tucker and Bradley to approve the Merger and the Merger Agreement, stockholders should be aware that certain members of the management and the Board of Directors of Tucker have certain interests in, and will receive benefits from, the Merger that are separate from the interests of, and benefits to, stockholders of Tucker generally.
Severance Plan. In connection with the execution of the Merger Agreement, Tucker adopted the Severance Plan which Bradley has agreed to assume and be bound by after the Effective Time. Pursuant to the terms of the Severance Plan, all employees of Tucker and its affiliates whose employment terminates under certain specified conditions prior to December 31, 1996 will be entitled to receive a severance payment equal to six weeks' base salary plus an additional two weeks' base salary for each full year of regular full-time employment with Tucker, its predecessors and their respective affiliates (including TTC), up to a maximum of twice the employee's annual compensation for the calendar year immediately prior to the employee's termination of employment.
Severance and Consulting Agreements. In connection with the execution of the Merger Agreement, Tucker has entered into agreements with the following employees: Kenneth Tucker, Richard Tucker, Harold Eisenberg, Lawrence Tucker, Norris Eber and William Karnes. Bradley has agreed to assume and be bound by each of these agreements after the Effective Time. These agreements are in place of, and not in addition to, what such employees would otherwise receive under the Severance Plan.
The severance agreement with Kenneth Tucker entitles Mr. Tucker to receive a severance payment of $225,000 if his employment is terminated under certain specified conditions prior to December 31, 1996 or if he is still employed by Tucker as of the Effective Time. In addition, if Mr. Tucker's employment is terminated under certain specified conditions prior to December 31, 1996, he is entitled to receive (i) twelve months of continued health care coverage for himself and his dependents following termination of employment, and (ii) car rental payments through April 1996. The severance agreement also entitles Mr. Tucker to purchase his existing office furniture at its fair market value and to exercise any purchase option provided in the current car rental agreement if his employment is terminated under certain specified conditions prior to December 31, 1996. In consideration of the foregoing, Mr. Tucker has agreed, among other things, to waive all of his rights under a lease of art previously entered into between Mr. Tucker and Tucker and to transfer to the Surviving Company title to each of the artworks covered by the lease.
Individual severance agreements with Richard Tucker, Harold Eisenberg and Lawrence Tucker provide that if the employee's employment is terminated under certain specified conditions prior to December 31, 1996, he will be entitled to receive (i) a severance payment of $123,000, $122,000 and $58,000, respectively, and (ii) twelve months of continued health care coverage following termination of employment. Richard Tucker's severance agreement also entitles him to purchase his existing office furniture at its fair market value if his employment is terminated under certain circumstances prior to December 31, 1996.
Norris Eber's agreement provides that he will receive (i) $139,000 if he is still employed by Tucker as of the Effective Time, and (ii) a severance payment of $61,000 and twelve months of continued health care coverage if his employment is terminated under certain specified conditions prior to December 31, 1996.
The severance agreement with William Karnes provides that he will receive twelve months of continued health care coverage following termination of employment if his employment is terminated under certain specified conditions prior to or concurrently with the consummation of the Merger or if his employment is terminated for any reason after the consummation of the Merger but prior to December 31, 1996. Tucker previously entered into an employment agreement with Mr. Karnes pursuant to which he will receive a severance payment equal to twelve months' base salary (currently $210,000) if his employment is terminated under certain conditions.
Bradley also has entered into a three-year consulting agreement with Kenneth Tucker, effective as of the Effective Time, pursuant to which Mr. Tucker will receive an aggregate payment of $405,000, consisting of three annual consulting fee payments of $135,000. The first of these payments will be paid on the date of the Merger, with the remaining payments being made on the first anniversary of the Merger and the second anniversary of the Merger. Pursuant to such consulting agreement, Mr. Tucker will consult with and advise Bradley on various retail real estate matters as requested by Bradley, provided that he is not required to devote more than ten hours per month to the performance of such consulting services. The consulting agreement also provides that Mr. Tucker will be reimbursed for reasonable business expenses incurred by him in performing his consulting services.
Indemnification. Pursuant to the terms of the Merger Agreement, Bradley has agreed to provide the directors, officers, employees, advisors and agents of Tucker and each of its subsidiaries with all rights to indemnification or exculpation existing under their respective charters or bylaws in effect as of the date of the Merger Agreement with respect to matters occurring at or prior to the Effective Time, and to provide such persons with certain indemnification rights under the Bradley Charter and the Bradley Bylaws. Bradley has also agreed to purchase, at or prior to the Effective Time, liability insurance coverage for Tucker's directors and officers for a period of six years which will provide the directors and officers with $10,000,000 of aggregate coverage. In addition, Bradley has agreed to adopt certain amendments to Tucker's existing indemnification agreements with its directors. See "The Merger Agreement--Indemnification."
Amended TOP Partnership Agreement and Transfer of Interests in TMC. In connection with the execution of the Merger Agreement, Bradley, Tucker and certain of the limited partners of TOP, including the Management Directors, agreed to an amendment and restatement of the TOP Partnership Agreement, which, among other things, limits in certain respects the environmental indemnification obligations of the Management Directors under the TOP Partnership Agreement and requires Bradley to register the shares of Bradley Common Stock which the limited partners may receive upon redemption of TOP Units under the Securities Act. See "The Merger Agreement--Amended TOP Partnership Agreement." In addition, in connection with the execution of the Merger Agreement, Kenneth and Richard Tucker have agreed to transfer their equity interests in TMC to two individuals who are officers of Bradley for $500 each at or prior to the Effective Time. See "The Merger Agreement-- Transfer of Interests in TMC."
No Ratification. Approval by stockholders of the Merger does not constitute a ratification of any of the foregoing transactions.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material United States federal income tax consequences of the Merger to Bradley, Tucker and their respective U.S. stockholders. The following discussion is based upon current provisions of the Code, existing, temporary and final regulations thereunder and current administrative rulings and court decisions, all of which are subject to change, possibly on a retroactive basis. No attempt has been made to comment on all United States federal income tax consequences of the Merger that may be relevant to stockholders of Bradley or Tucker. The tax discussion set forth below is included for general information only. It is not intended to be, nor should be construed to be, legal or tax advice to a particular stockholder of Bradley or Tucker.
THE FOLLOWING DISCUSSION MAY NOT APPLY TO PARTICULAR CATEGORIES OF HOLDERS OF SHARES OF TUCKER COMMON STOCK OR BRADLEY COMMON STOCK SUBJECT TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS FOREIGN HOLDERS AND HOLDERS WHOSE SHARES WERE ACQUIRED PURSUANT TO THE EXERCISE OF AN EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION. TUCKER AND BRADLEY STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING ANY STATE, LOCAL OR OTHER TAX CONSEQUENCES OF THE MERGER.
Tax Consequences of the Merger
Mayer, Brown & Platt, counsel for Tucker, has delivered its opinion to Tucker that, on the basis of facts, representations and assumptions set forth in such opinion, the Merger will be treated for United States federal income tax purposes as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Accordingly, (i) no gain or loss will be recognized by Tucker as a result of the Merger, and (ii) no gain or loss will be recognized by a stockholder of Tucker who receives Bradley Common Stock in exchange for Tucker Common Stock (except with respect to any cash received in lieu of a fractional interest in Bradley Common Stock). Goodwin, Procter & Hoar, counsel for Bradley, has delivered its opinion to Bradley that, on the basis of facts, representations and assumptions set forth in such opinion, the Merger will be treated for United States federal income tax purposes as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. Accordingly, no gain or loss will be recognized by Bradley as result of the Merger. These opinions are based, in part, upon a representation by the management of Tucker to the effect that, to the best knowledge of Tucker's management, there is no plan or intention on the part of the stockholders of Tucker to dispose of a number of shares of Bradley Common Stock received in the Merger that would reduce the Tucker stockholders' ownership of Bradley Common Stock to the number of shares having a value of less than 50 percent of the value of the Tucker Common Stock as of the date of the Merger and upon counsel's assumption to the effect that such representation is correct as if made without such "best knowledge" qualification. The opinions referred to above have been filed as Exhibits to the Registration Statement on Form S-4 (the "Registration Statement") of which this Joint Proxy Statement/Prospectus is a part.
The aggregate tax basis of the Bradley Common Stock to be received by stockholders of Tucker in the Merger will be the same as the aggregate tax basis in the Tucker Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received), and the holding period of the Bradley Common Stock to be received by the stockholders of Tucker in the Merger will include the holding period for the Tucker Common Stock surrendered in exchange therefor, provided that such Tucker Common Stock is held as a capital asset at the Effective Time.
Cash received in lieu of a fractional share of Bradley Common Stock will be treated as received in redemption for such fractional interest, and gain or loss will be recognized, measured by the difference between the amount of cash received and the portion of the basis of the shares of Tucker Common Stock allocable to such fractional interest. Such gain or loss will constitute capital gain or loss from the sale of stock if the stockholder holds its Tucker Common Stock as a capital asset at the Effective Time, and will be long-term capital gain or loss if the holding period for such shares of Tucker Common Stock was greater than one year at the Effective Time.
The Merger Agreement requires that Tucker distribute to its stockholders immediately prior to the Merger any undistributed "real estate investment trust taxable income" or "earnings and profits" of Tucker for Tucker's short taxable year ending with the Merger, plus any amounts necessary for Tucker to satisfy the REIT distribution requirements for such short taxable year. See "Risk Factors--Adverse Consequences of Failure to Qualify as a REIT and Other Tax Risks Relating to Operation of Bradley After the Effective Time." The Merger Agreement requires that Bradley distribute to its stockholders an amount per share equal to (i) the amount per share of any pre-Merger dividends paid by Tucker as described in the preceding sentence divided by (ii) the Exchange Ratio. Any such distributions of Bradley and Tucker are referred to herein as "Pre-Merger Dividends." Neither Tucker nor Bradley anticipates that such Pre-Merger Dividends (if any) would be designated as capital gain dividends. Accordingly, (i) any Pre-Merger Dividends made to Tucker's taxable U.S. stockholders out of Tucker's current or accumulated earnings and profits would be taken into account by such U.S. stockholders as ordinary income and would not be eligible for the dividends received deduction generally available for corporations and (ii) any Pre-Merger Dividends made to Bradley's taxable U.S. stockholders out of Bradley's current or accumulated earnings and profits also would be taken into account by such U.S. stockholders as ordinary income and would not be eligible for the dividends received deduction generally available to corporations. Any Pre-Merger Dividends in excess of current and accumulated earnings and profits of Tucker (in the case of any Tucker Pre- Merger Dividends) or Bradley (in the case of any Bradley Pre-Merger Dividends) would not be taxable to the stockholder to the extent that such distribution does not exceed the adjusted basis of the stockholder's stock with respect to which the distribution is made, but rather would reduce the adjusted basis of such stock. To the extent that any such Pre-Merger Dividend in excess of earnings and profits exceeds the adjusted basis of the stockholder's stock, such distribution would be included in the stockholder's income as long-term capital gain (or short-term capital gain if the stock has been held for one year or less) assuming the stockholder holds the stock as a capital asset at the time of the Merger.
Tax Aspects of Bradley's Investment in TOP
Tucker holds substantially all its assets through TOP and TOP's subsidiary partnerships, and, as a result of the Merger, Bradley will acquire Tucker's general partner interest in TOP. Bradley's interest in TOP and Bradley's indirect interests in the subsidiary partnerships of TOP (referred to collectively as the "Subsidiary Partnerships"), including TFP, involve special tax considerations, including those described below.
Tax Aspects of the Merger. As a result of the Merger, for federal income tax purposes TOP and certain of the Subsidiary Partnerships will be deemed to have liquidated and distributed their assets to their partners immediately after the Merger (including Bradley). The partners of such partnerships immediately after the Merger (including Bradley) will be deemed to have contributed the assets of each such partnership to a new partnership. Neither Bradley nor Tucker should recognize income as a result of such constructive liquidation- contribution. Such constructive liquidation-contribution will, however, subject Bradley to certain rules which, under certain circumstances, could require Bradley to recognize a portion of the gain (or loss) inherent in the Tucker properties (individually and in the aggregate) at the time of the Merger if TOP or a Subsidiary Partnership distributes property (other than money) to its partners within the five year period following the Merger. Such constructive liquidation-contribution could have additional consequences, such as changes in depreciation methods or recovery periods, but Tucker and Bradley do not anticipate that such consequences will be material.
Bradley's Tax Basis in TOP. In general, Bradley's initial adjusted tax basis in its interest in TOP will be equal to Tucker's adjusted tax basis in Tucker's interest in TOP immediately prior to the Merger, reduced by any actual or deemed cash distributions made to Tucker in connection with the Merger, plus or minus any net increase or decrease, respectively, in Bradley's share of the liabilities of TOP, as calculated immediately after consummation of the Merger. In general, after the Merger, Bradley's adjusted tax basis in TOP will be (i) increased by (a) the amount of any additional capital contributions made by Bradley to TOP, (b) Bradley's allocable share of TOP's income, if any, and (c) any further increases in Bradley's allocable share of the liabilities of TOP and (ii) decreased, but not below zero, by (x) Bradley's allocable share of losses suffered by TOP, (y) the amount of cash and the adjusted basis of any property distributed to Bradley and (z) any decreases in Bradley's share of liabilities of TOP. The tax basis of interests in the Subsidiary Partnerships will be determined in a similar manner.
Entity Classification. Each of TOP and the Subsidiary Partnerships is intended to qualify as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If any of TOP and the Subsidiary Partnerships were treated as an association, it would be taxable as a corporation and therefore subject to an entity-level tax on its income. In such a situation, the character of Bradley's assets and items of income would change, and Bradley likely would be unable to satisfy the asset and income requirements for qualification as a REIT. In addition, any change in the status of TOP or a Subsidiary Partnership for tax purposes might be treated as a taxable event causing Bradley to incur a tax liability without any related cash distributions. Similarly, classification of TOP or a Subsidiary Partnership as an association taxable as a corporation for any period prior to the Merger likely would disqualify Tucker as a REIT. An organization such as TOP or a Subsidiary Partnership formed as a partnership under state law will be treated as an association taxable as a corporation for federal income tax purposes if it has more than two of the four corporate characteristics that the Treasury Regulations use to distinguish a partnership from a corporation. These four corporate characteristics are (i) continuity of life, (ii) centralization of management, (iii) limited liability and (iv) free transferability of interests. Although neither Bradley nor Tucker has requested a ruling from the IRS or an opinion of counsel regarding the status of TOP and the Subsidiary Partnerships as partnerships as of the Merger, Bradley and Tucker believe that neither TOP nor any of the Subsidiary Partnerships has possessed or will possess more than two of the four corporate characteristics and that as a result each such partnership will be treated as a partnership for federal income tax purposes.
Notwithstanding the status of TOP and the Subsidiary Partnerships as partnerships rather than associations taxable as corporations, the IRS could allege that TOP or a Subsidiary Partnership is a "publicly-traded partnership" under Section 7704 of the Code. If such an assertion were successfully made, such partnership would be subject to tax as a corporation under the Code unless certain conditions regarding the nature of its income were satisfied. A partnership is a publicly-traded partnership if interests in such partnership are either traded on an established securities market or are "readily tradable on a secondary market (or the substantial equivalent thereof)." A publicly- traded partnership is not taxed as a corporation, however, if at least 90% of its gross income for each taxable year consists of certain passive income, including interest, dividends, real property rents, and gains from the sale or other disposition of real property. This exemption is referred to herein as the "qualifying income exemption."
In 1988, the IRS issued a notice (the "Notice") providing limited safe harbors from the definition of a publicly-traded partnership in advance of the issuance of Treasury Regulations. Pursuant to one of those safe harbors (the "Private Placement Exclusion"), interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof if (i) all of the partnership interests are issued in a transaction that is not registered under the Securities Act, and (ii) the partnership does not have more than 500 partners (taking into account as a partner each person who indirectly owns an interest in the partnership through a partnership, a grantor trust or an S corporation).
The U.S. Department of the Treasury recently issued final regulations (the "PTP Regulations") that modify the Private Placement Exclusion under the Notice in three respects. First, the PTP Regulations provide that the Private Placement Exclusion applies only if the partnership does not have more than 100 partners at any time during its taxable year. Second, a person who indirectly owns an interest in the partnership through another partnership, a grantor trust or an S corporation (each a "flow-through entity") is treated as a partner of the partnership only if (i) substantially all of the value of such person's interest in the flow-through entity is attributable to the flow- through entity's interest in the partnership and (ii) a principal purpose of the use of the tiered arrangement is to permit the partnership to satisfy the 100 partner limitation. Third, the PTP Regulations provide that the Private Placement Exclusion will apply only if any interest in the partnership offered and sold outside the United States would not be subject to registration under the Securities Act if such interest were sold within the United States. The PTP Regulations will apply to TOP for taxable years beginning on or after December 31, 2005 or such earlier time that TOP adds a substantial new line of business.
Interests in TOP or a Subsidiary Partnership have not been traded on an established securities market. Moreover, Tucker believes that, for periods ending on or before the Merger, TOP and each Subsidiary Partnership has qualified and will qualify for the Private Placement Exclusion under the Notice and also has not had and will not have more than 100 partners as determined under the PTP Regulations. In addition, Bradley anticipates that, following the Merger, TOP and each Subsidiary Partnership will satisfy the Private Placement Exclusion (as set forth in the Notice or as modified by the PTP Regulations, whichever applies) and/or will be eligible for the qualifying income exemption and that none of such partnerships will be treated as a publicly-traded partnership. There can be no assurance, however, that efforts to avoid publicly-traded partnership status will be successful.
Tax Aspects of Bradley's Investment in TOP. For purposes of the various REIT asset and income tests, Bradley will include as part of its assets and income Bradley's proportionate share (based on Bradley's capital interests in TOP and the Subsidiary Partnerships) of the assets and items of income, gain, loss and deduction of TOP and the Subsidiary Partnerships. Bradley will include in the computation of its taxable income Bradley's allocable share (taking into account allocations under Section 704(c) of the Code as described below) of income and loss of TOP and the Subsidiary Partnerships.
Allocations with Respect to Contributed or Revalued Property. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated in a manner such that for federal income tax purposes the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss generally equals the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution (a "Book-Tax Difference"). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. Under Treasury Regulations promulgated under Section 704(b) of the Code, similar rules apply when a partnership elects to "revalue" its assets in certain situations, such as when a contribution of property is made to a partnership by a new partner. As noted above, as a result of the Merger, for federal income tax purposes TOP will be deemed to have liquidated and distributed its assets to its partners immediately following the Merger (including Bradley). The partners of TOP immediately following the Merger (including Bradley) will be treated as contributing their proportionate share of the assets of
TOP (subject to liabilities) to a new partnership in a transaction governed by Section 704(c) of the Code. The Amended TOP Partnership Agreement will require that income, gain, loss and deduction attributable to contributed property with a Book-Tax Difference must be allocated in accordance with Section 704(c) of the Code. Such partnership agreement also will contain a similar provision for any Book-Tax Differences arising from a revaluation of partnership assets, which may occur in the future.
Based on the foregoing, in general, if any asset of TOP is determined to have a fair market value at the time of the Merger which is greater than its then-adjusted tax basis, certain partners of TOP will be allocated lower amounts of depreciation deductions for tax purposes by TOP and increased taxable income and gain on sale. Such allocations will tend to eliminate the Book-Tax Difference over the life of TOP. However, the special allocation rules of Section 704(c) of the Code do not always entirely rectify Book-Tax Differences on an annual basis or with respect to a specific transaction such as a sale. Thus, Bradley may be allocated lower depreciation and other deductions, and possibly amounts of taxable income in the event of a sale of such contributed assets in excess of the economic or book income allocated to it as a result of such sale. This may cause Bradley to recognize taxable income in excess of cash proceeds, which might adversely affect Bradley's ability to comply with the distribution requirements for REITs. Correspondingly, if any asset of TOP is determined to have a fair market value at the time of the Merger which is less than its then-adjusted tax basis, certain partners of TOP will be allocated higher amounts of depreciation deductions for tax purposes and increased taxable deductions and loss on sale by TOP.
Treasury Regulations under Section 704(c) of the Code were recently issued in final form providing partnerships with a choice of different methods of accounting for Book-Tax Differences. Bradley has not yet determined which of the alternate methods of accounting for Book-Tax Differences will be elected by TOP. Such determination could have different timing and other effects on the taxable income of Bradley.
These same rules will govern tax allocations with respect to contributed or revalued property of the Subsidiary Partnerships following the Merger, including property deemed contributed to certain of the Subsidiary Partnerships in connection with the deemed liquidation-contribution with respect to certain Subsidiary Partnerships resulting from the Merger as described above.
Qualification of Bradley as a REIT Following the Merger
General. If certain detailed conditions imposed by the REIT provisions of the Code are met, entities, such as Bradley and Tucker, that invest primarily in real estate and that otherwise would be treated for federal income tax purposes as corporations, are generally not taxed at the corporate level on their "real estate investment trust taxable income" that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" on earnings (i.e., at both the corporate and stockholder levels) that generally results from the use of corporations. Prior to the consummation of the Merger, Bradley and Tucker have been and will continue to be operated in a manner intended to allow each of them to qualify as a REIT. Bradley intends to operate following the Merger in a manner so that Bradley will continue to qualify as a REIT. If Bradley fails to qualify as a REIT in any taxable year, Bradley will be subject to federal income taxation as if it were a domestic corporation, and Bradley's stockholders will be taxed in the same manner as stockholders of ordinary corporations. In this event, Bradley could be subject to potentially significant tax liabilities, and the amount of cash available for distribution to stockholders would be reduced and possibly eliminated. Moreover, the liabilities that Bradley will assume in the Merger will include any unpaid taxes of Tucker, including taxes resulting if Tucker failed to qualify as REIT, for periods prior to the Merger, which also could reduce or eliminate cash available for distribution to Bradley's stockholders following the Merger.
Bradley's qualification and taxation as a REIT following the Merger will depend upon Bradley's continuing ability to meet, through actual operating results, the income and asset requirements, distribution levels, diversity of stock ownership and other requirements for qualification as a REIT under the Code. Counsel will not review Bradley's compliance with these tests on a continuing basis. Moreover, qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only administrative interpretations and the determination of various factual matters and circumstances not entirely within Bradley's control. See "Risk Factors--Adverse Consequences of Failure to Qualify as a REIT and Other Tax Risks Relating to Operation of Bradley After the Effective Time." Accordingly, no assurance can be given that Bradley will satisfy such tests on a continuing basis. Moreover, Bradley's ability to qualify as a REIT following the Merger will depend on the qualification of Bradley as a REIT for periods prior to the Merger. Bradley's continued qualification as a REIT following the Merger also could depend on Tucker's qualification as a REIT for periods through the Merger if the IRS subsequently determined that Tucker had earnings and profits as determined for federal income tax purposes at the time of the Merger (notwithstanding the requirement in the Merger Agreement that Tucker distribute all earnings and profits prior to the Merger) or if former stockholders of Tucker acquired 50% or more in value of the shares of Bradley Common Stock as a result of or following the Merger. See "Risk Factors-- Adverse Consequences of Failure to Qualify as a REIT and Other Tax Risks Relating to Operation of Bradley After the Effective Time."
In connection with the Merger, Goodwin, Procter & Hoar will render opinions regarding (i) Bradley's qualification as a REIT for periods prior to the Merger and (ii) Bradley's ability to qualify as a REIT following the Merger. A form of Goodwin, Procter & Hoar's opinion regarding Bradley's ability to qualify as a REIT following the Merger has been filed as an exhibit to this Joint Proxy Statement/Prospectus. Mayer, Brown & Platt, or another nationally recognized law firm selected by Tucker, will render an opinion regarding Tucker's qualification as a REIT for the taxable year ended December 31, 1995 and for the short tax year ending at the date of the Closing. Coopers & Lybrand L.L.P. will render an opinion regarding Tucker's qualification as a REIT for the taxable years ended December 31, 1993 and December 31, 1994. Each of the foregoing opinions will be based on representations from management regarding Tucker's and Bradley's compliance with the requirements for qualification as a REIT and are not binding on the IRS. Accordingly, no assurance can be given that the IRS could not challenge the status of Bradley as a REIT following the Merger.
Tucker Management Corp. The assets of TOP include 8% of the voting stock and 95% of the non-voting stock of TMC. TMC will not qualify as a REIT or as a qualified REIT subsidiary and will pay federal, state and local tax on its taxable income at normal corporate rates. By virtue of Bradley's ownership of TOP Units following the Merger, Bradley will be considered to own its pro rata share of the nonvoting and voting stock of TMC owned by TOP. In order for Bradley to qualify as a REIT (i) the value of TMC stock owned by Bradley through TOP may not exceed 5% of the value of Bradley's total assets and (ii) Bradley may not own more than 10% of the voting securities of TMC. In connection with the consummation of the Merger, Kenneth and Richard Tucker have agreed to transfer their respective shares in TMC consisting, collectively, of 5% of the outstanding preferred stock and 92% of the common stock to two officers of Bradley. As a result, neither Bradley nor TOP will own more than 8% of the voting securities of TMC. In addition, Bradley does not believe that Bradley's pro rata share of the value of the securities of TMC will exceed 5% of the value of the total assets of Bradley.
Bradley will account for the Merger as a purchase in accordance with Accounting Principles Board Opinion No. 16. Purchase accounting for a combination is similar to the accounting treatment used in the acquisition of any asset group. The fair market value of the consideration (cash, stock, debt securities, etc.) given by the acquiring firm is used as the valuation basis for the combination. The assets and liabilities of the acquired firm are revalued to their respective fair market values at the combination date. The financial statements of the acquiring company reflect the combined operations from the date of combination.
Tucker and Bradley believe that the Merger may be consummated without notification being given or certain information being furnished to the Federal Trade Commission (the "FTC") or the Antitrust Division of the Department of Justice (the "Antitrust Division") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and that no waiting period requirements under the HSR Act are applicable to the Merger. However, there can be no assurance that the consummation of the Merger will not be delayed by reason of the HSR Act. At any time before or after consummation of the Merger, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Merger or seeking divestiture of substantial assets of Bradley or Tucker. At any time before or after the Effective Time, any state could take such action under its own antitrust laws as it deems necessary or desirable. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of Tucker or assets of Bradley or Tucker by Bradley. Private parties may also seek to take legal action under antitrust laws under certain circumstances.
All shares of Bradley Common Stock received by Tucker stockholders in the Merger will be freely transferable, except that shares of Bradley Common Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of Tucker at the time of the Tucker Special Meeting may be resold by them only in transactions permitted by the resale provision of Rule 145 promulgated under the Securities Act (or Rule 144 in the case of such persons who become affiliates of Bradley) or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of Bradley or Tucker generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal stockholders of such party. The Merger Agreement requires Tucker to exercise its reasonable best efforts to cause each of its affiliates to execute a written agreement to the effect that such person will not offer to sell, transfer or otherwise dispose of any of the Bradley Common Stock issued to such person in or pursuant to the Merger unless (i) such sale, transfer or other disposition has been registered under the Securities Act; (ii) such sale, transfer or other disposition is made in conformity with Rule 145 under the Securities Act; or (iii) in the opinion of counsel, which opinion and counsel shall be reasonably satisfactory to Bradley, such sale, transfer or other disposition is exempt from registration under the Securities Act.
NEW YORK STOCK EXCHANGE LISTING
It is a condition to Tucker's and Bradley's obligations to consummate the Merger that Bradley obtain the approval for the listing of the shares of Bradley Common Stock issuable in the Merger on the NYSE, subject to official notice of issuance. See "The Merger Agreement--Conditions to the Merger."
Under the MGCL, stockholders of Tucker and Bradley are not entitled to dissenters' rights in connection with the Merger.
The Merger Agreement provides for a business combination between Bradley and Tucker in which Tucker would be merged with and into Bradley and the holders of Tucker Common Stock would be issued shares of Bradley Common Stock in a transaction intended to qualify as a purchase for accounting purposes and as a tax-free reorganization for federal income tax purposes. This Joint Proxy Statement/Prospectus discusses all material terms of the Merger Agreement. The discussion in this Joint Proxy Statement/Prospectus of the Merger Agreement and the description of the material terms of the Merger Agreement are subject to and qualified in their entirety by reference to the Merger Agreement, a copy of which is attached to this Joint Proxy Statement/Prospectus as Annex A and which is incorporated herein by reference.
EFFECTIVE TIME OF THE MERGER
In accordance with the MGCL, the Merger will become effective upon the acceptance for record of the Articles of Merger by the State Department of Assessments and Taxation of Maryland. Subject to the fulfillment (or waiver) of the other conditions to the obligations of Bradley and Tucker to consummate the Merger, it is currently expected that the Merger will be consummated as soon as practicable following the approval by the stockholders of Bradley and Tucker of the Merger and the Merger Agreement at their respective Special Meetings of Stockholders.
EXCHANGE OF TUCKER STOCK CERTIFICATES
Promptly after the Effective Time, Bradley will cause the Exchange Agent to mail to each holder of record of a Certificate or 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 delivery of the Certificates to the Exchange Agent and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Bradley Common Stock and cash in lieu of fractional shares. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate will be entitled to receive in exchange therefor (x) a certificate representing the number of whole shares of Bradley Common Stock to which such holder shall be entitled, and (y) a check representing the amount of cash in lieu of fractional shares, if any, plus the amount of any dividends or distributions, if any, pursuant to the following paragraph after giving effect to any required withholding tax, and the Certificate so surrendered will be canceled. TUCKER STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
No dividends or other distributions on Bradley Common Stock will be paid with respect to any shares of Tucker Common Stock represented by a Certificate until such Certificate is surrendered for exchange as provided above; provided, however, that subject to the effect of applicable laws, following surrender of any such Certificate, there will be paid to the holder of certificates representing whole shares of Bradley Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole shares of Bradley Common Stock and not paid, less the amount of any applicable withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of any dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Bradley Common Stock, less the amount of any applicable withholding taxes which may be required thereon.
No fractional shares of Bradley Common Stock will be issued in connection with the Merger. Each holder of Tucker Common Stock otherwise entitled to a fractional share of Bradley Common Stock will be paid, in lieu thereof, upon surrender of a Certificate, an amount in cash (without interest), rounded to the nearest cent, determined by multiplying the Closing Price by the fraction of a share of Bradley Common Stock which such holder would otherwise be entitled.
At and after the Effective Time, there will be no transfers on the stock transfer books of Tucker of the shares of Tucker Common Stock which were outstanding immediately prior to the Effective Time.
Any portion of the monies from which cash payments in lieu of fractional interests in shares of Bradley Common Stock will be made (including the proceeds of any investments thereof) and any shares of Bradley Common Stock deposited for the benefit of the holders of shares of Tucker Common Stock that are unclaimed by the former stockholders of Tucker one year after the Effective Time will be delivered to the Surviving Company. Any former stockholders of Tucker who have not complied with the exchange procedures described above within one year after the Effective Time shall thereafter look only to the Surviving Company for payment of their shares of Bradley Common Stock and cash in lieu of fractional shares (plus dividends and distributions to the extent set forth in the Merger Agreement), as determined pursuant to the Merger Agreement, without any interest thereon. None of Tucker, Bradley, the Exchange Agent or any other person will be liable to any former holder of shares of Tucker Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.
No interest will be paid or accrued on cash in lieu of fractional shares or on any dividend or distribution, payable to holders of Certificates.
In the event any Certificate has 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 required by the Surviving Company, the posting by such person of a bond in such reasonable amount as the Surviving Company may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent or the Surviving Company will issue in exchange for such lost, stolen or destroyed Certificate the shares of Bradley Common Stock and cash in lieu of fractional shares (plus, to the extent applicable, dividends and distributions payable pursuant to the terms of the Merger Agreement).
At the Effective Time, Tucker's obligations with respect to each outstanding option to acquire Tucker Common Stock (the "Existing Tucker Options") will be assumed by Bradley, subject to the provision that the Existing Tucker Options will continue to have, and be subject to, the same terms and conditions as set forth in the stock option plans and agreements (as in effect immediately prior to the Effective Time) pursuant to which such Existing Tucker Options were issued, except that (i) each option will be exercisable for that number of whole shares of Bradley Common Stock equal to the product of the number of shares of Tucker Common Stock covered by such option immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded to the nearest whole number of shares of Bradley Common Stock and (ii) the exercise price per share of Bradley Common Stock under such option will be equal to the exercise price per share of Tucker Common Stock under the Existing Tucker Option divided by the Exchange Ratio and rounded to the nearest cent.
The respective obligations of Bradley and Tucker to effect the Merger and the other transactions contemplated in the Merger Agreement are subject to the fulfillment or waiver of each of the following conditions at or prior to the Effective Time: (i) the Merger and the Merger Agreement shall have been approved by the requisite vote of stockholders of Tucker and Bradley; (ii) the waiting period applicable to the consummation of the Merger under the HSR Act, if applicable, shall have expired or been terminated; (iii) neither Bradley nor Tucker shall be subject to any order, ruling or injunction of a court of competent jurisdiction which prohibits the consummation of the transactions contemplated by the Merger Agreement; (iv) the Registration Statement shall have been declared effective by the Commission under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and no proceedings for that purpose shall have been initiated or, to the knowledge of Bradley or Tucker, threatened by the Commission; (v) Bradley shall have obtained the approval for the listing of the shares of Bradley Common Stock issuable in the Merger on the NYSE, subject to official notice of issuance; and (vi) all consents, authorizations, orders and approvals of (or filings or registrations with) any governmental commission, board, other regulatory body or third parties required to be made or obtained in connection with the execution, delivery and performance of the Merger Agreement and the ancillary agreements to the Merger Agreement shall have been obtained or made (except where the failure to obtain or make any such consent, authorization, order, approval, filing or registration would not have a Tucker Material Adverse Effect (as defined below) or a Bradley Material Adverse Effect (as defined below), as the case may be) including, without limitation, the Tucker REMIC Consent and the consent of each of the lenders under Bradley's and Tucker's credit agreements.
The obligations of each of Tucker and Bradley to effect the Merger are also subject to the fulfillment or waiver by the other party, at or prior to the Closing Date, of the following conditions: (i) the representations and warranties of the other party contained in the Merger Agreement shall be true and correct in all material respects as of the Effective Time; (ii) the other party shall have performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by it on or prior to the Effective Time; and (iii) each party shall have received the opinion of its tax counsel, dated not less than five business days prior to the date the Registration Statement is declared effective by the Commission, to the effect that the Merger will be treated for federal income tax purposes as a tax-free reorganization qualifying under the provisions of Section 368(a)(1)(A) of the Code, which opinion shall not have been withdrawn or modified in any material respect.
The obligation of Tucker to effect the Merger and the other transactions contemplated therein is also subject to the fulfillment or waiver of the following conditions at or prior to the Effective Time: (i) Tucker shall have received an opinion from Goodwin, Procter & Hoar, or another nationally recognized law firm selected by Bradley, to the effect that, for all applicable tax years for which Bradley's federal income tax returns are subject to audit and Bradley is subject to assessment for taxes reportable therein and through the Closing Date, Bradley has qualified to be taxed as a REIT under Sections 856 through 860 of the Code and (ii) from the date of the Merger Agreement through the Effective Time, there shall not have occurred any change concerning Bradley or any of its subsidiaries that has had or could be reasonably likely to have a material adverse effect on the business, results of operations or financial condition of Bradley and its subsidiaries taken as a whole (a "Bradley Material Adverse Effect").
The obligation of Bradley to effect the Merger is also subject to the fulfillment or waiver at or prior to the Closing Date of the following conditions: (a) at the closing of the Merger, Bradley shall have received (i) the opinion of Mayer, Brown & Platt, or another nationally recognized law firm selected by Tucker, to the effect that, for the taxable year ended December 31, 1995 and for the short taxable year ending on the Closing Date, Tucker has qualified to be taxed as a REIT under Sections 856 through 860 of the Code and (ii) the opinion of Coopers & Lybrand L.L.P., independent public accountants for Tucker, to the effect that for the taxable years ended December 31, 1993 and December 31, 1994, Tucker qualified to be taxed as a REIT under Sections 856 through 860 of the Code; (b) from the date of the Merger Agreement through the Effective Time, there shall not have occurred any change concerning Tucker or any of its subsidiaries, that has had or could be reasonably likely to have a material adverse effect on the business, results of operations or financial condition of Tucker and its subsidiaries taken as a whole (a "Tucker Material Adverse Effect"); (c) Tucker shall have obtained and delivered to Bradley estoppel certificates, dated no earlier than 45 days prior to the Effective Time, with respect to (i) certain leases and agreements set forth in a schedule to the Merger Agreement and (ii) leases representing a total of 50% of the total rented space of each Tucker property, other than rented space represented by the leases listed in the schedule referred to in (c)(i) above; (d) Tucker and all of the limited partners of TOP shall have executed the Amended TOP Partnership Agreement (see "--Amended TOP Partnership Agreement"), and Kenneth and Richard Tucker shall have transferred all of their respective equity interests in TMC to certain officers of Bradley; (e) Bradley shall have obtained a letter from Coopers & Lybrand L.L.P., independent public accountants for Tucker, certifying, among other things, that for federal income tax purposes, Tucker will not have any accumulated or current earnings or profits immediately prior to the Effective Time; and (f) Bradley shall have received a private letter ruling from the IRS, in form and substance reasonably satisfactory to Bradley, to the effect that following the consummation of the Merger, each of TFC and TPI will qualify as a "qualified REIT subsidiary" of Bradley under Section 856(i) of the Code.
The Merger Agreement contains various representations and warranties relating to, among other things: (i) the due organization, power, authority and standing of Bradley and Tucker and similar corporate matters; (ii) the authorization, execution, delivery and enforceability of the Merger Agreement; (iii) the capital structure of Bradley and Tucker; (iv) subsidiaries of Bradley and Tucker; (v) investment interests of Bradley and Tucker; (vi) conflicts under charters or bylaws, violations of any instruments and required consents or approvals; (vii) certain documents filed by each of Bradley and Tucker with the Commission and the accuracy of information contained therein; (viii) litigation; (ix) conduct of business in the ordinary course and the absence of certain changes or material adverse effects; (x) taxes; (xi) books and records; (xii) properties; (xiii) leases; (xiv) Tucker rents; (xv) environmental matters; (xvi) employee benefit plans; (xvii) labor matters; (xviii) brokers' and finders' fees with respect to the Merger; (xix) receipt of fairness opinions; (xx) ownership of the capital stock in the other company; (xxi) related party transactions; (xxii) contracts and commitments; and (xxiii) the issuance of shares of Bradley Common Stock in the Merger.
Except as specifically permitted by the Merger Agreement or upon written consent of the other party, Bradley and Tucker have each agreed, among other things, that it will, prior to the Effective Time: (i) use its reasonable best efforts, and cause its subsidiaries to use their reasonable best efforts, to preserve intact its business organization and goodwill and keep available the services of its officers and employees; (ii) confer on a regular basis with one or more representatives of the other to report operational matters of materiality, subject to certain exceptions, and any proposals to engage in material transactions; (iii) promptly notify the other of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of its business or in the operation of its properties, any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the breach in any material respect of any representation or warranty contained in the Merger Agreement; and (iv) promptly deliver to the other true and correct copies of any report, statement or schedule filed with the Commission subsequent to the date of the Merger Agreement.
Unless Bradley has consented as provided in the Merger Agreement, Tucker has agreed that, among other things, prior to the Effective Time, it (i) shall, and shall cause each of its subsidiaries to, conduct its operations according to its usual, regular and ordinary course in substantially the same manner as previously conducted, subject to clauses (ii)-(xii) below; (ii) shall not, and shall cause each of its subsidiaries not to, acquire, enter into an option to acquire or exercise an option or contract to acquire additional real property, incur additional indebtedness, encumber assets or commence construction of, or enter into any agreement or commitment to develop or construct, shopping centers or any other type of real estate projects, except that (A) Tucker may incur additional indebtedness under the Amended and Restated Revolving Credit Agreement dated as of June 27, 1994 among TOP, Tucker and The First National Bank of Boston as agent and (B) Tucker may extend the maturity of the current mortgage financing encumbering the Pavilion at Mequon until June 30, 1996 upon the same terms and conditions which are currently in effect for such financing; (iii) shall not amend the Tucker Charter or the Tucker Bylaws, and shall cause each of its subsidiaries not to amend its charter, bylaws, joint venture documents, partnership agreements or equivalent documents except as contemplated by the Merger Agreement; (iv) shall not (A) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date of the Merger Agreement and disclosed pursuant to the Merger Agreement, issue any shares of its capital stock, effect any stock split, reverse stock split, stock dividend, recapitalization or other similar transaction, (B) grant, confer or award any option, warrant, conversion right or other right not existing on the date of the Merger Agreement to acquire any shares of its capital stock, (C) increase any compensation or enter into or amend any employment agreement with any of its present or future officers or directors, or (D) adopt any new employee benefit plan (including any stock option, stock benefit or stock purchase plan), other than the Severance Plan and the agreements between Tucker and each of Kenneth Tucker, Richard Tucker, Harold Eisenberg, Norris Eber, Lawrence Tucker and William Karnes (collectively, the "Severance Agreements"), or amend any existing employee benefit plan in any material respect, except for changes which are less participants in such plans (in connection with the foregoing, Tucker has agreed that (x) the aggregate payments which may be paid after the date of the Merger Agreement under the Tucker Property Manager Bonus Program shall not exceed $150,000 and (y) Tucker shall award a maximum of $25,000 as bonus compensation for employees who are not executive officers at or immediately prior to the Effective Time); (v) shall not (A) declare, set aside or pay any dividend or make any other distribution or payment with respect to any shares of its capital stock, except a dividend not to exceed $.25 per share of Tucker Common Stock for the fourth quarter of 1995 and thereafter until the Effective Time and payment of the Pre-Merger Dividend, if necessary, or (B) except in connection with the use of shares of capital stock to pay the exercise price or tax withholding obligations in connection with the Tucker Stock Option Plan, directly or indirectly redeem, purchase or otherwise acquire any shares of its capital stock or capital stock of any of its subsidiaries, or make any commitment for any such action; (vi) shall not, and shall not permit any of its subsidiaries to, sell, lease or otherwise dispose of (A) any Tucker properties or any portion thereof or any of the capital stock of or partnership or other interests in any of its subsidiaries or (B) except in the ordinary course of business, any of its other assets which are material, individually or in the aggregate; (vii) shall not, and shall not permit any of its subsidiaries to, make any loans, advances or capital contributions to, or investments in, any other person; (viii) shall not, and shall not permit any of its subsidiaries to, pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) of Tucker included in Tucker's filings with the Commission as of the date of the Merger Agreement or incurred in the ordinary course of business consistent with past practice; (ix) shall not, and shall not permit any of its subsidiaries, subject to certain exceptions set forth in the Merger Agreement, to enter into any material commitment, contractual obligation, borrowing, capital expenditure or transaction (each, a "Commitment") which may result in total payments or liability by or to it in excess of $25,000; (x) except for the Severance Plan and the Severance Agreements, shall not, and shall not permit any of its subsidiaries to, enter into any Commitment with any officer, director, consultant or affiliate of Tucker or any of its subsidiaries; (xi) shall provide Bradley with a reasonable opportunity to review and comment on any federal income tax returns filed by Tucker or any of its subsidiaries prior to the Effective Time; and (xii) shall not, without prior notification and consultation with Bradley, terminate any employee under circumstances which would result in severance payments to such employee pursuant to the Severance Plan or pay any severance benefits to any employee under the terms of the Severance Plan on account of such employee's purported termination for "Good Reason" (within the meaning of the Severance Plan) on account of a substantial adverse change in his position, authorities, responsibilities or status.
Tucker and Bradley have agreed (a) to use all reasonable best efforts to cooperate with one another in (i) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from, governmental or regulatory authorities of the United States, the several states and foreign jurisdictions and any third parties in connection with the execution and delivery of the Merger Agreement, the ancillary agreements to the Merger Agreement and the consummation of the transactions contemplated thereby and (ii) timely making all such filings and timely seeking all such consents, approvals, permits or authorizations; (b) to use all reasonable best efforts to obtain in writing any consents required from third parties to effectuate the Merger, such consents to be in reasonably satisfactory form to Tucker and Bradley; and (c) to use all reasonable efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by the Merger Agreement and the ancillary agreements.
Tucker has agreed to use its reasonable best efforts to deliver or cause to be delivered to Bradley, prior to the Closing Date, certain letters from "affiliates," as defined under Rule 145 promulgated under the Securities Act. See "The Merger--Certain Resale Restrictions." Bradley has agreed to file the reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the Commission thereunder, and to take such further action as any affiliate of Tucker may reasonably request, all to the extent required from time to time to enable such affiliate to sell shares of Bradley Common Stock received by such affiliate in the Merger without registration under the Securities Act pursuant to Rule 145(d)(1) or any successor rule or regulation subsequently adopted by the Commission.
Tucker and Bradley have agreed that, from and after the date of the Merger Agreement until the Effective Time, neither Tucker nor Bradley, nor any of their respective subsidiaries or other affiliates will (i) knowingly take any action, or knowingly fail to take any action, that would jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code or (ii) enter into any contract, agreement, commitment or arrangement with respect to the foregoing.
The Merger Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after approval of the Merger and the Merger Agreement, by the stockholders of Tucker and Bradley, in a number of circumstances, including, among others: (a) by the mutual written consent of Tucker and Bradley; (b) by either Tucker or Bradley if (i) any United States federal or state court of competent jurisdiction or other governmental entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable, provided that the party seeking to terminate shall have used its best efforts to appeal such order, decree, ruling or other action, (ii) the Merger Agreement and the transactions contemplated thereby shall have failed to receive the requisite vote for approval by the stockholders of Bradley or Tucker upon the holding of a duly convened stockholder meeting, or (iii) the Merger shall not have been consummated on or before June 30, 1996 (other than due to the failure of the party seeking to terminate the Merger Agreement to perform its obligations under the Merger Agreement required to be performed by it at or prior to the Effective Time); (c) by action of Tucker if (i) any representation, warranty, covenant or agreement of Bradley set forth in the Merger Agreement has been breached or become untrue, as the case may be, and is incapable of being satisfied by June 30, 1996, provided, however, that, in any case, a willful breach shall be deemed to be incapable of being satisfied for the purposes of this provision (c)(i), (ii) the Board of Directors of Tucker recommends to Tucker's stockholders approval or acceptance of an Acquisition Proposal (as defined below in "--No Solicitation of Transactions") by a person other than Bradley, but only in the event that the Board of Directors of Tucker, after consultation with and based upon the advice of Mayer, Brown & Platt or another nationally recognized law firm, has determined in good faith that such action is necessary for the Board of Directors of Tucker to comply with its fiduciary duties to its stockholders under applicable law, (iii) the Board of Directors of Bradley fails to make, withdraws, amends, modifies or changes its approval or recommendation of the Merger Agreement or the Merger, or (iv) the Board of Directors of Bradley recommends to Bradley's stockholders approval or acceptance of a proposal by a person other than Tucker to acquire 50% or more of the assets or stock of Bradley, by way of merger, tender offer, exchange offer or similar transaction; or (d) by action of Bradley if (i) any representation, warranty, covenant or agreement of Tucker set forth in the Merger Agreement has been breached or become untrue, as the case may be, and is incapable of being satisfied by June 30, 1996, provided, however, that, in any case, a willful breach shall be deemed to be incapable of being satisfied for the purposes of this provision (d)(i), (ii) the Board of Directors of Tucker fails to make, withdraws, amends, modifies or changes its approval or recommendation of the Merger Agreement or any of the transactions contemplated thereby, (iii) Tucker fails as soon as practicable to mail this Joint Proxy Statement/Prospectus to its stockholders or to include the recommendation of its Board of Directors of the Merger Agreement and the transactions contemplated thereby in this Joint Proxy Statement/Prospectus, (iv) the Board of Directors of Tucker shall have recommended that stockholders of Tucker accept or approve an Acquisition Proposal by a person other than Bradley, or (v) Tucker or its Board of Directors shall have resolved to do any of the events set forth in (d)(ii), (d)(iii) or (d)(iv) above.
If (a) Bradley terminates the Merger Agreement because (i) the Board of Directors of Tucker has recommended that stockholders of Tucker accept or approve an Acquisition Proposal by a person other than Bradley (or Tucker or its Board has resolved to do such), or (ii) any representation, warranty, agreement on the part of Tucker set forth in the Merger Agreement has been willfully breached; or (b) Tucker terminates the Merger Agreement because the Board of Directors of Tucker, after consultation with and based upon the advice of Mayer, Brown & Platt or another nationally recognized law firm, has determined in good faith that its fiduciary duties to its stockholders under applicable law require it to recommend to its stockholders approval or acceptance of an Acquisition Proposal by a person other than Bradley, then Tucker shall pay to Bradley the Termination Amount in cash equal to the sum of $3,000,000 plus Bradley's out-of-pocket costs and expenses in connection with the Merger Agreement and the transactions contemplated thereby, up to $2,000,000.
If Bradley terminates the Merger Agreement because (i) the Board of Directors of Tucker has failed to make, or has withdrawn, amended, modified or changed its approval or recommendation of the Merger Agreement or any of the transactions contemplated thereby; (ii) Tucker has failed as soon as practicable to mail this Joint Proxy Statement/Prospectus to its stockholders or to include the recommendation of its Board of Directors of the Merger Agreement and the transactions contemplated thereby in this Joint Proxy Statement/Prospectus; (iii) Tucker or its Board of Directors has resolved to do either (i) or (ii) above; or (iv) any representation, warranty, covenant or agreement on the part of Tucker set forth in the Merger Agreement has been breached or become untrue, as the case may be, and is incapable of being satisfied by June 30, 1996 (except for a termination because of a willful breach by Tucker in which case the previous paragraph will apply), Tucker shall pay all of Bradley's Expenses in connection with the Merger Agreement and the transactions contemplated thereby, up to $2,000,000.
If at any time prior to or within one year after termination of the Merger Agreement, unless such termination was (i) pursuant to mutual written consent of Bradley and Tucker; (ii) by either Bradley or Tucker because of a United States federal or state court of competent jurisdiction or other governmental entity issuing a final and nonappealable order, decree or ruling or taking any other final and nonappealable action permanently enjoining, restraining or otherwise prohibiting the Merger (provided that the party seeking to terminate shall have used its best efforts to appeal such order, decree, ruling or other action); (iii) by Tucker because any representation, warranty, covenant or agreement of Bradley set forth in the Merger Agreement has been breached or become untrue, as the case may be, and is incapable of being satisfied by June 30, 1996; (iv) by either Bradley or Tucker because the Merger Agreement and the transactions contemplated thereby failed to receive the requisite vote for approval by the stockholders of Bradley or Tucker upon the holding of a duly convened stockholder meeting; (v) by Tucker because the Board of Directors of Bradley failed to make, withdrew, modified or changed its approval or recommendation of the Merger Agreement or the Merger; (vi) by Tucker because the Board of Directors of Bradley recommended to Bradley's stockholders that they approve or accept a proposal by a person other than Tucker to acquire 50% or more of the assets or stock of Bradley, by way of merger, tender offer, exchange offer or similar transaction; or (vii) by either Tucker or Bradley because the Merger was not consummated on or before June 30, 1996 (other than due to the failure of the party seeking to terminate the Merger Agreement to perform its obligations under the Merger Agreement required to be performed by it at or prior to the Effective Time), Tucker enters into an agreement relating to an Acquisition Proposal with a person other than Bradley or Tucker's Board of Directors recommends or resolves to recommend to Tucker's stockholders approval or acceptance of an Acquisition Proposal with a person other than Bradley, then, upon the entry into such agreement or the making of such recommendation or resolution, Tucker shall pay to Bradley the Termination Amount, which amount shall be reduced by any monies previously paid by Tucker to Bradley pursuant to the previous paragraphs.
The Merger Agreement provides that Tucker shall not, at any time prior to or within one year after termination of the Merger Agreement, enter into any agreement relating to an Acquisition Proposal with a person other than Bradley unless such agreement provides that such person shall, upon the execution of such agreement, pay any Termination Amount due Bradley under the Merger Agreement.
The Merger Agreement also provides that Bradley's right to payment of the Expenses and/or Termination Amount shall be in addition to any other rights or remedies under contract, at law or in equity to which Bradley may be entitled.
Except as otherwise provided in the Merger Agreement, Bradley and Tucker have agreed that all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby shall be paid by the party incurring such expenses, except that (i) the filing fee in connection with the HSR Act filing, if any; (ii) the filing fee in connection with the filing of this Joint Proxy Statement/Prospectus or the Registration Statement with the Commission; and (iii) the expenses incurred for printing and mailing the Registration Statement shall be shared equally by Tucker and Bradley. Bradley and Tucker have also agreed that all costs and expenses for professional services rendered pursuant to the transactions contemplated by the Merger Agreement including, but not limited to, investment banking and legal services, will be paid by each party incurring such services.
REDUCTION OF TERMINATION AMOUNT OR EXPENSES
In general, under the REIT provisions of the Code at least 75% of a REIT's gross income for each taxable year must consist of defined types of income derived directly or indirectly for investments relating to real property (the "75% income test"), and at least 95% of the REIT's gross income for each taxable year must be derived from such real property investments and from certain categories of investment income (the "95% income test"). The Merger Agreement provides in effect for a reduction in the Termination Amount and/or Expenses payable to Bradley if necessary to prevent such amounts from causing Bradley to fail these REIT income requirements. Specifically, the Merger Agreement provides that, notwithstanding anything to the contrary set forth in the Merger Agreement, in the event that Tucker is obligated to pay Bradley the Termination Amount and/or Expenses, Tucker (or any other person to the extent provided in the Merger Agreement) shall pay to Bradley from the applicable Termination Amount and/or Expenses, as the case may be, an amount equal to the lesser of (m) the Termination Amount and/or Expenses, as the case may be, and (n) the sum of (1) the maximum amount that can be paid to Bradley without causing Bradley to fail to meet the requirements of the 75% and 95% income tests determined as if the Termination Amount did not constitute qualifying income for purposes of the 75% and 95% income tests ("Qualifying Income"), plus (2) in the event Bradley receives either a ruling from the IRS or an opinion from Bradley's counsel that the Termination Amount and/or Expenses would constitute Qualifying Income or would be excluded from gross income for purposes of the 75% and 95% income tests, an amount equal to the Termination Amount and/or Expenses, as the case may be, less the amount payable under clause (1) above.
Unless and until the Merger Agreement has been terminated in accordance with its terms, Tucker has agreed and covenanted that neither it nor any of its subsidiaries will, and each of them will direct and use its best efforts to cause its respective officers, directors, employees, agents and representatives not to, directly or indirectly, initiate, solicit or encourage any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation or similar transaction involving, or any purchase of 10% or more of the assets or any equity securities or partnership interests (including, without limitation, TOP Units) of, Tucker or any of its subsidiaries, other than the transactions contemplated by the Merger Agreement (any such proposal or offer being herein referred to as an "Acquisition Proposal") or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal. In connection with the Merger Agreement, Tucker agreed to immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted prior to the date of the Merger Agreement with respect to any of the foregoing and to take the necessary steps to inform the individuals or entities referred to above of these obligations. Tucker has also agreed to notify Bradley immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with it; provided, however, that the Board of Directors of Tucker may (a) furnish information to or enter into discussions or negotiations with any person or entity that makes an unsolicited bona fide Acquisition Proposal, if, and only to the extent that, (i) the Board of Directors of Tucker, after consultation with and based upon the advice of Mayer, Brown & Platt or another nationally recognized law firm, determines in good faith that such action is required for the Board of Directors to comply with its fiduciary duties to stockholders under applicable law, (ii) prior to furnishing such information to, or entering into negotiations with, such person or entity, Tucker provides written notice to Bradley to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person or entity, and (iii) Tucker keeps Bradley informed of the status of any such discussions or negotiations; and (b) to the extent applicable, complies with Rule 14e-2 and Rule 14a-9 promulgated under the Exchange Act with regard to an Acquisition Proposal.
Bradley has agreed that all rights to indemnification or exculpation existing in favor of the directors, officers, employees, advisors and agents of Tucker and each of its subsidiaries as provided in their respective charters or bylaws in effect as of the date of the Merger Agreement with respect to matters occurring at or prior to the Effective Time will survive the Merger and will continue in full force and effect. For a period of six years after the Effective Time, Bradley has agreed not to amend, repeal or otherwise modify the provisions in the Bradley Charter and the Bradley Bylaws providing for exculpation of director liability and indemnification in any manner that would materially and adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees, advisors or agents of Tucker with respect to actions or omissions occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by the Merger Agreement), unless such modification is required by law; provided, however, that in the event any claim or claims are asserted or made either prior to the Effective Time or within such six year period, all rights to indemnification in respect of any such claim or claims will continue until disposition of any and all such claims.
In addition to the rights provided above, in the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any action by or on behalf of any or all security holders of Tucker or Bradley or by or in the right of Tucker or Bradley or any claim, action, suit, proceeding or investigation in which any person who is now, or has been, at any time prior to the date hereof, or who becomes prior to the Effective Time, a director of Tucker (the "Indemnified Parties"), is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he is or was a director of Tucker or any of the subsidiaries of Tucker or any action or omission by such person in his capacity as a director or (ii) the Merger Agreement or the transactions contemplated by the Merger Agreement, whether in any case asserted or arising before or after the Effective Time, Bradley, on the one hand, and the Indemnified Parties, on the other hand, have agreed to cooperate and use their reasonable best efforts to defend against and respond thereto. Bradley has agreed that, after the Effective Time, it will indemnify and hold harmless, as and to the full extent permitted by applicable law, each Indemnified Party against any losses, claims, liabilities, expenses (including reasonable attorneys' fees and expenses), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation. In addition, after the Effective Time, in the event of any such threatened or actual claim, action, suit, proceeding or investigation, Bradley has agreed to promptly pay and advance expenses and costs incurred by each Indemnified Person as they become due and payable in advance of the final disposition of any claim, action, suit, proceeding or investigation to the fullest extent and in the manner permitted by law.
Bradley has also agreed to purchase, at or prior to the Effective Time, liability insurance coverage for Tucker's directors and certain of its officers for a period of six years which will provide the directors and officers with $10,000,000 of aggregate coverage. In addition, the Tucker directors have agreed, at Bradley's request, to adopt certain amendments to Tucker's existing indemnification agreements with its directors including the deletion of any obligation of the Surviving Company to establish a trust fund for the payment of indemnification expenses upon a change in control.
Bradley and Tucker may amend the Merger Agreement by written agreement at any time before or after approval of matters presented in connection with the Merger by the stockholders of Bradley and Tucker, but after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval.
Tucker holds substantially all of its assets through TOP and TFP. In connection with the consummation of the Merger, (i) Bradley will acquire 95.9% of the partnership interests in TOP, comprising 10,828,283 TOP Units which are currently held by Tucker and (ii) the TOP Partnership Agreement will be amended and restated in the form of the Amended TOP Partnership Agreement set forth as Exhibit A to the Merger Agreement. The remaining partnership interests in TOP are held by the Management Directors (427,329 TOP Units or approximately 3.8%) and certain family members and family trusts related to the Management Directors (31,478 TOP Units or approximately 0.3%). The following summary of the Amended TOP Partnership Agreement, including the descriptions of certain provisions set forth elsewhere in this Joint Proxy Statement/Prospectus, is qualified in its entirety by reference to the Amended TOP Partnership Agreement, which is filed as an exhibit to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part.
The Amended TOP Partnership Agreement provides that management and control of TOP will be vested in Bradley, which will serve as the sole general partner of TOP. Equity ownership in TOP will be represented by the TOP Units. Each TOP Unit, other than those held by Bradley, is designed to provide distributions to the holder thereof that are equal to the distributions paid on each share of Bradley Common Stock, and each such TOP Unit is redeemable for the cash equivalent of one share of Bradley Common Stock (subject to certain restrictions), or, at Bradley's option, one share of Bradley Common Stock. Effective upon consummation of the Merger, each holder of TOP Units will exchange its pre-Merger TOP Units for a number of new TOP Units determined by multiplying (a) the number of TOP Units held by such unitholder prior to the Effective Time by (b) the Exchange Ratio. Therefore, assuming each TOP Unit following the Merger has the same value as a share of Bradley Common Stock, the current TOP Unitholders will receive an equal value for each TOP Unit as the stockholders of Tucker will receive for each share of Tucker Common Stock. Notwithstanding the similarities of Bradley Common Stock and TOP Units, there are certain differences between them, including the following:
Voting Rights. Holders of Bradley Common Stock may elect the Board of Directors of Bradley, which because Bradley will be the sole general partner of TOP, will control the business of TOP upon consummation of the Merger. Under the Amended TOP Partnership Agreement, Bradley as general partner may take any action in a manner which it reasonably believes is in the best interests of the Bradley stockholders or complies with the REIT requirements for Bradley. Holders of TOP Units may not elect directors, or elect or remove Bradley as the general partner of TOP. For a period of 24 months after the Effective Time, the general partner may not elect to dissolve the partnership or sell all or substantially all of the assets of the partnership without the consent of a majority in interest of the limited partners, except in connection with a merger or other business combination of the general partner or its affiliates. The limited partners have agreed to relinquish any other voting rights currently available in the TOP Partnership Agreement.
Transferability. The shares of Bradley Common Stock exchanged in the Merger will be freely transferable under the Securities Act by holders who are not affiliates of Bradley or Tucker. The TOP Units are freely transferable (i) either by will, the laws of intestacy or otherwise to the legal representative or successor of the transferring limited partner who shall be bound in all respects by the terms of the Amended TOP Partnership Agreement; (ii) for inter vivos transfers for estate planning purposes; or (iii) for pledges to secure the repayment of a loan. Other transfers are subject to the consent and approval of the general partner. Pursuant to the Amended TOP Partnership Agreement, the general partner may, in its sole and absolute discretion, transfer its interest in TOP; provided, however, that for a period of 24 months after the Effective Time, the general partner shall not without the consent of the majority of the limited partners, transfer its interest to any of its affiliates other than an affiliate whose securities will become issuable upon redemption of the TOP Units. Under the TOP Partnership Agreement as currently in effect, the withdrawal of the general partner from TOP, or the transfer of its interest in TOP, requires the prior written consent of a majority in interest of the limited partners.
Other material provisions of the Amended TOP Partnership Agreement include:
Issuance of Additional Units. The issuance of additional TOP Units, and the relative rights, powers and duties of such TOP Units, will be at the discretion of Bradley, as the sole general partner of TOP. Notwithstanding the foregoing, for a period of 24 months after the Effective Time, the general partner shall not cause TOP to issue additional TOP Units with rights, powers and duties senior to the TOP Units currently held by the limited partners. In addition, the general partner shall not permit TOP to issue additional TOP Units for a period of 24 months after the Effective Time if the issuance of such Units would cause a material adverse tax consequence to the limited partners (determined in the manner described in the Amended TOP Partnership Agreement), other than in connection with the merger, consolidation or combination of the general partner or its affiliates.
Distributions. The Amended TOP Partnership Agreement provides for operating distributions to be made first to the limited partners in an amount equal to the lesser of (i) 99% of the cash available for distribution from TOP and (ii) an amount calculated to provide the limited partners with distributions on each of their TOP Units equal to the dividend yield for the same period on a share of Bradley Common Stock. Any remaining cash from operations available for distribution will be distributed to Bradley as general partner. The Amended TOP Partnership Agreement provides for liquidating distributions to the limited partners in an amount calculated to equal either an amount per TOP Unit equal to the amount that would be distributed with respect to each share of Bradley Common Stock upon the liquidation of Bradley or, in the event that TOP is liquidated other than in connection with the liquidation of Bradley, an amount per TOP Unit equal to the then market price of a share of Bradley Common Stock; provided, however, that the limited partners will not receive more than 99% of any proceeds available for distribution from the liquidation of TOP. Any remaining liquidation proceeds will be distributed to Bradley as the general partner.
Redemption Rights. Pursuant to the Amended TOP Partnership Agreement, each partner (other than Bradley) will have the right, subject to certain limitations, to require TOP to redeem all or a portion of the TOP Units held by such partner for the cash equivalent of that number of shares of Bradley Common Stock (subject to certain adjustments to prevent dilution), or, at the option of Bradley, Bradley may elect to purchase TOP Units presented for redemption for an equivalent number of shares of Bradley Common Stock. The TOP Partnership Agreement, as currently in effect, provides that the holders of the TOP Units may exchange each TOP Unit for one share of Tucker Common Stock.
Liability of General Partner; Indemnification. The Amended TOP Partnership Agreement generally provides that the general partner and any person acting on its behalf will incur no liability to TOP or any limited partner for any act or omission within the scope of the general partner's authorities, provided the general partner's or such other person's action or omission to act was taken in good faith and in the belief that such action or omission was in the best interests of Bradley and its affiliates, and provided further, that the general partner's or such other person's actions or omissions shall not constitute actual fraud or gross negligence or deliberately dishonest conduct.
The Amended TOP Partnership Agreement also provides for the indemnification of the general partner and its affiliates and any individual acting on their behalf from any loss, damage, claim or liability, including, but not limited to, reasonable attorneys' fees and expenses, incurred by them by reason of any act performed by them in accordance with the standards set forth above or in enforcing the provisions of this indemnity.
Management Fees and Expenses. The Amended TOP Partnership Agreement provides that Bradley shall be reimbursed for all expenses incurred by Bradley relating to the management and business of TOP.
Amendment. Generally, the Amended TOP Partnership Agreement may be amended by the general partner without the consent of limited partners, except that certain amendments which alter or change the distribution rights or redemption rights of a limited partner shall require the consent of limited partners holding a majority in interest of TOP Units.
Termination. TOP will continue until December 31, 2050, or upon dissolution at an earlier time for specified reasons set forth in the Amended TOP Partnership Agreement.
Environmental Matters. At the time of Tucker's initial public offering, the Management Directors agreed to indemnify Tucker and TOP against certain potential environmental liabilities and expenses relating to the Commons of Chicago Ridge property. These indemnification obligations will be amended in certain respects by the Amended TOP Partnership Agreement. Originally, the Management Directors agreed to indemnify Tucker,
TOP, TFP and each of their subsidiaries against all claims, actions, losses, penalties, liabilities, costs and expenses incurred by Tucker or TOP and any of their subsidiaries as a result of or arising out of any matter, condition, or act at the Commons of Chicago Ridge involving (1) hazardous or regulated substances, materials, or wastes or petroleum products, (2) certain federal environmental laws, as well as all environmental health or safety laws, regulations, and other requirements relating to the aforementioned substances, materials, wastes, or products, or (3) any administrative, regulatory or judicial action, suit, investigation or proceeding relating to any of the aforementioned laws, regulations, or other requirements or any permit thereunder, which matter, condition or act existed on or arose prior to October 4, 1993.
The Amended TOP Partnership Agreement amends this indemnification obligation to apply only when a third party, whether a governmental or regulatory authority or a private party, initiates a claim, proceeding or investigation relating to the Commons of Chicago Ridge in connection with any applicable environmental health or safety law regarding hazardous substances, materials, wastes or petroleum products, or any common law right of action regarding such substances, materials, wastes or products, on or before October 4, 2003 with respect to conditions or acts at the Commons of Chicago Ridge which existed prior to October 4, 1993.
In connection with this indemnification obligation, Bradley has agreed to keep the Management Directors reasonably informed and to consult with the Management Directors with respect to any potential claims, settlements and remediation which could trigger the indemnification obligations of the Management Directors. In the event of any remediation or proceeding, Bradley has agreed to consider in good faith any suggestions of the Management Directors.
The Management Directors' indemnification obligations currently are secured by 102,308 shares of Tucker Common Stock and 427,339 TOP Units acquired by the Management Directors in connection with the Tucker's initial public offering and, upon consummation of the Merger, will be secured by 70,183 shares of Bradley Common Stock (into which their respective shares of Tucker Common Stock will be exchanged) and 293,154 TOP Units held or otherwise beneficially owned by each of the Management Directors and their family members as of the Effective Time (in each case assuming an Exchange Ratio of .686; an Exchange Ratio of .665 would yield 68,034 shares of Tucker Common Stock and 284,180 TOP Units, respectively). After the Effective Time, the TOP Units generally will be exchangeable at any time for cash or shares of Bradley Common Stock (subject to certain rights of Bradley), and all such shares of Bradley Common Stock may be transferred at any time, subject to compliance with applicable federal securities laws. Accordingly, there can be no assurance that the Management Directors will hold any shares of Bradley Common Stock or TOP Units at the time, if ever, when Bradley attempts to realize this security interest or that the shares of Bradley Common Stock or TOP Units held by the Management Directors will be sufficient to cover the indemnification obligations.
In connection with the execution of the Merger Agreement, Bradley and TOP and, if the Merger is consummated, the Management Directors have agreed to share the cost of having an outside consultant conduct a Phase II investigation of the soil and groundwater of the Commons of Chicago Ridge and prepare a report recommending what actions the Surviving Company should take with respect to such matters. In the event that Bradley decides to implement any of the recommendations of such consultant (the "Recommended Work"), TOP and the Management Directors have each agreed to pay fifty percent of the costs of such remediation, with the Management Directors' aggregate liability for the Recommended Work limited to a maximum of $200,000.
Registration Rights Agreement. In connection with the amendment and restatement of the TOP Partnership Agreement, Bradley has agreed to enter into a registration rights agreement (the "Registration Rights Agreement") with the holders of TOP Units, pursuant to which Bradley shall be obligated to file a shelf registration statement with the Commission to register the shares of Bradley Common Stock which such holders may receive upon redemption of TOP Units, which registration statement shall become effective at or prior to the Effective Time. Bradley will be obligated to maintain the effectiveness of such registration statement until a date to be agreed upon or until such time as all of the TOP Units have been redeemed for cash or Bradley Common Stock. Bradley has agreed to pay all fees incident to such registration other than discounts or fees of counsel, accountants or other persons retained by the holders, other than as provided in the Registration Rights Agreement.
Elimination of Covenant Not to Compete. The Amended TOP Partnership Agreement has also eliminated the covenant not to compete with TOP which was imposed on the Management Directors and certain of the executive officers of Tucker. In addition, the general partner, either directly or through entities other than TOP, may acquire, own, manage, develop, lease or invest in commercial real estate, including any shopping center, office building or retail project.
TRANSFER OF INTERESTS IN TMC
In connection with the execution of the Merger Agreement, Kenneth L. Tucker and Richard H. Tucker agreed to transfer all of their equity interests in TMC to two individuals who are officers of Bradley in exchange for $500 each. Prior to the Merger, Kenneth Tucker holds 368 shares of common stock, par value $.01 per share, of TMC ("TMC Common Stock") and 20 shares of preferred stock of TMC, par value $.01 per share ("TMC Preferred Stock"), and Richard Tucker holds 92 shares of TMC Common Stock and 5 shares of TMC Preferred Stock. The remainder of the outstanding shares of TMC Common Stock and TMC Preferred Stock are currently held and will continue to be held by TOP.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
During the period from January 1, 1994 to September 30, 1995, Bradley acquired three properties, sold one property, effected a $125,000,000 shelf registration statement, acquired the REIT advisory business of its long- standing external advisor, completed the July Offering and repaid certain fixed rate mortgage debt.
In March 1994, Bradley purchased Rivercrest for $24,500,000. The purchase of Rivercrest was financed through borrowings under the Bradley Line of Credit. In November 1994, Bradley acquired Westwind for $7,500,000. Westwind was purchased with the assumption of $5,000,000 of mortgage debt, with the balance paid through a tax-deferred exchange from the sale of Spruce Tree. In April 1995, Bradley acquired St. Francis Plaza for $5,200,000. St. Francis Plaza was purchased with the assumption of approximately $2,100,000 of mortgage debt and the cash proceeds from the sale of 182,500 shares of Bradley Common Stock to the former owner of St. Francis Plaza.
On January 31, 1995, following stockholder approval, Bradley acquired the REIT advisory business of its long-standing external advisor and thereby became a self-administered REIT. The acquisition, pursuant to which Bradley issued 325,000 shares of Bradley Common Stock to the owners of the advisor, resulted in the termination of an advisory arrangement extending through August 1999.
On July 6, 1995, Bradley completed the July Offering at a price of $16 per share. Net proceeds from the July Offering were approximately $37,405,000, of which $32,600,000 was used to pay down the Bradley Line of Credit, $4,712,000 was used to pay off the non-recourse mortgages assumed in November 1994 upon the acquisition of Westwind and the balance was used for general business purposes.
In June 1994, Tucker acquired the Mequon Pavilion. The Mequon Pavilion was purchased for $18,300,000 which was financed through a $13,500,000 mortgage note and borrowings for the balance under the Tucker Line of Credit.
This unaudited Pro Forma Condensed Statement of Operations is presented as if the Bradley acquisitions, disposition and capital transactions and the Tucker acquisition described above, and the Merger had been consummated on January 1, 1994 and with Bradley qualifying as a REIT, distributing all of its taxable income and, therefore, incurring no federal income tax expense during the year ended December 31, 1994. The Merger has been accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16. In the opinion of Bradley's management, all adjustments necessary to reflect the effects of these transactions have been made.
This unaudited Pro Forma Condensed Statement of Operations is presented for comparative purposes only and is not necessarily indicative of what the actual results of operations of Bradley would have been for the periods presented, nor does it purport to represent the results to be achieved in future periods. This unaudited Pro Forma Condensed Statement of Operations should be read in conjunction with, and is qualified in its entirety by, the respective historical financial statements and notes thereto of Bradley and Tucker incorporated by reference into this Joint Proxy Statement/Prospectus.
(A) See page 83 for computation of pro forma adjustments to reflect prior Bradley transactions.
(B) See page 85 for computation of pro forma adjustments to reflect the prior Tucker transaction.
(C) Represents the result of interest on borrowings estimated for payment of fees and expenses related to the Merger of approximately $8,500,000, at an interest rate of 8.688% which was Bradley's borrowing rate at September 30, 1995. A 0.125% change in the variable rate would result in a change in the pro forma interest adjustment of approximately $11,000.
(D) Depreciation and amortization changes relate to recording Tucker's properties at Bradley's purchase price, the related depreciation utilizing an estimated useful life of 39 years and a depreciable basis of approximately $233,000,000, and the elimination of historical amortization of Tucker deferred assets in accordance with the purchase method of accounting, as follows (in thousands):
(E) Represents general and administrative cost savings which have been estimated based upon historical costs for those items which will be eliminated as a result of the Merger, as follows (in thousands):
(F) Depreciation and amortization added back to net income in the calculation of FFO for Bradley Pro Forma, Tucker Pro Forma and Bradley as Adjusted is net of depreciation and amortization allocated to minority interest of approximately $0, $625,000 and $410,000, respectively.
(G) The Exchange Ratio used in the pro forma financial statements was .686 of a share of Bradley Common Stock per share of Tucker Common Stock. If the Exchange Ratio was .665, then pro forma net income per share for the year ended December 31, 1994 would have been $1.28, and pro forma weighted average number of shares outstanding for the year ended December 31, 1994 would have been 18,400,139.
PRO FORMA ADJUSTMENTS TO REFLECT PRIOR BRADLEY TRANSACTIONS:
(A) Increase represents historical operating revenues and expenses for the year ended December 31, 1994 for the three properties acquired during 1994 and 1995 for the period during which Bradley did not own them, offset by decreases in historical operating revenues and expenses for the year ended December 31, 1994 for the property sold in 1994 as if the property was sold prior to the beginning of the period presented.
(B) Decrease represents the net result of interest on borrowings for the period during which Bradley did not incur such interest and the elimination of interest on loans which have been repaid, as follows (in thousands):
(C) Increase represents additional depreciation of approximately $323,000 for the year ended December 31, 1994 relating to the three properties acquired during 1994 and 1995, for the period during which Bradley did not own them and an increase in amortization of $1,192,000 resulting from the buyout of the advisory agreement of Bradley's former external advisor as if the buyout occurred prior to the beginning of the period presented, partially offset by a decrease in depreciation of approximately $108,000 as if the property sold during 1994 was sold prior to the beginning of the period presented. The increase in depreciation expense for the property acquisitions was computed utilizing an estimated useful life of 39 years and a depreciable basis totaling $28,000,000. The decrease in depreciation expense for the property sold was computed utilizing an estimated useful life of 31.5 years and a depreciable basis of $1,500,000. The amortization was computed by amortizing the cost of the buyout of $5,565,000 over a period of approximately five years.
(D) Represents the net decrease in general and administrative expenses estimated resulting from the acquisition of the REIT advisory business of its long-standing external advisor as if the acquisition occurred prior to the beginning of the period presented, as follows (in thousands):
Additional expenses are based on actual costs incurred during the nine months ended September 30, 1995, which reflect the estimated expenses that would have been incurred if the acquisition occurred prior to the beginning of the period presented.
PRO FORMA ADJUSTMENTS TO REFLECT THE PRIOR TUCKER TRANSACTION:
(A) Increase represents historical operating revenues and expenses for the year ended December 31, 1994 for the property acquired during 1994 for the period during which Tucker did not own it.
(B) Represents additional interest on the mortgage obtained ($13,500,000) at 6.813% and an increase in the balance outstanding on the Tucker Line of Credit ($4,400,000) at 7.313% in connection with the acquisition of the property for the period during which Tucker did not own it. A 0.125% change in the variable rates would result in a change in the pro forma interest adjustment of approximately $12,000.
(C) Represents additional depreciation for the year ended December 31, 1994 relating to the property acquired during 1994 for the period during which Tucker did not own it. The increase in depreciation expense for the property acquired was computed utilizing an estimated useful life of 31.5 years and a depreciable basis of $15,552,000. The acquisition amount allocated to land was $2,748,000.
(D) Depreciation and amortization added back to net income in the calculation of FFO for Historical and Pro Forma is net of depreciation and amortization allocated to minority interest of approximately $615,000 and $625,000, respectively.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
During the period from January 1, 1995 to September 30, 1995, Bradley acquired one property. The acquisition was funded with the assumption of approximately $2,100,000 of mortgage debt and the cash proceeds from the sale of 182,500 shares of Bradley Common Stock at a price of $17 per share to the former owner of the property. Also during the period January 1, 1995 to September 30, 1995, Bradley acquired the REIT advisory business of its long- standing external advisor and completed the July Offering at a price of $16 per share. Net proceeds from the July Offering were approximately $37,405,000, of which $32,600,000 was used to pay down the Line of Credit, $4,712,000 was used to pay off the non-recourse mortgages assumed in November 1994 upon the acquisition of a property and the balance was used for general business purposes.
This unaudited Pro Forma Condensed Statement of Operations is presented as if the Bradley acquisitions described above, the July Offering and the Merger had been consummated on January 1, 1994 and with Bradley qualifying as a REIT, distributing all of its taxable income and, therefore, incurring no federal income tax expense during the period January 1, 1995 through September 30, 1995. The Merger has been accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16. In the opinion of Bradley's management, all adjustments necessary to reflect the effects of these transactions have been made.
This unaudited Pro Forma Condensed Statement of Operations is presented for comparative purposes only and is not necessarily indicative of what the actual results of operations of Bradley would have been for the period presented, nor does it purport to represent the results to be achieved in future periods. This unaudited Pro Forma Condensed Statement of Operations should be read in conjunction with, and is qualified in its entirety by, the respective historical financial statements and notes thereto of Bradley and Tucker incorporated by reference into this Joint Proxy Statement/Prospectus.
(A) See page 88 for computation of pro forma adjustments to reflect prior Bradley transactions.
(B) Represents historical operating results as reported by Tucker for the nine months ended September 30, 1995.
(C) Represents the result of interest on borrowings estimated for payment of fees and expenses related to the Merger of approximately $8,500,000, at an interest rate of 8.688% which was Bradley's borrowing rate at September 30, 1995. A 0.125% change in the variable rate would result in a change in the pro forma interest adjustment of approximately $8,000.
(D) Depreciation and amortization changes relate to recording Tucker's properties at Bradley's purchase price, the related depreciation utilizing an estimated useful life of 39 years and a depreciable basis of approximately $233,000,000, and the elimination of historical amortization of Tucker deferred assets in accordance with the purchase method of accounting, as follows (in thousands):
(E) Represents general and administrative cost savings which have been estimated based upon historical costs for those items which will be eliminated as a result of the Merger, as follows (in thousands):
(F) Represents the elimination of the write-offs of approximately $447,000 representing costs incurred related to the Merger, and approximately $491,000 representing capitalized costs related to certain development projects which will not be pursued by the Surviving Company.
(G) Depreciation and amortization added back to net income in the calculation of FFO for Bradley Pro Forma, Tucker Historical and Bradley as Adjusted is net of depreciation and amortization allocated to minority interest of approximately $0, $359,000 and $164,000, respectively.
(H) The Exchange Ratio used in the pro forma financial statements was .686 of a share of Bradley Common Stock per share of Tucker Common Stock. If the Exchange Ratio was .665, then pro forma net income per share for the nine months ended September 30, 1995 would have been $.78, and pro forma weighted average number of shares outstanding for the nine months ended September 30, 1995 would have been 18,400,139.
PRO FORMA ADJUSTMENTS TO REFLECT PRIOR BRADLEY TRANSACTIONS:
(A) Increase represents historical operating revenues and expenses for the nine months ended September 30, 1995 for the property acquired during 1995 for the period during which Bradley did not own it.
(B) Decrease represents the net result of interest on borrowings for the period during which Bradley did not incur such interest and the elimination of interest on loans which have been repaid, as follows (in thousands):
(C) Increase represents additional depreciation for the nine months ended September 30, 1995 relating to the property acquired during 1995 for the period during which Bradley did not own it. Depreciation expense was computed utilizing an estimated useful life of 39 years and a depreciable basis totaling approximately $3,700,000.
PRO FORMA CONDENSED BALANCE SHEET
This unaudited Pro Forma Condensed Balance Sheet is presented as if the Merger had been consummated on September 30, 1995. The Merger has been accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16. In the opinion of Bradley's management, all adjustments necessary to reflect the effects of this transaction have been made.
This unaudited Pro Forma Condensed Balance Sheet is presented for comparative purposes only and is not necessarily indicative of what the actual financial position of Bradley would have been at September 30, 1995, nor does it purport to represent the future financial position of Bradley. This unaudited Pro Forma Condensed Balance Sheet should be read in conjunction with, and is qualified in its entirety by, the respective historical financial statements and notes thereto of Bradley and Tucker incorporated by reference into this Joint Proxy Statement/Prospectus.
See footnotes on page 90.
(A) Represents adjustments to record the Merger in accordance with the purchase method of accounting, based upon a purchase price of approximately $311,032,000, which assumes a value of $14.125 per share of Bradley Common Stock, computed as follows (in thousands):
(B) Decrease in net book value of the Tucker real estate assets is based upon Bradley's purchase price.
(C) To reduce Tucker historical deferred rent receivables to reflect the price paid by Bradley in accordance with the purchase method of accounting.
(D) Represents the elimination of deferred charges in accordance with the purchase method of accounting and the elimination of costs related to the Merger, capitalized as of September 30, 1995, as follows (in thousands):
(E) Represents capitalized costs related to a development project not expected to be pursued by the Surviving Company.
(F) Estimated payments for fees and expenses related to the Merger as follows (in thousands):
(G) To reflect the adjustment of TOP Units based upon an exchange ratio of .686 and a Bradley stock price of $14.125, as follows:
(H) To adjust Tucker's capital accounts to reflect the issuance of 7,428,202 shares of Bradley Common Stock in exchange for all of the outstanding shares of Tucker Common Stock at an Exchange Ratio of .686 shares of Bradley Common Stock for each outstanding share of Tucker Common Stock, as follows (in thousands):
If the Exchange Ratio was .665 of a share of Bradley Common Stock for each outstanding share of Tucker Common Stock, then Tucker's capital accounts would be adjusted to reflect the issuance of 7,200,808 shares of Bradley Common Stock in exchange for all the outstanding shares of Tucker Common Stock, as follows (in thousands):
MANAGEMENT OF THE SURVIVING COMPANY
Under the Merger Agreement, the directors and executive officers of Bradley will become the directors and executive officers of the Surviving Company. The directors and executive officers of Bradley, their ages, positions and business experience for at least the past five years are set forth below. The Board of Directors is segregated into three classes, with terms ending in 1996, 1997 and 1998, respectively. Directors elected at future stockholder meetings will hold office for three years. Executive officers are elected annually by the Board of Directors for terms ending on the next annual meeting of the Board of Directors.
E. Lawrence Miller, age 53, has been Chief Executive Officer of Bradley since October 1994, President of Bradley since 1985, and was appointed to the Board in 1992. From 1984 to 1994, Mr. Miller was also a Senior Vice President of R.M. Bradley & Co., Inc., the long-standing external advisor of Bradley ("RMB"). Previously, Mr. Miller served as general counsel of Northeast Operations for Prudential Insurance Company of America. Mr. Miller serves as Chairman and a member of the Executive Committee of the Board of Governors of the National Association of Real Estate Investment Trusts and is a member of the Urban Land Institute and of the International Council of Shopping Centers.
William L. Brown, age 73, was Chairman of the Board of Bank of Boston Corporation and The First National Bank of Boston from 1983 to 1989, Chief Executive Officer from 1983 to 1987 and President from 1971 to 1982. He was a director of both Bank of Boston Corporation and The First National Bank of Boston until March 1992. He is also a director of GC Companies, Inc., Standex International Corporation, Stone & Webster, Incorporated, Ionics, Incorporated, North American Mortgage Company and the John F. Kennedy Library Foundation.
Joseph E. Hakim, age 48, is President of Joseph P. Kennedy Enterprises, Inc. in New York, New York, a Kennedy family-owned asset management company for which he has held a variety of executive positions since 1974. In this capacity, Mr. Hakim also serves as President and Chief Executive Officer of Merchandise Mart Properties, Inc. in Chicago, Illinois, a subsidiary of Joseph P. Kennedy Enterprises, Inc., which manages approximately 7.5 million square feet of properties. Mr. Hakim is Treasurer of the Joseph P. Kennedy, Jr. Foundation and the Robert F. Kennedy Memorial.
John B. Hynes III, age 37, is a Senior Vice President of RMB, overseeing the operations of its Commercial Brokerage Division. Prior to joining RMB in 1993, Mr. Hynes directed the Boston office of Lincoln Property Company (a commercial real estate development company) as its Operating Partner, and prior to that time was a Vice President of the Codman Company of Boston. He is a member of numerous Boston real estate industry organizations.
Stephen G. Kasnet, age 50, was Managing Director of First Winthrop Corporation and Winthrop Financial Associates (real estate development and management companies) from 1991 to September 1995. From 1989 to 1991, he was Executive Vice President of Cabot, Cabot & Forbes (a real estate development and management company) and prior to 1989 was Executive Vice President of RMB. He is Chairman of the Board of Warren Bancorp, Inc. and Warren Five Cents Savings Bank in Peabody, Massachusetts, a trustee of Pioneer Winthrop Real Estate Investment Fund and a member of the Urban Land Institute.
Paul G. Kirk, Jr., age 57, is counsel to, and until 1989 was a partner of, the law firm of Sullivan & Worcester in Boston, Massachusetts. He is also Chairman and Treasurer of Kirk-Sheppard & Co., Inc., a business advisory and consulting firm. From 1985 to 1989, he served as Chairman of the Democratic Party of the United States, and from 1983 to 1985 as its Treasurer. Mr. Kirk is a director of ITT Corporation, ITT Hartford Insurance Co. and Rayonier, Inc. He is a trustee of Stonehill College and St. Sebastian's School, Co- Chairman of the Commission on Presidential Debates, Chairman of the John F. Kennedy Library Foundation and Chairman of the National Democratic Institute for International Affairs.
W. Nicholas Thorndike, age 62, serves as a corporate director or trustee of a number of organizations, including Courier Corporation, Providence Journal Company, Eastern Utility Associates, Data General Corporation and The Putnam Funds. He also serves as a Trustee of Massachusetts General Hospital, having served as Chairman of the Board from 1987 to 1992 and President from 1992 to 1994. Until December 1988, he was Chairman and Managing Partner of Wellington Management Company (an investment advisor). In February 1994, he was appointed a successor trustee of certain private trusts in which he had no beneficial interest and concurrently became (until October 1994) Chairman of two privately-owned corporations controlled by such trusts. These corporations filed voluntary petitions under Chapter 11 of the Federal Bankruptcy Code in August 1994.
A. Robert Towbin, age 60, is a Managing Director of Unterberg Harris. From January 1994 to August 1995, he was President and Chief Executive Officer of the Russian American Enterprise Fund and, upon its merger with the Fund for Large Enterprises in Russia, Vice Chairman of the resulting U.S. Russia Investment Fund. From 1987 to 1994, Mr. Towbin was a Managing Director of Lehman Brothers. Prior to 1987, he was a director and Vice Chairman of L.F. Rothschild, Unterberg, Towbin Holdings, Inc. Mr. Towbin serves as a director of the Columbus New Millenium Fund, Gerber Scientific, Inc., Globalstar Telecommunications Limited and K&F Industries Inc., and is a former director of several other public companies. He is a member of the Securities Industry Association and is a director of numerous charitable and civic organizations.
Thomas P. D'Arcy, age 36, has served as Executive Vice President of Bradley since September 1995, having previously served as Senior Vice President of Bradley since 1992 and Vice President of Bradley since 1989. Prior to joining Bradley, Mr. D'Arcy was employed by RMB as a member of its property management and real estate brokerage departments for over eight years. Mr. D'Arcy is a member of the International Council of Shopping Centers and the Building Owners and Managers Association.
Richard L. Heuer, age 43, has served as Executive Vice President of Bradley since September 1995, having previously served as Senior Vice President of Bradley since late 1994. Prior to joining Bradley, Mr. Heuer was employed by the Welsh Companies, the independent property management company that was managing Bradley's Minnesota properties.
Marianne Dunn, age 36, was named Senior Vice President of Bradley in September 1995, having served as Vice President of Bradley since 1993 and as Investment Manager since 1990. Prior to joining Bradley, Ms. Dunn was employed by a lending institution as an Assistant Treasurer in the consumer lending department. Ms. Dunn is a member of the International Council of Shopping Centers.
Irving E. Lingo, Jr., age 43, joined Bradley as Chief Financial Officer in September 1995. Mr. Lingo was most recently employed as Chief Financial Officer of Lingerfelt Industrial Properties, a division of the Liberty Property Trust from 1993 to 1995. From 1991 to 1992, Mr. Lingo served as Vice
CSX Realty, a division of CSX Corporation. From 1983 to 1990, Mr. Lingo was Executive Vice President of Goodman Segar Hogan, Inc., a diversified Southeastern real estate firm. Prior to joining Goodman Segar Hogan, Mr. Lingo was associated with Ernst & Young for eight years. Mr. Lingo is a certified public accountant and member of the American Institute of Certified Public Accountants.
Carmella C. Brown, age 31, was named Treasurer of Bradley in 1995 and has served as Controller of Bradley since 1993, having previously served as Accounting Manager since 1990. She was also employed by RMB from 1990 to 1994, prior to which she was employed by KPMG Peat Marwick as a Senior Accountant. Ms. Brown is a member of the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants.
The Bradley Special Meeting will be held at , Boston, Massachusetts, on February , 1996, at 10:00 a.m., Eastern time. At the Bradley Special Meeting, holders of Bradley Common Stock will consider and vote upon a proposal to approve the Merger and the Merger Agreement. This proposal must be approved by the affirmative vote of the holders of a majority of the outstanding shares of Bradley Common Stock entitled to vote thereon. Holders of Bradley Common Stock are entitled to one vote per share.
Bradley has fixed the close of business on January , 1996 as the Bradley Record Date for determining holders entitled to notice of and to vote at the Bradley Special Meeting. Only holders of Bradley Common Stock at the close of business on the Bradley Record Date will be entitled to notice of and to vote at the Bradley Special Meeting. As of the Bradley Record Date, there were 11,226,624 shares of Bradley Common Stock issued and outstanding, of which approximately 64,000 shares (representing less than 1% of the outstanding shares of Bradley Common Stock) were owned beneficially by directors and executive officers of Bradley and their affiliates. As of the date of the Merger Agreement, all of the directors and executive officers of Bradley indicated that they presently intended to vote all shares of Bradley Common Stock which they own to approve the Merger and the Merger Agreement.
All shares of Bradley Common Stock represented by properly executed proxies will, unless such proxies have been previously revoked, be voted in accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF BRADLEY COMMON STOCK WILL BE VOTED IN FAVOR OF THE MERGER AND THE MERGER AGREEMENT. A stockholder who has given a proxy may revoke it at any time prior to its exercise by giving written notice thereof to the Secretary of Bradley, by signing and returning a later-dated proxy or by voting in person at the Bradley Special Meeting; however, mere attendance at the Bradley Special Meeting will not in and of itself have the effect of revoking the proxy.
Votes cast by proxy or in person at the Bradley Special Meeting will be tabulated by the inspector(s) of election appointed for the meeting and will determine whether or not a quorum is present. The presence in person or by properly executed proxy of the holders of a majority of the issued and outstanding shares of Bradley Common Stock entitled to vote at the Bradley Special Meeting is necessary to constitute a quorum at the Bradley Special Meeting. Abstentions and broker non-votes will be treated as shares that are present at the Bradley Special Meeting for purposes of determining whether a quorum exists. In order to be approved, the Merger and the Merger Agreement must receive the affirmative vote of the holders of a majority of the issued and outstanding shares of Bradley Common Stock entitled to vote on the Merger and the Merger Agreement. Abstentions and broker non-votes will have the effect of votes against the approval of the Merger and the Merger Agreement.
Bradley will bear its own cost of solicitation of proxies. Brokerage firms, fiduciaries, nominees and others will be reimbursed for their out-of-pocket expenses in forwarding proxy materials to beneficial owners of shares of Bradley Common Stock held in their names. In addition to the use of the mails, proxies may be solicited by directors, officers and regular employees of Bradley, who will not be specifically compensated for such services, by means of personal calls upon, or telephonic or telegraphic communications with, stockholders or their representatives. In addition, Georgeson & Co. has been engaged by Bradley to act as proxy solicitors and will receive a fee of $6,500 plus expenses.
THE BOARD OF DIRECTORS OF BRADLEY HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT BRADLEY STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. SEE "THE MERGER-- BACKGROUND OF THE MERGER" AND "--REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF BRADLEY."
The Tucker Special Meeting will be held at , Chicago, Illinois, on February , 1996, at 9:00 a.m., Central time. At the Tucker Special Meeting, holders of Tucker Common Stock will consider and vote upon a proposal to approve the Merger and the Merger Agreement. This proposal must be approved by the affirmative vote of the holders of two-thirds of the outstanding shares of Tucker Common Stock entitled to vote thereon. Holders of Tucker Common Stock are entitled to one vote per share.
The Tucker Board of Directors has fixed the close of business on January , 1996 as the Tucker Record Date for determining holders entitled to notice of and to vote at the Tucker Special Meeting. Only holders of Tucker Common Stock at the close of business on the Tucker Record Date will be entitled to notice of and to vote at the Tucker Special Meeting. As of the Tucker Record Date, there were 10,828,283 shares of Tucker Common Stock issued and outstanding, of which 112,583 shares (representing approximately 1% of the outstanding shares of Tucker Common Stock) were owned beneficially by directors and executive officers of Tucker and their affiliates. As of the date of the Merger Agreement, all of the directors and executive officers of Tucker indicated that they presently intended to vote all shares of Tucker Common Stock which they own to approve the Merger and the Merger Agreement.
All shares of Tucker Common Stock represented by properly executed proxies will, unless such proxies have been previously revoked, be voted in accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF TUCKER COMMON STOCK WILL BE VOTED IN FAVOR OF THE MERGER AND THE MERGER AGREEMENT. A stockholder who has given a proxy may revoke it at any time prior to its exercise by giving written notice thereof to the Secretary of Tucker, by signing and returning a later-dated proxy or by voting in person at the Tucker Special Meeting; however, mere attendance at the Tucker Special Meeting will not in and of itself have the effect of revoking the proxy.
Votes cast by proxy or in person at the Tucker Special Meeting will be tabulated by the inspector(s) of election appointed for the meeting and will determine whether or not a quorum is present. The presence in person or by properly executed proxy of the holders of a majority of the issued and outstanding shares of Tucker Common Stock entitled to vote at the Tucker Special Meeting is necessary to constitute a quorum at the Tucker Special Meeting. Abstentions and broker non-votes will be treated as shares that are present at the Tucker Special Meeting for purposes of determining whether a quorum exists. In order to be approved, the Merger and the Merger Agreement must receive the affirmative vote of the holders of two-thirds of the issued and outstanding shares of Tucker Common Stock entitled to vote on the Merger and the Merger Agreement. Abstentions and broker non-votes will have the effect of votes against the approval of the Merger and the Merger Agreement.
Tucker will bear its own cost of solicitation of proxies. Brokerage firms, fiduciaries, nominees and others will be reimbursed for their out-of-pocket expenses in forwarding proxy materials to beneficial owners of shares of Tucker Common Stock held in their names. In addition to the use of the mails, proxies may be solicited by directors, officers and regular employees of Tucker, who will not be specifically compensated for such services, by means of personal calls upon, or telephonic or telegraphic communications with, representatives. In addition, Georgeson & Co. has been engaged by Tucker to act as proxy solicitors and will receive a fee of $7,500 plus expenses.
THE BOARD OF DIRECTORS OF TUCKER HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT TUCKER STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT. SEE "THE MERGER--BACKGROUND OF THE MERGER," "--REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF TUCKER" AND "CONFLICTS OF INTEREST ARISING FROM BENEFITS TO AND OFFICERS AND DIRECTORS OF TUCKER."
At the Effective Time, the stockholders of Tucker will become stockholders of Bradley. As stockholders of Tucker, their rights are presently governed by the MGCL, the Tucker Charter and the Tucker Bylaws. As stockholders of Bradley, their rights will be governed by the MGCL, the Bradley Charter and the Bradley Bylaws. The Merger will not result in any change in the Bradley Charter or the Bradley Bylaws.
The following discussion summarizes certain differences between the rights of stockholders of Bradley and the rights of stockholders of Tucker. This summary does not purport to be complete and is subject to and qualified in its entirety by reference to the Tucker Charter, the Tucker Bylaws, the Bradley Charter, the Bradley Bylaws and the relevant provisions of the MGCL. Copies of the Tucker Charter, the Tucker Bylaws, the Bradley Charter and the Bradley Bylaws are incorporated by reference as exhibits to the Registration Statement.
AMENDMENT OF CHARTER AND BYLAWS
In conformity with the MGCL and the Bradley Charter, the Bradley Charter may be amended by the Board of Directors, with the approval of the holders of a majority of all of the votes entitled to be cast on the matter, except that the Bradley Charter permits the Board of Directors to amend the limitations on transfer and ownership of stock to the extent the Board deems appropriate to assure continued qualification as a REIT, without a vote of the stockholders. The Bradley Bylaws may be amended by the affirmative vote of the holders of a majority of the shares of Bradley Common Stock or by the Board of Directors without a vote of the stockholders.
In conformity with the MGCL, the Tucker Charter may be amended by the Board of Directors, with the approval of the holders of at least two-thirds of all of the votes entitled to be cast on the matter. The Tucker Bylaws may only be amended by the Board; provided, however, that the Bylaw provisions which (i) reserve to the independent directors the right to make all decisions regarding enforcement of certain agreements and (ii) set forth the number, tenure and qualification of the Directors, including the requirement that a majority of the Board be comprised of independent directors may only be amended by the affirmative vote of stockholders owning a majority of the votes cast at a stockholders' meeting at which a quorum is present.
Accordingly, stockholders of the Surviving Company will have a greater ability to amend the Bradley Charter and the Bradley Bylaws than Tucker stockholders currently have to amend the Tucker Charter and Tucker Bylaws.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
Under the MGCL, unless a corporation's charter provides for a lesser percentage (but not less than a majority), a proposed consolidation, merger, share exchange or transfer of all or substantially all of its assets must be approved by the stockholders of each corporation by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter. The Bradley Charter provides that such transactions may be approved by the affirmative vote of a majority of all the votes entitled to be cast on the matter. The Tucker Charter contains no such provision and therefore, such transactions require the approval of two-thirds of all votes entitled to be cast on the matter.
Thus, a lesser vote of the stockholders of the Surviving Company is required to authorize a proposed consolidation, merger, share exchange or transfer of all or substantially all of its assets than is currently required for Tucker stockholders.
The Bradley Bylaws provide that the number of directors of Bradley may be established by the Board of Directors but may not be fewer than the minimum number required by Maryland law. Directors of Bradley hold office until their successors are duly elected and qualified or until their death, resignation or removal by the affirmative vote of the holders of a majority of the outstanding shares of Bradley Common Stock. The Bradley Charter provides that a director may be removed from office only for cause and only by the affirmative vote of at least a majority of the votes entitled to be cast in the election of directors.
Pursuant to the terms of the Bradley Charter, the directors are divided into three classes with the term of office of one class expiring each year. As the term of each class expires, directors in that class will be elected for a term of three years and until their successors are duly elected and qualified.
The Tucker Bylaws provide that the number of directors of Tucker may be established by the Board of Directors but may not be fewer than the minimum number required by Maryland law nor more than nine. The Tucker Bylaws also require a majority of the Board of Directors to be independent. These provisions may only be amended by a vote of a majority of all of the votes cast at a stockholders meeting at which a quorum is present. Pursuant to the terms of the Tucker Charter, each director will hold office for a one-year term expiring at the annual meeting of stockholders to be held the following year and until his successor is duly elected and qualified.
The Tucker Charter provides that a director may be removed only for cause and only by the affirmative vote of at least two-thirds of the votes entitled to be cast for the election of directors. This provision, when coupled with the provision in the Bylaws authorizing the Board to fill vacant directorships, precludes stockholders from removing incumbent directors and filling the vacancies created by the removal with their own nominees except upon a substantial affirmative vote.
This staggered Board provision prevents stockholders from voting on the election of all directors at each annual meeting. The existence of a staggered Board may have the effect of delaying or deferring a change in control of the Surviving Company or removal of incumbent management.
The Bradley Bylaws provide that the chairman, if any, the president or a majority of the Board of Directors may call a special meeting of Bradley's stockholders. A special meeting may also be called by the secretary upon the written request of stockholders entitled to cast 25% or more of the votes entitled to be cast at such meeting.
The Tucker Bylaws provide that the chairman, if any, the president or the Board of Directors may call a special meeting of Tucker's stockholders. A special meeting may also be called by any stockholders who hold in the aggregate not less than 10% of the outstanding shares of Tucker Common Stock.
Because a higher percentage of stockholders is required to call a special meeting of Bradley's stockholders than is currently provided for in Tucker's By-laws, the Tucker stockholders, upon conversion of their shares into Bradley Common Stock in connection with the Merger, will have a lesser ability to call special meetings of stockholders.
Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange, or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 1% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate thereof are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding voting shares of the corporation and (ii) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder.
The Board of Directors of Tucker has exempted from these provisions of the MGCL any business combination with Kenneth Tucker and Richard Tucker (the "Tuckers") or any person acting in concert or as a group with the Tuckers. Bradley has not made any exemptions from these provisions of the MGCL other than for the Merger.
RESTRICTIONS ON THE OWNERSHIP, TRANSFER OR ISSUANCE OF SHARES
For a company to qualify as a REIT under the Code, among other things, not more than 50% in value of its outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (defined in the Code to include certain entities) during the last half of a taxable year (other than the first year), and such capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year) or during a proportionate part of a shorter taxable year. The Bradley Charter contains provisions, designed to ensure that Bradley remains a qualified REIT, that generally limit any holder from owning, or being deemed to own by virtue of the attribution provisions of the Code, shares of capital stock having a value that is more than 9.8% (the "Ownership Limit") of the value of all outstanding capital stock of Bradley. The Bradley Charter provides that each person (which includes natural persons, corporations, trusts, partnerships and other entities) shall be deemed to own stock that such person (i) actually owns, (ii) constructively owns after applying attribution rules specified in the Code, and (iii) has the right to acquire upon exercise of any options or warrants or conversion of any convertible securities held by such person. The fact that certain affiliated entities, such as separate mutual funds advised by the same investment adviser, may own more than 9.8% of the value of all outstanding capital stock in the aggregate will not of itself result in the Ownership Limit being exceeded, merely because a single person may be considered to be the "beneficial owner" of such stock for purposes of Section 13(g) of the Exchange Act. Bradley's Board of Directors may waive the Ownership Limit if evidence satisfactory to the Board of Directors and Bradley's tax counsel is presented that the changes in ownership will not then or in the future jeopardize Bradley's status as a REIT.
The Bradley Charter provides that any transfer of Bradley capital stock or any security convertible into capital stock that would create direct or indirect ownership of capital stock in excess of the Ownership Limit or that would result in the disqualification of Bradley as a REIT, including any transfer that results in Bradley being "closely held" within the meaning of Section 856(h) of the Code, shall be null and void, and the intended transferee will acquire no rights to the capital stock. Shares of capital stock owned, or deemed to be owned, or transferred to a stockholder in excess of the Ownership Limit will automatically be exchanged for shares of Excess Stock (as described below) that will be transferred, by operation of law, to a trustee (to be named by the Board of Directors of Bradley, but unaffiliated with Bradley) as trustee for the exclusive benefit (except to the extent described below) of one or more charitable beneficiaries designated from time to time by the Board of Directors. The Excess Stock held in trust will be considered as issued and outstanding shares of stock of Bradley, will be entitled to receive distributions declared by Bradley and may be voted by the trustee for the exclusive benefit of the charitable beneficiary. Any dividend or distribution paid to a purported transferee of Excess Stock prior to the discovery by Bradley that capital stock has been transferred in violation of the provisions of the Bradley Charter (a "prohibited transfer") shall be repaid to Bradley upon demand and thereupon paid over by Bradley to the trustee. Any votes of holders of shares of capital stock purported to have been cast by a purported transferee prior to such discovery of a prohibited transfer will be retroactively deemed not to have been cast, but said retroactive nullification of the vote of the relevant shares of capital stock shall not adversely affect the rights of any person (other than the purported transferee) who has relied in good faith upon the effectiveness of the matter that was the subject of the stockholder action as to which such votes were cast.
The Bradley Charter provides that Excess Stock is not transferable. Subject to the redemption rights of Bradley discussed below, the trustee of the trust may, however, sell and transfer the interest in the trust to a transferee in whose hands the interest in the trust representing Excess Stock would not be an interest in Excess Stock, and upon such sale the shares of Excess Stock represented by the sold interest shall be automatically exchanged for shares of capital stock of the class that was originally exchanged into such Excess Stock. Upon such sale, the trustee shall distribute to the purported transferee only so much of the sales proceeds as is not more than the price paid by the purported transferee in the prohibited transfer that resulted in the exchange of Excess Stock for the capital stock purported to have been transferred (or, if the purported transferee received such capital stock by gift, devise or otherwise without giving value for such stock, only an amount that does not exceed the market price for such stock, as determined in the manner set forth in the Bradley Charter, at the time of the prohibited transfer), and the trustee shall distribute all remaining proceeds from such sale to the charitable beneficiary.
In addition to the foregoing transfer restrictions, Bradley will have the right, for a period of 90 days during the time any Excess Stock is held by the trustee, to purchase all or any portion of the Excess Stock from the trustee for the lesser of the price paid for the capital stock by the original purported transferee or the market price of the capital stock on the date Bradley exercises its options to purchase. Upon any such purchase by Bradley, the trustee shall distribute the purchase price to the original purported transferee. The 90-day period begins on the date on which Bradley receives written notice of the prohibited transfer or other event resulting in the exchange of capital stock for Excess Stock.
If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any Excess Stock may be deemed, at the option of Bradley, to have acted as an agent on behalf of Bradley in acquiring the Excess Stock and to hold the Excess Stock on behalf of Bradley.
These restrictions will not preclude settlement of transactions on the NYSE or any other stock exchange on which capital stock of Bradley is listed. The foregoing restrictions on transferability and ownership also will not apply if Bradley's Board of Directors determines that it is no longer in the best interests of Bradley to continue to qualify as a REIT.
The Bradley Charter requires that, upon demand by Bradley, each stockholder and each proposed transferee of capital stock will disclose to Bradley in writing any information with respect to the direct, indirect and constructive ownership of shares of stock as Bradley's Board of Directors deems necessary to comply with the provisions of the Code applicable to REITs, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance.
The Tucker Charter contains ownership and transfer restrictions generally comparable to those in the Bradley Charter, except that (i) no person, other than the Tuckers, may own, or be deemed to own by virtue of the attribution provision of the Code, more than 7% of the value of the issued and outstanding stock of Tucker and (ii) the Tuckers and their affiliates may not own, directly or indirectly, more than 21% of the value of the issued and outstanding stock of Tucker.
The ownership restrictions provided by the Bradley Charter and the Tucker Charter may have the effect of delaying, deferring or preventing the acquisition of control of Bradley or Tucker. However, the Bradley Charter provides that the Ownership Limit shall not apply to shares of capital stock acquired pursuant to an all cash tender offer for all of the outstanding shares of capital stock in conformity with applicable laws where not less than two-thirds of the outstanding shares of capital stock (not including securities held by the tender offeror and/or its affiliates and associates) are tendered and accepted pursuant to such tender offer and where the tender offeror commits in such tender offer promptly after the tender offeror's purchase of the tendered stock, to give any non-tendering stockholders a reasonable opportunity to put their capital stock to the tender offeror at a price not less than that paid pursuant to the tender offer.
ADVANCE NOTICE FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The Bradley Bylaws provide that any stockholder of record wishing to nominate a director or have a stockholder proposal considered at an annual meeting (except for stockholder proposals included in Bradley's proxy materials pursuant to Rule 14a-8 under the Exchange Act) must provide written notice and certain supporting documentation to Bradley relating to the nomination or proposal not less than 75 days nor more than 150 days prior to the anniversary date of the prior year's annual meeting or special meeting in lieu thereof (the "Anniversary Date"). In the event that the annual meeting is called for a date more than seven calendar days before the Anniversary Date, stockholders generally must provide written notice within 20 calendar days after the date on which notice of the meeting is mailed to stockholders.
The purpose of requiring stockholders to give Bradley advance notice of nominations and other business is to afford the Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposed business and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders and make recommendations about the qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although Bradley's Bylaws do not give the Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of delaying or deferring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of the nominees or proposals might be harmful or beneficial to Bradley and its stockholders.
The Tucker Bylaws provide that any stockholder of record wishing to nominate a director or to make a stockholder proposal must deliver a notice and certain supporting documentation to the secretary or Tucker not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on Tucker's books, and of such beneficial owner, and (y) the class and number of shares of stock of Tucker which are owned beneficially and of record by such stockholder and such beneficial owner.
Because of the greater amount of time in which stockholder proposals or director nominations may be made under the Bradley Bylaws, the Tucker stockholders, upon conversion of their shares into Bradley Common Stock in connection with the Merger, will have a longer period of time in which to make such proposals or nominations.
The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror or by officers or directors who are employees of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror, or in respect of which the acquiror is able to exercise or direct the exercise of voting power except solely by virtue of a revocable proxy, would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and delivery of an "acquiring person statement"), may compel the corporation's board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
Unless the articles or bylaws provide otherwise, if voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement within ten (10) days following a control share acquisition then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. Moreover, unless the articles or bylaws provide otherwise, if voting rights for control shares are approved at a stockholders' meeting and the acquiror becomes entitled to exercise or direct the exercise of a majority or more of all voting power other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the articles or bylaws of the corporation.
Pursuant to the statute, Tucker has exempted control share acquisitions involving "Existing Holders," including the Tuckers, their affiliates and persons acting in concert with either of the Tuckers, that are not prohibited or restricted by the terms of the Tucker Charter, and the prohibition on voting control shares will not apply to the Tuckers, their affiliates and persons acting in concert with either of the Tuckers. An "Existing Holder" is defined in the Tucker Charter as: (i) any Person (as defined in the Tucker Charter) who is, or would be upon the exchange of TOP Units, the owner of Equity Stock (defined as either Tucker Common Stock or preferred stock of Tucker) in excess of the Ownership Limit set forth in the Tucker Charter, and (ii) any Person to whom an Existing Holder transfers ownership of equity stock causing such transferee to own equity stock in excess of the Ownership Limit. All other stockholders are subject to the terms of the control share acquisition statute.
The Bradley Bylaws contain a provision exempting any and all acquisitions of Bradley Common Stock from the control share provision of the MGCL, although there can be no assurance that the provision will not be amended or repealed in the future.
The MGCL and the Bradley Charter permit the dissolution of Bradley by (i) the affirmative resolution of a majority of the entire Board of Directors declaring such dissolution to be advisable and directing that the proposed dissolution be submitted for consideration at an annual or special meeting of stockholders, and (ii) upon proper notice, stockholder approval by the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter.
The dissolution of Tucker would require a similar resolution of Tucker's Board of Directors and approval by the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter.
Thus, a lesser vote of the stockholders of the Surviving Company is required to authorize the dissolution of the Surviving Company than is currently required for Tucker stockholders.
It is not expected that any matters other than those described in this Joint Proxy Statement/Prospectus will be brought before the Bradley Special Meeting or the Tucker Special Meeting. If any other matters are presented, however, it is the intention of the persons named in the Bradley proxy and Tucker proxy to vote the proxy in accordance with their best judgment.
Certain legal matters in connection with the Merger and the validity of the shares of Bradley Common Stock to be issued pursuant to the Merger will be passed upon for Bradley by Goodwin, Procter & Hoar (a partnership including professional corporations), Boston, Massachusetts. William B. King, whose professional corporation is a partner in Goodwin, Procter & Hoar, is Secretary of Bradley and is the beneficial owner of approximately 8,000 shares of Bradley Common Stock. Certain legal matters in connection with the Merger will be passed upon for Tucker by Mayer, Brown & Platt, Chicago, Illinois.
The financial statements of Bradley as of December 31, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1994 and the financial statement schedule as of December 31, 1994, incorporated by reference in this Joint Proxy Statement/Prospectus have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as indicated in their reports with respect thereto, and are incorporated by reference herein in reliance upon the authority of said firm as experts in accounting and auditing.
The financial statements of Tucker as of December 31, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1994 and the financial statement schedule as of December 31, 1994, incorporated by reference in this Joint Proxy Statement/Prospectus have been audited by Coopers & Lybrand L.L.P., independent certified public accountants, as indicated in their reports with respect thereto, and are incorporated by reference herein in reliance upon the authority of said firm as experts in accounting and auditing.
Any Bradley stockholder who wishes to submit a proposal for presentation at Bradley's 1996 Annual Meeting of Stockholders must have submitted the proposal to Bradley Real Estate, Inc., 699 Boylston Street, Boston, Massachusetts 02116, Attention: Secretary. Such proposal must have been received not later than November 30, 1995 for inclusion, if appropriate, in Bradley's proxy statement and form of proxy relating to its 1996 Annual Meeting.
Any Tucker stockholder who wishes to submit a proposal for presentation at Tucker's 1996 Annual Meeting of Stockholders (which would be held only if the Merger has not been consummated prior to the date the meeting is to be held) must submit the proposal to Tucker Properties Corporation, 40 Skokie Boulevard, Suite 600, Northbrook, Illinois 60062, Attention: Shareholder Relations. Such proposal must be received not later than January 31, 1996 for inclusion, if appropriate, in Tucker's proxy statement and form of proxy relating to its 1996 Annual Meeting.
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 30, 1995
EXHIBIT A-- Form of Amended and Restated Agreement of Limited Partnership of Bradley Operating Limited Partnership Agreement
EXHIBIT B-1-- Consents of Limited Partner of Tucker Operating Limited
EXHIBIT B-2-- Consent of General Partner of Tucker Operating Limited
EXHIBIT B-3-- Acknowledgment of Bradley Real Estate, Inc. to the Amended and Restated Agreement of Limited Partnership of Tucker Operating
EXHIBIT D-- Form of Affiliate Letter
EXHIBIT E-- Form of Tenant's Estoppel Certificate
EXHIBIT F-- Purchase and Sale of Securities
EXHIBIT G-- Tucker Properties Corporation Severance Pay Plan
EXHIBIT H-1-- Form of First Amendment to Indemnification Agreement
EXHIBIT H-2-- Acknowledgment of Bradley Real Estate, Inc. to the First Amendment of the Indemnification Agreements
EXHIBIT I-- Form of Seventh Amendment to Agreement of Limited Partnership of Tucker Operating Limited Partnership Agreement
EXHIBIT K-- Consulting Agreement with Kenneth Tucker
Schedule 1.7 Contracts to be Released
Schedule 7.12 Tucker's Directors' and Officers' Insurance Coverage
Schedule 8.3(f) Leases and REA Agreements Requiring Estoppel Certificates
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as of October 30, 1995, between Bradley Real Estate, Inc., a Maryland corporation ("Bradley"), and Tucker Properties Corporation, a Maryland corporation ("Tucker").
A. The Board of Directors of Bradley and the Board of Directors of Tucker each have determined that a business combination between Bradley and Tucker is in the best interests of their respective companies and stockholders and presents an opportunity for their respective companies to achieve long-term strategic and financial benefits, and accordingly have agreed to effect the merger provided for herein upon the terms and subject to the conditions set forth herein.
B. It is intended that the merger provided for herein, for federal income tax purposes, shall qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), and for financial accounting purposes shall be accounted for as a "purchase."
C. Bradley and Tucker have each received a fairness opinion from their respective financial advisors relating to the transactions contemplated hereby as more fully described herein.
D. Bradley and Tucker desire to make certain representations, warranties and agreements in connection with the merger.
NOW, THEREFORE, in consideration of the foregoing, and of the representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows:
1. The Merger and Amendment of Tucker Partnership Agreement.
1.1 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3 hereof), Tucker shall be merged with and into Bradley in accordance with this Agreement and the separate corporate existence of Tucker shall thereupon cease (the "Merger"). Bradley shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation"). The Merger shall have the effects specified in Section 3-114 of the Maryland General Corporation Law (the "MGCL").
1.2 The Closing. Subject to the terms and conditions of this Agreement, the closing of the Merger (the "Closing") shall take place (a) at the offices of Goodwin, Procter & Hoar, Exchange Place, Boston, Massachusetts, at 9:00 a.m., local time, on the first business day immediately following the day on which the last of the conditions set forth in Article 8 shall be fulfilled or waived in accordance herewith or (b) at such other time, date or place as the parties hereto may agree. The date on which the Closing occurs is hereinafter referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in Article 8 shall have been fulfilled or waived in accordance herewith and this Agreement shall not have been terminated as provided in Article 9, the parties hereto shall cause Articles of Merger satisfying the requirements of the MGCL to be properly executed, verified and delivered for filing in accordance with the MGCL on the Closing Date. The Merger shall become effective upon the acceptance for record of the Articles of Merger by the State Department of Assessments and Taxation of Maryland in accordance with the MGCL or at such later time which the parties hereto shall have agreed upon and designated in such filing in accordance with applicable law as the effective time of the Merger (the "Effective Time").
1.4 Amendment of Tucker Operating Limited Partnership Agreement. As a result of the consummation of the Merger, Bradley will acquire the general partnership interests and those limited partnership units ("TOP Units") in the Tucker Operating Limited Partnership, a Delaware limited partnership ("TOP"), which are currently owned by Tucker. In connection with the consummation of the Merger, the Limited Partnership Agreement of TOP (the "TOP Partnership Agreement") will be amended and restated substantially in the form of Exhibit A hereto. The execution of such agreement by Tucker will be authorized by a majority of Tucker's independent directors who are not affiliates of any of the Limited Partners (as such term is defined in the TOP Partnership Agreement). Concurrently with the execution of this Agreement, Tucker and Limited Partners of TOP holding at least 386,984 TOP Units will execute an agreement in the form of Exhibit B hereto consenting to, among other things, the Merger and the amendment and restatement, effective as of the Effective Time, of the TOP Partnership Agreement.
1.5 Transfer of Securities of Tucker Management Corporation. In connection with the consummation of the Merger, a designee or designees of Bradley will acquire from Kenneth Tucker and Richard Tucker (collectively, the "Tuckers") all of the outstanding securities of Tucker Management Corporation ("TMC") (other than securities owned by TOP). Concurrently with the execution of this Agreement, the Tuckers will execute an agreement in the form of Exhibit F hereto agreeing, among other things, to such transfer, effective as of the Effective Time.
1.6 Amendments of Governing Documents of Tucker Subsidiaries. In connection with the Closing, the Articles of Incorporation, Bylaws, partnership agreements and equivalent documents for the Tucker Subsidiaries (as defined in Section 5.1 hereof) will be amended to change the name of the entity (and, six months after the Effective Time, no such entity shall use the name "Tucker") and to make certain other changes to such documents in order to reflect the Merger and the transactions contemplated by this Agreement. Tucker and the Tucker Subsidiaries will take all actions which are necessary to effectuate such amendments and will use their best efforts to cause all of the stockholders in any Tucker Subsidiary and all of the partners in any Tucker Subsidiary to approve such amendments and to take such other actions to effectuate such amendments and the transactions contemplated by this Agreement as may be reasonably requested by Bradley.
1.7 Release and Termination. Concurrently with the execution of this Agreement, the parties listed on Schedule 1.7 hereto will execute releases providing for, among other things, the termination of all contracts and agreements listed on Schedule 1.7 hereto. Pursuant to such releases, all such contracts shall be terminated and released, effective as of the Effective Time, and the parties to such contracts agree to waive any and all rights they may have under such contracts or agreements.
1.8 Severance Pay Plan and Agreements. In connection with the execution of this Agreement, Tucker has adopted the Tucker Properties Corporation Severance Pay Plan (the "Severance Plan") for its employees, as set forth in Exhibit G hereto, and, prior to the Effective Time, Tucker will use its reasonable best efforts to enter into individual employment or severance agreements (the "Severance Agreements") with the following employees: Kenneth Tucker, Richard Tucker, Harold Eisenberg, Norris Eber, Larry Tucker and William Karnes, in the respective forms set forth in Exhibit J hereto and a consulting agreement with Kenneth Tucker in the form set forth in Exhibit K hereto. Bradley agrees that after the Effective Time, it will assume and be bound by the terms of the Severance Plan and Severance Agreements. Prior to the Effective Time, and as soon as practicable after this Agreement is signed, Tucker shall supply Bradley with the calculation of the actual severance payments that would be payable pursuant to the Severance Agreements assuming the covered individual's employment terminated in a Covered Termination (as defined in the Severance Agreements).
2. Charter and Bylaws of the Surviving Corporation.
2.1 Charter. The Charter (as defined in the MGCL) of Bradley in effect immediately prior to the Effective Time shall be the Charter of the Surviving Corporation, until duly amended in accordance with applicable law.
2.2 Bylaws. The Bylaws of Bradley in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, until duly amended in accordance with applicable law.
3. Directors and Officers of the Surviving Corporation.
3.1 Directors. The directors of Bradley immediately prior to the Effective Time shall be the directors of the Surviving Corporation as of the Effective Time.
3.2 Officers. The officers of Bradley immediately prior to the Effective Time shall be the officers of the Surviving Corporation as of the Effective Time.
4.1 Conversion of the Tucker Stock.
(a) At the Effective Time, each share of the Common Stock, $.01 par value per share, of Bradley ("Bradley Common Stock") outstanding immediately prior to the Effective Time shall remain outstanding and shall represent one share of the Common Stock, $.01 par value per share, of the Surviving Corporation.
(b) At the Effective Time, each share of Common Stock, par value $.001 per share, of Tucker (the "Tucker Common Stock") issued and outstanding immediately prior to the Effective Time (other than those shares of Tucker Common Stock to be canceled pursuant to Section 4.1(d)) shall, by virtue of the Merger and without any action on the part of Tucker, Bradley or the holders of any of the securities of any of these corporations, be converted into the right to receive 0.665 of a share of Bradley Common Stock; provided, however, that in the event that at the Effective Time the Closing Price (as such term is hereinafter defined) of a share of Bradley Common Stock is less than $16 per share but more than $15.50 per share, then each share of Tucker Common Stock will be converted into the right to receive that percentage of a share of Bradley Common Stock (determined to the nearest one-thousandth of a share) as is determined by dividing $10.64 by the Closing Price; and provided, further, that in the event that at the Effective Time, the Closing Price of a share of Bradley Common Stock is $15.50 per share or less, then each share of Tucker Common Stock will be converted into the right to receive 0.686 of a share of Bradley Common Stock (the applicable percentage of a share of Bradley Common Stock to be issued upon such conversion is hereinafter referred to as the "Exchange Ratio"); and provided further that if between the date of this Agreement and the Effective Time the outstanding shares of Bradley Common Stock shall have been changed into a different number of shares or a different class or series, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Exchange Ratio shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares. For purposes of this Agreement, the term "Closing Price" shall mean the average per share closing price of Bradley Common Stock as reported on the New York Stock Exchange ("NYSE") over the twenty (20) trading days immediately preceding the fifth (5th) day prior to the date of the Closing.
(c) As a result of the Merger and without any action on the part of the holder thereof, at the Effective Time, all shares of Tucker Common Stock shall cease to be outstanding, shall be canceled and retired and shall cease to exist and each holder of a certificate (a "Certificate") representing any shares of Tucker Common Stock shall thereafter cease to have any rights with respect to such shares of Tucker Common Stock, except the right to receive, without interest, shares of Bradley Common Stock and cash in lieu of fractional shares of Bradley Common Stock in accordance with Sections 4.1(b) and 4.2(e) upon the surrender of such Certificate.
(d) Each share of Tucker Common Stock issued and held in Tucker's treasury at the Effective Time, if any, by virtue of the Merger, shall cease to be outstanding, shall be canceled and retired and shall cease to exist and no payment of any consideration shall be made with respect thereto.
(e) At the Effective Time, Tucker's obligations with respect to each stock option set forth in Section 5.3 of the Tucker Disclosure Letter (as defined in Article 5 hereof) that will not automatically terminate by its terms at the Effective Time (the "Existing Tucker Options") shall be assumed by Bradley (the "Assumed Options"), subject to the provisions and amendments described in this Section. The Assumed Options shall continue to have, and be subject to, the same terms and conditions as set forth in the stock option plans and agreements (as in effect immediately prior to the Effective Time) pursuant to which the Existing Tucker Options were issued, except that (i) all references to Tucker shall be deemed to be references to Bradley, (ii) each option shall be exercisable for that number of whole shares of Bradley Common Stock equal to the product of the number of shares of Tucker Common Stock covered by such option immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded to the nearest whole number of shares of Bradley Common Stock and (iii) the exercise price per share of Bradley Common Stock under such option shall be equal to the exercise price per share of Tucker Common Stock under the Existing Tucker Option divided by the Exchange Ratio and rounded to the nearest cent. The adjustment provided herein with respect to any Existing Tucker Options that are "incentive stock options" (as defined in Section 422 of the Code) shall be and is intended to be effected in a manner that is consistent with Section 424(a) of the Code. Bradley shall (i) reserve for issuance the number of shares of Bradley Common Stock that will become issuable upon the exercise of such Assumed Options pursuant to this Section 4.1(e) and (ii) promptly after the Effective Time issue to each holder of an outstanding Existing Tucker Option a document evidencing the assumption by Bradley of Tucker's obligations with respect thereto under this Section. Nothing in this Section or this Agreement shall affect the schedule of vesting as set forth in Section 5.3 of the Tucker Disclosure Letter with respect to Tucker Stock Options to be assumed by Bradley as provided in this Section.
4.2 Exchange of Certificates Representing Tucker Common Stock.
(a) As of the Effective Time, Bradley shall deposit, or shall cause to be deposited, with an exchange agent selected by Bradley on or prior to the Effective Time (the "Exchange Agent"), for the benefit of the holders of shares of Tucker Common Stock, for exchange in accordance with this Article 4, certificates representing the shares of Bradley Common Stock and the cash in lieu of fractional shares (such cash and certificates for shares of Bradley Common Stock being hereinafter referred to as the "Exchange Fund") to be issued pursuant to Section 4.1 and paid pursuant to this Section 4.2 in exchange for outstanding shares of Tucker Common Stock.
(b) Promptly after the Effective Time, Bradley shall cause the Exchange Agent to mail to each holder of record of a Certificate or 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 delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Bradley may reasonably specify and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Bradley Common Stock and cash in lieu of fractional shares. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor (x) a certificate representing the number of whole shares of Bradley Common Stock to which such holder shall be entitled, and (y) a check representing the amount of cash in lieu of fractional shares, if any, plus the amount of any dividends, or distributions, if any, pursuant to paragraph (c) below, after giving effect to any required withholding tax, and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on the cash in lieu of fractional shares or on the dividend or distribution, if any, payable to holders of Certificates pursuant to this Section 4.2. In the event of a transfer of ownership of Tucker Common Stock which is not registered in the transfer records of Tucker, a Certificate representing the proper number of shares of Bradley Common Stock, together with a check for the cash to be paid in lieu of fractional shares plus, to the extent applicable, the amount of any dividend or distribution, if any, payable pursuant to may be issued to such a transferee if the Certificate representing shares of such Tucker Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.
(c) Notwithstanding any other provisions of this Agreement, no dividends or other distributions on Bradley Common Stock shall be paid with respect to any shares of Tucker Common Stock represented by a Certificate until such Certificate is surrendered for exchange as provided herein; provided, however, that subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the holder of the certificates representing whole shares of Bradley Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole shares of Bradley Common Stock and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) 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 subsequent to surrender payable with respect to such whole shares of Bradley Common Stock, less the amount of any withholding taxes which may be required thereon.
(d) At and after the Effective Time, there shall be no transfers on the stock transfer books of Tucker of the shares of Tucker Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged for certificates for shares of Bradley Common Stock and cash in lieu of fractional shares, if any, in accordance with this Section 4.2. Certificates surrendered for exchange by any person constituting an "affiliate" of Tucker for purposes of Rule 145, as such rule may be amended from time to time ("Rule 145"), of the rules and regulations promulgated under the Securities Act of 1933, as amended (the "Securities Act"), shall not be exchanged until Bradley has received an Affiliate Letter in the form of Exhibit D attached hereto, from such person as provided in Section 7.10.
(e) No fractional shares of Bradley Common Stock shall be issued pursuant hereto. In lieu of the issuance of any fractional share of Bradley Common Stock pursuant to Section 4.1(b), each holder of Tucker Common Stock upon surrender of a Certificate for exchange shall be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (i) the Closing Price by (ii) the fraction of a share of Bradley Common Stock which such holder would otherwise be entitled to receive under this Article 4.
4.3 Return of Exchange Fund. Any portion of the Exchange Fund (including the proceeds of any investments thereof and any shares of Bradley Common Stock) that remains unclaimed by the former stockholders of Tucker one year after the Effective Time shall be delivered to the Surviving Corporation. Any former stockholders of Tucker who have not theretofore complied with this Article 4 shall thereafter look only to the Surviving Corporation for payment of their shares of Bradley Common Stock and cash in lieu of fractional shares (plus dividends and distributions to the extent set forth in Section 4.2(c), if any), as determined pursuant to this Agreement, without any interest thereon. None of Bradley, Tucker, the Exchange Agent or any other person shall be liable to any former holder of shares of Tucker Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. 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 required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent or the Surviving Corporation will issue in exchange for such lost, stolen or destroyed Certificate the shares of Bradley Common Stock and cash in lieu of fractional shares (plus, to the extent applicable, dividends and distributions payable pursuant to Section 4.2(c)).
5. Representations and Warranties of Tucker.
Except as set forth in the disclosure letter delivered at or prior to the execution hereof to Bradley, which shall refer to the relevant Sections of this Agreement (the "Tucker Disclosure Letter"), Tucker represents and warrants to Bradley as follows:
5.1 Existence; Good Standing; Authority; Compliance With Law. Tucker is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Maryland. Tucker is duly licensed or qualified to do business as a foreign corporation and is in good standing under the laws of any other state of the United States in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so licensed or qualified would not have a material adverse effect on the business, results of operations or financial condition of Tucker and the Tucker Subsidiaries (as defined below) taken as a whole (a "Tucker Material Adverse Effect"). Tucker has all requisite corporate power and authority to own, operate, lease and encumber its properties and carry on its business as now conducted. Each of the Tucker Subsidiaries is a corporation or partnership duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the corporate or partnership power and authority to own its properties and to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in good standing would not have a Tucker Material Adverse Effect. Neither Tucker nor any of the Tucker Subsidiaries is in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Tucker or any Tucker Subsidiary or any of their respective properties or assets is subject, where such violation would have a Tucker Material Adverse Effect. Tucker and the Tucker Subsidiaries have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such license, permit or authorization or to take any such action would have a Tucker Material Adverse Effect. Copies of the Charter or other equivalent documents, Bylaws, organizational documents and partnership and joint venture agreements (and in each such case, all amendments thereto) of Tucker and each of the Tucker Subsidiaries are listed in Section 5.1 of the Tucker Disclosure Letter, and the copies of such documents, which have previously been delivered or made available to Bradley and its counsel, are true and correct. For the purposes of this Agreement, the term "Tucker Subsidiary" shall include any of the entities listed under such heading in Section 5.4 of the Tucker Disclosure Letter.
5.2 Authorization, Validity and Effect of Agreements. Each of Tucker and the Tucker Subsidiaries has the requisite power and authority to enter into the transactions contemplated hereby and to execute and deliver this Agreement and the agreements and documents listed in Schedule 5.2 to this Agreement (the "Ancillary Agreements") to which it is a party. The Board of Directors of Tucker has, by resolutions duly adopted by unanimous vote, approved this Agreement, the Merger and the transactions contemplated by this Agreement and has agreed to recommend that the holders of Tucker Common Stock adopt and approve this Agreement, the Merger and the transactions contemplated by this Agreement at the Tucker stockholders' meeting which will be held in accordance with the provisions of Section 7.3. In connection with the foregoing, the Board of Directors of Tucker has taken such actions and votes as are necessary on its part to render the provisions of the Control Share Acquisition Statute, the Business Combination Statute and all other applicable takeover statutes of the MGCL and any other applicable takeover statutes of any other state, inapplicable to this Agreement, the Merger and the transactions contemplated by this Agreement. As of the date hereof, all of the directors and executive officers of Tucker have indicated that they presently intend to vote all shares of Tucker Common Stock which they own to approve this Agreement, the Merger, and the transactions contemplated by this Agreement at the Tucker stockholders meeting which will be held in accordance with the provisions of Section 7.3. Subject only to the approval of this Agreement and the transactions contemplated hereby by the holders of two-thirds of the outstanding shares of Tucker Common Stock, the execution by Tucker and the Tucker Subsidiaries of this Agreement, the Ancillary Agreements to which they are parties and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements has been duly authorized by all requisite corporate or partnership action on the part of such entities. This Agreement constitutes, and the Ancillary Agreements to which they are parties (when executed and delivered pursuant hereto) will constitute, the valid and legally binding obligations of Tucker and the Tucker Subsidiaries, enforceable against Tucker and each of the Tucker Subsidiaries in accordance with their respective terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
(a) The authorized capital stock of Tucker consists of 90,000,000 shares of Tucker Common Stock and 10,000,000 shares of preferred stock, $.001 par value per share (the "Tucker Preferred Stock"). As of the date hereof, there are 10,828,283 shares of Tucker Common Stock issued and outstanding, and no shares of Tucker Preferred Stock are issued and outstanding. All such issued and outstanding shares of Tucker Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Except for the TOP Units and the Existing Tucker Options, Tucker has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of Tucker on any matter. Except for the TOP Units and the Existing Tucker Options (all of which have been issued under the Tucker Properties Corporation 1993 Share Option Plan (the "Tucker Stock Option Plan")), there are not at the date of this Agreement any existing options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Tucker to issue, transfer or sell any shares of capital stock of Tucker. Section 5.3 of the Tucker Disclosure Letter sets forth a full list of the Existing Tucker Options, including the name of the person to whom such stock options have been granted, the number of shares subject to each option, the per share exercise price for each option and the vesting schedule for each option. Except as set forth in Section 5.3 of the Tucker Disclosure Letter, the vesting schedule of all Existing Tucker Options shall not be changed or affected by the execution of this Agreement or the Ancillary Agreements or the consummation of the transactions contemplated by this Agreement or the Ancillary Agreements. Pursuant to the terms of the Tucker Stock Option Plan, at the Effective Time, all Existing Tucker Options will be assumed by Bradley in accordance with the provisions of Section 4.1(e). Except as set forth in Section 5.3 of the Tucker Disclosure Letter, there are no agreements or understandings to which Tucker or any Tucker Subsidiary is a party with respect to the voting of any shares of Tucker Common Stock or which restrict the transfer of any such shares, nor does Tucker have knowledge of any such agreements or understandings with respect to the voting of any such shares or which restrict the transfer of any such shares. Except for TOP Units held by Limited Partners, there are no outstanding contractual obligations of Tucker or any Tucker Subsidiary to repurchase, redeem or otherwise acquire any shares of capital stock, partnership interests or any other securities of Tucker or any Tucker Subsidiary. Except as set forth in Section 5.3 of the Tucker Disclosure Letter, neither Tucker nor any Tucker Subsidiary is under any obligation, contingent or otherwise, by reason of any agreement to register any of their securities under the Securities Act. After the Effective Time, except to the extent set forth in Section 4.1(e), the Surviving Corporation will have no obligation to issue, transfer or sell any shares of capital stock or other equity interest of Tucker or the Surviving Corporation pursuant to any Tucker Stock Option Plan or any other Tucker Benefit Plan (as defined in Section 5.16 hereof).
(b) The sole general partner of TOP is Tucker. As of the date hereof, there are issued and outstanding 11,287,100 TOP Units, 10,828,283 of which are owned by Tucker and the remainder of which are owned by the persons and in the amounts set forth in Section 5.3 of the Tucker Disclosure Letter. All such issued and outstanding TOP Units are duly authorized, validly issued, fully paid, and free of preemptive rights. The TOP Units owned by Tucker and, to the best knowledge of Tucker, the TOP Units owned by the Limited Partners, are subject only to the restrictions on transfer set forth in the TOP Partnership Agreement and those imposed by applicable securities laws. Except as set forth in Section 5.3 of the Tucker Disclosure Letter, TOP has not issued or granted, and is not a party to, any commitments of any kind relating to, or any agreements or understandings with respect to, TOP Units or any other interest in TOP or any securities convertible into TOP Units or such interests.
(c) TOP and Tucker Financing Corporation, a Delaware corporation ("TFC"), are the only partners in Tucker Financing Partnership, a Delaware partnership ("TFP"). As of the date hereof and at all times during its existence, TFC is and has been a wholly-owned subsidiary of Tucker, which owns all of the 100 issued and outstanding shares of common stock, par value $.01 per share, of TFC. As of the date hereof, 99% of the issued and outstanding units of partnership interests in TFP ("TFP Units"), are held by TOP and 1% are held by TFC. All such issued and outstanding TFP Units are duly authorized, validly issued, fully paid, and free of preemptive rights. The TFP Units are subject only to the restrictions on transfer set forth in the TOP Partnership Agreement, the partnership agreement of TFP and that certain Indenture, dated as of June 1, 1994, by and between TFP, Bankers Trust Company of California, N.A. and Bankers Trust (the "Indenture") and those imposed by applicable securities laws. TFP has not otherwise issued or granted, and is not a party to, any commitments of any kind relating to, or any agreements or understandings with respect to, TFP Units or any other interest in TFP or any securities convertible into TFP Units or such interests. TFP has financed all of the properties which it owns through a transaction which, as of the date hereof, qualifies as a real estate mortgage investment conduit (a "REMIC") under Section 860D of the Code. As part of the REMIC, TFP issued a $100,000,000 interest-bearing promissory note to a certain trust, which is governed by the Indenture. As of the date hereof, TFP has complied with all of the covenants contained in Section 1008 and Section 1009 of the Indenture and no Default or Event of Default (as defined in the Indenture), or any event the occurrence of which, with notice or lapse of time, will become a Default or Event of Default under Article 5 of the Indenture, has occurred or is occurring. The execution of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements will not violate or result in a violation of the covenants in Section 1008 and Section 1009 of the Indenture (subject to the receipt of the consent of the Indenture Trustee) and will not result in a default or Event of Default (as defined in the Indenture), or any event the occurrence of which, with notice or lapse of time, will become a Default or Event of Default under Article 5 of the Indenture. TFP is not subject to regulation under the Public Utility Holding Company Act of 1935 or the Federal Power Act and neither TFP or TOP is required to be registered as an "investment company" within the meaning of the Investment Company Act of 1940. The beneficial ownership of this trust is represented by 413 certificates in six different classes (A, B, C, D, E and R). The Class A, Class B, Class C, Class D and Class E certificates qualify for treatment as "regular interests" in the REMIC. The Class R certificates represent the sole class of "residual interests" in the REMIC.
5.4 Subsidiaries. Except as set forth in Section 5.4 of the Tucker Disclosure Letter, Tucker owns directly or indirectly each of the outstanding shares of capital stock or all of the partnership or other equity interests of each of the Tucker Subsidiaries. Each of the outstanding shares of capital stock in each of the Tucker Subsidiaries having corporate form is duly authorized, validly issued, fully paid and nonassessable. Except as set forth in Section 5.4 of the Tucker Disclosure Letter, each of the outstanding shares of capital stock of, or partnership or other equity interests in, each of the Tucker Subsidiaries is owned, directly or indirectly, by Tucker free and clear of all liens, pledges, security interests, claims or other encumbrances. The following information for each Tucker Subsidiary is set forth in Section 5.4 of the Tucker Disclosure Letter: (i) its name and jurisdiction of incorporation or organization; (ii) its authorized capital stock or share capital or partnership or other interests; (iii) the name of each stockholder or owner of a partnership or other equity interest and the number of issued and outstanding shares of capital stock or share capital or percentage ownership for non-corporate entities held by it and (iv) the name of the general partners, if applicable. TFC and Tucker Properties Investment, Inc. are the only Tucker Subsidiaries which are "qualified REIT subsidiaries" as such term is defined under Section 856(i) of the Code.
5.5 Other Interests. Except for interests in the Tucker Subsidiaries as set forth in Section 5.4 of the Tucker Disclosure Letter, neither Tucker nor any Tucker Subsidiary owns directly or indirectly any interest or investment (whether equity or debt) in any corporation, partnership, joint venture, trust or other entity (other than investments in short-term investment securities). With respect to the interests set forth in Section 5.4 of the Tucker Disclosure Letter, Tucker or the applicable Tucker Subsidiary, as the case may be, is a partner or stockholder in good standing, owns such interests free and clear of all liens, pledges, security interests, claims, options or other encumbrances, is not in breach of any provision of any agreement, document or governing such entity's rights in or to the interests owned or held, all of which agreements, documents and contracts are set forth in Section 5.4 of the Tucker Disclosure Letter, and have not been modified or amended since their description therein, and are in full force and effect and, to the best of the knowledge of Tucker, the other parties to such agreements, documents or contracts are not in breach of any of their respective obligations under such agreements, documents or contracts, and to the best of the knowledge of Tucker, if such other entities were included within the definition of Tucker Subsidiaries for purposes of this Agreement, there would be no exceptions or breaches to the representations and warranties made in this Article for Tucker Subsidiaries.
5.6 No Violation. Except as set forth in Section 5.6 of the Tucker Disclosure Letter, neither the execution and delivery by Tucker and the Tucker Subsidiaries of this Agreement or the Ancillary Agreements nor the consummation by Tucker and the Tucker Subsidiaries of the transactions contemplated by this Agreement and the Ancillary Agreements in accordance with their terms, will: (i) conflict with or result in a breach of any provisions of the Charter, Bylaws, organizational documents, partnership agreements, or joint venture agreements of Tucker or any Tucker Subsidiary; (ii) result in a breach or violation of, a default under, or the triggering of any payment or other material obligations pursuant to, or accelerate vesting under, the Tucker Stock Option Plan, or any grant or award made thereunder; (iii) violate, or 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 or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties of Tucker or the Tucker Subsidiaries under, or result in being declared void, voidable or without further binding effect, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust or any license, franchise, permit, lease, contract, agreement or other instrument, commitment or obligation to which Tucker or any of the Tucker Subsidiaries is a party, or by which Tucker or any of the Tucker Subsidiaries or any of their properties is bound or affected, except for any of the foregoing matters which, individually or in the aggregate, would not have a Tucker Material Adverse Effect; or (iv) other than the filings provided for in Article 1 of this Agreement, or required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act or applicable state securities and "Blue Sky" laws (collectively, the "Regulatory Filings"), require any consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority, except where the failure to obtain any such consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority would not have a Tucker Material Adverse Effect.
5.7 SEC Documents. A complete list of the registration statements of Tucker filed with the United States Securities and Exchange Commission ("SEC") in connection with Tucker's initial public offering of Tucker Common Stock, and all exhibits, amendments and supplements thereto (the "Tucker Registration Statement"), and each (A) registration statement, (B) annual report on Form 10- K, (C) quarterly report on Form 10-Q, (D) current report on Form 8-K, (E) proxy statement or information statement, and (F) other reports filed with the SEC pursuant to the requirements of the Exchange Act (in all such cases, including all exhibits, amendments and supplements thereto), prepared by Tucker or any of the Tucker Subsidiaries or relating to properties of Tucker or the Tucker Subsidiaries (including registration statements covering mortgage pass-through certificates) since the effective date of the Tucker Registration Statement, is set forth in Section 5.7 of the Tucker Disclosure Letter, and copies of such documents, in the form (including exhibits and any amendments thereto) filed with the SEC, have previously been provided or made available to Bradley or its counsel (collectively, the "Tucker Reports"). The Tucker Reports were filed with the SEC in a timely manner and constitute all forms, reports and documents required to be filed by Tucker under the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder (the "Securities Laws"). As of their respective dates, the Tucker Reports (i) complied as to form in all material respects with the applicable requirements of the Securities Laws and (ii) 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 made therein, in the light of the circumstances under which they were made, not misleading. Each of the consolidated balance sheets of Tucker included in or incorporated by reference into the Tucker Reports (including the related notes and schedules) fairly presents the consolidated financial position of Tucker and the Tucker Subsidiaries as of its date and each of the consolidated statements of income, retained earnings and cash flows of Tucker included in or incorporated by reference into the Tucker Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings or cash flows, as the case may be, of Tucker and the Tucker Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein and except, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC. Except as and to the extent set forth on the consolidated balance sheet of Tucker and the Tucker Subsidiaries at December 31, 1994, including all notes thereto, or as set forth in the Tucker Reports or in Section 5.7 of the Tucker Disclosure Letter, neither Tucker nor any of the Tucker Subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Tucker or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except liabilities arising in the ordinary course of business since such date and liabilities for expenses of attorneys, accountants and investment bankers incurred in connection with the Merger.
5.8 Litigation. There are (i) no continuing orders, injunctions or decrees of any court, arbitrator or governmental authority to which Tucker or any Tucker Subsidiary is a party or by which any of its properties or assets are bound or, to the reasonable best knowledge of Tucker, to which any of its directors, officers, employees or agents is a party or by which any of their properties or assets are bound, and (ii) no actions, suits or proceedings pending against Tucker or any Tucker Subsidiary or, to the reasonable best knowledge of Tucker, against any of its directors, officers, employees or agents or, to the reasonable best knowledge of Tucker, threatened against Tucker or any Tucker Subsidiary or against any of its directors, officers, employees or agents, at law or in equity, or before or by any federal or state commission, board, bureau, agency or instrumentality, that in the case of clause (i) or (ii), are reasonably likely, individually or in the aggregate, to have a Tucker Material Adverse Effect.
5.9 Absence of Certain Changes. Except as disclosed in the Tucker Reports filed with the SEC prior to the date hereof or as set forth in Section 5.9 of the Tucker Disclosure Letter, since December 31, 1994, Tucker and the Tucker Subsidiaries have conducted their business only in the ordinary course of such business and there has not been (i) any Tucker Material Adverse Effect; (ii) as of the date hereof, any declaration, setting aside or payment of any dividend or other distribution with respect to the Tucker Common Stock, except dividends of $0.36 per share paid on January 16, 1995 and April 14, 1995 and $0.25 per share paid on July 14, 1995 and October 16, 1995, (iii) any material commitment, contractual obligation, borrowing, capital expenditure or transaction (each, a "Commitment") entered into by Tucker or any of the Tucker Subsidiaries, outside the ordinary course of business except for commitments for expenses of attorneys, accountants and investment bankers incurred in connection with the Merger; or (iv) any material change in Tucker's accounting principles, practices or methods.
5.10 Taxes. Except as set forth in Section 5.10 of the Tucker Disclosure Letter:
(a) Tucker and each of the Tucker Subsidiaries has paid or caused to be paid all federal, state, local, foreign, and other taxes, including without limitation, income taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes, value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes, employment and payroll-related taxes, withholding taxes, stamp taxes, transfer taxes, windfall profit taxes, environmental taxes and property taxes, whether or not measured in whole or in part by net income, and all deficiencies, or other additions to tax, interest, fines and penalties (collectively, "Taxes"), owed by it through the date hereof.
(b) Tucker and each of the Tucker Subsidiaries has timely filed all federal, state, local and foreign tax returns required to be filed by any of them through the date hereof, and all such returns completely and accurately set forth the amount of any Taxes relating to the applicable period.
(c) Neither the Internal Revenue Service ("IRS") nor any other governmental authority is now asserting by written notice to Tucker or any Tucker Subsidiary or, to the knowledge of Tucker or the Tucker
Subsidiaries, threatening to assert against Tucker or any Tucker Subsidiary any deficiency or claim for additional Taxes. There is no dispute or claim concerning any Tax liability of Tucker or any Tucker Subsidiary, either claimed or raised by any governmental authority, or as to which any officer of Tucker or any Tucker Subsidiary has reason to believe may be claimed or raised by any federal or state governmental authority. No claim has ever been made by a taxing authority in a jurisdiction where Tucker does not file reports and returns that Tucker is or may be subject to taxation by that jurisdiction. There are no security interests on any of the assets of Tucker or any Tucker Subsidiary that arose in connection with any failure (or alleged failure) to pay any Taxes. Other than the agreement dated June 5, 1995, (the "1995 Closing Agreement") Tucker has never entered into a closing agreement pursuant to Section 7121 of the Code.
(d) Except as to matters in connection with the 1995 Closing Agreement, Tucker has not received written notice of any audit of any tax return filed by Tucker, and Tucker has not been notified by any tax authority that any such audit is contemplated or pending. Neither Tucker nor any of the Tucker Subsidiaries has executed or filed with the IRS or any other taxing authority any agreement now in effect extending the period for assessment or collection of any income or other taxes, and no extension of time with respect to any date on which a tax return was or is to be filed by Tucker is in force. True, correct and complete copies of all federal, state and local income or franchise tax returns filed by Tucker and each of the Tucker Subsidiaries and all communications relating thereto have been delivered to Bradley or made available to representatives of Bradley.
(e) Tucker and each Tucker Subsidiary has withheld and paid all taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other party.
(f) Each of the Tucker Subsidiaries of which all the outstanding capital stock is owned solely by Tucker is a Qualified REIT Subsidiary as defined in Section 856(i) of the Code. TOP, TFP and each of the other Tucker Subsidiaries listed as a partnership in Section 5.4 of the Tucker Disclosure Letter are, and have been at all times, properly classified as partnerships for federal income tax purposes and not as publicly-traded partnerships.
(g) For its taxable year ended December 31, 1993, Tucker made all federal and applicable state and local elections to qualify as a real estate investment trust. None of such elections has been terminated or revoked. For its taxable year ended December 31, 1993 and at all times thereafter up to and including the date hereof, Tucker has qualified to be treated as a real estate investment trust ("REIT") within the meaning of Sections 856-860 of the Code, including, without limitation, the requirements of Sections 856 and 857 of the Code. Tucker has qualified as a REIT for every year in which it existed. For the periods described in the preceding sentence, Tucker has met all requirements necessary to be treated as a REIT for purposes of the income tax provisions of those states in which Tucker is subject to income tax and which provide for the taxation of REITs in a manner similar to the treatment of REITs under Sections 856-860 of the Code.
(a) The books of account and other financial records of Tucker and each of the Tucker Subsidiaries are true, complete and correct in all material respects, have been maintained in accordance with good business practices, and are accurately reflected in all material respects in the financial statements included in the Tucker Reports.
(b) The minute books and other records of Tucker and each of the Tucker Subsidiaries have been made available to Bradley, contain in all material respects accurate records of all meetings and accurately reflect in all material respects all other corporate action of the stockholders and directors and any committees of the Board of Directors of Tucker and each of the Tucker Subsidiaries and all actions of the partners of each of the Tucker Subsidiaries.
5.12 Properties. All of the real estate properties owned by Tucker and each of the Tucker Subsidiaries are set forth in Section 5.12 of the Tucker Disclosure Letter. Except as set forth in Section 5.12 of the Tucker
Disclosure Letter, Tucker and each Tucker Subsidiary own fee simple title to each of the real properties identified in the Tucker Disclosure Letter (the "Tucker Properties"), free and clear of liens, mortgages or deeds of trust, claims against title, charges which are liens, security interests or other encumbrances on title (collectively, "Encumbrances") and the Tucker Properties are not subject to any rights of way, written agreements, laws, ordinances and regulations affecting building use or occupancy, or reservations of an interest in title (collectively, "Property Restrictions"), except for (i) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations, that do not adversely affect the current use of the property, materially detract from the value of or materially interfere with the present use of the property, (ii) Encumbrances and Property Restrictions disclosed on existing title reports or current surveys (in either case copies of which title reports and surveys have been delivered or made available to Bradley and are listed in Section 5.12 of the Tucker Disclosure Letter), and (iii) mechanics', carriers', workmen's or repairmen's liens and other Encumbrances, Property Restrictions and other limitations of any kind, if any, which, individually or in the aggregate, are not material in amount, do not materially detract from the value of or materially interfere with the present use of any of the Tucker Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Tucker and the Tucker Subsidiaries and which have arisen or been incurred only in the ordinary course of business. Except as set forth in Section 5.12 of the Tucker Disclosure Letter, valid policies of title insurance have been issued insuring Tucker's or the applicable Tucker Subsidiary's fee simple title to each of the Tucker Properties in amounts at least equal to the purchase price thereof, and such policies are, at the date hereof, in full force and effect and no claim has been made against any such policy and Tucker has no knowledge of any facts or circumstances which would constitute the basis for such a claim. To the best knowledge of Tucker, (i) no certificate, permit or license from any governmental authority having jurisdiction over any of the Tucker Properties or any agreement, easement or other right which is necessary to permit the lawful use and operation of the buildings and improvements on any of the Tucker Properties or which is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the Tucker Properties (a "REA Agreement") has not been obtained and is not in full force and effect, and there is no pending threat of modification or cancellation of any of same nor is Tucker nor any Tucker Subsidiary currently in default under any REA Agreement and the Tucker Properties are in full compliance with all governmental permits, licenses and certificates; (ii) no written notice of any violation of any federal, state or municipal law, ordinance, order, regulation or requirement affecting any portion of any of the Tucker Properties has been issued by any governmental authority; (iii) there are no material structural defects relating to any of the Tucker Properties; (iv) there is no Tucker Property whose building systems are not in working order in any material respect; (v) there is no physical damage to any Tucker Property in excess of $10,000 for which there is no insurance in effect covering the full cost of the restoration; or (vi) there is no current renovation or restoration or tenant improvements to any Tucker Property or any portion thereof, the cost of which exceeds $10,000, except in each instance as set forth in Section 5.12 of the Tucker Disclosure Letter. Except as noted in Section 5.12 of the Tucker Disclosure Letter, the use and occupancy of each of the Tucker Properties complies in all material respects with all applicable codes and zoning laws and regulations, and Tucker has no knowledge of any pending or threatened proceeding or action that will in any manner affect the size of, use of, improvements on, construction on, or access to any of the Tucker Properties, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such Tucker Properties. Neither Tucker nor any of the Tucker Subsidiaries has received any notice to the effect that (A) any betterment assessments have been levied against, or any condemnation or rezoning proceedings are pending or threatened with respect to any of the Tucker Properties or (B) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the Tucker Properties or by the continued maintenance, operation or use of the parking areas.
(a) Section 5.13 of the Tucker Disclosure Letter sets forth a true, accurate and complete rent roll for each of the Tucker Properties (the "Rent Roll") as of September 30, 1995. The Rent Roll includes, without limitation, the name of the Tenant, the space leased, the lease expiration date, security and other more than 30 days), percentage rent, pro rata share of operating expenses, taxes, charges and assessments. Section 5.13 of the Tucker Disclosure Letter contains a list of known defaults and a list of any extraordinary clauses including, without limitation, any "kick-out" clauses, cotenancy requirements or exclusions, "go-dark" clauses, or clauses requiring any future funding of tenant improvements.
(b) Except as noted in Section 5.13 of the Tucker Disclosure Letter, as of the last day of the calendar month immediately preceding the date hereof, (i) each of the leases and tenancies for all or any portion of the Tucker Properties (the "Tucker Leases") is valid and subsisting and in full force and effect, has not been amended, modified or supplemented; (ii) the tenant under each of the Tucker Leases is in actual possession of the leased premises; (iii) no tenants are in arrears for the payment of rent for any month preceding the month of the date of this Agreement or otherwise in default of such tenant's lease obligations as to which Tucker has given notice of default to such tenant; and (iv) neither Tucker nor any Tucker Subsidiary has received any written notice from any tenant of any intention to vacate. Except as set forth in Section 5.13 of the Tucker Disclosure Letter, neither Tucker nor any Tucker Subsidiary has collected payment of rent (other than security deposits) accruing for a period which is more than one month beyond the date of collection.
(c) Tucker has previously delivered or made available to Bradley a true and correct copy of all Tucker Leases.
(d) Except as shown in Section 5.13 of the Tucker Disclosure Letter, as of the last day of the calendar month immediately preceding the date hereof, no tenant under any of the Tucker Leases has asserted any claim of which Tucker or any Tucker Subsidiary has received written notice which would materially affect the collection of rent from such tenant and neither Tucker nor any Tucker Subsidiary has received written notice of any material default or breach on the part of Tucker or any Tucker Subsidiary under any of the Tucker Leases which has not been cured.
(e) Section 5.13 of the Tucker Disclosure Letter sets forth a complete and correct list, as of the date hereof, of all written or oral commitments made by Tucker or any Tucker Subsidiary to lease any of the Tucker Properties or any portion thereof which has not yet been reduced to a written lease. Tucker has provided true and correct copies of all such written commitments to Bradley and Section 5.13 of the Tucker Disclosure Letter provides with respect to each such oral commitment the principal terms of such commitment, including, if applicable, (i) the space to be occupied, (ii) the name of the tenant, (iii) the length of the original term thereof and any right or option to renew or extend the lease term, (iv) the monthly minimum rental, (v) rental escalations, (vi) the terms with respect to percentage rent or other overage rent, (vii) any provisions for tenant allowances and tenant build-out and (viii) the right of any third-party broker to any outstanding brokerage or other commission incidental thereto and all other financial terms.
(f) Except as set forth in Section 5.13 of the Tucker Disclosure Letter all material leases pursuant to which Tucker or any Tucker Subsidiary, as lessee, leases real or personal property are in good standing, valid and effective in accordance with their respective terms, and there is not, under any of such leases, any material existing default or any event which with notice or lapse of time or both would constitute such a default, nor do any of such leases contain any provision which would preclude the Surviving Corporation from occupying and using the leased premises for the same purposes and upon substantially the same rental and other terms as are applicable to the occupation and use by Tucker and the Tucker Subsidiaries.
5.14 Rents. The rents and other income and charges set forth in Section 5.13 of the Tucker Disclosure Letter are the actual rents, income and charges presently being charged by Tucker and the Tucker Subsidiaries under the Tucker Leases. No space is occupied rent free or at a rental rate reduced from the rate stated in Section 5.13 of the Tucker Disclosure Letter. Other than set forth in Section 5.13 of the Tucker Disclosure Letter, no tenant under any of the Tucker Leases is entitled to any purchase option, concessions, allowances, abatements, set-offs, rebates or refunds or has prepaid any rents or other charges for more than one month. None of the Tucker Leases and none of the rents or other amounts payable thereunder have been assigned, pledged or encumbered, other than to lenders, as described in Section 5.22 of the Tucker Disclosure Letter. Except as set forth in Section 5.22 of the Tucker Disclosure Letter, no brokerage or leasing commission or other compensation will be due or payable to any person, firm, corporation or other entity with respect to or on account of any of the Tucker Leases or any extensions or renewals thereof on and after the Effective Time.
5.15 Environmental Matters. Except as set forth in Section 5.15 of the Tucker Disclosure Letter, none of Tucker, any Tucker Subsidiary or, to the best knowledge of Tucker, any other person has caused or permitted (a) the unlawful presence of any hazardous substances, hazardous materials, toxic substances or waste materials (collectively, "Hazardous Materials") on any of the Tucker Properties, or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from any of the Tucker Properties as a result of any construction on or operation and use of such properties, which presence or occurrence would, individually or in the aggregate, have a Tucker Material Adverse Effect; and in connection with the construction on or operation and use of the Tucker Properties, neither Tucker nor any of the Tucker Subsidiaries has failed to comply, in any material respect, with any applicable local, state or federal environmental law, regulation, ordinance or administrative and judicial order relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials.
(a) All employee benefits plans (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and other benefit arrangements covering employees of Tucker and the Tucker Subsidiaries, other than any multiemployer plan (within the meaning of Section 3(37) of ERISA) (the "Tucker Benefit Plans") are listed in Section 5.16(a) of the Tucker Disclosure Letter. True and complete copies of the Tucker Benefit Plans have been provided or made available to Bradley. To the extent applicable, the Tucker Benefit Plans have been administered in all material respects in accordance with their terms and comply, in all material respects, with the applicable requirements of ERISA and the Code. Any Tucker Benefit Plan intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS or a determination letter request has been filed with the IRS with respect to any such plan and is still pending. No Tucker Benefit Plan is covered by Title IV of ERISA or Section 412 of the Code. No Tucker Benefit Plan nor Tucker or any Tucker Subsidiary has incurred any liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA. There are no pending or anticipated claims against or otherwise involving any of the Tucker Benefit Plans and no suit, action or other litigation (excluding claims for benefits incurred in the ordinary course of Tucker Benefit Plan activities) has been brought against or with respect to any such Tucker Benefit Plan. All material contributions required to be made as of the date hereof to the Tucker Benefit Plans have been made or provided for. Except as otherwise required by Sections 601 through 608 of ERISA, Section 4980B of the Code and applicable state laws or as set forth in the Severance Plan or the Severance Agreements, Tucker does not maintain or contribute to any plan or arrangement which provides or has any liability to provide life insurance, medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment and Tucker has never represented, promised or contracted (whether in oral or written form) to any employee or former employee that such benefits would be provided. Except as set forth in the Severance Plan or the Severance Agreements, as disclosed in the Tucker Reports or in Section 5.16(a) of the Tucker Disclosure Letter, the execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional subsequent events directly related to the transaction contemplated herein) (i) constitute an event under any Tucker Benefit Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any employee, director or consultant of Tucker or any Tucker Subsidiary pursuant to any Tucker Benefit Plan or (ii) result in the triggering or imposition of any restrictions or limitations on the right of Tucker or Bradley to amend or terminate any Tucker Benefit Plan. No payment or benefit which will be required to be made pursuant to the terms of any agreement, commitment or Tucker Benefit Plan (including the Severance Plan and the Severance Agreements and the Consulting Agreement with Ken Tucker), as a result of the transactions contemplated by this Agreement, to any officer, director or employee of Tucker or any of the Tucker Subsidiaries, could be characterized as an "excess parachute payment" within the meaning of Section 280G of the Code.
(b) Except as listed in Schedule 5.16(b) of the Tucker Disclosure Letter, neither Tucker nor any Tucker Subsidiary contributes to or has any liability to contribute to a multiemployer plan. All contributions have been made as required by the terms of each of the plans listed in Schedule 5.16(b) of the Tucker Disclosure Letter and the terms of any related collective bargaining agreements and neither Tucker nor any Tucker Subsidiary has any knowledge or received any notice that any such plan is in reorganization, that increased contributions are required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than required under section 412 of the Code, or that any such plan is insolvent.
5.17 Labor Matters. Except as set forth in Section 5.17 of the Tucker Disclosure Letter, neither Tucker nor any Tucker Subsidiary is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of Tucker, threatened against Tucker or any of the Tucker Subsidiaries relating to their business, except for any such proceeding which would not have a Tucker Material Adverse Effect. To the knowledge of Tucker, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Tucker or any of the Tucker Subsidiaries.
5.18 No Brokers. Neither Tucker nor any of the Tucker Subsidiaries has entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of such entity or Bradley to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby, except that Tucker has retained PaineWebber Incorporated ("PaineWebber") and those entities listed in Section 5.18 of the Tucker Disclosure Letter, as its financial advisors, the arrangements with which have been disclosed in writing to Bradley prior to the date hereof. Other than the foregoing arrangements and Bradley's arrangement with Alex. Brown & Sons Incorporated ("Alex. Brown"), Tucker is not aware of any claim for payment of any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby.
5.19 Opinion of Financial Advisor. Tucker has received the opinion of PaineWebber, to the effect that, as of the date hereof, the Exchange Ratio is fair to the holders of Tucker Common Stock from a financial point of view, and has delivered a true and correct copy of such opinion to Bradley.
5.20 Bradley Share Ownership. Neither Tucker nor any of the Tucker Subsidiaries owns any shares of Bradley Common Stock or other securities convertible into any shares of Bradley Common Stock.
5.21 Related Party Transactions. Set forth in Section 5.21 of the Tucker Disclosure Letter is a list of all arrangements, agreements and contracts (except for the Severance Plan and the Severance Agreements) entered into by Tucker or any of the Tucker Subsidiaries (which are or will be in effect as of or after the date of this Agreement) with (i) any consultant (X) involving payments in excess of $25,000 or (Y) which may not be terminated at will by Tucker or the Tucker Subsidiary which is a party thereto, (ii) any person who is an officer, director or affiliate of Tucker or any of the Tucker Subsidiaries, any relative of any of the foregoing or any entity of which any of the foregoing is an affiliate or (iii) any person who acquired Tucker Common Stock in a private placement. All such documents are listed in Section 5.21 of the Tucker Disclosure Letter and the copies of such documents, which have previously been provided or made available to Bradley and its counsel, are true and correct copies. All of the management, leasing or other contracts to which TMC, TMLP or any affiliate of Tucker is a party, receives income from or has obligations or liabilities arising out of are listed on Schedule 5.21 of the Tucker Disclosure Letter.
5.22 Contracts and Commitments. Section 5.22 of the Tucker Disclosure Letter sets forth (i) all notes, debentures, bonds and other evidence of indebtedness which are secured or collateralized by mortgages, deeds of trust or other security interests in the Tucker Properties or personal property of Tucker and each of the Tucker Subsidiaries and (ii) each Commitment entered into by Tucker or any of the Tucker Subsidiaries which may result in total payments by or liability of Tucker or any Tucker Subsidiary in excess of $10,000 except
Severance Plan and the Severance Agreements. Copies of the foregoing are listed in Section 5.22 of the Tucker Disclosure Letter and the copies of such documents, which have previously been provided or made available to Bradley and its counsel, are true and correct. None of Tucker or any of the Tucker Subsidiaries has received any notice of a default that has not been cured under any of the documents described in clause (i) above or is in default respecting any payment obligations thereunder beyond any applicable grace periods except where such default would not have a Tucker Material Adverse Effect. All joint venture agreements to which Tucker or any of the Tucker Subsidiaries is a party are set forth in Section 5.22 of the Tucker Disclosure Letter and neither Tucker nor any of the Tucker Subsidiaries is in default with respect to any obligations, which individually or in the aggregate are material, thereunder.
5.23 Development Rights. Set forth in Section 5.23 of the Tucker Disclosure Letter is a list of all agreements entered into by Tucker or any of the Tucker Subsidiaries relating to the development or construction of the Tucker Properties and a description of the current status of each such development. The copies of such agreements are listed in Section 5.23 of the Tucker Disclosure Letter, and such copies, which have previously been provided to Bradley and its counsel, are true and correct. All work to be performed, payments to be made and actions to be taken by Tucker or any of the Tucker Subsidiaries prior to the date hereof pursuant to any agreement entered into with a governmental body or authority in connection with the development of the Tucker Properties, including any Development Agreement relating to a site approval, zoning reclassification or other similar action (e.g., Local Improvement District, Road Improvement District, Environmental Mitigation, etc.) has been performed, paid or taken, as the case may be, and Tucker is not aware of any planned or proposed work, payments or actions that may be required after the date hereof pursuant to such agreements.
5.24 Certain Payments Resulting From Transactions. Except for the Severance Plan and the Severance Agreements and the vesting of options as set forth in Section 5.3 of the Tucker Disclosure Letter, the execution of, and performance of the transactions contemplated by, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Tucker Benefit Plan, policy, practice, agreement or other arrangement or any trust or loan (the "Employee Arrangements") that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee, director or consultant of Tucker or any of the Tucker Subsidiaries, or (ii) result in the triggering or imposition of any restrictions or limitations on the right of Tucker or Bradley to amend or terminate any Employee Arrangement and receive the full amount of any excess assets remaining or resulting from such amendment or termination, subject to applicable taxes. No payment or benefit which will be required to be made pursuant to the terms of any agreement, commitment or Tucker Benefit Plan (including the Severance Plan and the Severance Agreements), as a result of the transactions contemplated by this Agreement, to any officer, director or employee of Tucker or any of the Tucker Subsidiaries, could be characterized as an "excess parachute payment" within the meaning of Section 280G of the Code.
5.25 Indemnification Claims. No indemnification or other claims have been made by Tucker, any Tucker Subsidiary, or any other person against the TTC Principals or the TTC Guarantors (as such terms are defined in the TOP Partnership Agreement) under Section 14 or any other section or provision of the TOP Partnership Agreement or any other agreement to which Tucker or any Tucker Subsidiary is a party and, to the best knowledge of Tucker, no facts or circumstances exist which could give rise to any such claim.
5.26 Disclosure. The representations, warranties and statements made by Tucker in this Agreement, the Ancillary Agreements and in the Tucker Disclosure Letter and in the certificates and other documents delivered pursuant hereto do not contain any untrue statement of a material fact, and, when taken together, do not omit to state any material fact necessary to make such representations, warranties and statements, in light of the circumstances under which they are made, not misleading.
5.27 Status of Holden Court and Holden Court Escrow. Section 5.27 of the Tucker Disclosure Letter sets forth a description of the current status of the Holden Court Escrow Agreement established in connection with the contribution of One North State to TOP and a description of the status of efforts with the City of Chicago to secure fee simple title to Holden Court as required by the Holden Court Escrow Agreement.
5.28 Tenant Improvements. Section 5.28 of the Tucker Disclosure Letter contains (i) a list of any unfunded tenant improvements being conducted by Tucker or any Tucker Subsidiary in excess of $10,000 and (ii) to the best knowledge of Tucker, the aggregate amount of all unfunded tenant improvements for all Tucker Properties. Tucker and each Tucker Subsidiary has delivered or made available true and correct copies of any and all contracts, plans, specifications and agreements in connection with all tenant improvements in excess of $10,000.
5.29 Status of Options to Purchase Real Property. All options of Tucker or any of the Tucker Subsidiaries to purchase real property, including a description of the current status, conditions and contingencies relating to each of such options, are set forth in Section 5.29 of the Tucker Disclosure Letter.
5.30 Definition of Tucker's Knowledge. As used in this Agreement, the phrase "to the knowledge of Tucker" or "to the best knowledge of Tucker" (or words of similar import) means the knowledge or the best knowledge of those individuals identified in Section 5.30 of the Tucker Disclosure Letter, and includes any fact, matter or circumstance which any of such individuals, as an ordinary and prudent business person employed in the same capacity in the same type and size of business as Tucker, should have known.
6. Representations and Warranties of Bradley.
Except as set forth in the disclosure letter delivered at or prior to the execution hereof to Tucker, which shall refer to the relevant Sections of this Agreement (the "Bradley Disclosure Letter"), Bradley represents and warrants to Tucker as follows:
6.1 Existence; Good Standing; Authority; Compliance With Law. Bradley is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Maryland. Bradley is duly licensed or qualified to do business as a foreign corporation and is in good standing under the laws of any other state of the United States in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except where the failure to be so licensed or qualified would not have a material adverse effect on the business, results of operations or financial condition of Bradley and the Bradley Subsidiaries (as defined below) taken as a whole (a "Bradley Material Adverse Effect"). Bradley has all requisite corporate power and authority to own, operate, lease and encumber its properties and carry on its business as now conducted. Each of the Bradley Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the corporate power and authority to own its properties and to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in good standing would not have a Bradley Material Adverse Effect. Neither Bradley nor any Bradley Subsidiary is in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Bradley or any Bradley Subsidiary or any of their respective properties or assets is subject, where such violation would have a Bradley Material Adverse Effect. Bradley and the Bradley Subsidiaries have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such license, permit or authorization or to take any such action would have a Bradley Material Adverse Effect. Copies of the Charter and other equivalent documents and Bylaws (and all amendments thereto) of Bradley and each of the Bradley Subsidiaries are listed in Section 6.1 of the Bradley Disclosure Letter, and the copies of such documents, which have previously been delivered or made available to Tucker or its counsel, are true and correct copies. For purposes of this Agreement, the term "Bradley Subsidiary" shall include any of the entities set forth under such heading in Section 6.4 of the Bradley Disclosure Letter.
6.2 Authorization, Validity and Effect of Agreements. Bradley has the requisite corporate power and authority to enter into the transactions contemplated hereby and to execute and deliver this Agreement and the Ancillary Agreements to which it is a party. The Board of Directors of Bradley has, by resolutions duly adopted by unanimous vote approved this Agreement, the Merger and the other transactions contemplated by this Agreement and has agreed to recommend that the holders of Bradley Common Stock adopt and approve this Agreement, the Merger and the transactions contemplated by this Agreement at the Bradley stockholders' meeting which will be held in accordance with the provisions of Section 7.3. In connection with the foregoing, the Board of Directors of Bradley has taken such actions and votes as are necessary on its part to render the provisions of the Control Share Acquisition Statute, the Business Combination Statute and all other applicable takeover statutes of the MGCL and any other applicable takeover statutes of any other state, inapplicable to this Agreement, the Merger, and the transactions contemplated by this Agreement. As of the date hereof, all of the directors and executive officers of Bradley have indicated that they presently intend to vote all shares of Bradley Common Stock which they own to approve this Agreement, the Merger, and the transactions contemplated by this Agreement at the Bradley stockholders meeting which will be held in accordance with the provisions of Section 7.3. Subject only to the approval of this Agreement and the transactions contemplated hereby by the holders of a majority of the outstanding shares of Bradley Common Stock, the execution by Bradley of this Agreement, the Ancillary Agreements and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements has been duly authorized by all requisite corporate action on the part of Bradley. This Agreement constitutes, and the Ancillary Agreements to which it will become a party (when executed and delivered pursuant hereto) will constitute, the valid and legally binding obligations of Bradley, enforceable against Bradley in accordance with their respective terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity.
6.3 Capitalization. The authorized capital stock of Bradley consists of 80,000,000 shares of Bradley Common Stock, 20,000,000 shares of preferred stock, par value $.01 per share (the "Bradley Preferred Stock"), and 50,000,000 shares of excess stock, par value $.01 per share ("Bradley Excess Stock"). As of the date hereof, there are 11,226,606 shares of Bradley Common Stock issued and outstanding, and no shares of Bradley Preferred Stock or Bradley Excess Stock are issued and outstanding. All such issued and outstanding shares of Bradley Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Bradley has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the stockholders of Bradley on any matter. There are not at the date of this Agreement any existing options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Bradley to issue, transfer or sell any shares of Bradley Common Stock, other than the issuance by Bradley of up to 297,875 shares of Bradley Common Stock upon the exercise of stock options issued pursuant to Bradley's stock option plans. There are no agreements or understandings to which Bradley or any Bradley Subsidiary is a party with respect to the voting of any shares of Bradley Common Stock or which restrict the transfer of any such shares, nor does Bradley have knowledge of any such agreements or understandings with respect to the voting of any such shares or which restrict the transfer of such shares.
6.4 Subsidiaries. Bradley owns all of the outstanding shares of capital stock of each of the Bradley Subsidiaries. All of the outstanding shares of capital stock of each of the Bradley Subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and are owned, by Bradley free and clear of all liens, pledges, security interests, claims or other encumbrances. The following information for each Bradley Subsidiary is set forth in Section 6.4 of the Bradley Disclosure Letter: (i) its name and jurisdiction of incorporation or organization and (ii) its authorized capital stock.
6.5 Other Interests. Except for interests in the Bradley Subsidiaries and the securities of other publicly traded REITs, neither Bradley nor any Bradley Subsidiary owns directly or indirectly any interest or investment
(whether equity or debt) in any corporation, partnership, joint venture, trust or other entity (other than investments in short-term investment securities).
6.6 No Violation. Except as set forth in Section 6.6 of the Bradley Disclosure Letter, neither the execution and delivery by Bradley of this Agreement or the Ancillary Agreements nor the consummation by Bradley of the transactions contemplated by this Agreement and the Ancillary Agreements in accordance with their terms, will: (i) conflict with or result in a breach of any provisions of the Articles of Incorporation or Bylaws of Bradley; (ii) result in a breach or violation of, a default under, or the triggering of any payment or other material obligations pursuant to, or accelerate vesting under, any of Bradley's stock option plans, or any grant or award under any of the foregoing; (iii) violate, or 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 or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties of Bradley or any of the Bradley Subsidiaries under, or result in being declared void, voidable, or without further binding effect, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust or any license, franchise, permit, lease, contract, agreement or other instrument, commitment or obligation to which Bradley or any of the Bradley Subsidiaries is a party, or by which Bradley or any of the Bradley Subsidiaries or any of their properties is bound or affected, except for any of the foregoing matters which, individually or in the aggregate, would not have a Bradley Material Adverse Effect; or (iv) other than the Regulatory Filings, require any consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority except where the failure to obtain any such consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority would not have a Bradley Material Adverse Effect.
6.7 SEC Documents. A complete list of Bradley SEC filings, including the Form 10-K for the fiscal year ended December 31, 1993 filed by Bradley's predecessor entity, Bradley Real Estate Trust ("Bradley Trust"), and each (A) registration statement, (B) annual report on Form 10-K, (C) quarterly report on Form 10-Q, (D) current report on Form 8-K, (E) proxy statement or information statement, and (F) any other report filed with the SEC pursuant to the Exchange Act, (in all such cases, including all exhibits, amendments and supplements thereto) prepared by Bradley or Bradley Trust or relating to their properties since December 31, 1993, are set forth in Section 6.7 of the Bradley Disclosure Letter, and copies of which, in the form (including exhibits and any amendments thereto) filed with the SEC, have previously been provided or made available to Tucker or its counsel (collectively, the "Bradley Reports"). The Bradley Reports were filed with the SEC in a timely manner and constitute all forms, reports and documents required to be filed by Bradley (including for this purpose the Bradley Trust) under the Securities Laws subsequent to December 31, 1993. As of their respective dates, the Bradley Reports (i) complied as to form in all material respects with the applicable requirements of the Securities Laws and (ii) 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 made therein, in the light of the circumstances under which they were made, not misleading. Each of the consolidated balance sheets of Bradley included in or incorporated by reference into the Bradley Reports (including the related notes and schedules) fairly presents the consolidated financial position of Bradley and the Bradley Subsidiaries as of its date and each of the consolidated statements of income, retained earnings and cash flows of Bradley included in or incorporated by reference into the Bradley Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings or cash flows, as the case may be, of Bradley and the Bradley Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year- end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein and except, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC. Except as and to the extent set forth on the consolidated balance sheet of Bradley and the Bradley Subsidiaries at December 31, 1994, including all notes thereto, or as set forth in the Bradley Reports, neither Bradley nor any of the Bradley Subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Bradley or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except liabilities arising in the ordinary course of business since such date and liabilities for expenses of attorneys, accountants and investment bankers incurred in connection with the Merger.
6.8 Litigation. There are (i) no continuing orders, injunctions or decrees of any court, arbitrator or governmental authority to which Bradley or any Bradley Subsidiary is a party or by which any of its properties or assets are bound or, to the reasonable best knowledge of Bradley, to which any of its directors, officers, employees or agents is a party or by which any of their properties or assets are bound, and (ii) no actions, suits or proceedings pending against Bradley or any Bradley Subsidiary or, to the reasonable best knowledge of Bradley, against any of its directors, officers, employees or agents or, to the reasonable best knowledge of Bradley, threatened against Bradley or any Bradley Subsidiary or against any of its directors, officers, employees or agents, at law or in equity, or before or by any federal or state commission, board, bureau, agency or instrumentality, that, in the case of clause (i) or (ii), are reasonably likely, individually or in the aggregate, to have a Bradley Material Adverse Effect.
6.9 Absence of Certain Changes. Except as disclosed in the Bradley Reports filed with the SEC prior to the date hereof, since December 31, 1994, Bradley and the Bradley Subsidiaries have conducted their business only in the ordinary course of such business and there has not been (i) any Bradley Material Adverse Effect; (ii) as of the date hereof, any declaration, setting aside or payment of any dividend or other distribution with respect to the Bradley Common Stock, except dividends of $0.33 per share paid on March 31, June 30, 1995 and September 29, 1995; or (iii) any material change in Bradley's accounting principles, practices or methods.
6.10 Taxes. Except as set forth in Section 6.10 of the Bradley Disclosure Letter:
(a) Bradley and each of the Bradley Subsidiaries has paid or caused to be paid Taxes, owed by it through the date hereof.
(b) Bradley and each of the Bradley Subsidiaries has timely filed all federal, state, local and foreign tax returns required to be filed by any of them through the date hereof, and all such returns completely and accurately set forth the amount of any Taxes relating to the applicable period.
(c) Neither the IRS nor any other governmental authority is now asserting by written notice to Bradley or any Bradley Subsidiary or, to the knowledge of Bradley or the Bradley Subsidiaries, threatening to assert against Bradley any deficiency or claim for additional Taxes. There is no dispute or claim concerning any Tax liability of Bradley, either claimed or raised by any governmental authority, or as to which any officer of Bradley has reason to believe may be claimed or raised by any governmental authority. No claim has ever been made by a taxing authority in a jurisdiction where Bradley does not file reports and returns that Bradley is or may be subject to taxation by that jurisdiction. There are no security interests on any of the assets of Bradley or any Bradley Subsidiary that arose in connection with any failure (or alleged failure) to pay any Taxes. Bradley has never entered into a closing agreement pursuant to Section 7121 of the Code.
(d) Bradley has not received written notice of any audit of any tax return filed by Bradley, no such audit is in progress, and Bradley has not been notified by any tax authority that any such audit is contemplated or pending. Neither Bradley nor any of the Bradley Subsidiaries has executed or filed with the IRS or any other taxing authority any agreement now in effect extending the period for assessment or collection of any income or other taxes, and no extension of time with respect to any date on which a tax return was or is to be filed by Bradley is in force. True, correct and complete copies of all federal, state and local income or franchise tax returns filed by Bradley and each of the Bradley Subsidiaries and all communications relating thereto have been delivered to Tucker or made available to representatives of Tucker.
(e) Bradley and each Bradley Subsidiary has withheld and paid all taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other party.
(f) Each of the Bradley Subsidiaries of which all the outstanding capital stock is owned solely by Bradley is a Qualified REIT Subsidiary as defined in Section 856(i) of the Code.
(g) For all applicable tax years as to which Bradley's federal income tax returns are subject to audit and Bradley is subject to assessment for taxes reportable therein, and at all times thereafter up to and including the date hereof, Bradley has qualified to be treated as a REIT within the meaning of Sections 856-860 of the Code, including, without limitation, the requirements of Sections 856 and 857 of the Code. For the periods described in the preceding sentence, Bradley has met all requirements necessary to be treated as a REIT for purposes of the income tax provisions of each state in which Bradley is subject to income tax and which provides for the taxation of REITs in a manner similar to the treatment of REITs under Sections 856-860 of the Code, but, with respect to each such state, only for such periods for which Bradley's income tax returns are subject to audit and Bradley is subject to assessment for taxes reportable therein.
6.11 Books and Records. The books of account and other financial records of Bradley and each of the Bradley Subsidiaries are true, complete and correct in all material respects, have been maintained in accordance with good business practices, and are accurately reflected in all material respects in the financial statements included in the Bradley Reports. The minute books and other records of Bradley and each of the Bradley Subsidiaries have been made available to Tucker, contain in all material respects accurate records of all meetings and accurately reflect in all material respects all other corporate action of the shareholders and directors and any committees of the Board of Directors of Bradley and each of the Bradley Subsidiaries.
6.12 Properties. All of the real estate properties owned by Bradley and each of the Bradley Subsidiaries are set forth in Section 6.12 of the Bradley Disclosure Letter. Except as set forth in Section 6.12 of the Bradley Disclosure Letter, Bradley owns fee simple title to each of the real properties identified in the Bradley Disclosure Letter (the "Bradley Properties"), free and clear of Encumbrances. The Bradley Properties are not subject to any Property Restrictions, except for (i) Encumbrances and Property Restrictions set forth in Section 6.12 of the Bradley Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations that do not adversely affect the current use of the property, materially detract from the value or materially interfere with the present use of the property, (iii) Encumbrances and Property Restrictions disclosed on existing title reports or current surveys (in either case copies of which title reports and surveys have been delivered or made available to Tucker and are listed in Section 6.12 of the Bradley Disclosure Letter), and (iv) mechanics', carriers', workmen's or repairmen's liens and other Encumbrances, Property Restrictions and other limitations of any kind, if any, which, individually or in the aggregate, are not material in amount, do not materially detract from the value of or materially interfere with the present use of any of the Bradley Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Bradley and the Bradley Subsidiaries and which have arisen or been incurred only in the ordinary course of business. Such Encumbrances and Property Restrictions described in Section 6.12 of the Bradley Disclosure Letter are not convertible into shares of capital stock of Bradley or any Bradley Subsidiary nor does Bradley or any Bradley Subsidiary hold a participating interest therein. Bradley is the named insured in the title insurance policies set forth in Section 6.12 of the Bradley Disclosure Letter. Such policies are maintained with respect to each of the Bradley Properties in an amount of (i) the cost of acquisition of such property or (ii) the cost of construction by Bradley and the Bradley Subsidiaries of the improvements located on such property (measured at the time of such construction), except, in each case, (x) as listed in Section 6.12 of the Bradley Disclosure Letter or (y) where the failure to maintain such title insurance would not have a Bradley Material Adverse Effect. Such policies are, at the date hereof, in full force and effect and no claim has been made against any such policy. To the best knowledge of Bradley, (i) no certificate, permit or license from any governmental authority having jurisdiction over any of the Bradley Properties or any agreement, easement or other right which is necessary to permit the lawful use and operation of the buildings and improvements on any of the Bradley Properties or which is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the Bradley Properties has not been obtained and is not in full force and effect, and there is no pending threat of modification or cancellation of any of same; (ii) no written notice of any violation of any federal, state or municipal law, ordinance, requirement affecting any portion of any of the Bradley Properties has been issued by any governmental authority; (iii) there are no structural defects relating to any of the Bradley Properties; (iv) there is no Bradley Property whose building systems are not in working order in any material respect; (v) there is no physical damage to any Bradley Property in excess of $10,000 for which there is no insurance in effect covering the full cost of the restoration; or (vi) there is no current renovation or restoration to any Bradley Property, the cost of which exceeds $10,000. Except as noted in Section 6.12 of the Bradley Disclosure Letter, Bradley and the Bradley Subsidiaries have valid and subsisting leases for all leased Bradley Properties, the use and occupancy of each of the Bradley Properties complies in all material respects with all applicable codes and zoning laws and regulations, and Bradley has no knowledge of any pending or threatened proceeding or action that will in any manner affect the size of, use of, improvements on, construction on, or access to any of the Bradley Properties, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such Bradley Properties. Neither Bradley nor any of the Bradley Subsidiaries has received any notice to the effect that (A) any condemnation or rezoning proceedings are pending or threatened with respect to any of the Bradley Properties or (B) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the Bradley Properties or by the continued maintenance, operation or use of the parking areas.
6.13 Environmental Matters. None of Bradley, any Bradley Subsidiary or, to the best knowledge of Bradley, any other person has caused or permitted (a) the unlawful presence of any Hazardous Materials on any of the Bradley Properties, or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from any of the Bradley Properties as a result of any construction on or operation and use of such properties, which presence or occurrence would, individually or in the aggregate, have a Bradley Material Adverse Effect; and in connection with the construction on or operation and use of the Bradley Properties, neither Bradley nor any of the Bradley Subsidiaries has failed to comply, in any material respect, with any applicable local, state or federal environmental law, regulation, ordinance or administrative and judicial order relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials.
6.14 Employee Benefit Plans. All employee benefits plans (within the meaning of Section 3(3) of ERISA) and other benefit arrangements covering employees of Bradley and the Bradley Subsidiaries (the "Bradley Benefit Plans") are listed in Section 6.14 of the Bradley Disclosure Letter. True and complete copies of the Bradley Benefit Plans have been provided or made available to Tucker. To the extent applicable, the Bradley Benefit Plans have been administered in all material respects in accordance with their terms and comply, in all material respects, with the applicable requirements of ERISA and the Code. Any Bradley Benefit Plan intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS or a determination letter request has been filed with the IRS with respect to any such plan and is still pending. No Bradley Benefit Plan is covered by Title IV of ERISA or Section 412 of the Code. No Bradley Benefit Plan nor Bradley or any of the Bradley Subsidiaries has incurred any liability or penalty under Section 4975 of the Code or Section 502(i) of ERISA. There are no pending or anticipated claims against or otherwise involving any of the Bradley Benefit Plans and no suit, action or other litigation (excluding claims for benefits incurred in the ordinary course of Bradley Benefit Plan activities) has been brought against or with respect to any such Bradley Benefit Plan. All material contributions required to be made as of the date hereof to the Bradley Benefit Plans have been made or provided for. Neither Bradley nor any entity under "common control" with Bradley within the meaning of ERISA Section 4001 has contributed to, or been required to contribute to, any "multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA). Except as otherwise required by Sections 601 through 608 of ERISA, Section 4980B of the Code and applicable state laws, Bradley does not maintain or contribute to any plan or arrangement which provides or has any liability to provide life insurance, medical or other employee welfare benefits to any employee or former employee upon his retirement or termination of employment and Bradley has never represented, promised or contracted (whether in oral or written form) to any employee or former employee that such benefits would be provided. Except as disclosed in the Bradley Reports, the execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional subsequent events directly related to the contemplated herein) constitute an event under any Bradley Benefit Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any employee, director or consultant of Bradley or any Bradley Subsidiary.
6.15 Labor Matters. Neither Bradley nor any Bradley Subsidiary is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of Bradley, threatened against Bradley or any of the Bradley Subsidiaries relating to their business, except for any such proceeding which would not have a Bradley Material Adverse Effect. To the knowledge of Bradley, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Bradley or any of the Bradley Subsidiaries.
6.16 No Brokers. Neither Bradley nor any of the Bradley Subsidiaries has entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of such entity or Tucker to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby, except that Bradley has retained Alex. Brown as its financial advisor, the arrangements with which have been disclosed in writing to Tucker prior to the date hereof. Other than the foregoing arrangements and Tucker's arrangements set forth in Section 5.18 of this Agreement and Section 5.18 of the Tucker Disclosure Letter, Bradley is not aware of any claim for payment of any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby.
6.17 Opinion of Financial Advisor. Bradley has received the opinion of Alex. Brown to the effect that, as of the date hereof, the Exchange Ratio is fair to the holders of Bradley Common Stock from a financial point of view, and has delivered a true and correct copy of such opinion to Tucker.
6.18 Tucker Stock Ownership. Neither Bradley nor any of the Bradley Subsidiaries owns any shares of capital stock of Tucker or other securities convertible into capital stock of Tucker.
6.19 Related Party Transactions. Set forth in Section 6.19 of the Bradley Disclosure Letter is a list of all arrangements, agreements and contracts entered into by Bradley or any of the Bradley Subsidiaries (which are or will be in effect as of or after the date of this Agreement) with (i) any consultant in excess of $25,000 or which may not be terminated at will by Bradley, (ii) any person who is an officer, director or affiliate of Bradley or any of the Bradley Subsidiaries, any relative of any of the foregoing or any entity of which any of the foregoing is an affiliate or (iii) any person who acquired Bradley Common Stock in a private placement. All such documents are listed in Section 6.19 of the Bradley Disclosure Letter and the copies of such documents, which have previously been provided or made available to Tucker and its counsel, are true and correct.
6.20 Contracts and Commitments. Section 6.20 of the Bradley Disclosure Letter sets forth (i) all notes, debentures, bonds and other evidence of indebtedness which are secured or collateralized by mortgages, deeds of trust or other security interests in the Bradley Properties or personal property of Bradley and each of the Bradley Subsidiaries and (ii) each Commitment entered into by Bradley or any of the Bradley Subsidiaries which may result in total payments or liability in excess of $10,000. Copies of the foregoing are listed in Section 6.20 of the Bradley Disclosure Letter and the copies of such documents, which have previously been provided or made available to Tucker and its counsel, are true and correct copies. None of Bradley or any of the Bradley Subsidiaries has received any notice of a default that has not been cured under any of the documents described in clause (i) above or is in default respecting any payment obligations thereunder beyond any applicable grace periods, except where such default would not have a Bradley Material Adverse Effect. All options of Bradley or any of the Bradley Subsidiaries to purchase real property are set forth in Section 6.20 of the Bradley Disclosure Letter and such options and Bradley's or any of the Bradley Subsidiaries' rights thereunder are in full force and effect. All joint venture agreements to which Bradley or any of the Bradley Subsidiaries is a party are set forth in Section 6.20 of the Bradley Disclosure Letter and neither Bradley nor any of the Bradley Subsidiaries is in default with respect to any obligations, which individually or in the aggregate are material, thereunder.
6.21 Development Rights. Set forth in Section 6.21 of the Bradley Disclosure Letter is a list of all agreements entered into by Bradley or any of the Bradley Subsidiaries relating to the development or construction of real estate properties. The copies of such agreements are listed in Section 6.21 of the Bradley Disclosure Letter and the copies of such documents, which have previously been provided or made available to Tucker and its counsel, are true and correct.
6.22 Bradley Common Stock. The issuance and delivery by Bradley of shares of Bradley Common Stock in connection with the Merger and this Agreement have been duly and validly authorized by all necessary corporate action on the part of Bradley except for the approval of its stockholders contemplated by this Agreement. The shares of Bradley Common Stock to be issued in connection with the Merger and this Agreement, when issued in accordance with the terms of this Agreement, will be validly issued, fully paid, nonassessable and free of preemptive rights.
6.23 Convertible Securities. Bradley has no outstanding options, warrants or other securities exercisable for, or convertible into, shares of Bradley Common Stock, the terms of which would require any anti-dilution adjustments by reason of the consummation of the transactions contemplated hereby.
6.24 Disclosure. The representations, warranties and statements made by Bradley in this Agreement, the Ancillary Agreements and in the Bradley Disclosure Letter and in the certificates and other documents, delivered pursuant hereto do not contain any untrue statement of a material fact, and, when taken together, do not omit to state any material fact necessary to make such representations, warranties and statements, in light of the circumstances under which they are made, not misleading.
6.25 Definition of Bradley's Knowledge. As used in this Agreement, the phrase "to the knowledge of Bradley" or "to the best knowledge of Bradley" (or words of similar import) means the knowledge or the best knowledge of those individuals identified in Section 6.25 of the Bradley Disclosure Letter, and includes any fact, matter or circumstance which any of such individuals, as an ordinary and prudent business person employed in the same capacity in the same type and size of business as Bradley, should have known.
7.1 Acquisition Proposals. Unless and until this Agreement shall have been terminated in accordance with its terms, Tucker agrees and covenants (a) that neither it nor any Tucker Subsidiary shall, and each of them shall direct and use its best efforts to cause its respective officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of the Tucker Subsidiaries) not to, directly or indirectly, initiate, solicit or encourage any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation or similar transaction involving, or any purchase of 10% or more of the assets or any equity securities or partnership interests (including, without limitation, TOP Units) of, Tucker or any Tucker Subsidiary, other than the transactions contemplated by this Agreement (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; (b) that Tucker will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing and will take the necessary steps to inform the individuals or entities referred to above of the obligations undertaken in this Section 7.1; and (c) that Tucker will notify Bradley immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, it; provided, however, that nothing contained in this Section 7.1 shall prohibit the Board of Directors of Tucker, from (i) furnishing information to or entering into discussions or negotiations with, any person or entity that makes an unsolicited bona fide Acquisition Proposal, if, and only to the extent that, (A) the Board of Directors of Tucker, after consultation with and based upon the advice of Mayer, Brown & Platt, or another nationally recognized law firm selected by Tucker, determines in good faith that such action is required for the Board of Directors to comply with its fiduciary duties to stockholders under applicable law, (B) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, Tucker provides written notice to Bradley to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person or entity, and (C) Tucker keeps Bradley informed of the status of any such discussions or negotiations; and (ii) to the extent applicable, complying with Rule 14e-2 and Rule 14a-9 promulgated under the Exchange Act with regard to an Acquisition Proposal. Notwithstanding anything to the contrary set forth herein, nothing in this Section 7.1 shall (x) permit Tucker to terminate this Agreement (except as specifically provided in Article 9 hereof), (y) except as specifically provided in Article 9 hereof, permit Tucker or any Tucker Subsidiary to enter into any agreement with respect to an Acquisition Proposal during the term of this Agreement (it being agreed that during the term of this Agreement, neither Tucker nor any Tucker Subsidiary shall enter into any agreement with any person that provides for, or in any way facilitates, an Acquisition Proposal), or (z) affect any other obligation of any party under this Agreement.
(a) Prior to the Effective Time, except as specifically permitted by this Agreement, unless the other party has consented in writing thereto, Bradley and Tucker:
(i) Shall use their reasonable best efforts, and shall cause each of their respective Subsidiaries to use their reasonable best efforts, to preserve intact their business organizations and goodwill and keep available the services of their respective officers and employees;
(ii) Shall confer on a regular basis with one or more representatives of the other to report operational matters of materiality and, subject to Section 7.1, any proposals to engage in material transactions;
(iii) Shall promptly notify the other of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of their businesses or in the operation of their properties, any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the breach in any material respect of any representation or warranty contained herein; and
(iv) Shall promptly deliver to the other true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement.
(b) Prior to the Effective Time, unless Bradley has consented as set forth below in this clause (b) Tucker:
(i) Shall, and shall cause each Tucker Subsidiary to, conduct its operations according to their usual, regular and ordinary course in substantially the same manner as heretofore conducted, subject to clauses
(ii) Shall not, and shall cause each Tucker Subsidiary not to, acquire, enter into an option to acquire or exercise an option or contract to acquire additional real property, incur additional indebtedness, encumber assets or commence construction of, or enter into any agreement or commitment to develop or construct, shopping centers or any other type of real estate projects (including, but not limited, to options to purchase real property listed on Section 5.29 of the Tucker Disclosure Letter), except that (i) Tucker may incur additional indebtedness under the Amended and Restated Revolving Credit Agreement dated as of June 27, 1994 among TOP, Tucker and The First National Bank of Boston, as agent, and (ii) except that Tucker may extend the maturity of the current mortgage financing encumbering the Pavilion at Mequon until June 30, 1996 upon the same terms and conditions which are currently in effect for such financing;
(iii) Shall not amend its Charter or Bylaws, and shall cause each Tucker Subsidiary not to amend its Charter, Bylaws, joint venture documents, partnership agreements or equivalent documents except (A) as contemplated by this Agreement or (B) in the event that the Merger is not consummated
1996, Tucker may adopt an amendment to the TOP Partnership Agreement, substantially in the form of Exhibit I hereto;
(iv) Shall not (A) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date hereof and disclosed pursuant to this Agreement, issue any shares of its capital stock, effect any stock split, reverse stock split, stock dividend, recapitalization or other similar transaction, (B) grant, confer or award any option, warrant, conversion right or other right not existing on the date hereof to acquire any shares of its capital stock, (C) increase any compensation or enter into or amend any employment agreement with any of its present or future officers or directors, or (D) adopt any new employee benefit plan (including any stock option, stock benefit or stock purchase plan) other than the Severance Plan and the Severance Agreements or amend any existing employee benefit plan in any material respect, except for changes which are less favorable to participants in such plans (in connection with the foregoing, Tucker hereby agrees that (i) the aggregate payments which may be paid after the date hereof under the Tucker Property Manager Bonus Program shall not exceed $150,000 and (ii) Tucker shall award a maximum of $25,000 as bonus compensation for employees who are not executive officers at or immediately prior to the Effective Time);
(v) Shall not (A) declare, set aside or pay any dividend or make any other distribution or payment with respect to any shares of its capital stock, except in compliance with Section 7.15 of this Agreement, or (B) except in connection with the use of shares of capital stock to pay the exercise price or tax withholding in connection with the Tucker Stock Option Plan, directly or indirectly redeem, purchase or otherwise acquire any shares of its capital stock or capital stock of any of the Tucker Subsidiaries, or make any commitment for any such action;
(vi) Shall not, and shall not permit any of the Tucker Subsidiaries to, sell, lease or otherwise dispose of (A) any Tucker Properties or any portion thereof or any of the capital stock of or partnership or other interests in any of the Tucker Subsidiaries or (B) except in the ordinary course of business, any of its other assets which are material, individually or in the aggregate;
(vii) Shall not, and shall not permit any of the Tucker Subsidiaries to, make any loans, advances or capital contributions to, or investments in,
(viii) Shall not, and shall not permit any of the Tucker Subsidiaries to, pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) of Tucker included in the Tucker Reports or incurred in the ordinary course of business consistent with past practice;
(ix) Shall not, and shall not permit any of the Tucker Subsidiaries to, enter into any Commitment which may result in total payments or liability by or to it in excess of $25,000 (provided, however, that nothing contained in this clause (ix) shall permit Tucker or any Tucker Subsidiary to take any action prohibited by the other provisions of this Section 7.2); provided further, that notwithstanding anything in this Section 7.2(b) to the contrary, Tucker's current Senior Vice President of Asset Management shall be permitted on behalf of Tucker or a Tucker Subsidiary to enter into a Commitment (A) to make any repairs and/or prevent damage to any Tucker Properties as is necessary in the event of an emergency situation as long as he uses his reasonable best efforts to contact Bradley prior to entering into such Commitment and provides Bradley with a copy of such Commitment on the day after such Commitment is entered into and (B) to the extent that the failure to enter into such Commitment will result in Tucker being in default under the terms of any of the Tucker Leases so long as Tucker has provided Bradley with five days prior written notice that it is entering
(x) Except for the Severance Plan and the Severance Agreements, shall not, and shall not permit any of the Tucker Subsidiaries to, enter into any Commitment with any officer, director, consultant or affiliate of Tucker or any of the Tucker Subsidiaries;
(xi) Shall provide Bradley with a reasonable opportunity to review any comment on any federal income tax returns filed by Tucker or any Tucker Subsidiary prior to the Effective Time; and
(xii) Shall not, without prior notification and consultation with Bradley, terminate any employee under circumstances which would result in severance payments to such employee pursuant to the Severance Plan or pay any severance benefits to any employee under the terms of the Severance Plan on account of such employee's purported termination for "Good Reason" (within the meaning of the Severance Plan) on account of a substantial adverse change in his position, authorities, responsibilities or status.
Bradley shall respond to any consent requested by Tucker pursuant to this Section 7.2(b) within five (5) business days of the receipt of such request. In the event no response is received by Tucker by the expiration of such five business day period, such consent shall be deemed given.
(c) Notwithstanding anything to the contrary set forth in this Agreement and without limiting any of the other rights of Bradley set forth herein, between the date of this Agreement and the Effective Time, Bradley and the Bradley Subsidiaries may enter into leases with respect to all or any portion of the Bradley Properties, acquire, lease, enter into an option to acquire, lease or exercise an option or contract to acquire, additional real property, incur additional indebtedness, encumber assets or commence construction of, or enter into any agreement or commitment to develop or construct, shopping centers or other real estate projects.
7.3 Meetings of Stockholders. Each of Bradley and Tucker will take all action necessary in accordance with applicable law and its Charter and Bylaws to convene a meeting of its stockholders as promptly as practicable to consider and vote upon the approval of this Agreement and the transactions contemplated hereby. The Board of Directors of Bradley and Tucker each shall recommend that its stockholders approve this Agreement and the transactions contemplated hereby and Bradley and Tucker each shall use their reasonable best efforts to obtain such approval, including, without limitation, by timely mailing the joint proxy statement/prospectus contained in the Form S-4 (as defined in Section 7.7 hereof) to their respective stockholders; provided, however, that nothing contained in this Section 7.3 shall prohibit the Board of Directors of Bradley or the Board of Directors of Tucker from failing to make such recommendation or using their reasonable best efforts to obtain such approval if the Board of Directors of Bradley or Tucker, as the case may be, has determined in good faith, after consultation with and based upon the advice of Mayer, Brown & Platt or Goodwin, Procter & Hoar, or another nationally recognized firm selected by Tucker or Bradley, as the case may be, that such action is necessary for such Board of Directors to comply with its fiduciary duties to its stockholders under applicable law. Bradley and Tucker shall coordinate and cooperate with respect to the timing of such meetings and shall use their reasonable best efforts to hold such meetings on the same day. It shall be a condition to the mailing of the Form S-4 that (i) Bradley shall have received a "comfort" letter from Coopers & Lybrand LLP, independent public accountants for Tucker, dated as of a date within two business days before the date on which the Form S-4 shall become effective, with respect to the financial statements of Tucker included or incorporated in the Form S-4, in form and substance reasonably satisfactory to Bradley, and customary in scope and substance for "comfort" letters delivered by independent public accountants in connection with registration statements and proxy statements similar to the Form S-4, and (ii) Tucker shall have received a "comfort" letter from KPMG Peat Marwick LLP, independent public accountants for Bradley, dated as of a date within two business days before the date on which the Form S-4 shall become effective, with respect to the financial statements of Bradley included or incorporated in the Form S-4, in form and substance reasonably satisfactory to Tucker, and customary in scope and substance for "comfort" letters delivered by independent public accountants in connection with registration statements and proxy statements similar to the Form S-4.
7.4 Filings; Other Action. Subject to the terms and conditions herein provided, Tucker and Bradley shall: (a) to the extent required, promptly make their respective filings and thereafter make any other required submissions under the HSR Act with respect to the Merger; (b) use all reasonable best efforts to cooperate with one another in (i) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from, governmental or regulatory authorities of the United States, the several states and foreign jurisdictions and any third parties in connection with the execution and delivery of this Agreement, and the Ancillary Agreements and the consummation of the transactions contemplated by such agreements and (ii) timely making all such filings and timely seeking all such consents, approvals, permits or authorizations; (c) use all reasonable best efforts to obtain in writing any consents required from third parties to effectuate the Merger, such consents to be in reasonably satisfactory form to Tucker and Bradley; and (d) use all reasonable best efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purpose of this Agreement or the Ancillary Agreements, the proper officers and directors of Bradley and Tucker shall take all such necessary action.
7.5 Inspection of Records. From the date hereof to the Effective Time, each of Tucker and Bradley shall allow all designated officers, attorneys, accountants and other representatives of the other access at all reasonable times to the records and files, correspondence, audits and properties, as well as to all information relating to commitments, contracts, titles and financial position, or otherwise pertaining to the business and affairs, of Tucker and Bradley and their respective subsidiaries.
7.6 Publicity. Bradley and Tucker shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or any transaction contemplated herein and shall not issue any such press release or make any such public statement without the prior consent of the other party, which consent shall not be unreasonably withheld; provided, however, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may be required by law or the rules of the NYSE if it has used its reasonable best efforts to consult with the other party and to obtain such party's consent but has been unable to do so in a timely manner.
7.7 Registration Statement. Bradley and Tucker shall cooperate and promptly prepare and Bradley shall file with the SEC as soon as practicable a Registration Statement on Form S-4 under the Securities Act, with respect to the shares of Bradley Common Stock issuable in the Merger, a portion of which Form S-4 shall also serve as the joint proxy statement with respect to the meetings of the stockholders of Tucker and of Bradley in connection with the Merger (in its entirety, the "Form S-4"). The respective parties will cause the Form S-4 to comply as to form in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations thereunder. Each of Bradley and Tucker shall furnish all information about itself and its business and operation and all necessary financial information to the other as the other may reasonably request in connection with the preparation of the Form S-4. Bradley shall use its reasonable best efforts, and Tucker will cooperate with Bradley, to have the Form S-4 declared effective by the SEC as promptly as practicable. Bradley shall use its reasonable best efforts to obtain, prior to the effective date of the Form S-4, all necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement and will pay all expenses incident thereto. Bradley agrees that the Form S-4 and each amendment or supplement thereto at the time of mailing thereof and at the time of the respective meetings of stockholders of Bradley and Tucker, will 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, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing shall not apply to the extent that any such untrue statement of a material fact or omission to state a material fact was made by Bradley in reliance upon and in conformity with information concerning Tucker furnished to Bradley by Tucker for use in the Form S-4. Tucker agrees that the information provided by it for inclusion in the Form S-4 and each amendment or supplement thereto, at the time of mailing thereof and at the time of the respective meetings of stockholders of Bradley and Tucker, will 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, in light of the circumstances under which they were made, not misleading. Bradley will advise and deliver copies (if any) to Tucker, promptly after it receives notice thereof, of the time when the Form S-4 has become effective or any supplement or amendment has been filed, the issuance of any stop order, the suspension of the qualification of the Bradley Common Stock issuable in connection with the Merger for offering or sale in any any request by the SEC for amendment of the Form S-4 or comments thereon and responses thereto or requests by the SEC for additional information.
7.8 Listing Application. Bradley shall promptly prepare and submit to the NYSE a listing application covering the shares of Bradley Common Stock issuable in the Merger, and shall use its best efforts to obtain, prior to the Effective Time, approval for the listing of such Bradley Common Stock, subject to official notice of issuance.
7.9 Further Action. Each party hereto shall, subject to the fulfillment at or before the Effective Time of each of the conditions of performance set forth herein or the waiver thereof, perform such further acts and execute such documents as may reasonably be required to effect the Merger. Without limiting the foregoing, at the Closing, Tucker shall deliver, deeds, affidavits or other documents necessary for Bradley to obtain endorsements to existing title insurance policies or new title insurance policies which (i) insure that Bradley is the general partner (by merger) of the record owner of the Tucker Properties, subject only to the Encumbrances and (ii) contain a so-called "non-imputation" endorsement (such non-imputation endorsement insuring that Bradley will not be charged with the imputed knowledge of Tucker, the Tucker Subsidiaries and Affiliates thereof). In connection with the Closing, Tucker and each Tucker Subsidiary shall use its best efforts to deliver to Bradley such deeds, bills of sale, assignments, certificates and affidavits as are required to effectuate the consummation of the transactions described herein.
(a) At least 30 days prior to the Closing Date, Tucker shall deliver to Bradley a list of names and addresses of those persons who were, in Tucker's reasonable judgment, at the record date for its stockholders' meeting to approve the Merger, "affiliates" (each such person, an "Affiliate") of Tucker within the meaning of Rule 145. Tucker shall provide Bradley such information and documents as Bradley shall reasonably request for purposes of reviewing such list. Tucker shall use its reasonable best efforts to deliver or cause to be delivered to Bradley, prior to the Closing Date, from each of the Affiliates of Tucker identified in the foregoing list, an Affiliate Letter in the form attached hereto as Exhibit D. Bradley shall be entitled to place legends as specified in such Affiliate Letters on the certificates evidencing any shares of Bradley Common Stock to be received by such Affiliates pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the shares of Bradley Common Stock, consistent with the terms of such Affiliate Letters.
(b) Bradley shall file the reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the SEC thereunder, and it will take such further action as any Affiliate of Tucker may reasonably request, all to the extent required from time to time to enable such Affiliate to sell shares of Bradley Common Stock received by such Affiliate in the Merger without registration under the Securities Act pursuant to (i) Rule 145(d)(1) or (ii) any successor rule or regulation hereafter adopted by the SEC.
7.11 Expenses. Subject to the provisions of Article 9, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, except that (a) the filing fee in connection with the HSR Act filing, if any, (b) the filing fee in connection with the filing of the Form S-4 or Proxy Statement/Prospectus with the SEC and (c) the expenses incurred for printing and mailing the Form S-4, shall be shared equally by Tucker and Bradley. All costs and expenses for professional services rendered pursuant to the transactions contemplated by this Agreement including, but not limited to, investment banking and legal services, will be paid by each party incurring such services.
(a) Bradley agrees that all rights to indemnification or exculpation now existing in favor of the directors, officers, employees, advisors and agents of Tucker and the Tucker Subsidiaries (including, without limitation, TOP) as provided in their respective charters or By-Laws in effect as of the date hereof with respect to matters occurring at or prior to the Effective Time shall survive the Merger and shall continue in full force and effect.
For a period of six years after the Effective Time, Bradley shall not amend, repeal or otherwise modify the provisions in its Charter and Bylaws providing for exculpation of director liability and indemnification in any manner that would materially and adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees, advisors or agents of Tucker in respect of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement), unless such modification is required by law; provided, however, that in the event any claim or claims are asserted or made either prior to the Effective Time or within such six year period, all rights to indemnification in respect of any such claim or claims shall continue until disposition of any and all such claims. In connection with the execution of this Agreement, all directors of Tucker shall enter into amendments to their existing indemnification agreements with Tucker and Bradley, substantially in the form of Exhibit H hereto, which will be effective as of the Effective Time. Nothing in the following paragraphs of this Section 7.12 shall create an inference, either by omission or inclusion, that limits in any way the rights set forth herein.
(b) In addition to the rights provided in Section 7.12(a) above, in the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any action by or on behalf of any or all security holders of Tucker or Bradley or by or in the right of Tucker or Bradley or any claim, action, suit, proceeding or investigation in which any person who is now, or has been, at any time prior to the date hereof, or who becomes prior to the Effective Time, a director of Tucker (the "Indemnified Parties"), is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he is or was a director of Tucker or any of the Tucker Subsidiaries (including, without limitation, TOP) or any action or omission by such person in his capacity as a director, or (ii) this Agreement or the transactions contemplated by this Agreement, whether in any case asserted or arising before or after the Effective Time, Bradley on one hand and the Indemnified Parties on the other hand, hereto agree to cooperate and use their reasonable best efforts to defend against and respond thereto. It is understood and agreed that, after the Effective Time, Bradley shall indemnify and hold harmless, as and to the full extent permitted by applicable law, each Indemnified Party against any losses, claims, liabilities, expenses (including reasonable attorneys' fees and expenses), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation. In addition, after the Effective Time, in the event of any such threatened or actual claim, action, suit, proceeding or investigation, Bradley shall promptly pay and advance expenses and costs incurred by each Indemnified Person as they become due and payable in advance of the final disposition of any claim, action, suit, proceeding or investigation to the fullest extent and in the manner permitted by law. Notwithstanding the foregoing, Bradley shall pay for only one counsel and one local counsel for all Indemnified Parties unless the use of one such counsel and one local counsel for such Indemnified Parties would present such counsel with a conflict of interest, in which case Bradley shall employ other counsel to the extent necessary to avoid a conflict of interest with any counsel or party involved in the matter. Notwithstanding anything to the contrary set forth in this Agreement, Bradley (i) shall not be liable for any settlement effected without its prior written consent, and (ii) shall not have any obligation hereunder to any Indemnified Party if a court of competent jurisdiction shall determine in a final and non-appealable order that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. In the event of such a final and non- appealable determination by a court that such indemnification is prohibited by applicable law, the Indemnified Person shall promptly refund to Bradley the amount of all expenses theretofore advanced pursuant hereto. Any Indemnified Party wishing to claim indemnification under this Section, upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify Bradley of such claim and the relevant facts and circumstances with respect thereto, provided that the failure to provide such notice shall not affect the obligations of Bradley except to the extent such failure to notify materially prejudices Bradley's ability to defend such claim, action, suit, proceeding or investigation.
(c) At or prior to the Effective Time, Bradley shall purchase directors' liability insurance policy coverage for Tucker's directors and Executive Officers as provided in Schedule 7.12 hereto.
(d) This Section 7.12 is intended for the irrevocable benefit of, and to grant third party rights to, the Indemnified Parties and their successors, assigns and heirs and shall be binding on all successors and assigns of Bradley. Each of the Indemnified Parties shall be entitled to enforce the covenants contained in this Section 7.12 and Bradley acknowledges and agrees that each Indemnified Party would suffer irreparable harm and that no adequate remedy at law exists for a breach of such covenants.
(e) To the extent permitted by law, all rights of indemnification for the benefit of any director of Tucker shall be mandatory rather than permissive.
(f) Any determination required to be made with respect to whether a party's conduct complies with the standards set forth in the Charter or By-Laws of the Surviving Corporation or under applicable law shall be made by (i) Sidley & Austin or (ii) in the event Sidley & Austin shall not be available to make such determination, then Skadden, Arps, Slate, Meagher & Flom or (iii) in the event that neither Sidley & Austin nor Skadden, Arps, Slate, Meagher & Flom shall be available to make such determination, then Kirkland & Ellis, or (iv) in the event that none of Sidley & Austin, Skadden, Arps, Slate, Meagher & Flom or Kirkland & Ellis shall be available to make such determination, then O'Melveny & Myers (in each case whose reasonable fees and expenses shall be paid by the Surviving Corporation).
(g) Notwithstanding anything to the contrary set forth in this Agreement, in the event any Indemnified Party is required to file suit against Bradley to enforce the indemnity obligations provided for in this Section, it shall be entitled to all expenses, including reasonable attorneys' fees and expenses, which it has incurred in enforcing its rights hereunder.
(h) In the event that Bradley or any of its successors or assigns (i) consolidates with or merges into any other person or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person or entity, then, and in each such case, proper provision shall be made so that the successors and assigns of Bradley assume the obligations set forth in this Section.
7.13 Reorganization. From and after the date hereof and until the Effective Time, neither Bradley nor Tucker nor any of their respective subsidiaries or other affiliates shall (i) knowingly take any action, or knowingly fail to take any action, that would jeopardize qualification of the Merger as a reorganization within the meaning of Section 368(a)(1)(A) of the Code or (ii) enter into any contract, agreement, commitment or arrangement with respect to the foregoing. Following the Effective Time, Bradley shall use its best efforts to conduct its business in a manner that would not jeopardize the characterization of the Merger as a reorganization within the meaning of Section 368(a) of the Code.
(a) Bradley agrees that Tucker and the Tucker Subsidiaries, and the Surviving Corporation and its subsidiaries after the Effective Time, will provide benefit plans to employees of Tucker and the Tucker Subsidiaries that, at the option of Bradley, either (i) will be no less favorable, in the aggregate, than those provided by Bradley and the Bradley Subsidiaries to their employees or (ii) will, in the aggregate, be no less favorable than those provided by Tucker and the Tucker Subsidiaries to their employees immediately prior to the date of this Agreement. Nothing contained in this Agreement shall be construed to grant any right of continued employment to any present employee of Tucker or any of the Tucker Subsidiaries.
(b) Except for normal increases in the ordinary course of business that are consistent with past practices and cost increases of third party providers necessary to maintain benefits at current levels that, in the aggregate, do not result in a material increase in benefits or compensation expense to Tucker or any of the Tucker Subsidiaries or as set forth in Section 5.16 of the Tucker Disclosure Letter, Tucker will not, and will not permit any of the Tucker Subsidiaries to, adopt or amend (except as may be required by law and except for the establishment of the Severance Plan and the Severance Agreements) any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit agreements, trusts, plans, funds or other arrangements for the benefit or welfare of any director, officer or employee that increase in any manner the compensation, retirement, welfare or fringe benefits of any officer or employee or pay any benefit not required by any existing plan or arrangement (including without limitation the granting of stock options) or take any action or grant any benefit not expressly required under the terms of any existing agreements, trusts, plans, funds or other such arrangements or enter into any contract, agreement, commitment or arrangement to any of the foregoing.
(a) Prior to the Effective Time, Tucker and Bradley shall cooperate and coordinate with each other so that (i) the record date for regular quarterly dividends and distributions with respect to the fourth quarter of 1995 and thereafter until the Effective Time shall occur on the same date, (ii) the payment date for each such regular quarterly dividend and distribution shall be on the last day of such applicable quarter, and (iii) the amount of each such regular quarterly dividend and distribution shall not exceed $.25 per quarter for Tucker and $.33 per quarter for Bradley.
(b) For its taxable year ending at the Effective Time (the "Short Taxable Year") Tucker will not have any (i) "net income from foreclosure property" as defined by Section 857(b)(4) of the Code or (ii) "net income derived from prohibited transactions" as defined by Section 857(b)(6) of the Code. Immediately prior to the Effective Time, Tucker will cause to be distributed a dividend (within the meaning of Section 316 of the Code) to its stockholders (the "Merger Dividend") of an amount such that (i) Tucker's "real estate investment trust taxable income" as defined in Section 857(b)(2) of the Code for the Short Taxable Year shall equal zero; (ii) Tucker's current and accumulated earnings and profits as described in Section 312 of the Code for the Short Taxable Year shall equal zero; and (iii) Tucker's "deduction for dividends paid during the taxable year" (within the meaning of Sections 561 and 857(a)(1) of the Code and determined without regard to "capital gain dividends" within the meaning of Section 857(b) of the Code) for the Short Taxable Year will equal or exceed the amount set forth in Section 857(a)(1)(A) and (B) of the Code.
(c) Tucker will do all things necessary to ensure that it continues to meet all of the requirements to be treated as a REIT for all purposes under the Code and the income tax provisions of the State of Illinois (and any other state in which Tucker is subject to tax and which provides for the taxation of REITs in a manner similar to the treatment of REITs under Sections 856-860 of the Code) and shall make any and all required filings in connection therewith, including providing Bradley with all information, documentation and assistance Bradley may reasonably request in order for Bradley to mail the stockholder demand letters required by Treasury Regulation 1.857-8 within 30 days after the Effective Time and to take any other actions that may be necessary or appropriate for Bradley, as the Surviving Corporation, to take in order to maintain Tucker's status as a REIT through the Effective Time.
(d) Bradley shall pay a dividend in connection with the Closing to its stockholders in an amount per share equal to the quotient obtained by dividing (x) the Merger Dividend per share paid by Tucker pursuant to Section 7.15(b) by (y) the Exchange Ratio.
(e) Until the Effective Time, Bradley shall not declare, set aside or pay any dividend or make any other distribution or payment with respect to any of its respective shares of capital stock which is "extraordinary." For the purposes of this Agreement, a dividend, distribution or payment with respect to capital stock shall be considered "extraordinary" if (a) the Board of Directors of Bradley designates such cash payment as "extraordinary" when declared or (b) the amount by which any cash payment exceeds 200% of the most recent cash dividend declared by the Board of Directors of Bradley.
7.16 IRS Private Letter Ruling. Tucker shall cooperate and assist Bradley in submitting an application for and obtaining the private letter ruling from the IRS which is described in Section 8.3(i) hereto.
8.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger and the other transactions contemplated herein shall be subject to the fulfillment at or prior to the Effective Time of the following conditions, any or all of which may be waived, in whole or in part by the parties hereto, to the extent permitted by applicable law:
(a) This Agreement and the transactions contemplated hereby shall have been approved by the requisite vote of stockholders of Bradley and Tucker.
(b) The waiting period applicable to the consummation of the Merger under the HSR Act, if applicable, shall have expired or been terminated.
(c) Neither of the parties hereto shall be subject to any order, ruling or injunction of a court of competent jurisdiction which prohibits the consummation of the transactions contemplated by this Agreement. In the event any such order, ruling or injunction shall have been issued, each party agrees to use its best efforts to have any such order, ruling or injunction lifted, stayed or reversed.
(d) The Form S-4 shall have been declared effective by the SEC under the Securities Act, and no stop order suspending the effectiveness of the Form S-4 shall have been issued by the SEC, and no proceedings for that purpose shall have been initiated or, to the knowledge of Bradley or Tucker, threatened by the SEC.
(e) Bradley shall have obtained the approval for the listing of the shares of Bradley Common Stock issuable in the Merger on the NYSE, subject to official notice of issuance.
(f) The consents set forth in Schedule 8.1(f) hereof shall have been obtained. All other consents, authorizations, orders and approvals of (or filings or registrations with) any governmental commission, board, other regulatory body or third parties required to be made or obtained by Bradley, Tucker and their respective subsidiaries and affiliated entities in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements shall have been obtained or made, except where the failure to have obtained or made any such consent, authorization, order, approval, filing or registration, would not have (i) a Tucker Material Adverse Effect or (ii) a Bradley Material Adverse Effect, as the case may be.
8.2 Conditions to Obligations of Tucker to Effect the Merger. The obligation of Tucker to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, unless waived by Tucker:
(a) Each of the representations and warranties of Bradley contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time and Tucker shall have received a certificate, dated the Closing Date, signed on behalf of Bradley by the President of Bradley to the foregoing effect.
(b) Bradley shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and Tucker shall have received a certificate, dated the Closing Date, signed on behalf of Bradley by the President of Bradley to the foregoing effect.
(c) Tucker shall have received the opinion of Mayer, Brown & Platt, or another nationally recognized law firm selected by Tucker, dated not less than five business days prior to the date the Form S-4 is declared effective by the SEC, reasonably acceptable to Tucker, and subject to customary conditions and qualifications (including reliance, in part, on representations of Bradley and Tucker and certain stockholders of Tucker), to the effect that the Merger will be treated for federal income tax purposes as a tax-free reorganization qualifying under the provisions of Sections 368(a)(1)(A) of the Code, which opinion shall not have been withdrawn or modified in any material respect.
(d) At closing, Tucker shall have received the opinion of Goodwin, Procter & Hoar, or another nationally recognized law firm selected by Bradley, in form and substance reasonably satisfactory to Tucker, to the effect that, for all applicable tax years for which Bradley's federal income tax returns are subject to audit and Bradley is subject to assessment for taxes reportable therein and through the date of the Closing, Bradley has qualified to be taxed as a REIT under Sections 856 through 860 of the Code.
(e) From the date of this Agreement through the Effective Time, there shall not have occurred any change concerning Bradley or any of the Bradley Subsidiaries that has had or could be reasonably likely to have a Bradley Material Adverse Effect and Tucker shall have received a certificate, dated the Closing Date, signed on behalf of Bradley by the President of Bradley to the foregoing effect.
8.3 Conditions to Obligation of Bradley to Effect the Merger. The obligations of Bradley to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, unless waived by Bradley:
(a) Each of the representations and warranties of Tucker contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time, and Bradley shall have received a certificate, dated the Closing Date, signed on behalf of Tucker by the President of Tucker to the foregoing effect.
(b) Tucker shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and Bradley shall have received a certificate, dated the Closing Date, signed on behalf of Tucker by the President of Tucker to the foregoing effect.
(c) Bradley shall have received the opinion of Goodwin, Procter & Hoar, or another nationally recognized law firm selected by Bradley, dated not less than five business days prior to the date the Form S-4 is declared effective by the SEC, reasonably acceptable to Bradley, and subject to customary conditions and qualifications (including reliance, in part, on representations of Bradley and Tucker and certain stockholders of Tucker), to the effect that the Merger will be treated for federal income tax purposes as a tax-free reorganization qualifying under the provisions of Sections 368(a)(1)(A) of the Code, which opinion shall not have been withdrawn or modified in any material respect.
(d) At closing, Bradley shall have received (i) the opinion of Mayer, Brown & Platt, or another nationally recognized law firm selected by Tucker, in form and substance reasonably satisfactory to Bradley, to the effect that, for the taxable year ended December 31, 1995 and for the short taxable year ending at the date of the Closing, Tucker has qualified to be taxed as a REIT under Sections 856 through 860 of the Code and (ii) the opinion of Coopers & Lybrand LLP, independent public accountants for Tucker, in form and substance reasonably satisfactory to Bradley, to the effect that for the taxable years ended December 31, 1993 and December 31, 1994, Tucker qualified to be taxed as a REIT under Section 856 through 860 of the Code.
(e) From the date of this Agreement through the Effective Time, there shall not have occurred any change concerning Tucker or any of the Tucker Subsidiaries, that has had or could be reasonably likely to have a Tucker Material Adverse Effect and Bradley shall have received a certificate, dated the Closing Date, signed on behalf of Tucker by the President of Tucker to the foregoing effect.
(f) Tucker shall have obtained and delivered to Bradley estoppel certificates dated no earlier than 45 days prior to the Effective Time with respect to (x) each of the leases and REA Agreements set forth on Schedule 8.3(f) hereof and (y) leases representing a total of 50% of the total rented space of each Tucker Property, other than rented space represented by the leases listed on Schedule 8.3(f) hereof. Such estoppel certificates shall either be (x) substantially in the form of Exhibit E hereto or (y) in the form required by the applicable lease.
(g) Tucker and all of the limited partners of TOP shall have executed the amended and restated TOP Partnership Agreement in the form attached hereto as Exhibit B and the transfers of securities contemplated by Section 1.5 of this Agreement and all of the actions described in Section 1.6 of this Agreement have been consummated or shall have occurred.
(h) Bradley shall have obtained a letter from Coopers & Lybrand LLP, independent public accountants for Tucker, in form and substance reasonably satisfactory to Bradley, certifying that (i) Tucker has satisfied the requirements of Section 7.15(b) of this Agreement and (ii) for federal income tax purposes, Tucker will not have any accumulated or current earnings or profits immediately prior to the Effective Time.
(i) Bradley shall have received a private letter ruling from the IRS, in form and substance reasonably satisfactory to Bradley, to the effect that following the consummation of the Merger, each of TFC and Tucker Properties Investment, Inc. will qualify as a "qualified REIT subsidiary" of Bradley under Section 856(i) of the Code.
9.1 Termination. This Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after approval and adoption of this Agreement by the stockholders of Tucker and Bradley:
(a) by mutual written consent of Bradley and Tucker; or
(b) by either Bradley or Tucker if any United States federal or state court of competent jurisdiction or other governmental entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and non-appealable, provided that the party seeking to terminate shall have used its best efforts to appeal such order, decree, ruling or other action; or
(c) by Bradley upon a breach of any representation, warranty, covenant or agreement on the part of Tucker set forth in this Agreement, or if any representation or warranty of Tucker shall have become untrue, in either case such that the conditions set forth in Section 8.3(a) or Section 8.3(b), as the case may be, would be incapable of being satisfied by June 30, 1996; provided, however, that, in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section
(d) by Tucker upon a breach of any representation, warranty, covenant or agreement on the part of Bradley set forth in this Agreement, or if any representation or warranty of Bradley shall have become untrue, in either case such that the conditions set forth in Section 8.2(a) or Section 8.2(b), as the case may be, would be incapable of being satisfied by June 30, 1996; provided, however, that, in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section
(e) by Bradley if (i) the Board of Directors of Tucker shall have failed to make, or shall have withdrawn, amended, modified or changed its approval or recommendation of this Agreement or any of the transactions contemplated hereby; (ii) Tucker shall have failed as soon as practicable to mail the Form S-4 to its stockholders or to include the recommendation of its Board of Directors of this Agreement and the transactions contemplated hereby in the Form S-4; (iii) the Board of Directors of Tucker shall have recommended that stockholders of Tucker accept or approve an Acquisition Proposal by a person other than Bradley (or Tucker or its Board shall have resolved to do such); or (iv) Tucker or its Board of Directors shall have resolved to do any of the
(f) by Tucker, if the Board of Directors of Tucker recommends to Tucker's stockholders approval or acceptance of a Acquisition Proposal by a person other than Bradley, but only in the event that the Board of Directors of Tucker, after consultation with and based upon the advice of Mayer, Brown & Platt or another nationally recognized law firm, has determined in good faith that such action is necessary for the Board of Directors of Tucker to comply with its fiduciary duties to its stockholders under applicable law;
(g) by either Bradley or Tucker if this Agreement and the transactions contemplated hereby shall have failed to receive the requisite vote for approval and adoption by the stockholders of Bradley or Tucker upon the holding of a duly convened stockholder meeting;
(h) by Tucker if (i) the Board of Directors of Bradley shall have failed to make, or shall have withdrawn, amended, modified or changed its approval or recommendation of this Agreement or the Merger or (ii) if the Board of Directors of Bradley recommends to Bradley's stockholders approval or acceptance of a proposal by a person other than Tucker to acquire 50% or more of the assets or stock of Bradley, by way of merger, tender offer, exchange offer or similar
(i) by either Bradley or Tucker, if the Merger shall not have been consummated on or before June 30, 1996 (other than due to the failure of the party seeking to terminate this Agreement to perform its obligations under this Agreement required to be performed by it at or prior to the Effective Time).
The right of any party hereto to terminate this Agreement pursuant to this Section 9.1 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person controlling any such party or any of their respective employees, officers, directors, agents, representatives or advisors, whether prior to or after the execution of this Agreement.
(a) In the event of the termination and abandonment of this Agreement pursuant to Section 9.1 hereof, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto or its affiliates, directors, officers or stockholders and all rights and obligations of any party hereto shall cease except for agreements contained in Section 10.5; provided, however, that nothing contained in this Section 9.2 shall relieve any party from liability for any breach of this Agreement or shall relieve Tucker from any liability under this Article 9.
(b) If (x) Bradley terminates this Agreement pursuant to Section 9.1(e)(iii) or pursuant to 9.1(c) as a result of a willful breach by Tucker or (y) Tucker terminates this Agreement pursuant to Section 9.1(f), then Tucker shall pay to Bradley an amount (the "Termination Amount") in cash equal to the sum of (i) $3,000,000, plus (ii) Bradley's out-of-pocket costs and expenses, in connection with this Agreement and the transactions contemplated hereby, including, without limitation, fees and disbursements of accountants, attorneys and investment bankers, up to a maximum of $2,000,000 in accordance with the provisions of Section 9.3.
(c) If Bradley terminates this Agreement pursuant to Section 9.1(e)(i), 9.1(e)(ii), 9.1(e)(iv) or 9.1(c) (except for a termination because of a willful breach by Tucker in which case the provisions of Section 9.2(b) will apply), Tucker shall pay all of Bradley's out-of-pocket costs and expenses, in connection with this Agreement and the transactions contemplated hereby, including, without limitation, fees and disbursements of accountants, attorneys and investment bankers up to a maximum of $2,000,000 ("Expenses") in accordance with the provisions of Section 9.3.
(d) If at any time prior to or within one year after termination of this Agreement (unless such termination was pursuant to Section 9.1(a), (b), (d), (g), (h) or (i)) Tucker enters into an agreement relating to an Acquisition Proposal with a person other than Bradley or Tucker's Board of Directors recommends or resolves to recommend to Tucker's stockholders approval or acceptance of an Acquisition Proposal with a person other than Bradley, then, upon the entry into such agreement or the making of such recommendation or resolution, Tucker shall pay to Bradley the Termination Amount in accordance with the provisions of Section 9.3 which amount shall be reduced by any monies previously paid by Tucker to Bradley pursuant to Section 9.2(b) or Section 9.2(c).
(e) At any time prior to or within one year after termination of this Agreement, Tucker shall not enter into any agreement relating to an Acquisition Proposal with a person other than Bradley unless such agreement provides that such person shall, upon the execution of such agreement, pay any Termination Amount due Bradley under this Section 9.2. All such amounts shall be paid in accordance with the provisions of Section 9.3.
(f) The parties acknowledge and agree that the provisions for payment of Expenses and/or the Termination Amount are included herein in order to induce Bradley to enter into this Agreement and to reimburse Bradley for incurring the costs and expenses related to entering into this Agreement and contemplated by this Agreement. The parties hereto agree that Bradley's rights to payment of the Expenses and/or Termination Amount shall be in addition to any other rights or remedies under contract, at law or in equity to which Bradley may be entitled.
(g) Notwithstanding any provision to the contrary herein, the aggregate amount of the Termination Amount or Expenses, as the case may be, payable to Bradley pursuant to this Section 9.2 shall be subject to the limitations set forth in Section 9.3.
9.3 Payment of Termination Amount or Expenses.
(a) In the event that Tucker is obligated to pay Bradley the Termination Amount and/or Expenses pursuant to Section 9.2 (the "Section 9.2 Amount"), Tucker (or any other person to the extent provided by Section 9.2(d)) shall pay to Bradley from the applicable Section 9.2 Amount deposited into escrow in accordance with the next sentence, an amount equal to the lesser of (m) the Section 9.2 Amount and (n) the sum of (1) the maximum amount that can be paid to Bradley without causing Bradley to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute income described in Sections 856(c)(2)(A)-(H) or 856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by Bradley's certified public accountants, plus (2) in the event Bradley receives either (X) a letter from Bradley's counsel indicating that Bradley has received a ruling from the IRS described in Section 9.3(b)(ii) or (Y) an opinion from Bradley's counsel as described in Section 9.3(b)(ii), an amount equal to the Section 9.2 Amount less the amount payable under clause (1) above. To secure Tucker's obligation to pay these amounts, Tucker shall deposit into escrow an amount in cash equal to the Section 9.2 Amount with an escrow agent selected by Bradley and on such terms (subject to Section 9.3(b)) as shall be agreed upon by Bradley and the escrow agent. The payment or deposit into escrow of the Section 9.2 Amount pursuant to this Section 9.3(a) shall be made within three days of the event which gives rise to the payment of the Section 9.2 Amount by wire transfer or bank check.
(b) The escrow agreement shall provide that the Section 9.2 Amount in escrow or any portion thereof shall not be released to Bradley unless the escrow agent receives any one or combination of the following: (i) a letter from Bradley's certified public accountants indicating the maximum amount that can be paid by the escrow agent to Bradley without causing Bradley to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute Qualifying Income or a subsequent letter from Bradley's accountants revising that amount, in which case the escrow agent shall release such amount to Bradley, or (ii) a letter from Bradley's counsel indicating that Bradley received a ruling from the IRS holding that the receipt by Bradley of the Section 9.2 Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of Sections 856(c)(2) and (3) of the Code (or alternatively, Bradley's legal counsel has rendered a legal opinion to the effect that the receipt by Bradley of the Section 9.2 Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of Sections 856(c)(2) and (3) of the Code), in which case the escrow agent shall release the remainder of the Section 9.2 Amount to Bradley. Tucker agrees to amend this Section 9.3 at the request of Bradley in order to (x) maximize the portion of the Section 9.2 Amount that may be distributed to Bradley hereunder without causing Bradley to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code, (y) improve Bradley's chances of securing a favorable ruling described in this Section 9.3(b) or (z) assist Bradley in obtaining a favorable legal opinion from its counsel as described in this Section 9.3(b); provided that Bradley's legal counsel has rendered a legal opinion to Bradley to the effect that such amendment would not cause Bradley to fail to meet the requirements of Section 856(c)(2) or (3) of the Code. The escrow agreement shall also provide that any portion of the Section 9.2 Amount held in escrow for five years shall be released by the escrow agent to Tucker. Tucker shall not be a party to such escrow agreement and shall not bear any cost of or have liability resulting from the escrow agreement.
(c) Notwithstanding anything to the contrary set forth in this Agreement, in the event Bradley is required to file suit to seek all or a portion of Termination Amount and/or the Expenses, it shall be entitled to all expenses, including attorneys' fees and expenses, which it has incurred in enforcing its payment of such expenses shall be subject to the limitations of Section 9.3(a) (determined as if such expenses were included in the Section 9.2 Amount).
9.4 Extension; Waiver. At any time prior to the Effective Time, any party hereto, by action taken by its Board of Directors, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party.
10.1 Nonsurvival of Representations, Warranties and Agreements. All representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall not survive the Merger, provided, however, that the agreements contained in Article 4, the last sentence of Section 7.4 and Sections 7.10, 7.12, 7.13 and 7.14 and this Article 10 shall survive the Merger.
10.2 Notices. Any notice required to be given hereunder shall be in writing and shall be sent by facsimile transmission (confirmed by any of the methods that follow), courier service (with proof of service), hand delivery or certified or registered mail (return receipt requested and first-class postage prepaid) and addressed as follows:
If to Tucker:Kenneth L. Tucker, President
or to such other address as any party shall specify by written notice so given, and such notice shall be deemed to have been delivered as of the date so delivered.
10.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, except for the provisions of Article 4 and Sections 7.10, 7.12, 7.13 and 7.14(b), nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement.
10.4 Entire Agreement. This Agreement, the Exhibits, the Tucker Disclosure Letter and the Bradley Disclosure Letter and any documents delivered by the parties in connection herewith constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto.
(a) As used herein, "Confidential Material" means, with respect to either party hereto (the "Providing Party"), all information, whether oral, written or otherwise, furnished to the other party hereto (the "Receiving Party") or such Receiving Party's directors, officers, partners, Affiliates (as defined in Rule 12b-2 under the Exchange Act), employees, agents or representatives (collectively, "Representatives"), by the Providing Party and all reports, analyses, compilations, studies and other material prepared by the Receiving Party or its Representatives (in whatever form maintained, whether documentary, computer storage or otherwise) containing, reflecting or based upon, in whole or in part, any such information. The term "Confidential Material" does not include information which (i) is or becomes generally available, to the public other than as a result of a disclosure by the Receiving Party, its Representatives or anyone to whom the Receiving Party or any of its Representatives transmit any Confidential Material in violation of this Agreement, (ii) is or becomes known or available to the Receiving Party on a non-confidential basis from a source (other than the Providing Party or one of its Representatives) who is not, to the knowledge of the Receiving Party after reasonable inquiry, prohibited from transmitting the information to the Receiving Party or its Representatives by a contractual, legal, fiduciary or other obligation or (iii) is contained in the Form S-4.
(b) Subject to paragraph (c) below or except as required by law, the Confidential Material will be kept confidential and will not, without the prior written consent of the Providing Party, be disclosed by the Receiving Party or its Representatives, in whole or in part, and will not be used by the Receiving Party or its Representatives, directly or indirectly, for any purpose other than in connection with this Agreement, the Merger or the evaluating, negotiating or advising with respect to a transaction contemplated herein. Moreover, each Receiving Party agrees to transmit Confidential Material to its Representatives only if and to the extent that such Representatives need to know the Confidential Material for purposes of such transaction and are informed by such Receiving Party of the confidential nature of the Confidential Material and of the terms of this Section. In any event, each Receiving Party will be responsible for any actions by its Representatives which are not in accordance with the provisions hereof.
(c) In the event that either Receiving Party, its Representatives or anyone to whom such Receiving Party or its Representatives supply the Confidential Material, are requested (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand, any informal or formal investigation by any government or governmental agency or authority or otherwise in connection with legal process) to disclose any Confidential Material, such Receiving Party agrees (i) to immediately notify the Providing Party of the existence, terms and circumstances surrounding such a request, (ii) to consult with the Providing Party on the advisability of taking legal available steps to resist or narrow such request and (iii) if disclosure of such information is required, to furnish only that portion of the Confidential Material which, in the opinion of such Receiving Party's counsel, such Receiving Party is legally compelled to disclose and to cooperate with any action by the Providing Party to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Material (it being agreed that the Providing Party shall, reimburse the Receiving Party for all reasonable out-of-pocket expenses incurred by the Receiving Party in connection with such cooperation).
(d) In the event of the termination of this Agreement in accordance with its terms, promptly upon request from either Providing Party, the Receiving Party shall, except to the extent prevented by law, redeliver to the Providing Party or destroy all tangible Confidential Material and will not retain any copies, extracts or other reproductions thereof in whole or in part. Any such destruction shall be certified in writing to the Providing Party by an authorized officer of the Receiving Party supervising the same. Notwithstanding the foregoing, each Receiving Party and one Representative designated by each Receiving Party shall be permitted to retain one permanent file copy of each document constituting Confidential Material.
(e) Tucker and Bradley agree that prior to and within one year after the termination of this Agreement they shall not solicit for employment, whether as an employee or independent contractor, any person who is (or has been within a period of one year) employed by the other, without the written consent of the other.
10.6 Amendment. This Agreement may be amended by the parties hereto, by action taken by their respective Board of Directors, at any time before or after approval of matters presented in connection with the Merger by the stockholders of Tucker and Bradley, but after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.
10.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland without regard to its rules of conflict of laws. Each of Tucker and Bradley hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of Maryland and of the United States of America located in the State of Maryland (the "Maryland Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the Maryland Courts and agrees not to plead or claim in any Maryland Court that such litigation brought therein has been brought in any inconvenient forum.
10.8 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto.
10.9 Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only, and shall be given no substantive or interpretive effect whatsoever.
10.10 Interpretation. In this Agreement, unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa.
10.11 Waivers. Except as provided in this Agreement, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained in this Agreement. The waiver by any party hereto of a breach of any provision hereunder shall not operate or be construed as a waiver of any prior or subsequent breach of the same or any other provision hereunder.
10.12 Incorporation. The Tucker Disclosure Letter and the Bradley Disclosure Letter and all Exhibits and Schedules attached hereto and thereto and referred to herein and therein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein.
10.13 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement 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.
10.14 Enforcement of Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions thereof in any Maryland Court, this being in addition to any other remedy to which they are entitled at law or in equity.
(a) As used in this Agreement, the word "Subsidiary" or "Subsidiaries" when used with respect to any party means any corporation, partnership, joint venture, business trust or other entity, of which such party directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization.
(b) As used in this Agreement, the word "person" means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, a limited liability company, any unincorporated organization or any other entity.
(c) As used in this Agreement, the word "affiliate" shall have the meaning set forth in Rule 12b-2 of the Exchange Act.
10.16 Schedules. Any fact or item disclosed in one section of any Disclosure Letter or schedule hereto ("Schedule") shall be deemed to be disclosed with respect to any other relevant section of such Disclosure Letter or Schedule, whether or not an explicit cross-reference appears.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the same to be duly delivered on their behalf on the day and year first written above.
ATTEST: BRADLEY REAL ESTATE, INC.
/s/ WILLIAM B. KING /s/ E. LAWRENCE MILLER Name: William B. King Name: E. Lawrence Miller Title: Secretary Title: President and CEO
/s/ RICHARD H. TUCKER /s/ KENNETH L. TUCKER Name: Richard H. Tucker Name: Kenneth L. Tucker Title: Secretary Title: Chairman of the Board
Board of Directors of Bradley Real Estate, Inc.
Bradley Real Estate, Inc. ("Bradley") and Tucker Properties Corporation ("Tucker") have entered into an Agreement and Plan of Merger dated as of October 30, 1995 (the "Agreement") pursuant to which Tucker will be merged with and into Bradley in a transaction (the "Merger") in which each share of Tucker's common stock, par value $.001 per share, will be converted into the right to receive .665 shares (the "Exchange Ratio") of common stock of Bradley, par value $.01 per share, subject to certain adjustments as set forth in the Agreement. You have requested our opinion as to whether the Exchange Ratio is fair, from a financial point of view, to the stockholders of Bradley.
Alex. Brown & Sons Incorporated, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. We have acted as financial advisor to the Board of Directors of Bradley in connection with the transaction described above and will receive a fee for our services. We have also acted as co-manager of a public offering of the common stock of Bradley. Alex. Brown & Sons Incorporated regularly publishes research reports regarding the real estate investment trust industry and the businesses and securities of publicly owned companies in that industry. In the ordinary course of business, we may actively trade the securities of both Bradley and Tucker for our own account and the account of our customers and, accordingly, may at any time hold a long or short position in securities of Bradley and Tucker.
In connection with our opinion, we have reviewed certain publicly available financial information concerning Tucker and certain internal financial analyses and other information furnished to us by Bradley and Tucker. We have also held discussions with members of the senior managements of Bradley and Tucker regarding the business and prospects of Tucker. In addition, we have (i) reviewed the reported price and trading activity for the common stock of Bradley and Tucker, (ii) compared certain financial and stock market information for Tucker with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations and (iv) performed such other studies and analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and for purposes of this opinion have assumed the accuracy, completeness and fairness thereof. With respect to information relating to the prospects of Tucker, we have assumed that such information reflects the best currently available estimates and judgments of the managements of Bradley and Tucker as to the likely future financial performance of Tucker. In addition, we have not made an independent evaluation or appraisal of the assets of Tucker, nor have we been furnished with any such evaluation or appraisal. Our opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of this letter.
Our advisory services and the opinion expressed herein are for the information of the Board of Directors of Bradley and do not constitute a recommendation to Bradley's stockholders as to how they should vote at the stockholders' meeting in connection with the Merger. We hereby consent, however, to the inclusion of this opinion as an exhibit to any proxy or registration statement distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the date of this letter, the Exchange Ratio is fair, from a financial point of view, to the stockholders of Bradley.
ALEX. BROWN & SONS INCORPORATED
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Maryland General Corporation Law ("MGCL") permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Articles of Amendment and Restatement (the "Bradley Charter") of Bradley Real Estate, Inc. ("Bradley") contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law.
The Bradley Charter authorizes Bradley, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director, officer, agent, employee or plan administrator of Bradley or of its predecessor Bradley Real Estate Trust (the "Trust") or (ii) any individual who, at the request of Bradley, serves or has served in any of these capacities with another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise. The Bylaws of Bradley obligate Bradley, to the maximum extent permitted by Maryland law, to indemnify (i) any present or former director or officer of Bradley; (ii) any individual who, at the request of Bradley, serves or has served another corporation, partnership, joint venture, trust or other enterprise as a director or officer; or (iii) any present or former trustee or officer of the Trust.
The MGCL requires a corporation (unless its charter provides otherwise, which the Bradley Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty; (b) the director or officer actually received an improper personal benefit in money, property or services; or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation. In addition, the MGCL requires a Maryland corporation, as a condition to advancing expenses, to obtain (i) a written affirmation by the director or officer of good faith belief that he has met the standard of conduct necessary for indemnification by the corporation as authorized by the corporation's bylaws and (ii) a written statement by or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met.
Bradley has a claims-made directors and officers liability insurance policy that insures the directors and officers of Bradley against loss from claimed wrongful acts and insures Bradley for indemnifying the directors and officers against such loss. The policy limit of liability is $3,000,000 each policy year and is subject to a retention of $150,000 of loss by Bradley.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
**To be filed by amendment.
The opinions of PaineWebber Incorporated will be included, and the opinion of Alex. Brown & Sons Incorporated is included, as Annex B and C, respectively, to the Prospectus/Proxy Statement included in this Registration Statement.
(a) The 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 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.
(b) The registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes 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.
(d) 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 Securities Act of 1933 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 Securities Act of 1933 and will be governed by the final adjudication of such issue.
(e) The registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.
(f) The registrant hereby undertakes to supply by means of post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
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-4 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 THE 16TH DAY OF JANUARY, 1996.
By: /s/ E. Lawrence Miller
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 DATES INDICATED.
**To be filed by amendment. | S-4/A | S-4/A | 1996-01-16T00:00:00 | 1996-01-16T11:59:31 |
0000950117-96-000041 | 0000950117-96-000041_0004.txt | THIS LINE OF CREDIT NOTE AMENDS AND RESTATES, EFFECTIVE AS OF DECEMBER 15, 1995, THAT CERTAIN LINE OF CREDIT NOTE DATED FEBRUARY 19, 1993 IN THE PRINCIPAL AMOUNT OF TWO HUNDRED THOUSAND DOLLARS ($200,000) EXECUTED BY PHYSICIAN SUPPORT SYSTEMS, INC. AND PAYABLE TO THE ORDER OF MERIDIAN BANK, BUT SHALL NOT RELEASE OR DISCHARGE PHYSICIAN SUPPORT SYSTEMS, INC. FROM ANY ACCRUED DUTIES, OBLIGATIONS, OR LIABILITIES UNDER OR IN CONNECTION WITH SUCH LINE OF CREDIT NOTE.
AMENDED AND RESTATED LINE OF CREDIT NOTE
FOR VALUE RECEIVED, PHYSICIAN SUPPORT SYSTEMS, INC., a Delaware Corporation and SPRING ANESTHESIA GROUP, INC., a California corporation (collectively, the "Maker"), jointly and severally promise to pay to the order of Meridian Bank, ("Payee") at its address at 51 South Duke Street, Lancaster, Pennsylvania 17602 or at such other place as Payee may from time to time designate in writing, the principal sum of Six Hundred Thousand Dollars ($600,000) or such greater or lesser amount as shall be shown on the records of Payee as the unpaid principal balance of this Note, in lawful money of the United States of America, (a) within fifteen (15) days after demand and (b) immediately and automatically upon any Event of Default as defined and described in Paragraphs 7.1(e) or 7.1(f) of the Loan Agreement (as hereinafter defined), on the terms and conditions described below.
1. Interest. (a) Payment. Maker also promises to pay interest on the unpaid principal balance of this Note at an annual rate equal to Payee's National Commercial Rate as hereinafter defined plus one percent (1.0%). Accrued interest shall be payable monthly commencing April 1, 1993 and continuing on the first day of each month thereafter until the principal amount of, and all accrued interest on, this Note have been paid in full and all credit availability under this Note has expired or been terminated. The interest rate provided in this Note shall apply to the indebtedness evidenced hereby before, on and after the date or dates on which Payee enters judgment on this Note.
(b) National Commercial Rate. "National Commercial Rate" means a floating annual rate of interest that is designated from time to time by Payee as the "National Commercial Rate" and is used by Payee as a reference base with respect to different interest rates charged to borrowers generally. The interest rate payable hereunder shall change simultaneously with and automatically upon Payee's designation of any change in such reference rate. Payee's determination and designation from time to time of the reference rate shall not in any way preclude Payee from making loans to other borrowers at a rate which is higher or lower than or different from the reference rate.
2. Maximum Legal Rate. Maker shall not be obligated to pay and Payee shall not collect interest at a rate in excess of the maximum permitted by law or the maximum that will not subject Payee to any civil or criminal penalties. If, because of the acceleration of maturity, the payment of interest in advance or any other reason, Maker is required, under the provisions of any Loan Document (as defined in the Loan Agreement referred to below), or otherwise, to pay interest at a rate in excess of such maximum rate, the rate of interest under such provisions shall immediately and automatically be reduced to such maximum rate, and any payment made in excess of such maximum rate, together with interest thereon at the rate provided herein from the date of such payment, shall be immediately and automatically applied to the reduction of the unpaid principal balance of this Note as of the date on which such excess payment was made. If the amount to be so applied to reduction of the unpaid principal balance exceeds the unpaid principal balance, the amount of such excess shall be refunded by Payee to Maker.
3. Interest Computation. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed (365 or 366/360, as the case may be).
4. Late Charges. Maker shall pay to Payee a monthly late charge imposed by Payee for any payment of principal and/or interest received by Payee after the fifteenth day of any month, in an amount equal to two percent (2.0%) of any overdue amount.
5. Application of Payments. All payments shall be applied first to the payment in full of any costs incurred in the collection of any sum due under this Note, including (without limitation) reasonable attorneys' fees, then to the payment in full of any late charges, then to the payment in full of accrued, unpaid interest and finally to the reduction of the unpaid principal balance of this Note.
6. Loan Agreement. This Note is the Line of Credit Note referred to in the Amended and Restated Loan Agreement dated August 12, 1993, as amended on February 25, 1994, on May 19, 1994, on March 19, 1995, on September 13, 1995, and on December 15, 1995 between Maker and Payee (as that Loan Agreement may be amended from time to time, the "Loan Agreement") and evidences the Maker's obligations under the Line of Credit Loan described in the Payee's commitment letter dated December 15, 1995. This Note is issued subject to the terms and conditions of the Loan Agreement and is entitled to all the benefits contained in, and security referred to in, the Loan Agreement. Prior to the occurrence of an Event of Default or Payee making a demand for payment hereunder, Maker may borrow, repay and reborrow under the Line of Credit Loan. Any capitalized terms used herein which are not defined herein shall have the meanings given to them in the Loan Agreement.
7. Security. This Note is secured, and payment hereof is assured, by the Security Documents.
This Note is issued subject to the terms and conditions of, and is entitled to all the rights, remedies and benefits contained in, the Loan Agreement, the Security Documents, and all other documents and instruments regarding this Note executed pursuant to the Loan Agreement. All of the Notes shall be secured on a pari passu basis by the Security Documents.
8. Payee's Lien. Maker also grants Payee, as further security for payment of this Note, a lien upon and security interest in any deposit or other account of Maker with Payee and any other debts which Payee may owe to Maker from time to time.
9. Default: Rights, Remedies. Upon the occurrence of an Event of Default as defined in the Loan Agreement and so long as the Event of Default shall continue unwaived by Payee:
(a) Upon the occurrence of an Event of Default described in Paragraphs 7.1(e) or 7.1(f) of the Loan Agreement, the credit availability evidenced by this Note shall immediately and automatically terminate, and thereafter the Payee shall have no obligation to make any advances thereunder. Upon the occurrence of an Event of Default as described in Paragraphs 7.1(a) through 7.1(4) or 7.1(g) through 7.1(k) of the Loan Agreement, the Payee may, by written notice to Maker, terminate all credit availability evidenced by this Note, and thereafter Payee shall have no obligation to make any advances thereunder.
(b) Payee may exercise any of its rights and remedies set forth in the Loan Agreement, the Security Documents, and all other documents and instruments regarding this Note executed pursuant to the Loan Agreement.
THE FOLLOWING PARAGRAPH SETS FORTH A WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST THE MAKER. IN GRANTING THIS WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST THE MAKER, THE MAKER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, AND, ON THE ADVICE OF SEPARATE COUNSEL OF THE MAKER, UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS THE MAKER HAS OR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES AND THE COMMONWEALTH OF PENNSYLVANIA.
(c) Maker authorizes and empowers any attorney of any court of record of Pennsylvania or elsewhere to appear for and enter judgment against it for the then unpaid principal amount of this Note, together with all accrued unpaid interest and late charges, costs of suit and reasonable attorneys' fees, with or without declaration or stay of execution, and with release of errors, for which this Note or a copy hereof shall serve as a sufficient warrant. This power to enter judgment against Maker shall not be exhausted by any exercise of the power and shall continue from time to time and at all times until full payment of all amounts due under this Note.
(d) The remedies of Payee shall be cumulative and concurrent, and may be pursued singly, successively, or together, at its sole discretion, and may be exercised as often as the occasion therefore shall occur; and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release thereof.
10. Joint and Several Obligation. All references herein to the "Maker" shall be deemed to refer to each and every person defined herein as the "Maker" individually, and to all of them, collectively, jointly and severally, as though each were named whenever the term "Maker" is used, and this Note shall be a joint and several obligation of all of them.
11. Waivers. Maker and all guarantors of and sureties for this Note waive presentment for payment, demand, notice of dishonor, protest, and notice of protest with regard to this Note, all errors, defects and imperfections in any proceedings instituted by Payee under the terms of this Note, or of the Loan Agreement, or any of the Loan Documents, and all benefit that might accrue to Maker by virtue of any present or future laws exempting any property, real or personal, or any part of the proceeds arising from any sale of any such property, from attachment, levy, or sale under execution, or providing for any stay of execution, exemption from civil process, or extension of time for payment; and Maker agrees that any real estate that may be levied upon pursuant to a judgment obtained by virtue hereof, on any writ of execution issued thereon, may be sold upon any such writ in whole or in part in any order desired by Payee.
12. Unconditional Liability. Maker and all endorsers, sureties and guarantors hereby jointly and severally waive all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Note, and they agree that the liability of each of them shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Payee, and consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Payee with respect to the payment or other provisions of this Note, and to the release of any part of any collateral, with or without substitution, and agree that additional makers, endorsers, guarantors, or sureties may become parties hereto without notice to them or affecting their liability hereunder.
13. Construction. This Note shall be construed and enforced in accordance with the domestic, internal law, but not the law of conflict of laws, of the Commonwealth of Pennsylvania.
14. Severability. Any provision contained in this Note which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
15. Successors, Heirs and Assigns. The provisions of this Note shall bind and inure to the benefit of Maker and Payee and their respective successors, heirs, personal representatives and permitted assigns.
IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has caused this Amended and Restated Note to be duly executed by its authorized officers this December l6, 1995.
By /s/ Hamilton F. Potter, III
SPRING ANESTHESIA GROUP, INC., a surviving corporation as a result of the merger of PSS/INVESTMENT, INC. with and into SPRING
By /s/ Hamilton F. Potter, III
Accepted by Meridian Bank, as Payee, this December 16, 1995.
By /s/ Randall M. Johnston
On this 18th day of December, 1995, before me, a notary public, the undersigned officer, personally appeared Hamilton F. Potter, III, who acknowledged himself to be the Vice President of PHYSICIAN SUPPORT SYSTEMS, INC., a Delaware corporation, and that he as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
On this 18th day of December, 1995, before me, a notary public, the undersigned officer, personally appeared Hamilton F. Potter, III, who acknowledged himself to be the Vice President of SPRING ANESTHESIA GROUP, INC., a California corporation (the surviving corporation as a result of the merger of PSS INVESTMENT, INC. with and into SPRING ANESTHESIA GROUP, INC.,) and that he as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal. | S-1/A | EX-10 | 1996-01-16T00:00:00 | 1996-01-16T16:27:59 |
0000784056-96-000002 | 0000784056-96-000002_0004.txt | 1. The Plan. This amended and restated Plan (the "Plan") is the written plan, contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of 1940 (the "1940 Act"), of Tax-Free Trust of Arizona (the "Trust"). Part I of the Plan applies solely to the Front-Payment Class ("Class A") of shares of the Trust, Part II solely to the Level-Payment Class ("Class C") and Part III to all classes.
2. Disinterested Trustees. While any Part of this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not "interested persons" of the Trust shall be committed to the discretion of such disinterested Trustees. Nothing herein shall prevent the involvement of others in such selection and nomination if the final decision on any such selection and nomination is approved by a majority of such disinterested Trustees.
Payments Involving Trust Assets Allocated to Front-Payment Shares
3. Applicability. This Part I of the Plan applies only to the Front-Payment Class ("Class A") of shares of the Trust (regardless of whether such class is so designated or is redesignated by some other name).
4. Definitions for Part I. As used in this Part I of the Plan, "Qualified Recipients" shall mean broker-dealers or others selected by Aquila Distributors, Inc. (the "Distributor"), including but not limited to any principal underwriter of the Trust, with which the Trust or the Distributor has entered into written agreements in connection with this Part I ("Class A Plan Agreements") and which have rendered assistance (whether direct, administrative, or both) in the distribution and/or retention of the Trust's Front-Payment Shares or servicing of shareholder accounts with respect to such shares. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Front-Payment Shares beneficially owned by such Qualified Recipient, or beneficially owned by its brokerage customers, other customers, other contacts, investment advisory clients, or other clients, if the Qualified Recipient was, in the sole judgment of the Distributor, instrumental in the purchase and/or retention of such shares and/or in providing administrative assistance or other services in relation thereto. "Administrator" shall mean Aquila Management Corporation or any successor serving as sub-adviser or administrator of the Fund.
5. Certain Payments Permitted. Subject to the direction and control of the Board of Trustees of the Trust, the Trust may make payments ("Class A Permitted Payments") to Qualified Recipients, which Class A Permitted Payments may be made directly, or through the Distributor or shareholder servicing agent as disbursing agent, which may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Plan are not accruable or for any fiscal year which is not a full fiscal year) 0.15 of 1% of the average annual net assets of the Trust represented by the Front-Payment Class of shares. Such payments shall be made only out of the Trust assets allocable to the Front-Payment Shares. The Distributor shall have sole authority (i) as to the selection of any Qualified Recipient or Recipients; (ii) not to select any Qualified Recipient; and (iii) the amount of Class A Permitted Payments, if any, to each Qualified Recipient provided that the total Class A Permitted Payments to all Qualified Recipients do not exceed the amount set forth above. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient; (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Front- Payment Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; furnishing (either alone or together with other reports sent to a shareholder by such person) monthly and year end statements and confirmations of purchases and redemptions; transmitting, on behalf of the Trust, proxy statements, annual reports, updating prospectuses and other communications from the Trust to its shareholders; receiving tabulating and transmitting to the Trust proxies executed by shareholders with respect to meetings of shareholders of the Trust; and providing such other related services as the Distributor or a shareholder may request from time to time; and (c) the possibility that the Qualified Holdings of the Qualified Recipient would be redeemed in the absence of its selection or continuance as a Qualified Recipient. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years.
6. Reports. While this Part I is in effect, the Trust's Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all Class A Permitted Payments made under Section 5 of the Plan, the identity of the Qualified Recipient of each payment, and the purposes for which the amounts were expended; and (ii) all fees of the Trust to the Distributor paid or accrued during such quarter. In addition, if any such Qualified Recipient is an affiliated person, as that term is defined in the Act, of the Trust, the Adviser, the Administrator or the Distributor, such person shall agree to furnish to the Distributor for transmission to the Board of Trustees of the Trust an accounting, in form and detail satisfactory to the Board of Trustees, to enable the Board of Trustees to make the determinations of the fairness of the compensation paid to such affiliated person, not less often than annually.
7. Effectiveness, Continuation, Termination and Amendment. To the extent required by the 1940 Act, this Part I of the Plan has been approved (i) by a vote of the Trustees, including those Trustees (the "Independent Trustees") who, at the time of such vote, were not "interested persons" (as defined in the 1940 Act) of the Trust and had no direct or indirect financial interest in the operation of this Plan or in any agreements related to this Plan, with votes cast in person at a meeting called for the purpose of voting on Part I of the Plan; and (ii) by a vote of holders of at least a "majority" (as defined in the 1940 Act) of the outstanding voting securities of the Front-Payment Class (or of any predecessor class or category of shares, whether or not designated as a class) and a vote of holders of at least a "majority" (as so defined) of the outstanding voting securities of the Level-Payment Class and/or of any other class whose shares are convertible into Front-Payment Shares. This Part I is effective as of the date first above written and will, unless terminated as hereinafter provided, continue in effect until April 30 of each year only so long as such continuance is specifically approved at least annually by the Trust's Trustees and its Independent Trustees with votes cast in person at a meeting called for the purpose of voting on such continuance. This Part I may be terminated at any time by the vote of a majority of the Independent Trustees or by shareholder approval of the class or classes of shares affected by this Part I as set forth in (ii) above. This Part I may not be amended to increase materially the amount of payments to be made without shareholder approval of the class or classes of shares affected by this Part I as set forth in (ii) above, and all amendments must be approved in the manner set forth in (i) above.
8. Class A Plan Agreements. In the case of a Qualified Recipient which is a principal underwriter of the Trust, the Class A Plan Agreement shall be the agreement contemplated by Section 15(b) of the 1940 Act since each such agreement must be approved in accordance with, and contain the provisions required by, the Rule. In the case of Qualified Recipients which are not principal underwriters of the Trust, the Class A Plan Agreements with them shall be their agreements with the Distributor with respect to payments under this Part I.
Payments Involving Trust Assets Allocated to Level-Payment Shares
9. Applicability. This Part II of the Plan applies only to the Level Payment Class ("Class C") of shares of the Trust (regardless of whether such class is so designated or is redesignated by some other name).
10. Definitions for Part II. As used in this Part II of the Plan, "Qualified Recipients" shall mean broker-dealers or others selected by Aquila Distributors, Inc. (the "Distributor"), including but not limited to any principal underwriter of the Trust, with which the Trust or the Distributor has entered into written agreements in connection with this Part II ("Class C Plan Agreements") and which have rendered assistance (whether direct, administrative, or both) in the distribution and/or retention of the Trust's Level-Payment Shares or servicing of shareholder accounts with respect to such shares. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Level-Payment Shares beneficially owned by such Qualified Recipient, or beneficially owned by its brokerage customers, other customers, other contacts, investment advisory clients, or other clients, if the Qualified Recipient was, in the sole judgment of the Distributor, instrumental in the purchase and/or retention of such shares and/or in providing administrative assistance or other services in relation thereto. "Administrator" shall mean Aquila Management Corporation or any successor serving as sub-adviser or administrator of the Fund.
11. Certain Payments Permitted. Subject to the direction and control of the Board of Trustees of the Trust, the Trust may make payments ("Class C Permitted Payments") to Qualified Recipients, which Class C Permitted Payments may be made directly, or through the Distributor or shareholder servicing agent as disbursing agent, which may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Plan are not accruable or for any fiscal year which is not a full fiscal year) 0.75 of 1% of the average annual net assets of the Trust represented by the Level-Payment Class of shares. Such payments shall be made only out of the Trust assets allocable to the Level-Payment Shares. The Distributor shall have sole authority (i) as to the selection of any Qualified Recipient or Recipients; (ii) not to select any Qualified Recipient; and (iii) the amount of Class C Permitted Payments, if any, to each Qualified Recipient provided that the total Class C Permitted Payments to all Qualified Recipients do not exceed the amount set forth above. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient; (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Level- Payment Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; furnishing (either alone or together with other reports sent to a shareholder by such person) monthly and year end statements and confirmations of purchases and redemptions; transmitting, on behalf of the Trust, proxy statements, annual reports, updating prospectuses and other communications from the Trust to its shareholders; receiving tabulating and transmitting to the Trust proxies executed by shareholders with respect to meetings of shareholders of the Trust; and providing such other related services as the Distributor or a shareholder may request from time to time; and (c) the possibility that the Qualified Holdings of the Qualified Recipient would be redeemed in the absence of its selection or continuance as a Qualified Recipient. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years.
12. Reports. While this Part II is in effect, the Trust's Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all Class C Permitted Payments made under Section 11 of the Plan, the identity of the Qualified Recipient of each payment, and the purposes for which the amounts were expended; and (ii) all fees of the Trust to the Distributor paid or accrued during such quarter. In addition, if any such Qualified Recipient is an affiliated person, as that term is defined in the Act, of the Trust, the Adviser, the Administrator or the Distributor, such person shall agree to furnish to the Distributor for transmission to the Board of Trustees of the Trust an accounting, in form and detail satisfactory to the Board of Trustees, to enable the Board of Trustees to make the determinations of the fairness of the compensation paid to such affiliated person, not less often than annually.
13. Effectiveness, Continuation, Termination and Amendment. This Part II has been approved (i) by a vote of the Trustees, including the Independent Trustees, with votes cast in person at a meeting called for the purpose of voting on Part II of the Plan; and (ii) by a vote of holders of at least a "majority" (as defined in the 1940 Act) of the outstanding voting securities of the Level-Payment Class. This Part II is effective as of the date first above written and will, unless terminated as hereinafter provided, continue in effect until April 30 of each year only so long as such continuance is specifically approved at least annually by the Trust's Trustees and its Independent Trustees with votes cast in person at a meeting called for the purpose of voting on such continuance. This Part II may be terminated at any time by the vote of a majority of the Independent Trustees or by the vote of the holders of a "majority" (as defined in the 1940 Act) of the outstanding voting securities of the Level-Payment Class. This Part II may not be amended to increase materially the amount of payments to be made without shareholder approval of the class or classes of shares affected by this Part II as set forth in (ii) above, and all amendments must be approved in the manner set forth in (i) above.
14. Class C Plan Agreements. In the case of a Qualified Recipient which is a principal underwriter of the Trust, the Class C Plan Agreement shall be the agreement contemplated by Section 15(b) of the 1940 Act since each such agreement must be approved in accordance with, and contain the provisions required by, the Rule. In the case of Qualified Recipients which are not principal underwriters of the Trust, the Class C Plan Agreements with them shall be their agreements with the Distributor with respect to payments under this Part II.
15. Certain Payments Permitted. Whenever the Administrator of the Trust (i) makes any payment directly or through the Trust's Distributor for additional compensation to dealers in connection with sales of shares of the Trust, which additional compensation may include payment or partial payment for advertising of the Trust's shares, payment of travel expenses, including lodging, incurred in connection with trips taken by qualifying registered representatives and members of their families to locations within or outside of the United States, other prizes or financial assistance to securities dealers in offering their own seminars or conferences, or other items described in the Trust's prospectus, in amounts that will not exceed the amount of the sales charges in respect of sales of shares of the Trust effected through such participating dealers whether retained by the Distributor or reallowed to participating dealers, or (ii) bears the costs, not borne by the Distributor, of printing and distributing all copies of the Trust's prospectuses, statements of additional information and reports to shareholders which are not sent to the Trust's shareholders, or the costs of supplemental sales literature and advertising, such payments are authorized.
It is recognized that, in view of the bearing by the Administrator of certain distribution expenses, the profits, if any, of the Administrator are dependent primarily on the administration fees paid by the Trust to the Administrator and that its profits, if any, would be less, or losses, if any, would be increased due to the bearing by it of such expenses. If and to the extent that any such administration fees paid by the Trust might, in view of the foregoing, be considered as indirectly financing any activity which is primarily intended to result in the sale of shares issued by the Trust, the payment of such fees is authorized by the Plan.
16. Certain Trust Payments Authorized. If and to the extent that any of the payments listed below are considered to be "primarily intended to result in the sale of" shares issued by the Trust within the meaning of the Rule, such payments are authorized under this Plan: (i) the costs of the preparation of all reports and notices to shareholders and the costs of printing and mailing such reports and notices to existing shareholders, irrespective of whether such reports or notices contain or are accompanied by material intended to result in the sale of shares of the Trust or other funds or other investments; (ii) the costs of the preparation and setting in type of all prospectuses and statements of additional information, and the costs of printing and mailing of all prospectuses and statements of additional information to existing shareholders; (iii) the costs of the preparation, printing and mailing of all proxy statements and proxies, irrespective of whether any such proxy statement includes any item relating to, or directed toward, the sale of the Trust's shares; (iv) all legal and accounting fees relating to the preparation of any such reports, prospectuses, statements of additional information, proxies and proxy statements; (v) all fees and expenses relating to the registration or qualification of the Trust and/or its shares under the securities or "Blue-Sky" laws of any jurisdiction; (vi) all fees under the Securities Act of 1933 and the 1940 Act, including fees in connection with any application for exemption relating to or directed toward the sale of the Trust's shares; (vii) all fees and assessments of the Investment Company Institute or any successor organization, irrespective of whether some of its activities are designed to provide sales assistance; (viii) all costs of the preparation and mailing of confirmations of shares sold or redeemed or share certificates, and reports of share balances; and (ix) all costs of responding to telephone or mail inquiries of investors.
17. Reports. While Part III of this Plan is in effect, the Trust's sub-adviser, Administrator or Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all payments made under Section 15 of this Plan; (ii) all costs of each item specified in Section 16 of this Plan (making estimates of such costs where necessary or desirable) during the preceding calendar or fiscal quarter; and (iii) all fees of the Trust to the Distributor, sub-adviser or Administrator paid or accrued during such quarter.
18. Effectiveness, Continuation, Termination and Amendment. To the extent required by the 1940 Act, this Part III of the Plan has, with respect to each class of shares outstanding, been approved (i) by a vote of the Trustees of the Trust and of the Independent Trustees, with votes cast in person at a meeting called for the purpose of voting on this Plan; and (ii) by a vote of holders of at least a "majority" (as defined in the 1940 Act) of the outstanding voting securities of such class and a vote of holders of at least a "majority" (as so defined) of the outstanding voting securities of any class whose shares are convertible into shares of such class. This Part III is effective with respect to each class of shares outstanding as of the date first above written and will, unless terminated as hereinafter provided, continue in effect with respect to each class of shares to which it applies until April 30 of each year only so long as such continuance is specifically approved with respect to that class at least annually by the Trust's Trustees and its Independent Trustees with votes cast in person at a meeting called for the purpose of voting on such continuance. This Part III of the Plan may be terminated at any time with respect to a given class by the vote of a majority of the Independent Trustees or by the vote of the holders of a "majority" (as defined in the 1940 Act) of the outstanding voting securities of that class. This Part III may not be amended to increase materially the amount of payments to be made without shareholder approval as set forth in (ii) above, and all amendments must be approved in the manner set forth in (i) above.
19. Additional Terms and Conditions. This Plan and each Part of it shall also be subject to all applicable terms and conditions of Rule 18f-3 under the Act as now in force or hereafter amended. Specifically, but without limitation, the provisions of Part III shall be deemed to be severable, within the meaning of and to the extent required by Rule 18f-3, with respect to each outstanding class of shares of the Trust. | 485APOS | EX-1 | 1996-01-16T00:00:00 | 1996-01-12T17:54:29 |
0000950120-96-000008 | 0000950120-96-000008_0002.txt | <DESCRIPTION>EXHIBIT 10.6 EMPLOYMENT AGREEMENT OF E. LEVY
AGREEMENT, dated as of September 13, 1995, by and
among ADVANCED NMR SYSTEMS, INC., a Delaware corporation
("ANMR"), ADVANCED MAMMOGRAPHY SYSTEMS, INC., a Delaware
corporation ("AMS") (ANMR and AMS sometimes referred to
collectively as the "Companies"), and ENRIQUE LEVY ("the
WHEREAS, AMS, an affiliate of ANMR, and ANMR are
both engaged in research and development and applications in
the field of magnetic resonance imaging; and
WHEREAS, each of the Companies desires to retain
the services of the Executive as President and Chief
Operating Officer of the Companies, and the Executive desires
NOW, THEREFORE, in consideration of the foregoing
and the mutual agreements contained herein, the Companies and
the Executive agree as follows:
1. Employment. Each of the Companies hereby
employs the Executive as its President and Chief Operating
Officer, and the Executive hereby accepts such employment and
agrees to perform services for the Companies, for the period
and upon the other terms and conditions set forth in this
2. Term. The term of the Executive's
employment (the "Term") shall be for a period of five years
commencing on October 1, 1995 (the "Commencement Date") and
terminating on September 30, 2000, and shall be automatically
renewable for an additional five year period unless
terminated by either the Executive or the Companies giving
written notice of non-renewal to the other prior to March 31,
2000. Should the Executive be unable for any reason to
commence his employment on the Commencement Date hereof, this
Agreement shall be void and of no force or effect and the
Executive shall promptly return to the Company all amounts he
received as a signing bonus pursuant to Section 5.01 hereof.
3. Representations of the Executive. The
Executive represents to the Companies that (i) he is not
bound by any restrictive covenant or other agreement (written
or oral) which would prevent or restrict him in any manner
whatsoever from performing his duties as the Chief Operating
Officer or President of the Companies as provided in this
Agreement, (ii) his entry into and the performance under this
Agreement will not cause a breach under his present
employment arrangement, and (iii) he does not possess
confidential information arising out of his prior employment
which would be utilized in connection with his employment by
4.01 Service with the Companies. The Executive
agrees to perform his executive employment duties consistent
with the positions specified in Section 1 hereof and he shall
be the most senior operating officer of both Companies with
exclusive senior authority and responsibility for all
operating decisions including, without limitation, those
involving hiring and firing of employees, research and
development, sales and marketing, administration and
financial reporting, subject to consultation with and
reporting to the Chairman of the Board and the Chief
Executive Officer and to the direction of the Board of
Directors of the respective Companies and in accordance with
the approved budget and business plan of the Companies. It
is understood that the Executive shall devote a portion of
his time hereunder to AMS serving as President and Chief
Operating Officer while AMS and ANMR are parties to a Shared
Services Agreement. The Executive shall allocate his time
between ANMR and AMS, as directed by the Chairman of the
Board and Chief Executive Officer of each of ANMR and AMS.
The Executive is serving as a member of the Board of
Directors of each of ANMR and AMS and the Executive shall
hereafter be on the management slate for election to the
Board of Directors of each of the Companies so long as this
Agreement is in effect; provided, however, that in the event
the Executive's employment hereunder is terminated as to one
of the Companies, the Executive shall immediately resign as a
Director of the affected Company. The Executive shall also
serve on the Executive Committee of each of ANMR and AMS and,
if requested, serve as a director of their subsidiaries as
may be in existence from time to time.
4.02 Performance of Duties. The Executive agrees
to serve each of the Companies faithfully and to the best of
his ability and to devote the time, attention and efforts
necessary to advance the business and affairs of each of the
Companies during the Term of this Agreement. The Executive
shall operate primarily out of the executive offices located
in Fort Lee, N.J. (the "Executive Offices"), but it is
understood that the Executive shall also spend considerable
time as business operations require at the Companies' office
in Wilmington, Massachusetts and he will undertake such
travel as is necessary to perform his duties under this
Agreement. It is further understood that the Executive shall
devote his full and exclusive business time to ANMR, AMS and
any of their affiliates (excluding the business of Medical
Diagnostics, Inc. and its subsidiaries with respect to
operating decisions of such entities), subject to the
discontinuation of services to AMS upon termination of the
Shared Services Agreement, as provided for in Section 8.02
hereof. During the Term hereof, as provided herein, the
Executive shall not serve as a director, consultant or
advisor to any other corporation or business entity not
affiliated with the Companies without the prior written
consent of the Companies' Executive Committees, which consent
shall not be unreasonably withheld.
5.01 Signing Bonus. In consideration of the
Executive agreeing to be President of the Companies in
accordance with this Agreement, the Executive shall receive a
$30,000 bonus upon his execution of this Agreement.
5.02 Base Salary. As compensation for all
services to be rendered by the Executive under this
Agreement, ANMR and AMS shall pay to the Executive an initial
base annual salary (the "Base Salary") of $225,000. The Base
Salary shall be paid in installments in accordance with
ANMR's normal payroll procedures and policies. The Base
Salary for the second year of this Agreement shall
automatically increase by an amount equal to at least ten
percent (10%) of the initial Base Salary for the first year.
Thereafter, the Base Salary shall be reviewed annually by the
Compensation Committee of the Board of Directors of ANMR and
AMS with any increases to be based upon the Executive's
success in increasing net income of the ANMR (excluding the
results of MDI) and AMS in excess of the annual budgeted net
income of the respective companies.
5.03 Payment by AMS. As between ANMR and AMS,
AMS shall bear a portion of the Base Salary as determined by
the Chief Financial Officer of the Companies based upon the
Executive's time which is devoted and allocated to AMS in
accordance with Section 4.01 hereof and other factors deemed
relevant by the Chief Financial Officer. The payment by AMS
may be either direct to the Executive or a reimbursement to
ANMR of amounts previously paid by ANMR to the Executive.
5.04 Bonus. In addition to the Base Salary, the
Executive shall be eligible for an annual bonus, payable by
ANMR or AMS, as determined by the Compensation Committee of
the Board of Directors of each of the Companies. Such Bonus
shall be based upon the Executive's overall performance,
including a comparison of the actual annual financial results
of each of the Companies (excluding the results of Medical
Diagnostics, Inc. and its subsidiaries) as compared to the
5.05 Stock Options. Effective upon the
Commencement Date, the Executive shall be granted stock
options to purchase 250,000 shares of ANMR Common Stock under
the ANMR 1993 Employee Stock Option Plan and 100,000 shares
of AMS Common Stock under the AMS 1992 Employee Stock Option
Plan, exercisable at the respective market prices on the date
upon which the options are granted for a period of five years
and vesting as to one-third of the options at the conclusion
of each year commencing with the vesting of one-third the
options one year after the Commencement Date, which vesting
may be accelerated as provided for in Sections 7 and 8
hereof. The Executive may be granted such additional stock
options in each of ANMR and AMS as determined by the
respective Option Committees of the Boards of Directors of
5.06 Participation in Benefit Plans. During the
Term hereunder, to the extent that his position, title,
tenure, salary, age, health and other qualifications make him
eligible, the Executive shall be entitled to the following
(i) vacation of four (4) weeks each calendar year and
sick leaves in accordance with ANMR's policies from time to
time in effect for officers and executive employees of ANMR;
(ii) participation, subject to requirements, in major
medical and dental, term life (with beneficiary selected by
the Executive), disability, or other insurance or
hospitalization plans and any pension, profit sharing or
other employee benefit plans, directors and officers
liability insurance, presently in effect or hereafter
instituted by ANMR and applicable to its officers and
5.07 Reimbursement of Expenses. In accordance
with the Companies' policies established from time to time,
ANMR or AMS, as applicable, shall pay or reimburse the
Executive for all reasonable and necessary out-of-pocket
expenses incurred by him in the performance of his duties to
either of the respective Companies under this Agreement.
Such expenses shall include, without limitation, $700 per
month for automobile expenses, as well as cellular and home
telephone charges for business use. It is understood that
the Executive shall make regular visits to the offices of the
Companies in Massachusetts for which he shall be reimbursed
for (i) travel expenses directly incurred in connection with
such commuting to and from Wilmington and (ii) hotel
accommodations in the Wilmington, Massachusetts area.
6.01 Confidentiality. Except as permitted or
directed by the Companies' Board of Directors, the Executive
shall not during the Term of this Agreement nor at any time
thereafter divulge, furnish or make accessible to anyone for
use in any way (other than in the ordinary course of the
business of the Companies) any confidential or secret
knowledge or information of either of the Companies or any of
their affiliates which the Executive has acquired or become
acquainted with prior to the termination of the period of his
employment by the Companies concerning any trade secrets,
confidential or secret designs, processes, formulae, plans,
devices or material (whether or not patented or patentable)
and budgets, business plans and contractual arrangements
directly or indirectly useful in any aspect of the business
of either of the Companies, any confidential customer or
supplier lists of either of the Companies, any confidential
or secret development or research work of either of the
Companies, or any other confidential or secret aspects of the
business of either of the Companies. The Executive
acknowledges that the above-described knowledge or
information constitutes a unique and valuable asset of each
of the Companies acquired at great time and expense by each
of the Companies, and that any disclosure or other use of
such knowledge or information other than for the sole benefit
of either of the Companies would be wrongful and would cause
irreparable harm to each of the Companies. Both during and
after the Term of this Agreement, the Executive shall refrain
from disclosing any confidential information that would
reduce the value of the use of such knowledge or information
to either of the Companies. The foregoing obligations of
confidentiality, however, shall not apply to any knowledge or
information which (i) at the time of disclosure or thereafter
is generally available to and known by the public (other than
as a result of its disclosure by the Executive), (ii) was
available to the Executive on a nonconfidential basis from a
source other than the Companies, provided that source is not
known by the Executive to be bound by any confidentiality
agreement with the Companies or otherwise subject to another
contractual, legal or fiduciary obligation of confidentiality
to the Companies or any other party or (iii) has been
independently acquired or developed by the Executive without
violating any of his obligations under this Agreement.
6.02 Non-Competition. The Executive recognizes
that the services to be performed by him for each of the
Companies are special and unique. The Executive further
recognizes that the nature of each of the Companies' business
is such that the Executive will have full knowledge of each
of the Companies' business plans, practices and secrets. The
parties therefore confirm that, in order to protect each of
the Companies' goodwill, it is necessary that the Executive
agree, and the Executive hereby does agree that during the
Term of his employment hereunder and for a period of one (1)
year following the termination of such employment (except if
this Agreement is not renewed at the end of any then Term,
the foregoing period shall be six (6) months following the
termination of employment), he shall not directly or
indirectly engage anywhere in the United States in
competition with either ANMR or AMS by being an employee,
shareholder, sole proprietor, partner, member or consultant
to an entity which is engaged in a business (the "Competitive
Business") similar to that conducted by ANMR, AMS or any of
their affiliates at any time during the six (6) month period
preceding his termination of employment with either ANMR or
AMS, as the case may be, provided that the termination of
employment with either of the Companies shall not, by reason
of this Section 6.02, restrict the Executive from continued
employment with the other Company.
6.03 Application. The restrictions in
Section 6.02 hereof shall not apply with respect to (i) a
passive investment by the Executive of less than 2% of the
outstanding shares of voting capital stock of any
corporation, (ii) employment by the Executive with an entity
in a management capacity in an area of business which does
not, directly or indirectly, include a Competitive Business,
(iii) a termination of this Agreement by both Companies other
than for cause pursuant to 7.05 hereof or by the Executive
for cause pursuant to Section 7.06 hereof or upon a change of
control pursuant to Section 7.07 hereof.
6.04 Remedies. The Executive agrees that any
breach or threatened breach by him of any provision of this
Agreement shall entitle either or both of the Companies
affected by the breach, in addition to any other legal
remedies available to them, to apply to any court of
competent jurisdiction to enjoin such breach or threatened
7.01 Disability of the Executive. The Executive
shall be considered disabled if, due to illness or injury,
either physical or mental, he is unable to perform his
customary duties and responsibilities as required by this
Agreement for more than six (6) months in the aggregate out
of any period of twelve (12) consecutive months. The
determination that the Executive is disabled shall be made by
the Executive Committee or by the Board of Directors of ANMR
based upon an examination and certification by a physician
selected by ANMR subject to the Executive's approval, which
approval shall not be unreasonably withheld. The Executive
agrees to submit timely to any required medical or other
examination, provided that such examination shall be
conducted at a location convenient to the Executive and that
if the examining physician is other than the Executive's
personal physician, the Executive shall have the right to
have his personal physician present at such examination.
7.02 Effect of Disability. If the Executive is
found to be disabled pursuant to Section 7.01 hereof, within
30 days of such determination of disability, ANMR shall have
the option to terminate this Agreement by written notice to
the Executive stating the date of termination, which date may
be at any time subsequent to the date of such determination.
Upon termination of this Agreement due to disability as
provided herein, (i) the Companies shall pay to the
Executive, in proportion to the amounts they respectively
owe, the accrued amount of the Base Salary (and any Bonus),
prorated through the date of termination (other than expense
reimbursements which shall be paid in full), if, as and when
such amounts would be paid but for the termination of this
Agreement (ii) the Executive's inclusion in the health plan
shall continue at the expense of ANMR for a period of ninety
(90) days, provided the Executive does not obtain any
employment during that time which provides him with
comparable health plan coverage and also subject to any
changes in such plan as applicable to other executive
officers, (iii) the Companies shall pay to the Executive an
amount equal to (A) two (2) times his then Base Salary, less
(B) the aggregate amount of all income disability benefits
which he may be entitled to during the first twenty-four (24)
months after termination by reason of ANMR's disability
policies for which ANMR paid the premiums thereon, commencing
on the first day of the month immediately following the month
during which the foregoing termination of employment
occurred, and payable in twenty-four (24) equal monthly
installments, (iv) each of the Companies shall pay to the
Executive an amount equal to the product of (A) any Bonus
such Company had paid to the Executive for the immediately
preceding year of this Agreement multiplied by (B) a fraction
the numerator of which shall be the number of whole months
during the current year hereof that the Executive was an
employee of the respective Company and the denominator shall
be 12, and (v) all stock options and other equity based
awards granted by the Companies to the Executive shall become
fully vested and immediately exercisable subject to their
7.03 Death. If the Executive shall die during
the term of this Agreement, this Agreement and the
Executive's employment hereunder shall terminate immediately
upon the Executive's death. Upon such termination, (i) the
Companies shall pay to the Executive's estate, in proportion
to the amounts they respectively owe, accrued amount of the
Base Salary (and any Bonus), benefits, reimbursements or
other sums payable pursuant to this Agreement accrued to the
date of death, (ii) the Companies shall pay to the Executive
an amount equal to two (2) times the Base Salary in effect at
his death, payable in twenty-four (24) equal monthly
installments, commencing on the first day of the month
immediately following the month in which the Executive died,
(iii) each of the Companies shall pay to the Executive's
estate an amount equal to the product of (A) any Bonus such
Company had paid to the Executive for the immediately
preceding year of this Agreement multiplied by (B) a fraction
the numerator of which shall be the number of whole months
during the current year hereof prior to the month in which
the Executive died and the denominator shall be 12, and (iv)
all stock options and other equity based awards granted by
the Companies to the Executive shall become fully vested and
immediately exercisable by the Executive's estate subject to
7.04 By ANMR For Cause. Each of the Companies
may terminate this Agreement for cause at any time. For
purposes of this Section 7.04, the term "cause" shall be
limited to (i) the willful engaging by the Executive in
misconduct which is materially injurious to ANMR or AMS or
their affiliates, (ii) the conviction of the Executive of a
crime involving any financial impropriety or which would
materially interfere with the Executive's ability to perform
his services required under this Agreement or otherwise be
materially injurious to ANMR or AMS, (iii) the failure of the
Executive to have disclosed to ANMR or AMS any prior
misconduct by the Executive which would adversely affect his
position with or status of the Companies, (iv) the failure of
the Executive to perform in any material respect any of his
material obligations under this Agreement without proper
justification, which failure is not cured within ten (10)
days after notice thereof from either of the Companies, or
(v) the breach by the Executive of any of his representations
herein. In the event this Agreement is terminated pursuant
to this Section 7.04, the Executive shall not be entitled to
any compensation other than his then current Base Salary or
any payments owed by ANMR or AMS which have accrued through
his date of termination, subject to the Companies' right of
offset based upon acts of the Executive which gave rise to
the termination and any other claims which the Companies may
then have against the Executive, and all stock options and
other equity based awards granted by the Companies to the
Executive which have not yet vested shall terminate.
7.05 By ANMR Not for Cause. If ANMR terminates
this Agreement other than for cause as defined in
Section 7.04 hereof prior to the end of the then Term hereof,
the Executive shall be entitled to (i) the continuation of
his then Base Salary for three (3) full years from the date
of termination if the termination date is within two (2)
years of the Commencement Date or for two (2) full years from
the date of termination if the termination date is more than
two (2) years after the Commencement Date, which payments
shall be made in monthly installments, (ii) any payments owed
by ANMR or AMS which have accrued through his date of
termination, (iii) any Bonus through the end of the current
fiscal year, (iv) the continuation of his participation in
the health plan at the expense of ANMR for a period of two
(2) years subject to termination of such health benefits upon
the Executive becoming covered by a comparable plan offered
by a subsequent employer and also subject to any changes in
such plan as applicable to other executive officers, and (v)
all stock options and other equity based awards granted by
the Companies to the Executive under a plan of either of the
Companies shall become fully vested and immediately
exercisable subject to their respective terms.
7.06 By the Executive for Cause. The Executive
may terminate this Agreement for cause at any time upon
written notice given to the Companies not more than thirty
(30) days after the Executive becomes aware of an event which
may constitute "cause." For purposes of this Section 7.06,
the term "cause" shall be limited to (I) the failure of
either of the Companies to perform in any material respect
any of its material obligations under this Agreement without
proper justification, and such failure continues for at least
fifteen (15) days after written notice from the Executive to
the Companies specifying the nature of the alleged failure,
(II) a change in title or responsibilities or functions of
the Executive, (III) a change in reporting to Jack Nelson,
the current Chairman and CEO of ANMR or AMS, unless such
person's employment is terminated by reason of his death,
disability, voluntary resignation or removal for cause by the
respective Boards of Directors, or (IV) the relocation of the
Executive Offices of the Company to a site more than 30 miles
away from the current Executive Offices without the prior
consent of the Executive. In the event that the Executive
terminates this Agreement pursuant to this Section 7.06, the
Executive shall then be entitled to a severance payment equal
to an amount equal to: (i) three (3) times his then Base
Salary if the termination date is within two (2) years of the
Commencement Date or two (2) times his then Base Salary if
the termination date is more than two (2) years after the
Commencement Date, payable within thirty (30) days after the
termination of this Agreement by reason of this Section 7.06,
(ii) any payments owed by ANMR or AMS which have accrued
through his date of termination, (iii) any Bonus through his
date of termination, (iv) the continuation of his
participation in the health plan at the expense of ANMR for a
period of two (2) years subject to termination of such health
plan benefits upon the Executive becoming covered by a
comparable plan offered by a subsequent employer and also
subject to any changes in such plan as applicable to other
executive officers, and (v) all stock options and other
equity based awards granted to the Executive under a plan of
either of the Companies shall become fully vested and
immediately exercisable subject to their respective terms.
7.07 Change in Control of the Company. If, at
anytime during the Term hereof, a change in control of ANMR
(as defined in Section 7.08 hereof) occurs, then within sixty
(60) days after receipt of written notice of such change in
control of ANMR, the Executive may, by written notice to ANMR
(or its successor), terminate this Agreement. In the event
of said termination, (i) the Executive shall receive a lump
sum payment equal to 2.99 times his then current Base Salary,
payable within thirty (30) days after termination of this
Agreement, (ii) ANMR (or its successor) shall maintain, at
its expense, the health plan coverage of the Executive for a
period of twelve (12) months after such termination, subject
to termination of such health plan benefits upon the
Executive becoming covered by a comparable plan offered by a
subsequent employer and also subject to any changes in such
plan as applicable to other executive officers and (iii) all
stock options and other equity based awards granted to the
Executive under a plan of either of the Companies shall
become fully vested and exercisable subject to their
respective terms; provided, however, if the amount to be paid
or distributed to the Executive pursuant to this Section 7.07
(taken together with any amounts otherwise to be paid or
distributed to the Executive by the Companies) (such amounts
collectively the "Section 7.07 Payment") would result in the
application of an excise tax under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or
any successor or similar provision thereto, the Section 7.07
Payment shall not be paid or distributed in the amounts or at
the times otherwise required by this Agreement, but shall
instead be paid or distributed annually, beginning within
thirty (30) days after the termination date pursuant to
Section 7.06 hereof and thereafter on each anniversary
thereof, in the maximum substantially equal amounts and over
the minimum number of years that are determined to be
required to reduce the aggregate present value of Section
7.07 Payment to an amount that will not cause any Section
7.07 Payment to be non-deductible under Section 280G of the
Code. For purposes of this Section 7.07, present value shall
be determined in accordance with Section 280G(d)(4) of the
Code. All determinations to be made under the foregoing
proviso to this Section 7.07 shall be made by the accounting
firm which served as the Company's independent public
accountant immediately prior to the change of control (the
"Accounting Firm"), which firm shall provide its
determinations and any supporting calculations both to the
Company and the Executive within twenty (20) days of the
termination date. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive.
7.08 Change of Control, Defined. "Change of
control of ANMR" shall be deemed to have occurred if:
(a) any "person" or "group" (as "person" and
"group" are defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than (i) the Executive or a person controlled
by him, (ii) a trustee or other fiduciary holding securities
under an employee benefit plan of ANMR, (iii) a person or
group by reason of a transaction with ANMR approved by the
ANMR Board of Director as constituted in accordance with
Subsection (b) below, or (iv) a corporation owned, directly
or indirectly, by the stockholders of ANMR in substantially
the same proportions, is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of ANMR representing 20% or more
of the combined voting power of ANMR's then outstanding
(b) individuals who on the Commencement Date
constitute members of the Board of Directors, or successors
chosen by such individuals, shall cease for any reason to
constitute a majority of the whole Board of Directors.
8.01 Assignment and Inurement. This Agreement
shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, administrators, successors
and permitted assigns. ANMR may, without the consent of the
Executive, assign its rights and obligations under this
Agreement to any corporation, firm or other business entity,
subject to the Executive's right to terminate this Agreement
pursuant to Section 7.06 hereof.
8.02 Separation. In the event that the Shared
Services Agreement between AMS and ANMR terminates for any
reason and is not replaced by a similar sharing arrangement,
AMS would cease to have any obligation hereunder from the
date of the termination of the Shared Services Agreement and
the Executive's services shall thereafter be rendered solely
at the direction of ANMR, and the Executive's post-employment
obligations to AMS under Section 6.02 hereof shall commence
upon AMS ceasing to have any further obligation hereunder.
The termination of AMS's obligations hereunder pursuant to
the immediately preceding sentence shall not reduce the
compensation payable to the Executive under this Agreement.
9.01 Governing Law. This Agreement is made under
and shall be governed by and construed in accordance with the
laws of the State of New Jersey.
9.02 Prior Agreements. This Agreement contains
the entire agreement of the parties relating to the subject
matter hereof and supersedes all prior agreements and
understandings (written or oral) with respect to such subject
matter. The parties hereto have made no agreements,
representations or warranties relating to the subject matter
of this Agreement which are not set forth herein.
9.03 Withholding Taxes. The Companies may
withhold from any benefits payable under this Agreement all
federal, state, city and other taxes as shall be required
pursuant to any law or governmental regulation or ruling.
9.04 Amendments. No amendment or modification of
this Agreement shall be deemed effective unless made in
writing and executed by the parties hereto. Any written
waiver shall not be deemed a continuing waiver unless
specifically stated, shall operate only as to the specific
term or condition for the future or as to any act other than
9.05 Notices. Any notice, request, demand or
other document to be given hereunder shall be in writing, and
shall be delivered personally or sent by registered,
certified or express mail or facsimile followed by mail as
Attn: Chairman of the Board
Attn: Chairman of the Board
or to such other address as either party hereto may
hereinafter duly give to the other parties hereto.
9.06 Severability. To the extent any provision
of this Agreement shall be invalid of unenforceable, it shall
be considered deleted here from and the remainder of such
provision and of this Agreement shall be unaffected and shall
continue in full force and effect. In furtherance and not in
limitation of the foregoing, should the duration of
geographical extent of, or business activities covered by any
provisions of this Agreement be in excess of that which is
valid or enforceable under applicable law, then such
provision shall be construed to cover only that duration,
extent or activities which may valid and enforceable be
covered. The Executive acknowledges the uncertainty of the
law in this respect and expressly stipulates that this
Agreement be given the construction which renders its
provisions valid and enforceable to the maximum extent (not
exceeding its express term) possible under applicable law.
9.07 Counterparts. This Agreement may be
executed in counterparts, each of which shall be deemed an
original and all of which shall constitute a single
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year set forth above. | 10-K | EX-10 | 1996-01-16T00:00:00 | 1996-01-16T14:20:45 |
0000016058-96-000004 | 0000016058-96-000004_0000.txt | Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(Exact name of registrant as specified in its Charter)
(State or other jurisdiction of incorporation)
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective January, 1996, CACI, Inc., a wholly-owned subsidiary of the Company (CACI) purchased all of the outstanding shares of the common stock of IMS Technologies, Inc. (IMS) for $6.5 million in cash. The purchase was funded through the Company's line of credit with Signet Bank, and, based upon current forecasts, is expected to provide at least $0.05 in earnings per share during the first full year of operations. The terms of the agreement also provide for the payment of consulting fees of $1.5 million over three years to four founders of IMS. The Company previously announced the signing of a Letter of Intent to acquire IMS on October 27, 1995.
As a result of the acquisition, approximately 285 new employees, generating approximately $21 million in annual revenue, have joined CACI. IMS provides a wide range of computer services, including consulting, programming, communications design and installation, software development, and systems integration, for a variety of applications under U.S. Federal Government and commercial contracts. Major government clients of IMS include the U.S. Navy, the Departments of Justice and Education, the Drug Enforcement Agency, the Social Security Administration, and the Internal Revenue Service. IMS has major offices in Rockville, MD, Dahlgren, VA, Arlington, VA, New Orleans, LA and Cherry Point, NC.
A copy of the Company's January 2, 1996 press release regarding the acquisition of IMS is attached as an Exhibit to this Report on Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a)(4)(iv) Consolidated Financial Statements of IMS for the years ended September 30, 1995 and 1994 and Independent Auditors' Report;
Unaudited Financial Statements of IMS for the period ending December 2, 1995.
(b) Pro forma financial information of the Company for the year ended June 30, 1995; and
Pro forma financial information of the Company for the quarter ended September 30, 1995.
The following pro forma condensed consolidated statements of operations for the year ended June 30, 1995 and the quarter ended September 30, 1995, and the pro forma consolidated balance sheet as of September 30, 1995 are unaudited and have been prepared on a pro forma basis to give effect to the acquisition (accounted for as a purchase) of the business and substantially all of the assets of IMS as if all transactions had occurred on July 1, 1995.
The pro forma condensed consolidated statements of operations do not purport to represent what the Company's result of operations would actually have been had the transaction in fact occurred at the beginning of the respective fiscal period, or to project the Company's results of operations for any future periods. The pro forma adjustments are based upon available
information and upon certain assumptions that management believes are reasonable under the circumstances.
Exhibit 99(a) Press Release dated January 2, 1996, completion of acquisition of IMS.
Years ended September 30, 1995 and 1994 with Report of Independent Auditors
Years ended September 30, 1995 and 1994
Consolidated Statements of Stockholders' Equity.....................5 Consolidated Statements of Cash Flow................................6 Notes to Consolidated Financial Statements..........................7
[logo of Ernst & Young LLP] 1225 Connecticut Avenue, N.W. Phone: 202 327-6000
The Board of Directors and Stockholders IMS Technologies, Inc.
We have audited the accompanying consolidated balance sheets of IMS Technologies, Inc. as of September 30, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. 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 accordance with the terms of our engagement, we did not audit the financial statements of Information Management Systems, Inc., a foreign investment, for the year ended September 30, 1995 and 1994. The Company accounts for this interest in the foreign investment using the cost method. During 1994, the investment should have been accounted for using the equity method (Note 4). The effect of this departure from generally accepted accounting principles has not been determined.
In our opinion, except for the effects on the September 30, 1994 financial statements as discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IMS Technologies, Inc. at September 30, 1995 and 1994, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.
Accounts receivable, net (Note 3) $ 8,625,867 $ 8,914,417 Prepaid income taxes 156,296 - Deferred income tax benefit (Note 11) 110,000 271,000 Total current assets 8,984,907 9,439,996 Property and equipment (Note 2): Data processing equipment and software 1,662,211 1,632,162 Office furniture and equipment 706,976 730,217 Net property and equipment 285,692 382,388
Deferred income tax benefit (Note 11) 274,000 292,000 Cash surrender value of officers' life insurance 420,254 399,228 Investment in and advances to foreign entity (Note 4) 131,198 131,198
Line of credit (Note 5) $ 1,428,952 $ 622,564 Payroll taxes and benefits accrued 215,698 350,357 Income taxes payable - 71,191 Long-term liabilities: Deferred compensation (Note 7) 575,253 575,253 Total long-term liabilities 575,253 577,633 Stockholders' equity: Class B common stock, issued and outstanding shares of 70,483 as of September 30, 1995 and 1994 750 750 Additional paid-in capital 199,427 199,427 Treasury stock (Note 8 & 13) (299,432) (299,432) Total stockholders' equity 5,651,847 5,479,247
Total liabilities and stockholders' equity $10,122,153 $10,671,812
Total cost of revenue 19,107,697 20,251,250
General and administrative expense 2,247,983 2,343,913 Income from operations 378,864 344,040
Net interest expense (97,488) (76,545)
Income before income taxes 281,376 267,495 Provision for income taxes (Note 11) 108,776 113,155 Net income $ 172,600 $ 154,340
Consolidated Statements of Stockholders' Equity
(1) Represents the appropriate historical results of IMS for the year ended June 30, 1995. Assumed the purchase took place 7/1/94. (2) Adjustments include certain officers compensation of $573,000 eliminated due to purchase. (3) Includes goodwill amortization of $164,000 for the year. (4) To record $64,000 tax benefit for goodwill amortization, and an additional $223,000 of tax expense for certain officer compensation reduction.
For the Quarter ended September 30, 1995
UNAUDITED PRO-FORMA CONSOLIDATED BALANCE SHEET FOR THE QUARTER ENDED SEPTEMBER 30, 1995
(1) Represents the allocation of the total purchase cost of $8,000,000: purchase price of $6,500,000 plus consulting fees of $1,500,000 to all of the assets, liabilities and intangible assets of IMS Technologies, Inc. The excess of the purchase price over the fair value of the net assets acquired was estimated at $2,476,000 and will be amortized on a straight line basis over 15 years. The preliminary purchase price allocation may change during the year ending June 30, 1996 as additional information concerning the net asset valuations is obtained. (2) Includes a $6,833,000 payment for IMS acquisition. (3) Eliminated investment in foreign subsidiary and land (not included in purchase). (4) Includes goodwill amortization of $41,000 for the first quarter. (5) Includes $1,167,000 accrued for the remaining amount due for consulting fees associated with the purchase of IMS. (6) To record $16,000 tax benefit for goodwill amortization, and a $56,000 expense for certain officers compensation reduction. (7) Adjustments include certain officers compensation of $143,000 eliminated due to purchase.
UNAUDITED PRO-FORMA CONSOLIDATED BALANCE SHEET FOR THE QUARTER ENDED SEPTEMBER 30, 1995 - Continued
(1) Represents the allocation of the total purchase cost of $8,000,000: purchase price of $6,500,000 plus consulting fees of $1,500,000 to all of the assets, liabilities and intangible assets of IMS Technologies, Inc. The excess of the purchase price over the fair value of the net assets acquired was estimated at $2,476,000 and will be amortized on a straight line basis over 15 years. The preliminary purchase price allocation may change during the year ending June 30, 1996 as additional information concerning the net asset valuations is obtained. (2) Includes a $6,833,000 payment for IMS acquisition. (3) Eliminated investment in foreign subsidiary and land (not included in purchase). (4) Includes goodwill amortization of $41,000 for the first quarter. (5) Includes $1,167,000 accrued for the remaining amount due for consulting fees associated with the purchase of IMS. (6) To record $16,000 tax benefit for goodwill amortization, and a $56,000 expense for certain officers compensation reduction. (7) Adjustments include certain officers compensation of $143,000 eliminated due to purchase.
UNAUDITED PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1995
(1) Represents the historical results of IMS for the quarter ended September 30, 1995. Assumed the purchase took place 7/1/95. (2) Adjustments include certain officers compensation of $143,000 eliminated due to purchase. (3) Includes goodwill amortization of $41,000 for the first quarter. (4) To record $16,000 tax benefit for goodwill amortization, and an additional $56,000 of tax expense for certain officer compensation reduction.
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/ Dated: January 16, 1996 Sr. Vice President, General Counsel | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T16:38:04 |
0000012707-96-000001 | 0000012707-96-000001_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, 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 January 8, 1996 Common Stock $.01 Par Value 1,000 shares
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 10
Exhibit 11 - Computation of Net Income
(In thousands, except share data) Current assets: Cash and cash equivalents, including short-term investments of $75,197 and $39,458 $ 77,225 $ 42,576 Accounts receivable, net of allowances for doubtful accounts of $3,065 and $2,611 107,272 130,665 Deferred income taxes 25,050 25,068 Other current assets 8,131 16,153 Total current assets 292,918 291,537 Property, plant and equipment, net of accumulated depreciation of $155,681 and $145,519 122,138 134,289 Cost in excess of net assets of acquired
Notes payable and current maturities of long-term debt $ 4,438 $ 7,791 Other current liabilities 486 4,658 Total current liabilities 129,579 169,432 Long-term debt, exclusive of current maturities 96,684 99,754 Deferred income taxes, exclusive of current portion 18,617 19,214 Shareholder's equity (Note 2): Common stock, $.01 par value, 1,000 shares issued - - Capital in excess of par value of stock 25,482 23,557 Accumulated translation adjustment 8,463 8,250 Total shareholder's equity 241,240 203,067 Total Liabilities and Shareholder's Equity $509,340 $517,788
The accompanying notes are an integral part of these statements.
(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 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 Net income per common share (Note 2) $ 15,187 $ 12,336 $ 41,288 $ 31,043 (Note 2) 1,000 1,000 1,000 1,000 per share (Note 2) $ 1,758 $ 1,514 $ 5,253 $ 4,532
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended November 30, Cash Flows From Operating Activities: Net Income $ 41,288 $ 31,043 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (579) 529 Loss on disposals of property, plant and equipment 166 473 Changes in assets and liabilities, net of effects of businesses acquired and sold: (Increase) decrease in accounts receivable 14,699 (370) (Increase) decrease in inventories 1,655 (2,140) (Increase) decrease in other assets 2,739 (1,619) Decrease in accounts payable (13,682) (13,597) Increase (decrease) in accrued expenses (9,755) 19,774 Decrease in other liabilities (5,869) (11,090) Net cash provided by operating activities 47,113 40,283 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 (630) Issuance of long-term debt 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 reinvestment plans 1,925 871 Net cash used in financing activities (8,397) (22,039)
Net increase in cash and cash equivalents 34,649 4,975 Cash and cash equivalents at beginning of period 42,576 52,213 Cash and cash equivalents at end of period $ 77,225 $ 57,188
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 In the opinion of management, the accompanying unaudited consolidated financial statements 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 the consolidated financial statements included in Blount, Inc.'s Annual Report to Shareholders for the year ended February 28, 1995. 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 Blount International, Inc. ("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.
On January 5, 1996, Blount, Inc.'s amended and restated certificate of incorporation, which authorizes only 1,000 shares of common stock, $.01 par value, became effective. All 1,000 shares are outstanding and held by BII. The share data and per share data in the accompanying consolidated financial statements have been restated to reflect this reduction in outstanding common stock.
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 Blount, Inc. 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 the Consolidated Financial Statements included in Blount, Inc.'s Annual Report to Shareholders for the year ended February 28, 1995 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 (4,077) (10,338) (12,607) (20,299) 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
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 shares outstanding in each period, as restated for the reduction in common stock outstanding subsequent to November 30, 1995 (See Note 2).
NOTE 10 In December 1995, the Company 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.
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 $15.2 million and $41.3 million for the third quarter and first nine months of fiscal 1996 compared to $12.3 million and $31.0 million 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 notes to the financial statements included in Blount, Inc.'s Annual Report to Shareholders for the year ended February 28, 1995.
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. 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 $96.7 million long-term debt and equity of $241.2 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 $80.1 million maturing in 2003. See Note 3 of Notes to the Consolidated Financial Statements included in Blount, Inc.'s 1995 Annual Report to Shareholders 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 $163.3 million at November 30, 1995 compared to $122.1 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 $23.4 million, $21.5 million and $10.8 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 $40.3 million in the first nine months of fiscal 1995, while cash and cash equivalent balances increased by $34.6 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.
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 | 1996-01-16T09:47:09 |
0000899243-96-000021 | 0000899243-96-000021_0001.txt | Section 1.1. Offices. The principal business office of the Company shall be at 13333 Northwest Freeway, Houston, Texas 77040. The Company may have such other business offices within or without the State of Texas as the board of directors may from time to time establish.
Section 2.1. Certificate Representing Shares. Shares of the capital stock of the Company shall be represented by certificates in such form or forms as the board of directors may approve, provided that such form or forms shall comply with all applicable requirements of law or of the articles of incorporation. Such certificates shall be signed by the president or a vice president, and by the secretary or an assistant secretary, of the Company and may be sealed with the seal of the Company or imprinted or otherwise marked with a facsimile of such seal. In the case of any certificate countersigned by any transfer agent or registrar, provided such countersigner is not the Company itself or an employee thereof, the signature of any or all of the foregoing officers of the Company may be represented by a printed facsimile thereof. If any officer whose signature, or a facsimile thereof, shall have been set upon any certificate shall cease, prior to the issuance of such certificate, to occupy the position in right of which his signature, or facsimile thereof, was so set upon such certificate, the Company may nevertheless adopt and issue such certificate with the same effect as if such officer occupied such position as of such date of issuance; and issuance and delivery of such certificate by the Company shall constitute adoption thereof by the Company. The certificates shall be consecutively numbered, and as they are issued, a record of such issuance shall be entered in the books of the Company.
Stock 2.2. Stock Certificate Book and Shareholders of Record. In the absence of a duly appointed transfer agent or registrar, the secretary of the Company shall maintain, among other records, a stock certificate book, the stubs in which shall set forth the names and addresses of the holders of all issued shares of the Company, the number of shares held by each, the number of certificates representing such shares, the date of issue of such certificates, and whether or not such shares originate from original issue or from transfer. The names and addresses of shareholders as they appear on the stock certificate book shall be the official list of shareholders of record of the Company for all purposes. The board of directors may appoint a transfer agent or registrar to maintain the stock register and to record transfer of shares thereon. The Company shall be entitled to treat the holder of record of any shares as the owner thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or any rights deriving from such shares on the part of any other person, including, but without limitation, a purchaser, assignee, or transferee, unless and until such other person becomes the holder of record of such shares, whether or not the Company shall have either actual or constructive notice of the interest of such other person.
Section 2.3. Transfer of Stock. The shares represented by any certificate of the Company are transferable only on the books of the Company by the holder of record thereof or by his duly authorized attorney or legal representative upon surrender of the certificate for such shares, properly endorsed or assigned. The board of directors may make such rules and regulations concerning the issue, transfer, registration and replacement of certificates as they deem desirable or necessary.
Section 2.4. Transfer Agent and Registrar. The board of directors may appoint one or more transfer agents or registrars of the shares, or both, and may require all share certificates to bear the signature of a transfer agent or registrar, or both.
Section 2.5. Lost, Stolen or Destroyed Certificates. The Company may issue a new certificate for shares of stock in the place of any certificate theretofore issued and alleged to have been lost, stolen or destroyed, but the board of directors may require the owner of such lost, stolen or destroyed certificate, or his legal representative, to furnish an affidavit as to such loss, theft, or destruction and to give a bond in such form and substance, and with such surety or sureties, with fixed or open penalty, as the board may direct, in order to indemnify the
Company and its transfer agents and registrars, if any, against any claim that may be made on account of the alleged loss, theft or destruction of such certificate.
Section 2.6. Fractional Shares. Only whole shares of the stock of the Company shall be issued. In case of any transaction by reason of which a fractional share might otherwise be issued, the directors, or the officers in the exercise of powers delegated by the directors, shall take such measures consistent with the law, the articles of incorporation and these bylaws, including (for example, and not by way of limitation) the payment in cash of an amount equal to the fair value of any fractional share, as they may deem proper to avoid the issuance of any fractional share.
Section 3.1. Annual Meeting. Commencing in the calendar year 1980, the annual meeting of the shareholders, for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held at the principal office of the Company, at 10:00 a.m. local time, on the second Tuesday in October of each year unless such day is a legal holiday, in which case such meeting shall be held at such hour on the first day thereafter which is not a legal holiday; or at such other place and time as may be designated by the board of directors. Failure to hold any annual meeting or meetings shall not work a forfeiture or dissolution of the Company.
Section 3.2. Special Meetings. Except as otherwise provided by law or by the articles of incorporation, special meetings of the shareholders may be called by the chairman of the board, the president, or the board of directors, or the holders of not less than one-tenth of all the shares having voting power at such meeting, and shall be held at the principal office of the Company or at such other place, and at such time, as may be stated in the notice calling such meeting. Business transacted at any special meeting of shareholders shall be limited to the purpose stated in the notice of such meeting given in accordance with the terms of section 3.3.
Section 3.3. Notice of Meetings -- Waiver. Written or printed notice of each meeting of shareholders, stating the place, day and hour of any meeting and, in case of a special shareholders' meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than fifty days before the date of such meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary, or the persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Company, with postage thereon prepaid. Such further or earlier notice shall be given as may be required by law. The signing by a shareholder of a written waiver of notice of any shareholders' meeting, whether before or after the time stated in such waiver, shall be equivalent to the receiving by him of all notice required to be given with respect to such meeting. Attendance by a shareholder, whether in person or by proxy, at a shareholders' meeting shall constitute a waiver of notice of such meeting. No notice of any adjournment of any meeting shall be required.
Section 3.4. Closing of Transfer Books and Fixing Record Date. For the purpose of determining shareholders entitled to notice of, or to vote at, any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend or in order to make a determination of shareholders for any other proper purpose, the board of directors of the Company may provide that the stock transfer books shall be closed for a stated period in no case to exceed fifty days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the stock transfer books, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in no case to be more than fifty days nor, in case of a meeting of shareholders, less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date of such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made, as provided in this section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of stock transfer books and the stated period of closing has expired.
Section 3.5. Voting List. The officer or agent having charge of the stock transfer books for shares of the Company shall make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the registered office of the Company and shall be subject to lawful inspection by any shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. Failure to comply with this section shall not affect the validity of any action taken at such meeting.
Section 3.6. Quorum and Officers. Except as otherwise provided by law, by the articles of incorporation or by these bylaws, the holders of a majority of the shares entitled to vote and represented in person or by proxy shall constitute a quorum at a meeting of shareholders, but the shareholders present at any meeting, although representing less than a quorum, may from time to time adjourn the meeting to some other day and hour, without notice other than announcement at the meeting. The vote of the holders of a majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the shareholders' meeting, unless the vote of a greater number is required by law. The chairman of the board shall preside at, and the secretary shall keep the records of, each meeting of shareholders, and in the absence of either such officer, his duties shall be performed by any other officer authorized by these bylaws or any person appointed by the meeting.
Section 3.7. Voting at Meetings. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders except to the extent that the articles of incorporation or the laws of the State of Texas provide otherwise.
Section 3.8. Proxies. A shareholder may vote either in person or by proxy executed in writing by the shareholder, or by his duly authorized attorney-in-fact. Proxies shall be dated but need not be sealed, witnessed and acknowledged. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. A proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Proxies shall be filed with the secretary of the Company before or at the time of the meeting.
Section 3.9. Balloting. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. At each meeting inspectors of election may be appointed by the presiding officer of the meeting, and at any meeting for the election of directors, inspectors shall be so appointed on the demand of any shareholder present or represented by proxy and entitled to vote in such election of directors. No director or candidate for the office of director shall be appointed as such inspector. The number of votes cast by shares in the election of directors shall be recorded in the minutes.
Section 3.10. Voting Rights, Prohibition of Cumulative Voting for Directors. Each outstanding share of common stock shall be entitled to one (1) vote upon each matter submitted to a vote at a meeting of shareholders. No shareholder shall have the right to cumulate his votes for the election of directors but each share shall be entitled to one vote in the election of each director. In the case of any contested election for any directorship, the candidate for such position receiving a plurality of the votes cast in such election shall be elected to such position.
Section 3.11. Record of Shareholders. The Company shall keep at its principal business office, or the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each.
Section 3.12. Action Without Meeting. Any action required by statute to be taken at a meeting of the shareholders of the Company, or any action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof and such consent shall have the same force and effect as a unanimous vote of the shareholders. Any such signed consent, or a signed copy thereof, shall be placed in the minute book of the Company.
Section 4.1. Number, Qualifications and Term. The business and affairs of the Company shall be managed and controlled by the board of directors; and, subject to any restrictions imposed by law, by the articles of incorporation, or by these bylaws, the board of directors may exercise all the powers of the Company. The board of directors shall consist of four members. Such number may be increased or decreased by amendment of these bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors need not be residents of Texas or shareholders of the Company absent provision to the contrary in the articles of incorporation or laws of the State of Texas. Except as otherwise provided in section 4.3. of these bylaws, each position on the board of directors shall be filled by election at the annual meeting of shareholders. Any such election shall be conducted in accordance with section 3.7. of these bylaws. Each person elected a director shall hold office, unless removed in accordance with section 4.2. of these bylaws, until the next annual meeting of the shareholders and until his successor shall have been duly elected and qualified.
Section 4.2. Removal. Any director or the entire board of directors may be removed from office, with or without cause, at any special meeting of shareholders by the affirmative vote of a majority of the shares of the shareholders present in person or by proxy and entitled to vote at such meeting, if notice of the intention to act upon such matter shall have been given in the notice calling such meeting. If the notice calling such meeting shall have so provided, the vacancy caused by such removal may be filled at such meeting by the affirmative vote of a majority in number of the shares of the shareholders present in person or by proxy and entitled to vote.
Section 4.3. Vacancies. Any vacancy occurring in the board of directors may be filled by the vote of a majority of the remaining directors, even if such remaining directors comprise less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any position on the board of directors to be filled by reason of an increase in the number of directors shall be filled by election at an annual meeting of the shareholders, or at a special meeting of shareholders duly called for such purpose.
Section 4.4. Place of Meeting. Meetings of the board of directors may be held either within or without the State of Texas, at whatsoever place is specified by the officer or directors calling the meeting. In the absence of other designation, the meeting shall be held at the principal business office of the Company in the City of Houston, Texas.
Section 4.5. Regular Meetings. Regular meetings of the board of directors shall be held immediately following each annual meeting of shareholders, at the place of such meeting, and at such other times and places as the board of directors shall determine. No notice of any kind of such regular meetings to be given to either old or new members of the board of directors.
Section 4.6. Special Meetings. Special meetings of the board of directors shall be held at any time by call of the chairman of the board, the president, the secretary or any director. The secretary shall give notice of each special meeting to each director at his usual business or residence address by mail at least three days before the meeting or by telegraph or telephone at least one day before such meeting. Except as otherwise provided by law, by the articles of incorporation, or by these bylaws, such notice need not specify the business to be transacted at, or the purpose of, such meeting. No notice shall be necessary for any adjournment of any meeting. The signing of a written waiver of notice of any special meeting by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the receiving of such notice. Attendance of a director at a meeting shall also constitute a waiver of notice of such meeting, except where a director attends a meeting for the express and announced purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
Section 4.7. Quorum. A majority of the number of directors fixed by these bylaws shall constitute a quorum for the transaction of business and the act of not less than a majority of such quorum of the directors shall be required in order to constitute the act of the board of directors, unless the act of a greater number shall be required by law, by the articles of incorporation or by these bylaws. Any one or more directors, although less than a quorum may adjourn the meeting to some other day or hour.
Section 4.8. Procedure at Meetings. The chairman of the board shall preside at meetings of the board of directors. In his absence at any meeting, any officer authorized by these bylaws or any member of the board selected by the members present shall preside. The secretary of the Company shall act as secretary at all meetings of the board. In his absence, the presiding officer of the meeting may designate any person to act as secretary. At meetings of the board of directors, the business shall be transacted in such order as the board may from time to time determine.
Section 4.9. Presumption of Assent. Any director of the Company who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.
Section 4.10. Action Without a Meeting. Any action required by statute to be taken at a meeting of the directors of the Company, or which may be taken at such meeting, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by each director entitled to vote at such meeting, and such consent shall have the same force and effect as a unanimous vote of the directors. Such signed consent, or a signed copy thereof, shall be placed in the minute book of the Company.
Section 4.11. Compensation. Directors shall receive such compensation for their service as directors or members of the executive committee as the board of directors may by resolution approve. Any director may serve the Company in any other capacity and receive compensation therefor.
Section 4.12. Executive Committee. The board of directors, by resolution adopted by a majority of the number of directors fixed by these bylaws, may designate an executive committee, which committee shall consist of two or more of the directors of the Company. Such executive committee may exercise such authority of the board of directors in the business and affairs of the Company as the board of directors may by resolution duly delegate to it except as prohibited by law. The designation of such committee and the delegation thereto of authority shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed upon it or him by law. Any member of the executive committee may be removed by the board of directors by the affirmative vote of a majority of the number of directors fixed by the bylaws whenever in the judgment of the board the best interests of the Company will be served thereby.
The executive committee shall keep regular minutes of its proceedings and report the same to the board of directors when required. The minutes of the proceedings of the executive committee shall be placed in the minute book of the Company.
Section 4.13. Other Committees of the Board of Directors. The board of directors, by resolution adopted by a majority of the number of directors fixed by the bylaws, may designate from their number such other committees as they shall from time to time deem necessary and proper. Such committees shall be composed of not less than two members and shall have and exercise such authority of the board of directors as shall by resolution be delegated to them. The designation of such other committees and the delegation of authority thereto shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed upon it or him by law.
Section 4.14. Meetings and Reports of the Committees. The committees shall meet from time to time on call of the Chairman or any two or more members thereof. Notice of each such meeting, stating the place, day and hour thereof, shall be served personally on each member of such committee, or shall be mailed, telegraphed or telephoned to his address on the books of the Company, at least twenty-four (24) hours before the meeting. No such notice need state the business proposed to be transacted at the meeting. No notice of the time or place at any meeting of such committee need be given to any member thereof who attends in person or who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. No notice need be given of an adjourned meeting of any committee. Meetings of the committees may be held at such place or places, either within or outside of the State of Texas, as such committee shall determine, or as may be specified or fixed in the respective notices or waivers thereof. Each committee may fix its own rules of procedure. They shall keep record of their proceedings and shall report these proceedings to the board of directors at the regular meetings thereof held next after they have been taken.
Section 5.1. Number. The officers of the Company shall consist of a chairman of the board, a president, one or more vice presidents, a secretary and a treasurer; and, in addition, such other officers and assistant officers and agents as may be deemed necessary or desirable. Officers shall be elected or appointed by the board of directors. Any two or more offices may be held by the same person except that the president and secretary shall not be the same person. In its discretion, the board of directors may leave unfilled any office except those of president, treasurer and secretary.
Section 5.2. Election; Term; Qualification. Officers shall be chosen by the board of directors annually at the meeting of the board of directors following the annual shareholders' meeting. Each officer shall hold office until his successor has been chosen and qualified, or until his death, resignation, or removal.
Section 5.3. Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the Company shall be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create any contract rights.
Section 5.4. Vacancies. Any vacancy in any office for any cause may be filled by the board of directors at any meeting.
Section 5.5. Duties. The officers of the Company shall have such powers and duties, except as modified by the board of directors, as generally pertain to their offices, respectively, as well as such powers and duties as from time to time shall be conferred by the board of directors and by these bylaws.
Section 5.6. The Chairman of the Board. The chairman of the board shall be the chief officer in charge of policy, planning and corporate development, and shall be responsible directly to the board of directors. He shall be available to consult with the president on all major decisions relating to the Company's business and affairs. He shall preside at all meetings of shareholders and directors. He may sign and execute in the name of the Company (i) all contracts or other instruments authorized by the board of directors, and (ii) all contracts or instruments in the usual and regular course of business, pursuant to section 6.2 hereof, except in cases when the signing and execution thereof shall be expressly delegated by the board or by these bylaws to some other officer or agent of the Company; and, he shall perform such other duties as the bylaws provide or the board of directors may prescribe.
Section 5.7. The President. The president shall be the chief executive officer and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and affairs of the Company. He may sign, with the secretary or an assistant secretary, any or all cates of stock of the Company. He may sign and execute in the name of the Company (i) all contracts or other instruments authorized by the board of directors, and (ii) all contracts or instruments in the usual and regular course of business, pursuant to section 6.2 hereof, except in cases when the signing and execution thereof shall be expressly delegated by the board or by these bylaws to some other officer or agent of the Company. At the request of the chairman of the board, or in his absence or disability, he shall preside at meetings of shareholders and directors. He shall, in general, have the powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be assigned to him by the board of directors.
Section 5.8. The Vice Presidents. At the request of the president, or in his absence or disability, the vice presidents, in the order of their election, shall perform the duties of the president, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the president. Any action taken by a vice president in the performance of the duties of the president shall be conclusive evidence of the absence or inability to act of the president at the time such action was taken. The vice presidents shall perform such other duties as may, from time to time, be assigned to them by the board of directors or the president. A vice president may sign, with the secretary or an assistant secretary, certificates of stock of the Company.
Section 5.9. Secretary. The secretary shall keep the minutes of all meetings of the shareholders, of the board of directors, and of the executive committee, if any, of the board of directors, in one or more books provided for such purpose and shall see that all notices are duly given in accordance with the provisions of these bylaws or as required by law. He shall be custodian of the corporate records and of the seal (if any) of the Company and see, if the Company has a seal, that the seal of the Company is affixed to all documents the execution of which on behalf of the Company under its seal is duly authorized; shall have general charge of the stock certificate books, transfer books and stock ledgers, and such other books and papers of the Company as the board of directors may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the office of the Company during business hours; and in general shall perform all duties and exercise all powers incident to the office of the secretary and such other duties and powers as the board of directors or the president from time to time may assign to or confer on him.
Section 5.10. Treasurer. The treasurer shall keep complete and accurate records of account, showing at all times the financial condition of the Company. He shall be the legal custodian of all money, notes, securities and other valuables which may from time to time come into the possession of the Company. He shall furnish at meetings of the board of directors, or whenever requested, a statement of the financial condition of the Company, and shall perform such other duties as these bylaws may require or the board of directors may prescribe.
Section 5.11. Assistant Officers. Any assistant secretary or assistant treasurer appointed by the board of directors shall have power to perform, and shall perform, all duties incumbent upon the secretary or treasurer of the Company, respectively, subject to the general direction of such respective officers, and shall perform such other duties as these bylaws may require or the board of directors may prescribe.
Section 5.12. Salaries. The salaries or other compensation of the officers shall be fixed from time to time by the board of directors. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director of the Company.
Section 5.13. Bonds of Officers. The board of directors may secure the fidelity of any officer of the Company by bond or otherwise, on such terms and with such surety or sureties, conditions, penalties or securities as shall be deemed proper by the board of directors.
Section 5.14. Delegation. The board of directors may delegate temporarily the powers and duties of any officer of the Company, in case of his absence or for any other reason, to any other officer, and may authorize the delegation by any officer of the Company of any of his powers and duties to any agent or employee, subject to the general supervision of such officer.
Section 6.1. Dividends. Dividends on the outstanding shares of the Company, subject to the provisions of the articles of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid by the Company in cash, in property, or in the Company's own shares, but only out of the unreserved and unrestricted earned surplus of the Company, except as otherwise allowed by law.
Subject to limitations upon the authority of the board of directors imposed by law or by the articles of incorporation, the declaration of and provision for payment of dividends shall be at the discretion of the board of directors.
Section 6.2. Contracts. The chairman of the board and president shall each have the power and authority to execute, on behalf of the Company, contracts or instruments in the usual and regular course of business, and in addition, the board of directors may authorize any officer or officers, agent or agents, of the Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Company, and such authority may be general or confined to specific instances. Unless so authorized by the board of directors or by these bylaws, no officer, agent or employee shall have any power or authority to bind the Company or any contract or engagement, or to pledge its credit or to render its pecuniarily liable for any purpose or in any amount.
Section 6.3. Checks, Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Company shall be signed by such officers or employees of the Company as shall from time to time be authorized pursuant to these bylaws or by resolution of the board of directors.
Section 6.4. Depositories. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks or other depositories as the board of directors may from time to time designate, and upon such terms and conditions as shall be fixed by the board of directors. The board of directors may from time to time authorize the opening and maintaining within any such depository as it may designate, of general and special accounts, and may make such special rules and regulations with respect thereto as it may deem expedient.
Section 6.5. Endorsement of Stock Certificates. Subject to the specific directions of the board of directors, any share or shares of stock issued by any corporation and owned by the Company, including reacquired shares of the Company's own stock, may, for sale or transfer, be endorsed in the name of the Company by the president or any vice president; and such endorsement may be attested or witnessed by the secretary or any assistant secretary either with or without the affixing thereto of the corporate seal.
Section 6.6. Voting of Shares Owned by the Corporation. Unless otherwise ordered by the board of directors, the chairman of the board, the president, the secretary and the treasurer, or any of them, shall have full power and authority on behalf of the Company to attend and to vote and to grant proxies to be used at any meeting of shareholders of any corporation in which the Company may hold stock. The board of directors may confer like powers upon any other person or persons.
Section 6.7. Corporate Seal. The corporate seal, if any, shall be in such form as the board of directors shall approve, and such seal, or a facsimile thereof, may be impressed on, affixed to, or in any manner reproduced upon, instruments of any nature required to be executed by officers of the Company.
Section 6.8. Fiscal Year. The fiscal year of the Company shall begin and end on such dates as the board of directors at any time shall determine.
Section 6.9. Books and Records. The Company shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders and board of directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each.
Section 6.10. Resignations. Any director or officer may resign at any time. Such resignations shall be made in writing and shall take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the president or secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation.
Section 6.11. Indemnification of Officers and Directors.
(a) The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a director of the Company, or is or was serving at the request of the Company as a director or officer of another corporation, 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 if he acted in good faith and 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 or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.
(c) To the extent that a director or officer of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b), or in defense of any claim, issue or matter therein, the Company shall indemnify him against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith.
(d) The determination that an officer or director has met the applicable standard of conduct set forth in subsections (a) and (b) (unless indemnification is ordered by a court or required by subsection (c)) shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding when authorized by the board of directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Company as authorized in this Section 6.11.
(f) For purposes of this section 6.11, references to "the Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors and officers so that any person who is or who was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this section 6.11, with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.
(g) The indemnification provided hereunder shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any other bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.
(h) The Company intends that the indemnification provided hereunder shall indemnify its officers and directors to the fullest extent possible under the Texas Business Corporation Act; and if any indemnification which would otherwise be granted by this section 6.11 shall be disallowed by any competent court or administrative body as illegal, then any officer or director with respect to whom such adjudication was made, and any other officer or director, shall be indemnified to the fullest extent permitted under the Texas Business Corporation Act.
Section 6.12. Meetings by Telephone. Subject to the provisions required or permitted by these bylaws or the laws of the State of Texas for notice of meetings, shareholders, members of the board of directors, or members of any committee designated by the board of directors may participate in and hold any meeting required or permitted under these bylaws by telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such a meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
Section 7.1. Amendments. These bylaws may be altered, amended, or repealed, or new bylaws may be adopted, by a majority of the board of directors at any duly held meeting of directors or by the holders of a majority of the shares represented at any duly held meeting of shareholders; provided that notice of such proposed action shall have been contained in the notice of any such meeting.
Amendment 1 -- dated October 12, 1983
Amendment 2 -- dated April 12, 1984
Amendment 3 -- dated October 11, 1988
Sections 4.1 and 4.3 of the bylaws of Vallen Corporation are amended to allow the Vallen Corporation Board of Directors to increase its number in the interim period between annual shareholders' meetings and to fill the vacancies created by the increase, provided that the directors may not appoint more than two new (increased) directors, in any period between shareholders' meetings. If the Board of Directors is to be increased by a number greater than two, a shareholders' meeting and election of such additional directors will be required.
Section 4.1 of the bylaws of Vallen Corporation is amended to state that the Board of Directors shall consist of three members.
RESOLVED, that Section 4.1 of the Bylaws of Vallen Corporation be amended to state that the Board of Directors shall consist of four members.
The bylaws were amended to include a new Section 6.11.
Section 6.11. Indemnification of Officers and Directors.
(a) The Company shall indemnify any person who was or is a named defendant or respondent or is threatened to be made a named defendant or respondent to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal to such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (collectively, such actions, suits, proceedings, appeals, inquiries and investigations are referred to collectively as "Proceedings" and individually as "Proceeding") by reason of the fact that such person either is or was a director of the Company, or while a director of the Company, is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another domestic or foreign corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by such person in connection with such Proceeding if it is determined that such person conducted himself in good faith, and if such conduct was in such person's official capacity as a director of the Company, in a manner he reasonably believed to be in the best interests of the Company, and, in all other cases, in a manner he reasonably believed was not opposed to the best interests of the Company and, in the case of any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful, provided that if a person is found liable to the Company or is found liable on the basis that personal benefit was improperly received by him, the indemnification (i) shall be limited to reasonable expenses (including court costs and attorneys' fees) actually incurred by the person in connection with the Proceeding and (ii) shall not be made in respect of any Proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the Company. The Company shall pay or reimburse expenses incurred by a director in connection with such person's appearance as a witness or other participation in a Proceeding at a time when such person is not named defendant or respondent in such Proceeding.
(b) The determination to be made in such subsection (a) of this Section 6.11 shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who at the time of the vote are not named defendants or respondents in the Proceeding; or (ii) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated to act in the matter by a majority vote of all directors, consisting solely of two or more directors who at the time of the vote are not named defendants or respondents to the Proceeding; or (iii) by a special legal counsel selected by the board of directors or a committee of the board by vote as set forth in subsection (i) or (ii), or, if such a quorum cannot be obtained and such a committee cannot be established by a majority vote of all directors; or (iv) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the Proceeding. A determination as to the reasonableness of expenses (including court costs and attorneys' fees) shall be made in the same manner as the determination that indemnification is permissible; provided, however, that if the determination required to be made under subsection (a) of this Section 6.11 is made by special legal counsel, the determination as to reasonableness of expenses shall be made in the manner specified in this subsection (b) (iii) for the selection of legal counsel.
(c) Reasonable expenses incurred by a director in connection with a Proceeding, shall be paid by the Company in advance of the final disposition of such Proceeding and without any of the determination specified in subsection (b) of this Section 6.11 upon receipt by the Company of a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under this Section 6.11 and a written undertaking by or on behalf of the director to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Company as authorized in this Section 6.11, which undertaking shall be an unlimited general obligation of such director and may be unsecured.
(d) The right to indemnification conferred in this Section 6.11 shall be a contract right and shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any other law, bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in their official capacities and as to action in another capacity while acting as a director and shall continue as to a person who has ceased to be a director and shall inure to the benefit of the heirs, executors and administrators of such person. Any indemnification of or advance of expenses to a director in accordance with this Section 6.11 shall be reported in writing to the shareholders in accordance with the provisions of Article 2.02-1 of the Texas Business Corporation Act or any successor provision thereto.
(e) The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of the Company, or who is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, other enterprise, or employee benefit plan, against any liability asserted against and incurred by that person in such a capacity or arising out of his status as such a person, whether or not the Company would have the power to indemnify such person against such liability under this Section 6.11.
(f) The Company intends that the indemnification provided hereunder shall indemnify its directors to the fullest extent possible under the Texas Business Corporation Act; and if any indemnification which would otherwise be granted by this Section 6.11 shall be disallowed by any competent court or administrative body as illegal, then any officer or director with respect to whom such adjudication was made, and any other officer or director, shall be indemnified to the fullest extent permitted under the Texas Business Corporation Act.
RESOLVED, that consistent with recent changes in the Texas Business Corporation Act, the bylaws of the Company be and hereby are amended to change the phrase "fifty days" appearing in the sixth line of Section 3.3 and in the seventh and fourteenth lines of Section 3.4 in each instance to read "sixty days" and to change the second sentence of the first paragraph of Section 6.1 to read in its entirety as follows:
"Dividends may be paid by the Company in cash, in property, or in the Company's own shares, but only if (i) after giving effect to such dividend the Company will not be insolvent and (ii) the amount of such dividend does not exceed the surplus of the Company, except as otherwise allowed by law."
RESOLVED, that Section 4.1 of the Bylaws of Vallen Corporation be amended to state that the Board of Directors shall consist of five members. | 10-Q | EX-3.II | 1996-01-16T00:00:00 | 1996-01-16T08:08:40 |
0000912057-96-000513 | 0000912057-96-000513_0000.txt | THE SECURITIES ACT OF 1933 AAR CORP. (Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
ELK GROVE VILLAGE, ILLINOIS (Zip code) (Address of principal executive offices)
AAR CORP. STOCK BENEFIT PLAN (FORMERLY KNOWN AS AAR CORP. AMENDED STOCK OPTION AND INCENTIVE PLAN) (Full title of the plan)
VICE PRESIDENT, GENERAL COUNSEL & SECRETARY ELK GROVE VILLAGE, ILLINOIS 60007 (Name and address of agent for service) (Telephone number, including area code, of agent for
(a) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933.
(b) Each unit consists of one share of Common Stock and one related Common Stock Purchase Right. The Rights currently are not evidenced by separate certificates and may not be transferred except upon transfer of the related shares. The value attributable to the Common Stock Purchase Rights is reflected in the market price of the Common Stock.
E. REGISTRATION OF ADDITIONAL SECURITIES
Pursuant to General Instruction E of Form S-8, the contents of the Registration Statement of Registrant on Form S-8, Registration No. 33-26783, filed by the Registrant with the Securities and Exchange Commission on February 1, 1989, registering its Common Stock, $1.00 par value per share, and its Common Stock Purchase Rights, issuable pursuant to the AAR CORP. Stock Benefit Plan (formerly known as the AAR CORP. Amended Stock Option and Incentive Plan), are hereby incorporated by reference.
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
All information required in this registration statement not included in the Exhibits attached hereto or set forth on the signature page is set forth in the Registration Statement of the Registrant on Form S-8 (Registration No. 33-26783) which is incorporated herein by reference.
The Exhibits filed herein are set forth on the exhibit index filed as part of this Registration Statement on page 6 hereof.
KNOWN BY ALL MEN BY THESE PRESENTS, that each of the persons signing this Registration Statement as a director or officer, or both, of AAR CORP., a Delaware corporation, hereby constitutes and appoints Ira A. Eichner, David P. Storch, and Howard A. Pulsifer, and each of them, his true and lawful attorneys- in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Village of Elk Grove Village, State of Illinois, on January 8, 1996. AAR CORP. By: /s/ Ira A. Eichner Chairman of the Board and
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and effective on the dates indicated.
/s/ Ira A. Eichner Chairman of the Board and January 8, 1996 ------------------------ Chief Executive Officer; Director Ira A. Eichner (Principal Executive Officer)
/s/ David P. Storch President and Chief Operating January 8, 1996
/s/ Timothy J. Romenesko Vice President, Chief Financial January 8, 1996 Timothy J. Romenesko (Principal Financial and
/s/ A. Robert Abboud Director January 8, 1996
/s/ Howard B. Bernick Director January 8, 1996
/s/ Edgar D. Jannotta Director January 8, 1996
/s/ Robert D. Judson Director January 8, 1996
/s/ Erwin E. Schulze Director January 8, 1996
/s/ Joel D. Spungin Director January 8, 1996
/s/ Lee B. Stern Director January 8, 1996
/s/ Richard D. Tabery Director January 8, 1996
4. Instruments 4 Instruments defining the rights of security defining the holders are hereby incorporated by reference as rights of Exhibits to the Registrant's Annual Report on security Form 10-K for the fiscal year ended May 31, 1995.
5. Opinion re 5.1 Opinion of Mr. Howard A. Pulsifer, Vice legality President, General Counsel and Secretary (filed herewith, Page 7).
23. Consents 23.1 Consent of KPMG Peat Marwick LLP (filed herewith, Page 8).
23.2 Consent of Mr. Howard A. Pulsifer, Vice President, General Counsel and Secretary (contained in opinion referred to in Exhibit 5)
24. Power of The Power of Attorney immediately precedes the Attorney signature page hereof (filed herewith, Page 4). | S-8 | S-8 | 1996-01-16T00:00:00 | 1996-01-16T14:35:25 |
0000912057-96-000522 | 0000912057-96-000522_0001.txt | EXHIBIT 15.1 -- INDEPENDENT ACCOUNTANTS' REVIEW REPORT
We have reviewed the accompanying consolidated balance sheet of Price Enterprises, Inc. as of December 24, 1995, and the related consolidated statements of income and cash flows for the sixteen week periods ended December 24, 1995 and December 18, 1994. These financial statements are the responsibility of the Company's management.
We conducted our reviews 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 taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Price Enterprises, Inc. as of August 31, 1995, and the related statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated October 10, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of August 31, 1995, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. | 10-Q | EX-15.1 | 1996-01-16T00:00:00 | 1996-01-16T15:56:50 |
0000950123-96-000130 | 0000950123-96-000130_0002.txt | <DESCRIPTION>OPINION OF WILLKIE FARR & GALLAGHER
[Willkie Farr & Gallagher Letterhead]
Re: Registration Statement on Form S-3 (No. 33-64685)
Prime Hospitality Corp. (the "Company") has requested our opinion in connection with the Registration Statement on Form S-3 (No. 33-64685) (the "Registration Statement") relating to the First Mortgage Notes due 2006 of the Company (the "Notes"). The Notes will be issued under an Indenture (the "Indenture") to be entered into by the Company and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee") and sold pursuant to the terms of an underwriting agreement to be executed by and among Smith Barney Inc., BT Securities Corporation and Montgomery Securities (the "Underwriters").
We have examined copies of the Certificate of Incorporation and ByLaws of the Company, the Registration Statement, all resolutions adopted by the Company's Board of Directors and other records and documents that we have deemed necessary for the purpose of this opinion. We have also examined such other documents, papers, statutes and authorities as we have deemed necessary to form a basis for the opinion hereinafter expressed.
In our examination, we have assumed the genuineness of all signatures and the conformity to original documents of all copies submitted to us. As to various questions of fact material to our opinion, we have relied on statements and certificates of officers and representatives of the Company and public officials. In rendering this opinion, we have also assumed that there will be no changes in applicable law or facts between the date hereof and any date of issuance of Notes and that the provisions of all applicable federal and state securities laws have been complied with.
Based upon and subject to the foregoing, we are of the opinion that the Notes have been duly authorized and, when duly executed, authenticated and delivered by or on behalf of the Company, duly authenticated by the Trustee and duly paid for by the Underwriters, will be binding obligations of the Company and entitled to the benefits of the Indenture.
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 caption "Legal Matters" in the Registration Statement. | S-3/A | EX-5.1 | 1996-01-16T00:00:00 | 1996-01-16T15:25:14 |
0000950152-96-000105 | 0000950152-96-000105_0000.txt | November 30, 1995 and February 28, 1995
November 30, 1995 and February 28, 1995
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Earnings
Nine- and three-month periods ended November 30, 1995 and 1994
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
Nine-month periods ended November 30, 1995 and 1994
See accompanying notes to condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
Nine- and three-month periods ended November 30, 1995 and 1994
Note A In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain such adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position of The Tranzonic Companies (Company) at November 30, 1995 and the results of operations for the nine- and three-month periods ended November 30, 1995 and 1994. The statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report for the fiscal year ended February 28, 1995.
Note B Net earnings per share have been calculated based on the weighted average Class A common and Class B common shares outstanding during the periods plus the incremental shares (calculated using the treasury share method) for those outstanding share options which are considered equivalent shares and have a dilutive impact on net earnings per share.
The table below depicts the average Class A common and Class B common shares used in the calculation of net earnings per share for the reported periods:
The table below depicts the Class A common and Class B common shares outstanding at the end of the periods reported:
Note C On March 1, 1995, the Company acquired substantially all the assets and assumed certain liabilities of Plezall Wipers, Inc., a Miami, Florida distributor of woven textile wipers. The acquisition was accounted for under the purchase method of accounting.
Note D The insurance company which insures and administers the Company's health and welfare benefits plan converted from a mutual to a stock company. As a result of that conversion, and subsequent to this quarter close, the Company was issued shares of stock which it then sold at a gain of approximately $600,000 after tax which will be reflected in the fourth quarter. These proceeds will be used to fund future health and welfare benefit claims.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
The Company's financial position remains strong. The current ratio at November 30, 1995 was 3.0:1, and current assets continue to exceed total liabilities.
Revenues for the nine-month period ended November 30, 1995 increased 8.3 percent to $122,224,052 from $112,863,988 recorded in the prior year like period. Third quarter revenues increased 7.9 percent to $40,224,220 from $37,276,446 recorded in the same prior year period. The inclusion of sales from the March 1995 acquisition of Plezall Wipers, Inc. contributed in both periods to the revenue growth. In addition, each of the Company's divisions recorded year-to-year revenue growth.
Gross profit margins for both the third quarter and year-to-date periods continue to reflect the impact of significantly higher raw material costs, particularly in wood pulp, steel, and cotton. Added is the fact that economic conditions in the retail industry and strong competitive pressures have limited our ability to maintain historic gross margins. Recent indications are that these raw material costs have leveled off or declined slightly. Company-wide efforts to identify labor and manufacturing efficiencies have been made in an attempt to dampen the impact of current margin trends.
Improved sales volume and cost containment strategies in place at each of our divisions continue to favorably impact selling, general, and administrative expenses on a relative basis. Selling, general, and administrative expenses were 25.8 percent of sales in both the third quarter and year-to-date as compared to 27.1 percent and 26.7 percent, respectively, in the prior year.
As a result of increased borrowings for our March 1995 acquisition of Plezall and opportunistic forward purchases of raw materials, net interest costs increased in both the current fiscal three- and nine-month periods ended November 30, 1995.
With cash flow generated from operations and recent signs of raw material cost stability, the Company has been able to reduce its borrowings by $3,500,000 during the third quarter to near the prior fiscal year-end level.
Net earnings for the nine-month period ended November 30, 1995 were $3,135,730 or 89 cents per share, down 22.4 percent from $4,041,231 or $1.15 per share recorded in the prior year like period. Net earnings for the current fiscal three-month period were $913,862 or 26 cents per share, down 29.2 percent from $1,290,729 or 36 cents per share of the same period a year ago.
FORM 10-Q - PART II: OTHER INFORMATION
Items 1 through 5 are not applicable or the answer to such items is negative; therefore, the items have been omitted and no reference is required in this report.
ITEM 6. Exhibits and 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 thereto duly authorized.
Date: 1/12/96 By: /s/ Richard J. Pennza
(1) Filed only in electronic format pursuant to Item 601(b) (27) of Regulation S-K. | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T10:58:14 |
0000950172-96-000028 | 0000950172-96-000028_0000.txt | PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(Date of earliest event reported)
(Exact name of Registrant as specified in its charter)
(State of (Commission File No.) (IRS Employer
(Address of principal executive offices)
(Registrant's telephone number, including area code)
On January 11, 1996, the Board of Directors (the "Board") of A. Schulman, Inc. (the "Company") adopted a stockholder rights plan which contemplates the issuance of special stock purchase rights to the Company's common stockholders of record as of January 25, 1996, as set forth in the Rights Agreement between the Company and Society National Bank, as Rights Agent, incorporated herein by reference as Exhibit 4.1.
Also on January 11, 1996, the Board adopted amendments to the Company's By-laws which require a stockholder to provide notice to the Company of such stockholder's intent to nominate a director or raise business at an annual meeting. Such notice must be provided to the Company not less than 60 nor more than 90 days prior to the anniversary of the previous year's annual meeting and must contain certain specified information concerning the proposed director nominee or the matters to be brought before the annual meeting and concerning the stockholder submitting the proposal. Copies of the Company's By-laws, as amended to date, are incorporated herein by reference as Exhibit 3.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
3.1 By-Laws dated December 8, 1983 (incorporated by reference to Exhibit 3(c) of the Company's Form 10-K for fiscal year ended August 31, 1990).
3.2 Amendment to the By-Laws dated October 20, 1986 (incorporated by reference to Exhibit 3(f) of the Company's Form 10-K for fiscal year ended August 31, 1991).
3.3 Amendment to the By-Laws dated January 11, 1996.
4.1 Rights Agreement, dated as of January 12, 1996, between the Company and Society National Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A, dated January 15, 1996).
20.1 Form of Letter to the Company's stockholders describing the Rights, dated January __, 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, thereto duly authorized.
By: /s/ Robert A. Stefanko
Title: Chairman of the Board and
3.1 By-Laws dated December 8, 1983 Exhibit 3(c) of the Company's Form 10-K for fiscal year ended August 31, 1990).
3.2 Amendment to the By-Laws dated October 20, 1986 (incorporated by reference to Exhibit 3(f) of the Company's Form 10-K for fiscal year ended August 31, 1991).
3.3 Amendment to the By-Laws dated January 11, 1996.
4.1 Rights Agreement, dated as of January 12, 1996, between the Company and Society National Bank, as Rights Agent, which includes as Exhibit B thereto the Form of herein by reference to Exhibit 1 Statement on Form 8-A dated January 15, 1996).
20.1 Form of letter to the Company's Rights, dated January __, 1996. | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T14:34:12 |
0000873084-96-000005 | 0000873084-96-000005_0001.txt | Sears Credit Account Master Trust I
Group 1 Monthly Certificateholders' Statement
Distribution Date: January 16, 1996 Due Period Ending December, 1995
Under the Series Supplements relating to the Pooling and Servicing Agreement dated as of November 18,1992 by and among Sears Roebuck and Co., Sears Receivables Financing Group, Inc. and First Trust of Illinois, National Associaton,as Trustee, the Trustee is required to prepare certain information each month regarding current distributions to Certificateholders and the performance of the Trust. The information for the Due Period and Distribution Date listed above is set forth below:
A.Payments to Group 1 Investors this Due Period (per $1,000 of Original Group 1 Total Interest Principal
Series 0 $43.920138890 $2.253472220 $0.000000000
1. Principal Receivables at the end of the Due Period
(b) Investor Interest by Groups
TOTAL INVESTOR INTEREST BY GROUPS $416,666,666.62 (c) Group 1 Investor Interest
TOTAL GROUP 1 INVESTOR INTEREST $416,666,666.62
(a) Invested Amount by Groups
TOTAL INVESTED AMOUNT BY GROUPS $416,666,666.62
(b) Group 1 Invested Amount
TOTAL GROUP 1 INVESTED AMOUNT $416,666,666.62
3. Allocation of Receivables Collected During the Due Period
(a) Allocation of Collections by Group Collections Collections
TOTAL ALLOCATION BY GROUPS $20,356,552.24 $63,607,191.37
(b) Group 1 Allocations by Series to Investor and Seller
TOTAL GROUP 1 ALLOCATIONS $20,356,552.24 $63,607,191.37
4. Information Concerning the Series Principal Funding Account ("SPFA")
Group 1 Due Period Total Deposits Investment Income
Series 1 N/A N/A N/A TOTAL GROUP 1 $0.00 $0.00 $0.00
* No Series has a Deficit Accumulation Amount.
5. Information Concerning the Series Interest Funding Account ("SIFA")
Group 1 This Due Period Total Deposits
TOTAL GROUP 1 $0.00 $0.00
6. Information Concerning Amount of Controlled Amortization Payments
Group 1 This Due Period This Due Period
TOTAL GROUP 1 $0.00 $0.00
Group 1 This Due Period
This Due Period Off Amount
TOTAL GROUP 1 $1,857,499.21 $1,857,499.21
9. Investor Losses This Due Period
TOTAL GROUP 1 $0.00 $0.00
10.Reimbursement of Investor Losses This Due Period
- not applicable since no Series experienced an Investor Loss.
11.Aggregate Amount of Unreimbursed Investor Losses
- not applicable since no Series experienced an Investor Loss.
12.Investor Monthly Servicing Fee Payable this Due Period
13.Available Subordinated Amount at the end of the Due Period Group 1 Total Invested Amount
Allocated Yield (2) $15,928,763.05 41.70%
Certificate Interest (3) $2,253,472.22 5.90% Servicing Fees (4) $763,888.89 2.00% Allocated Charge-Offs (5) $1,857,499.21 4.86%
(1) Annualized percentage of the Invested Amount at the beginning of the related Due Period. (2) See Section B3(b) above (3) See Section A above (4) See Section B12 above (5) See Section B8 above
Note: Payment rate (aggregate collections/beg. receivables balance) for the related Due Period: 6.47%
The aging of delinquent receivables is summarized as follows (1): Delinquencies as a % of balances 60 - 89 days past due.......... 1.55% 90 - 119 days past due......... 0.97% 120 days or more past due...... 1.67%
(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.
FIRST TRUST OF ILLINOIS, NATIONAL ASSOCIATION | 8-K | EX-21 | 1996-01-16T00:00:00 | 1996-01-16T10:23:04 |
0000912057-96-000471 | 0000912057-96-000471_0000.txt | U.S. SECURITIES AND EXCHANGE COMMISSION
/ / Form 10-K / / Form 11-K / / Form 20-F /X/ Form 10-Q / / Form N-SAR For Period Ended: November 30, 1995
If the notification relates to a portion of the filing check above, identify the Item(s) to which the notification relates: N/A
PART I -- REGISTRANT INFORMATION
Full Name of Registrant: APPLIED RESEARCH CORPORATION
Address of Principal Executive Office (Street and Number):
8201 Corporate Drive, Ste. 1120
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 of this form could not be eliminated without unreasonable effort or expense;
/X/ (b) The subject annual report or semi-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 prescribed due date; and
/ / (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 form 10-K, 11-K, 20-F, 10-Q or N-SAR or portion thereof could not be filed within the prescribed time period.
The Registrant is unable to file its Quarterly Report on Form 10-QSB within the prescribed time period because the Company has experienced some difficulty in compiling its financial records to complete the preparation of the unaudited financial statements for the relevant fiscal quarter.
PART IV -- OTHER INFORMATION
(1) Name and telephone number of person to contact in regard to this
(2) Have all other period reports required under section 13 or 15(d) of the Securities Exchange Act of 1934 or section 30 of the Investment Company Act of 1940 during the preceding 12 months or for such shorter period that the registrant was required to file such report(s) been filed? If the answer is no, identify report(s). /X/ Yes / / No
(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? / / Yes /X/ No
If so; attached an explanation of the anticipated change, both narratively and quantitively, and, if appropriate, state the reasons why a reasonable estimate of the results cannot 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: January 9, 1996 By: /s/ S.P.S. Anand S.P.S. Anand, President and CEO | NT 10-Q | NT 10-Q | 1996-01-16T00:00:00 | 1996-01-16T08:05:48 |
0000950124-96-000237 | 0000950124-96-000237_0000.txt | Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934
For Quarter Ended November 30, 1995
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
AMCORE Bank N.A., 501 Seventh Street (Address of principal executive offices)
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has 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.
PART I - ITEM 1
as of November 30, 1995
The accompanying notes are an integral part of the financial statements.
for the three-months and six-months ended November 30, 1995 and 1994
The accompanying notes are an integral part of the financial statements.
November 30, 1995 and 1994
The accompanying notes are an integral part of the financial statements.
1. The balance sheet as of November 30, 1995, the statements of operations for the three-month and six-month periods ended November 30, 1995 and 1994, and the statements of cash flows for the six-month periods ended November 30, 1995 and 1994, have been prepared without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for all periods presented have been made. The May 31, 1995 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.
Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the May 31, 1995 annual report. The results of operations for the period ended November 30, 1995 are not necessarily indicative of the operating results for the full year.
2. During the quarter, the trustee was informed that the lessee of the property had filed for reorganization under Chapter 11 of the Bankruptcy Code on September 22, 1995. The trustee filed a Report on 8-K with the SEC on October 6, 1995 regarding this matter. Subsequent to the quarter end, the trustee was informed that the lessee failed timely to pay the Cook County, Illinois collector the real estate taxes of $780,385 (including penalties as of 12/1/95). The trustee has delivered notice to the lessee and its lender that such failure to pay the real estate taxes constitutes a default under the lease. The lessee has until February 15, 1996 to rectify the default. The trustee has filed a Report on 8-K with the SEC on December 19, 1995 regarding this matter.
PART I - ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Due to the passive nature of the Registrant's activities, which generally include only the collection of rent and the disbursements of these proceeds less expenses to the certificate holders of the Registrant, there has been no material variation in the Registrant's financial condition or results of operations.
However, the lessee of the property owned by the Trust has filed for reorganization under Chapter 11 of the Bankruptcy Code. The trustee will take steps to protect the rights of the Trust, including future collection of rent. The payment of distributions to the certificate holders is dependent upon the collection of unpaid rent.
In addition, the trustee has delivered notice to the lessee and its lender that the failure to pay delinquent real estate taxes constitutes a default under the lease. The lessee has until February 15, 1996 to rectify the default.
PART II - ITEM 6
Exhibits and reports on Form 8-K
(b) A report on Form 8-K was filed October 6, 1995 notifying the SEC of the bankruptcy of the lessee.
Subsequent to quarter end, a report on Form 8-K was filed December 19, 1995 notifying the SEC of the delinquent real estate tax payment.
Pursuant to the requirements of Date January 13, 1996 the Securities Exchange Act of Bankers Building Land Trust
1934, the Registrant has duly By AMCORE Bank N.A., Trustee caused this report to be signed
on its behalf by the undersigned, By /s/ Patricia N. Fong thereunto duly authorized. Patricia N. Fong | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T09:58:33 |
0000891020-96-000022 | 0000891020-96-000022_0000.txt | <DESCRIPTION>PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
This Prospectus offers individual Variable Annuity contracts that are designed (i) to fund benefits under individual retirement accounts and annuities qualified for special tax treatment under Section 408 of the Internal Revenue Code of 1986 and (ii) for sale to individuals where no special tax treatment is available (the "Contract(s)"). The Contracts are offered on a flexible payment basis.
Under the Contracts, annuity payments may commence on a preselected future date (presumably at retirement) under one of the annuity options provided in the Contracts. Prior to the time annuity payments begin, the Contracts are partially or totally redeemable based on their current value and subject to applicable Contingent Deferred Sales Charges.
SAFECO Life Insurance Company ("SAFECO") provides for variable accumulations and variable benefits under the Contracts by crediting net Purchase Payments to one or more Sub-Accounts ("Sub-Accounts") within SAFECO Separate Account C ("Separate Account") as directed by the owner of the Contract ("Owner"). Net Purchase Payments to Contracts may be invested in any combination of the 12 Sub-Accounts available under the Contracts or in the Fixed Account. The Sub-Accounts invest in corresponding investment portfolios of separate mutual funds ("Available Funds"). Five of the Available Funds currently are investment portfolios of the SAFECO Resource Series Trust: SAFECO Resource Bond Portfolio; SAFECO Resource Equity Portfolio; SAFECO Resource Growth Portfolio; SAFECO Resource Money Market Portfolio; and SAFECO Resource Northwest Portfolio (each a "SAFECO Fund"). The Other Available Funds currently are: Insurance Management Series: Corporate Bond Fund ("Federated Corporate Bond Fund"); and Utility Fund ("Federated Utility Fund"); Lexington Emerging Markets Fund, Inc. ("Lexington Emerging Markets Fund"); Lexington Natural Resources Trust ("Lexington Natural Resources Fund"); TCI Portfolios, Inc.: TCI Balanced Fund ("TCI Balanced Fund"); and TCI International Fund ("TCI International Fund"); and Wanger Advisors Trust: U.S. Small Cap Advisor ("Wanger U.S. Small Cap Fund").
Generally, within ten (10) days after the Contract is received, an Owner may cancel it by returning it to the Home Office or the representative that sold it. Free look provisions may vary based on the state of issue. The state of issue is based on the address of the Payor.
A prospectus for each of the Available Funds may be obtained from SAFECO, P.O. Box 34690, Seattle, Washington 98124-1690. An investor should read those prospectuses carefully before buying a Contract described in this Prospectus or investing in any Sub-Account.
This Prospectus sets forth concisely the information about the Contracts and the Separate Account that a prospective investor should know before investing and should be retained for future reference. Additional information about the Contracts and the Separate Account is contained in a Statement of Additional Information dated October 10, 1995 which is incorporated herein by reference. The Statement of Additional Information is available upon written or oral request and without charge from SAFECO, P.O. Box 34690, Seattle, Washington 98124-1690, Telephone Number (800) 426-7649. The table of contents for the Statement of Additional Information is shown on page 33 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MAINSAIL IS NOT INSURED BY THE FDIC. IT IS NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION THROUGH WHICH IT MAY BE SOLD. MAINSAIL IS SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF EACH OF THE FOLLOWING MUTUAL FUNDS: SAFECO Resource Bond Fund; SAFECO Resource Equity Fund; SAFECO Resource Growth Fund; SAFECO Resource Money Market Fund; SAFECO Resource Northwest Fund; Federated Corporate Bond Fund; Federated Utility Fund; Lexington Emerging Markets Fund, Inc.; Lexington Natural Resources Trust; TCI Balanced Fund; TCI International Fund; and Wanger U.S. Small Cap Fund.
Some of the technical expressions and names frequently used in this Prospectus are defined below for ready reference:
1. ACCUMULATION UNIT - The measure used to calculate the value of a Sub-Account prior to the Annuity Date.
2. ANNUITANT - The natural person upon whose life annuity payments are payable in accordance with the Contract.
3. ANNUITY - Any series of payments starting on the Annuity Date, payable in accordance with the Contract, under the Settlement Options.
4. ANNUITY DATE - The date selected by the Owner for commencing annuity payments under the Contract. The day of the month on which the payments are made will be determined by SAFECO. The Annuity Date cannot be later than the date the Annuitant attains age 90.
5. ANNUITY UNIT - The measure used to calculate annuity payments after the Annuity Date.
6. AVAILABLE FUNDS - The SAFECO Funds and the Other Available Funds under the Contract.
7. BENEFICIARY (OR BENEFICIARIES) - The person (or persons) entitled to receive benefits under the Contract upon the death of the Owner.
8. CODE - The Internal Revenue Code of 1986, as amended.
9. CONTRACT - The Individual Variable Annuity Contract by and between SAFECO and the Owner.
10. CONTRACT ANNIVERSARY - Any anniversary of the Contract Date.
11. CONTRACT DATE - The earlier of the date on which the initial Net Purchase Payment is allocated to the Separate Account or the initial Net Purchase Payment is allocated to the Fixed Account.
12. CONTRACT VALUE - The sum of the Owner's interest in the Sub-Accounts and the Fixed Account, including all Purchase Payments made, investment experience, and less any previous withdrawals, and related Contingent Deferred Sales Charges, and less all other applicable charges or fees.
13. CONTRACT YEAR - The twelve month period which commences on the Contract Date and each succeeding twelve month period thereafter.
14. ELIGIBLE INVESTMENTS - An investment entity under the Contract, including the Fixed Account.
15. FIXED ANNUITY - An annuity with payments which do not vary in accordance with the net investment results of the Separate Account.
16. FIXED ACCOUNT - Contract Value allocated to SAFECO's General Account under the Contract.
17. FUND SHARE - A share of the capital stock or a share of beneficial interest in any of the Available Funds.
18. GENERAL ACCOUNT - The General Account of SAFECO in which are held all the assets other than those held in the Separate Account or in any other separate account established or maintained by SAFECO.
19. HOME OFFICE - The principal office of SAFECO at 15411 N.E. 51st Street, Redmond, Washington.
20. NET INVESTMENT FACTOR - A factor which reflects the net investment experience of each Sub-Account less certain charges for the mortality and expense risk expenses, administrative charges and taxes, if applicable, during a Valuation Period.
21. NET PURCHASE PAYMENT - Purchase Payment less any premium taxes.
22. 1940 ACT - The Investment Company Act of 1940, as amended.
23. NON-QUALIFIED CONTRACT - A Contract which does not receive favorable tax treatment under Sections 401, 403, and 408 of the Code.
24. OTHER AVAILABLE FUNDS - The underlying mutual funds or portfolios that are available under a Contract, in addition to the SAFECO Funds: Federated Corporate Bond Fund; Federated Utility Fund; Lexington Emerging Markets Fund; Lexington Natural Resources Fund; TCI Balanced Fund; TCI International Fund; and Wanger U.S. Small Cap Fund.
25. OWNER - The person(s) (or entity) named in the Application for the Contract who has all rights under the Contract. Joint Owners are allowed only if the joint Owners are spouses. Each joint Owner shall have equal ownership rights and must jointly exercise those rights.
26. PAYOR - The person(s) (or entity) that makes the initial Purchase Payment and any subsequent payments under the Contract.
27. PROGRAM(S) - Certain investment related services offered by SAFECO under the Contract to allow for (a) automatic transfers of Contract Value among Sub-Accounts and the Fixed Account, and/or (b) automatic investment in the Separate Account, and/or (c) automatic periodic withdrawals of Contract Value.
28. PURCHASE PAYMENTS - Payments made to purchase Accumulation Units or allocated to the Fixed Account.
29. QUALIFIED CONTRACT - A Variable Annuity Contract that has been issued to fund benefits under an Individual Retirement Account or Annuity qualifying, or intended to qualify, for tax deferment under Section 408 of the Code.
30. SAFECO FUNDS - The five separate portfolios of the SAFECO Resource Series Trust which are available under a Contract: SAFECO Resource Bond Fund, SAFECO Resource Equity Fund, SAFECO Resource Growth Fund, SAFECO Resource Money Market Fund, and SAFECO Resource Northwest Fund.
31. SEPARATE ACCOUNT - The separate investment account designated as SAFECO Separate Account C.
32. SUB-ACCOUNT(S) - A sub-account of the Separate Account investing in shares of one of the Available Funds.
33. VALUATION DATE - Each day the New York Stock Exchange is open for business, as well as each day otherwise required.
34. VALUATION PERIOD - The period commencing at the close of business for the Separate Account which is usually 4:00 p.m. (EST) on each Valuation Date and ending at the close of business for the next succeeding Valuation Date.
35. VARIABLE ANNUITY - An annuity with payments varying in accordance with the net investment results of the Separate Account.
*The Contingent Deferred Sales Charge declines over time and is 0% beginning in the seventh Contract Year. (See "Contingent Deferred Sales Charge" on page 16.) In each Contract Year, an Owner generally may withdraw up to 10% of the Contract Value without payment of the Contingent Deferred Sales Charge.
**A maximum charge of $25 is assessed for each withdrawal (surrender) after the first taken in any Contract Year, except under the Periodic Withdrawal Program where the charge is $25 per year if withdrawals are in excess of one per year. (See "Deductions under the Contracts" on page 16 and "Periodic Withdrawal
***A charge of $10 per transfer between Sub-Accounts of the Separate Account or the Fixed Account may be charged for transfers in excess of twelve (12) transfers, which may be made each Contract Year without charge. (See "Transfers Between Sub-Accounts" on page 18.)
**** The Annual Administration Maintenance Charge is assessed only if the Contract Value is less than $100,000. (See "Annual Administration Maintenance Charge" on page 17 and 22.)
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSET VALUE)
(as a percentage of average net assets of each)
*After reimbursement, if applicable. From time to time, the Available Funds' investment advisers in their sole discretion may waive all or part of their fees and/or voluntarily assume certain Available Fund expenses. For the six months ended June 30, 1995, the Funds voluntarily waived or reimbursed expenses, as follows: Federated Corporate Bond Fund $116,027, absent reimbursement $127,025; Federated Utility Fund $123,561, absent reimbursement $144,557; Lexington Emerging Markets Fund $70,426, absent reimbursement $105,813; Wanger U.S. Small Cap Fund $18,089, absent reimbursement $22,608. For a more complete description of the Available Funds' fees and expenses, see the Available Funds' prospectuses.
The purpose of the preceding table is to assist an Owner or prospective Owner in understanding the various costs and expenses an Owner will bear directly or indirectly. The above table reflects expenses of the Separate Account as well as the Available Funds. The above examples reflect the $30 Annual Administration Maintenance Charge as an annual charge of .77% of assets based on an average expected Contract Value of $30,000.
THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. The example assumes a 5% annual rate of return pursuant to requirements of the Securities and Exchange Commission ("Commission"). This hypothetical rate of return is not intended to be representative of past or future performance of any Sub-Account. (See "Deductions under the Contracts" on page 16.) The examples assume that Purchase Payments are allocated to each Available Fund which may have different expenses.
The Contingent Deferred Sales Charge shown in the table is the maximum sales load. (See "Contingent Deferred Sales Charge" on page 16 of this Prospectus which describes the range of the Contingent Deferred Sales Charge over time and limits on the Contingent Deferred Sales Charge as a percentage of total gross Purchase Payments.) The table does not reflect premium taxes which are levied by some states. (See "Premium Tax" on page 16.) Any premium taxes or other taxes levied by any governmental entity which SAFECO, in its sole discretion, determines have resulted from the establishment or maintenance of the
Contract or any portion the Contract, the receipt by SAFECO of Purchase Payments, or the commencement of annuity payments will be deducted from the Contract. Currently, with respect to Qualified Contracts, SAFECO intends to assume responsibility for all premium taxes, provided that SAFECO reserves the right, in the future, to pass the responsibility for all premium taxes to the Owner of the Contract and assess a charge for such taxes to the Contract.
The table reflects Owner transaction expenses, administrative fees, and other Separate Account charges during the Accumulation Period. (See the descriptions beginning on page 24 of this Prospectus). The Annual Administration Maintenance Charge and the Contingent Deferred Sales Charge are not applicable during the Annuity Period; the other charges and expenses, including those of the Available Funds, do apply during the Annuity Period. The information in the Expense Table and Examples is based in part on information provided by the Funds and SAFECO and the Separate Account do not assume responsibility for the accuracy of such information. (See the prospectuses of the Available Funds for a fuller
The minimum initial Purchase Payment under the Contract is $2,000 for a Qualified Contract and $5,000 for a Non-Qualified Contract. The minimum additional Purchase Payment is $250 for both a Qualified Contract and a Non-Qualified Contract, except for additional Purchase Payments made through a Systematic Investing Program, described below, in which case the minimum for both a Qualified Contract and Non-Qualified Contract is $100.
If the Contract Value available for annuity payments after the Annuity Date is less than $5,000, the Contract Value may be distributed in one lump sum in lieu of annuity payments. If any Annuity payment under the Contract would be less than $250, SAFECO shall have the right to change the frequency of payments to such intervals as will result in payments of at least $250. (See "The Annuity
SAFECO does not deduct a sales charge from Purchase Payments. However, if any part of the value of the Contracts is surrendered SAFECO will, with certain exceptions, deduct from the value of the Contract, a Contingent Deferred Sales Charge equal to the maximum of 7% of the amount withdrawn, but in no event more than 9% of gross Purchase Payments. This charge is imposed to permit SAFECO Securities, Inc. ("SAFECO Securities"), the distributor, or SAFECO to recover sales expenses which they have advanced. (See "Contingent Deferred Sales Charge"
In addition, on the last day of each Contract Year or upon full surrender, SAFECO currently will deduct an Annual Administration Maintenance Charge of $30 from the Contract Value of those Contracts with a Contract Value less than $100,000. An Asset Related Administration Charge equivalent to an annual rate of .15% of the average daily net asset value of the Separate Account is charged both during the Accumulation Period and the Annuity Period and is guaranteed to not increase for the duration of the Contract. These charges are to reimburse SAFECO for administrative expenses related to the issue, maintenance and administration of the Contracts. SAFECO does not expect to recover from these charges an amount in excess of the actual costs associated with administering the Contracts. (See "Contract Administrative Charges" on page 16.)
SAFECO deducts a mortality and expense risk charge from the assets of the Separate Account, as a daily asset charge equivalent to an annual rate of 1.25% of the average daily net asset value of the Separate Account during the Accumulation Period and the Annuity Period. SAFECO imposes the mortality and expense risk charge as compensation for assuming several mortality risks and expense risks for the duration of the Contract. SAFECO assumes a mortality risk by its contractual obligation to pay (i) a death benefit to the Beneficiary if the Owner dies prior to the Annuity Date, (ii) the minimum guaranteed death benefit, which reflects increases in Contract Value; and (iii) annuity payments for a longer period than anticipated. SAFECO assumes the expense risk that (i) the deductions for sales and administration charges may prove to be insufficient to cover the actual expenses incurred and (ii) no surrender or similar charge on the death benefit or upon annuitization is imposed. (See "Deduction for Assuming Mortality and Expense Risks" on page 17.)
As set forth in the Contract, any premium taxes payable to any governmental entity, which SAFECO determines to be properly chargeable against the Contract, will be charged against the Contract. (See "Premium Tax" on page 16.)
The Owner generally may, within ten (10) days after the date on which the Contract is issued, revoke the Contract, in which event the Owner will be paid the Contract Value, which may be more or less than the Purchase Payments. In states where required, SAFECO will refund the Purchase Payments rather than the Contract Value. SAFECO reserves the right to allocate all payments to the SAFECO Resource Money Market Sub-Account until the expiration of fifteen (15) days from the date the first Purchase Payment is received. If SAFECO so allocates payments, SAFECO will refund the greater of Purchase Payments or the Contract Value. Free look provisions may vary based on the Owner's state of residence.
An individual for whom a Contract is purchased under an individual retirement account may revoke the Contract by giving written notice of revocation to the Home Office at any time within seven (7) days after the later of the date on which (i) the account is established, or (ii) the individual receives a disclosure statement notifying him of his right of revocation. Upon such revocation, SAFECO will refund the full initial Purchase Payment made.
This Prospectus describes how a Contract may be purchased and redeemed. (See "Distribution of Contracts" on page 29 and "Redemptions" on page 18.)
Premature payments of benefits under a Contract may cause a penalty tax to be incurred. (See "Federal Tax Status" on page 29.)
SAFECO is a stock life insurance company organized under the insurance laws of the state of Washington on January 23, 1957. SAFECO is primarily engaged in the writing of individual and group life, accident and health insurance and annuity policies. SAFECO is authorized to write insurance and annuities in the District of Columbia and all states, except New York. Its Home Office is located at 15411 N.E. 51st Street, Redmond, Washington 98052. SAFECO is a wholly-owned subsidiary of the SAFECO Corporation, which is a holding company whose subsidiaries are engaged primarily in insurance and financial service businesses.
The Separate Account was established pursuant to a resolution of the Board of Directors of SAFECO dated February 6, 1986. The Separate Account was established under the laws of the state of Washington and is registered as a unit investment trust under the 1940 Act. Such registration does not involve supervision of the investments or investment policies of the Separate Account and does not imply that the Contract has been approved or disapproved by the Commission.
The income, gains or losses of the Separate Account are credited to or charged against the assets of the Separate Account without regard to the other income, gains or losses of SAFECO. These assets are held with relation to the Contracts described in this Prospectus and such other Variable Annuity contracts as may be issued by SAFECO and designated by it as participating in the Separate Account.
Although the assets maintained in the Separate Account will not be charged with any liabilities arising out of any other business conducted by SAFECO, all obligations arising under the Contracts, including the promise to make annuity payments, are general corporate obligations of SAFECO. Accordingly, all of SAFECO's assets are available to meet its contractual obligations and expenses under the Contracts participating in the Separate Account.
SUB-ACCOUNTS OF THE SEPARATE ACCOUNT
Twelve Sub-Accounts, each of which reflects the investment performance of a specific underlying mutual fund in which the Sub-Account invests, are available under the Contracts. Subject to certain limitations and any restrictions by an applicable retirement plan, the Owner may elect to have Net Purchase Payments credited to any of the available Sub-Accounts.
Five of the Sub-Accounts invest in shares of the corresponding portfolio of the SAFECO Resource Series Trust, an open-end diversified management investment company (the "SAFECO Funds"). Seven of the Sub-Accounts invest in shares of the Other Available Funds.
The SAFECO Funds were formed specifically to serve as an investment medium for the Separate Account or other segregated asset accounts established by SAFECO or an affiliate of SAFECO ("Other Separate Accounts"). Only the Separate Account and the Other Separate Accounts are eligible at this time to purchase shares of the SAFECO Funds. The SAFECO Funds reserve the right to offer their shares to Separate or other segregated asset accounts established by other insurance companies. SAFECO Asset Management Company ("SAFECO Management"), SAFECO Plaza, Seattle, Washington 98185, a wholly-owned subsidiary of SAFECO Corporation, is the investment adviser to the SAFECO Funds and also performs certain administrative functions for each SAFECO Fund. SAFECO provides certain personnel and facilities utilized by SAFECO Management in performing its investment advisory and administrative functions.
The Other Available Funds are open-end diversified management investment companies. The Other Available Funds are designed to serve as investment vehicles for variable annuity and variable life insurance contracts of various insurance companies and currently are available to the separate accounts of a number of insurance companies including SAFECO. The investment adviser for each of the Other Available Funds is: Federated Advisers; Lexington Management Corporation; Investors Research Corporation and Wanger Asset Management, L.P.
The Boards of Directors or Trustees of the Other Available Funds are responsible for monitoring the Other Available Funds for the existence of any material irreconcilable conflict between the interests of the owners of all separate accounts investing in the Other Available Funds and determining what action, if any, should be taken if a material irreconcilable conflict should occur. (See the prospectuses of the Other Available Funds for further discussion of the risks associated with the offering of Other Available Fund shares to the Separate Account and the separate accounts of other insurance companies. Also see the Statement of Additional Information regarding the terms of the Participation Agreements relating to the Separate Account's investment in the
INVESTMENT OBJECTIVES OF THE AVAILABLE FUNDS
Set forth below is a summary of the investment objectives of the Available Funds. There can be no assurance that these objectives will be achieved. The Available Funds' prospectuses accompany this Prospectus; investors should read them carefully before investing.
SAFECO RESOURCE BOND FUND (SAFECO RESOURCE BOND SUB-ACCOUNT)
The investment objective of the SAFECO Resource Bond Sub-Account is to seek as high a level of current income as is consistent with the relative stability of capital. The SAFECO Resource Bond Sub-Account invests in the SAFECO Resource Bond Fund. To pursue its investment objective, the SAFECO Resource Bond Fund invests primarily in medium-term debt securities. Although the SAFECO Resource Bond Fund does not intend to purchase below investment grade bonds during the coming year, it may hold up to 20% of total assets in bonds which are downgraded after purchase to below investment grade quality by Standard & Poor's Corporation or Moody's Investors Services, Inc. Below investment grade bonds are to as high-yield or "junk" bonds and have special risks associated with them. (See the SAFECO Funds' prospectus and statement of additional information for
SAFECO RESOURCE EQUITY FUND (SAFECO RESOURCE EQUITY SUB-ACCOUNT)
The investment objective of the SAFECO Resource Equity Sub-Account is to seek long-term growth of capital and reasonable current income. The SAFECO Resource Equity Sub-Account invests in the SAFECO Resource Equity Fund. To pursue its investment objective, the SAFECO Resource Equity Fund ordinarily invests principally in common stocks or securities convertible into common stocks. Fixed-income securities may be purchased in accordance with business and financial conditions.
SAFECO RESOURCE GROWTH FUND (SAFECO RESOURCE GROWTH SUB-ACCOUNT)
The investment objective of the SAFECO Resource Growth Sub-Account is to seek growth of capital and the increased income that ordinarily follows from such growth. The SAFECO Resource Growth Sub-Account invests in the SAFECO Resource Growth Fund. To pursue its investment objective, the SAFECO Resource Growth Fund ordinarily invests a preponderance of its assets in common stocks selected primarily for potential appreciation. To determine those common stocks which have the potential for long-term growth, SAFECO Management evaluates the issuer's financial strength, quality of management and earning power. Because the SAFECO Resource Growth Fund invests primarily in common stock selected for potential appreciation, its share price may be more volatile than the other equity funds.
SAFECO RESOURCE MONEY MARKET FUND (SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT)
The investment objective of the SAFECO Resource Money Market Sub-Account is to seek as high a level of current income as is consistent with the preservation of capital and liquidity through investments in high-quality money market investment maturing in thirteen months or less. The SAFECO Resource Money Market Sub-Account invests in the SAFECO Resource Money Market Fund which seeks to maintain a net asset value per share of $1.00. SHARES OF THE SAFECO RESOURCE MONEY MARKET FUND ARE NEITHER INSURED, NOR GUARANTEED, BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE SAFECO RESOURCE MONEY MARKET FUND WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SAFECO RESOURCE NORTHWEST FUND (SAFECO RESOURCE NORTHWEST SUB-ACCOUNT)
The investment objective of the SAFECO Resource Northwest Sub-Account is to seek long-term growth of capital through investing primarily in Northwest companies. The SAFECO Resource Northwest Sub-Account invests in the SAFECO Resource Northwest Fund. To pursue its investment objective, the SAFECO Resource Northwest Fund invests at least 65% of its total assets in securities issued by companies with their principal executive offices located in Washington, Alaska, Idaho, Oregon or Montana. The SAFECO Resource Northwest Fund ordinarily invests its assets in shares of common stock selected primarily for potential long-term appreciation. The SAFECO Resource Northwest Fund also may occasionally invest in securities convertible into common stock.
FEDERATED CORPORATE BOND FUND (FEDERATED CORPORATE BOND SUB-ACCOUNT)
The investment objective of the Federated Corporate Bond Sub-Account is to seek high current income. The Federated Corporate Bond Sub-Account invests in the Federated Corporate Bond Fund. To pursue its investment objective, the Federated Corporate Bond Fund invests primarily in a diversified portfolio of professionally managed fixed-income securities. The fixed-income securities in which the Federated Corporate Bond Fund intends to invest are lower-rated corporate debt obligations, which are commonly referred to as "junk bonds." Some of these fixed-income securities may involve equity features. Capital growth will be considered, but only when consistent with the investment objective of high current income.
FEDERATED UTILITY FUND (FEDERATED UTILITY SUB-ACCOUNT)
The investment objective of the Federated Utility Sub-Account is to seek high current income and moderate capital appreciation. The Federated Utility Sub-Account invests in the Federated Utility Fund. To pursue its investment objective, the Federated Utility Fund invests primarily in a professionally managed and diversified portfolio of equity and debt securities of utility companies that produce, transmit, or distribute gas and electric energy as well as those companies that provide communications facilities, such as telephone and telegraph companies. Under normal market conditions, the Federated Utility Fund invests at least 65% of its total assets in securities of utility companies.
LEXINGTON EMERGING MARKETS FUND (LEXINGTON EMERGING MARKETS SUB-ACCOUNT)
The investment objective of the Lexington Emerging Markets Sub-Account is to seek long-term growth of capital primarily through investment in equity securities and equivalents of companies domiciled in, or doing business in, emerging countries and emerging markets. The Lexington Emerging Markets Sub-Account invests in the Lexington Emerging Markets Fund. To pursue its investment objective, the Lexington Emerging Markets Fund invests primarily in emerging country and emerging market equity securities of all types of common stocks and equivalents (the following constitute equivalents: convertible debt securities and warrants), although the Fund also may invest in preferred stocks, bonds, and money market instruments of foreign and domestic companies, the U.S. government, and its agencies. The Lexington Emerging Markets Fund, under normal conditions, will invest at least 65% of its total assets in emerging country and emerging market equity securities in at least three countries outside of the U.S. and at all times will invest in a minimum of three countries outside of the U.S. Investments in emerging country equity securities are not subject to a maximum limit, and it is the intention of the Lexington Emerging Markets Fund's adviser to invest substantially all of the Fund's assets in such securities. For purposes of its investment objective, the Lexington Emerging Markets Fund considers emerging country equity securities to be any country whose economy and market the World Bank or United Nations considers to be emerging or developing, and the Fund also may invest in equity securities and equivalents, traded in any market, of companies that derive 50% or more of their total revenue from either goods or services produced in such emerging countries and emerging markets or sales made in such countries.
LEXINGTON NATURAL RESOURCES FUND (LEXINGTON NATURAL RESOURCES SUB-ACCOUNT)
The investment objective of the Lexington Natural Resources Sub-Account is to seek long-term growth of capital through investing primarily in common stocks of companies that own or develop natural resources and other basic commodities, or supply goods and services to such companies. The Lexington Natural Resources Sub-Account invests in the Lexington Natural Resources Fund. To pursue its investment objective, the Lexington Natural Resources Fund seeks to identify securities of companies that, in its management's opinion, are undervalued relative to the value of natural resource holdings of such companies in light of current and anticipated economic or financial conditions. The Lexington Natural Resources Fund will consider a company to have substantial natural resource assets when, in its management's opinion, the company's holdings of the assets are of such magnitude, when compared to the capitalization, revenues or operating profits of the company, that changes in the economic value of the assets will affect the market price of the equity securities of such company, which, generally, is when at least 50% of the non-current assets, capitalization, gross revenues or operating profits of the company in the most recent or current fiscal year are involved in or result from, directly or indirectly through subsidiaries, exploring, mining, refining, processing, fabricating, dealing in or owning natural resource assets. Up to 25% of the Lexington Natural Resources Fund's total assets may be invested in securities principally traded in markets outside the U.S.
TCI BALANCED FUND (TCI BALANCED SUB-ACCOUNT)
The investment objective of the TCI Balanced Sub-Account is capital growth and current income. The TCI Balanced Sub-Account invests in the TCI Balanced Fund. To pursue its investment objective with regard to the equity portion of the portfolio, the TCI Balanced Fund invests primarily in common stocks, including securities convertible into common stocks and other equity equivalents and other standards, and have better-than-average potential for appreciation. Management of the TCI Balanced Fund intends to maintain approximately 60% of its assets in such securities, regardless of the movement of stock prices. Management intends to maintain approximately 40% of its assets in fixed income securities, with a minimum of 25% of that amount in fixed income senior securities. The fixed income securities will be chosen based on their level of income production and price stability.
The TCI Balanced Fund may invest in a diversified portfolio of debt and other fixed-rate securities payable in U.S. currency. These may include obligations of the U.S. Government, i.e., Treasury Bills, Treasury notes, and U.S. Government Bonds supported by the full faith and credit of the United States, its agencies and instrumentalities, corporate securities, i.e., bonds, notes, preferred and convertible issues, and sovereign government, municipal, mortgage-related and other asset-backed securities.
TCI INTERNATIONAL FUND (TCI INTERNATIONAL SUB-ACCOUNT)
The investment objective of the TCI International Sub-Account is capital growth. The TCI International Sub-Account invests in the TCI International Fund. To pursue its investment objective, the TCI International Fund invests primarily in securities of foreign companies that meet certain standards that have potential for appreciation. The TCI International Fund will invest primarily in common stocks of such companies, including depositary receipts for common stocks and other equity equivalents. The TCI International Fund tries to stay fully invested in such securities, regardless of the movement of stock prices generally. Under normal conditions, the TCI International Fund will invest at least 65% of its assets in common stocks or other equity equivalents from at least three countries outside the United States. When management believes that the total capital growth potential or other securities equals or exceeds the potential return of common stocks, it may invest up to 35% of its assets in such other securities.
In order to achieve maximum investment flexibility, the TCI International Fund has not established geographic limits on asset distribution on either a country-by-country or region-by-region basis. Management expects to invest both in issuers whose principal place of business is located in countries with developed economies and in countries with less developed economies. The principal criterion for inclusion of a security in the fund's portfolio is its ability to meet the fundamental and technical standards of selection and, in the opinion of the fund's investment manager, to achieve better-than-average appreciation.
The other securities in which the TCI International Fund may invest are convertible securities, preferred stocks, bonds, notes and debt securities of companies, obligations of domestic and foreign governments and their agencies.
WANGER U.S. SMALL CAP FUND (WANGER U.S. SMALL CAP SUB-ACCOUNT)
The investment objective of the Wanger U.S. Small Cap Sub-Account is to seek long-term capital growth. The Wanger U.S. Small Cap Sub-Account invests in the Wanger U.S. Small Cap Fund. To pursue its investment objective, the Wanger U.S. Small Cap Fund invests mostly in stocks of small and medium-size companies, concentrating on companies with a total market capitalization of less than $1 billion. The Wanger U.S. Small Cap Fund invests mostly in U.S. companies, but also may invest up to one-third of its total assets in foreign securities.
The values of the investments held in the Available Funds fluctuate daily and are subject to the risk of changing economic conditions as well as the risks inherent in the ability of management to anticipate changes in such investments necessary to meet changes in economic conditions. Additional information concerning the Available Funds, including information as to the expenses paid by the Available Funds, is given in the Available Funds' prospectuses which accompany and should be read in conjunction with this Prospectus.
SUBSTITUTION OF OTHER SECURITIES OR AVAILABLE FUNDS
If the shares of any Available Funds should no longer be available for investment by the Separate Account or, if in the judgment of SAFECO further investment in such Funds' shares should become inappropriate, SAFECO may substitute shares of some other investment company for Fund shares already be purchased in the future under the Contract. Any substitution will be made pursuant to any prior approval of the Commission and compliance with all applicable rules and regulations. In the event of any substitution or change, SAFECO will endorse the Contract if necessary to reflect the substitution or change.
SAFECO makes no deduction from Purchase Payments for sales expenses, but does impose a Contingent Deferred Sales Charge. SAFECO incurs sales expenses upon the issuance of the Contracts. Such expenses include commissions, costs of advertising and sales promotion, costs associated with this Prospectus allocable to new sales, and sales administration and related costs. Because the Contracts are normally purchased for the long term, SAFECO expects to recover these costs over time. If, however, a Contract is totally or partially surrendered, a Contingent Deferred Sales Charge is imposed at that time as a means for SAFECO to recover sales expenses.
The Contingent Deferred Sales Charge is assessed on withdrawals during the first six Contract Years. The charge is 7% of the amount withdrawn during the first Contract Year. The percentage scales downward by one percent each Contract Year so that during the second Contract Year the charge is 6% and during the sixth Contract Year is 2%. Beginning in the seventh Contract Year there will be no charge.
Each Contract Year, an Owner generally may withdraw up to 10% of the Contract Value without payment of the Contingent Deferred Sales Charge. Thus, if there is more than one withdrawal per Contract Year, the free withdrawal amount will be recalculated at the time of each withdrawal. Further, a maximum charge of $25 is assessed for each withdrawal after the first taken in any Contract Year. SAFECO has represented in documents filed with the SEC that this charge for withdrawals in excess of one withdrawal per Contract Year is consistent with the expenses assumed by SAFECO based on its review of its requirements and likely costs over the duration of the Contracts.
No Contingent Deferred Sales Charge will be deducted from the Contract Value due to: Transfers between Sub-Accounts (see "Transfers Between Sub-Accounts" and "Other Services"); withdrawals made pursuant to a Settlement Option (see "Settlement Options"); annual required minimum distributions; the death of the Owner; or withdrawals for payment of the Annual Administration Maintenance Charge.
Deduction for premium taxes will be made only in those instances and at such time as the laws and regulations of the various states (or other jurisdictions) assess such a tax and where SAFECO determines that such premium taxes have resulted from the establishment or maintenance of the Contract or any portion of the Contract, the receipt by SAFECO of Purchase Payments, or the commencement of annuity payments. Premium tax assessments are based on the address of record of the Payor at the time a premium tax may be payable. It is SAFECO's current practice not to assess the applicable deduction for premium taxes to Qualified Contracts, although SAFECO reserves the right to assess such deduction to Qualified Contracts in the future. SAFECO currently assesses the applicable deduction for premium taxes to Non-Qualified Contracts. Premium taxes presently range from 0% to 3.5% of Purchase Payments or the amount applied to a Settlement Option, as the case may be.
SAFECO performs or delegates all administrative functions relative to the Contracts. Except as noted below, deductions are made under each Contract for the expenses associated with such functions. Such expenses may include salaries, rent, office equipment, communications, postage, legal, actuarial, and auditing fees. SAFECO may receive compensation from the investment advisers or administrators of the Available Funds consistent with the administrative services rendered to such entities.
If the Contract Value is below $100,000 an Annual Administration Maintenance Charge of $30 will be deducted from the Contract Value. There is no charge if the Contract Value is $100,000 or above. SAFECO may change the amount of the Annual Administration Maintenance Charge but in no event will the Annual Administration Maintenance Charge exceed the lesser of $40 per Contract Year or the anticipated costs.
The entire Annual Administration Maintenance Charge is deducted from the Contract Value in one Sub-Account or the Fixed Account, which is determined according to the following order: the SAFECO Resource Money Market Sub-Account; SAFECO Resource Bond Sub-Account; the TCI Balanced Sub-Account; the TCI International Sub-Account; the Wanger U.S. Small Cap Sub-Account; the Federated Utility Sub-Account; the Federated Corporate Bond Sub-Account; the Lexington Natural Resources Sub-Account; the Lexington Emerging Markets Sub-Account; the SAFECO Resource Equity Sub-Account; the SAFECO Resource Northwest Sub-Account; the SAFECO Resource Growth Sub-Account; and the Fixed Account.
For example, if there is Contract Value only in the SAFECO Resource Money Market Sub-Account, TCI Balanced Sub-Account and the Wanger U.S. Small Cap Sub-Account, then the Annual Administration Maintenance Charge of $30 is deducted from the SAFECO Resource Money Market Sub-Account, while if there is Contract Value only in the TCI Balanced Sub-Account, TCI International Sub-Account and the Wanger U.S. Small Cap Sub-Account, then the Annual Administration Maintenance Charge of $30 is deducted from the TCI Balanced Sub-Account. The Annual Administration Maintenance Charge is deducted by redeeming the number of Accumulation Units in the applicable Sub-Account equal in value to the Annual Administration Maintenance Charge or by deducting the amount of the Annual Administration Maintenance Charge from the Fixed Account. (See "Fixed Account".) The deduction is made on the last day of each Contract Year and upon a complete withdrawal of all Contract Value from all Sub-Accounts and the Fixed Account.
To further defray administrative costs, SAFECO deducts a charge of .000411% of the average daily net asset value of the Sub-Account(s) of the Separate Account per day, which is approximately equal to an annual rate of .15% for a 365 day year. SAFECO guarantees that the Asset Related Administration Charge will never be increased.
DEDUCTION FOR ASSUMING MORTALITY AND EXPENSE RISKS
SAFECO assumes a mortality risk by its contractual obligation to pay a death benefit to the Beneficiary if the Owner dies prior to the Annuity Date. Moreover, the minimum guaranteed death benefit, which reflects increases in Contract Value, imparts a significant mortality risk on SAFECO. SAFECO also assumes the risk that annuity payments will continue for a longer period than anticipated. SAFECO assumes the expense risk that the deductions for sales and administration charges may prove to be insufficient to cover the actual expenses incurred. Further, SAFECO assumes an expense risk from the fact that the Contract does not impose any surrender or similar charge on the death benefit or upon election of a Settlement Option. SAFECO assumes these risks for the duration of the Contract. As compensation for assuming these risks, SAFECO imposes a charge based on assets, during the Accumulation Period and the Annuity Period.
The charge is .002466% per day of the average daily net asset value of the Sub-Accounts for assuming mortality risks, including the minimum guaranteed death benefit, and .000959% for assuming expense risks. These charges, when combined, are approximately equal to 1.25% on an annual basis for a 365 day year. The charge, together with the Administrative charge, is applied at the end of each Valuation Period through a factor used in the determination of the net investment results of the Sub-Accounts. (See "Net Investment Factor".)
Revenue received from the mortality and expense risk and administrative charges is added to the General Account of SAFECO and is not specifically earmarked for any other purpose. SAFECO utilizes the assets in its General Account to meet administration, mortality and general expenses, as well as any shortfall in the recovery of distribution costs related to the Contracts. Charges under other provide a source of revenue to meet these expenses. Based upon SAFECO's actuarial projections, it is possible that the Contingent Deferred Sales Charge described above may, at least initially, be insufficient to recover all of the distribution costs and related expenses incurred in connection with the Contracts. In such event, some portion of the mortality and expense risk charges (to the extent such charges comprise surplus in the General Account) may be utilized by SAFECO to meet such excess sales expenses.
There are deductions from and expenses paid out of the assets of the Available Funds that are described in the prospectuses for those Funds. These deductions and expenses and the investment performance of the Available Funds affect the value of Accumulation Units. (See "The Accumulation Period".)
At any time, the Owner may elect by written notice to the Home Office or by properly executed telephone instructions to transfer amounts between the Sub-Accounts. The number of Accumulation Units equal to the amount to be transferred from a Sub-Account will be deducted from that Sub-Account and the number of Accumulation Units equal to the amount transferred will be credited to the other Sub-Account(s). Each such transfer must involve a minimum of $500, except for transfers made pursuant to certain Programs. (See "Other Services".) If the remaining balance of any Sub-Account after a transfer would be less than $500, the remaining balance also will be transferred. The minimum amount that may be transferred into a Sub-Account is $50.
An Owner may make up to twelve transfers each Contract Year at no charge. A charge of $10 per transfer may be charged for transfers in excess of these limitations. Transfers effected pursuant to certain Programs will not be counted towards these limitations. (See "Other Services"). However, unscheduled transfers are limited by the terms of certain Programs. Further, there are certain limitations upon an Owner's ability to transfer from and to the Fixed Account. (See "Fixed Account".) Transfer requests may be deferred or suspended, as permitted under the 1940 Act.
Subject to certain requirements in the Contracts, an Owner may, at or prior to the Annuity Date, redeem all or part of the Contract Value, except that, if the value of the Sub-Account being partially redeemed would be less than $500 after such redemption, the remaining balance will also be redeemed. The minimum amount that may be redeemed is $500, or the Contract Value, if less. The redemption will be effected by canceling the number of Accumulation Units equal in value to the amount of the redemption request. Accumulation Units will be canceled at the Accumulation Unit value as of the end of the Valuation Period in which the request for redemption is received at the Home Office.
Any applicable Contingent Deferred Sales Charge will be deducted from the redemption value determined as described above and below. (See "Deductions Under the Contracts".) The annuitant has no redemption right under the Contracts subsequent to the commencement of annuity payments.
Payment of a redemption request will be made within seven (7) days of receipt of such request in proper and complete form, except that payment of a redemption request, like a transfer request, may be deferred as permitted under provisions of the 1940 Act, for any period when: (i) the New York Stock Exchange ("Exchange") is closed (other than customary weekend and holiday closings); (ii) trading on the Exchange is restricted as determined by the Commission or the Exchange is closed for other than weekends and holidays; (iii) an emergency exists as determined by the Commission as a result of which disposal by an Available Fund of securities held by it is not reasonably practicable, or it is not reasonably practicable for an Available Fund fairly to determine the value of its net assets; or (iv) the Commission by order so permits for the protection of security holders.
The tax consequences, including the tax withholding requirements, of a redemption should be carefully considered. (See "Federal Tax Status".)
SAFECO offers several investment related programs which are available only during the Accumulation Period: Dollar Cost Averaging; Automatic Transfers; Appreciation or Interest Sweeps; Sub-Account Rebalancing; Systematic Investment; and Periodic Withdrawal Programs. Certain of the Programs are alternatives with respect to any one Sub-Account; other Programs may be combined. Thus, the Dollar Cost Averaging Program, the Automatic Transfer Program and the Appreciation or Interest Sweep Program are alternatives with respect to the selected Sub-Account, and in all cases with respect to the Fixed Account. However, the Sub-Account Rebalancing Program may be combined with each of the other Programs, but it is not available with respect to the Fixed Account. Under each Program, the related transfers between and among Sub-Accounts and the Fixed Account are not counted as one of the twelve free transfers. However, if an Owner executes an unrelated voluntary transfer from the Sub-Account participating in a Program, other than the Sub-Account Rebalancing Program, the Program will be terminated for the remainder of the Contract Year. In addition, if a Program is terminated before six Program transfers have occurred, the six Program transfers are counted as part of the twelve free transfers. If the balance in a Sub-Account would be less than $500 as a result of a transfer pursuant to one of these Programs, other than the Appreciation or Interest Sweep and Sub-Account Rebalancing Programs, then the entire balance in that Sub-Account will also be transferred. Each of the Programs has its own requirements, as discussed below.
If the Owner has submitted the required telephone authorization form, certain changes may be made by telephone. For those programs involving transfers, Owners may change instructions by telephone with regard to which Sub-Accounts or the Fixed Account Contract Value may be transferred. SAFECO will not be responsible for the authenticity of telephone instructions nor for any loss, damage, cost or expense arising out of any telephone instructions that SAFECO reasonably believes to be authentic based on its verification procedures. Such procedures may include requiring certain personal identification information prior to acting on telephone instructions, tape recording telephone communications, and providing written confirmation of instructions communicated by telephone. If SAFECO does not employ reasonable verification procedures to confirm that instructions communicated by telephone are genuine, it may be liable for any losses arising out of any action on its part or any failure or omission to act as a result of its own negligence, lack of good faith, or willful misconduct.
SAFECO offers a Dollar Cost Averaging Program during the Accumulation Period whereby an Owner may predesignate a portion of any Sub-Account's Contract Value or the Fixed Account's Contract Value to be automatically transferred on a monthly or quarterly basis to one or more of the other Sub-Accounts or to the Fixed Account. The amount to be transferred may be expressed as a set dollar amount or as a percentage of the Contract Value in the selected Sub-Account or the Fixed Account. Transfers from the Fixed Account are subject to a maximum of 1.33% monthly or 4% quarterly of the Contract Value in the Fixed Account at the time of the initial transfer. Upon election of the Dollar Cost Averaging Program the limitations on transfers from the Fixed Account will be calculated. The resultant limitations will apply for the entire duration of participation in this Program. Each Dollar Cost Averaging transfer is subject to a minimum transfer of fifty dollars ($50).
The Dollar Cost Averaging Program is available for Purchase Payments and for Contract Value transferred into any Sub-Account. An Owner may enroll in this Program at the time the Contract is issued or anytime thereafter by properly completing the Dollar Cost Averaging enrollment form and returning it to SAFECO at its Home Office at least ten (10) business days prior to the first business day of the month, which is the date that all Program transfers will be made ("Transfer Date"). This Program must be elected for at least a six (6) month period.
If the Contract Value in the participating Sub-Account or the Fixed Account does not equal or exceed the amount designated to be transferred on each Transfer Date, Dollar Cost Averaging will cease automatically and the remaining amount will be transferred.
Dollar Cost Averaging will terminate when (i) the designated monthly or quarterly amounts of transfers have been completed, (ii) the Owner requests termination in writing and such writing is received at the Home Office at least ten (10) business days prior to the next Transfer Date in order to cancel the transfer scheduled to take effect on such date, (iii) the Owner effects any other transfer from the participating Sub-Account or the Fixed Account while the Dollar Cost Averaging Program is in effect, or (iv) the Contract is surrendered. In addition, if any transfer or withdrawal has been made from the Fixed Account during the Contract Year, the Dollar Cost Averaging Program may not be established through the Fixed Account for that Contract Year.
An Owner may initiate, reinstate or change the Dollar Cost Averaging terms by properly completing a new enrollment form and returning it to the Home Office at least ten (10) business days prior to the next Transfer Date such transfer is to be made.
When utilizing Dollar Cost Averaging an Owner may be invested in either a Sub-Account or the Fixed Account and may be invested in any other Sub-Accounts or the Fixed Account at any given time.
The Automatic Transfer Program is identical to the Dollar Cost Averaging Program in all respects other than with regard to the limitations on transfers from the Fixed Account. The limitations on transfers from the Fixed Account are recalculated annually. Transfers from the Fixed Account are limited to 1.5% monthly and 4.5% quarterly.
APPRECIATION OR INTEREST SWEEP PROGRAM
An Owner may enroll in the Appreciation or Interest Sweep Program through either or both the SAFECO Resource Money Market Sub-Account or the Fixed Account. Enrollment is limited to Owners whose total Contract Value is greater than $10,000. Under the Program, if appreciation on Contract Value in the SAFECO Resource Money Market Sub-Account or credited interest earned on Contract Value in the Fixed Account ("Earnings") is greater than 10%, the Earnings up to 10% of the Contract Value in the Fixed Account or the SAFECO Resource Money Market Sub-Account, respectively, will be transferred to any of the Sub-Accounts, other than the SAFECO Resource Money Market Sub-Account. Earnings in the SAFECO Resource Money Market Sub-Account may not be transferred to the Fixed Account. In no event may the total Contract Value transferred from the Fixed Account in each Contract Year exceed a total of 10% of the Contract Value for each such Contract Year in the Fixed Account computed at the time of the transfer. Moreover, the Program may not be instituted for the Fixed Account in any Contract Year during which transfers or withdrawals have been made from the Fixed Account. Transfers under this Program will be processed monthly or quarterly on the Transfer Date.
In accordance with the Owner's election of the relative purchase payments percentage allocations, SAFECO will automatically rebalance the Contract Value of each Sub-Account either quarterly, semi-annually, or annually. SAFECO will automatically rebalance the Contract Value in each of the Sub-Accounts to match the current purchase payments percentage allocations as of the first Transfer Date during the period selected. Enrollment is limited to Owners whose total Contract Value is greater than $10,000 at the time the Program is selected. The Program may be terminated at any time and the percentages may be altered by written authorization. The requested change must be received at the Home Office ten (10) days prior to the Transfer Date. If the Owner terminates the Program, a new Program may not be instituted until the next Contract Year.
Purchase Payments may be made by monthly draft against the bank account of any Owner that has completed and returned to SAFECO a Systematic Investment Program application and authorization form. The application and authorization form may be obtained from SAFECO or from the sales representative. Each Systematic Investment Program Purchase Payment is subject to a minimum of one hundred dollars ($100).
SAFECO will make monthly, quarterly or annual distributions of a predetermined dollar amount to an Owner that has enrolled in the Periodic Withdrawal Program. Under the Program, all distributions will be made directly to the Owner and will be treated for federal tax purposes as any other withdrawal or distribution of Contract Value. (See "Federal Tax Status".) An Owner may specify the amount of each withdrawal, subject to a minimum of $250. In each Contract Year, up to 10% of Contract Value may be withdrawn without the imposition of any Contingent Deferred Sales Charge. If withdrawals pursuant to the Program are greater than 10% of Contract Value in any Contract Year, the amount of the withdrawals greater than 10% will be subject to the applicable Contingent Deferred Sales Charge. Any ad hoc withdrawals an Owner makes during a Contract Year will be aggregated with withdrawals pursuant to the Program to determine the applicability of any Contingent Deferred Sales Charge. If the frequency of withdrawals under the Program is greater than annually, SAFECO will charge an annual fee of $25 to compensate it for the added administrative costs.
Unless the Owner specifies the Sub-Account or Sub-Accounts or the Fixed Account from which withdrawals of Contract Value shall be made or if the amount in a specified Sub-Account is less than the predetermined amount, SAFECO will make withdrawals under the Program from the Sub-Accounts and the Fixed Account in amounts proportionate to the amounts in the Sub-Accounts and the Fixed Account. Withdrawals are subject to the applicable minimum Sub-Account balances. All withdrawals under the Program will be effected by canceling the number of Accumulation Units equal in value to the amount to be distributed to the Owner and any applicable Contingent Deferred Sales Charge.
The Program may be combined with all other Programs except those entailing transfers or withdrawals from the Fixed Account. However, the Owner may terminate such other program and may begin participation in the Program on the first day of the next Contract Year.
It may not be advisable to participate in the Program and incur a Contingent Deferred Sales Charge when making additional Purchase Payments under the Contract.
Owners may allocate Purchase Payments to the Fixed Account. In addition, Owners may transfer amounts in or out of the Fixed Account. Such fixed amounts are held in the General Account of SAFECO. Because of exemptive and exclusionary provisions, amounts in the Fixed Account have not been registered under the Securities Act of 1933 and the Fixed Account has not been registered as an investment company under the 1940 Act. Accordingly, neither the Fixed Account nor any interests therein are subject to the provisions of these acts and, as a result, the staff of the Commission has not reviewed the disclosures in this Prospectus relating to the Fixed Account. Disclosures regarding the Fixed Account may, however, be subject to certain generally applicable provisions of the Federal securities laws relating to the accuracy and completeness of statements made in prospectuses. This Prospectus is generally intended to serve as a disclosure document only for the aspects of the Contract involving the Separate Account and contains only selected information regarding the Fixed Account. More information regarding the Fixed Account may be obtained from the Home Office or from the sales representative.
SAFECO's obligations with respect to the Fixed Account are supported by SAFECO's General Account. Subject to applicable law, SAFECO has sole discretion over the investment of the assets in the General Account.
SAFECO guarantees that Fixed Account Contract Value will accrue interest at an annual effective rate of at least 3%, independent of the actual investment experience of the General Account. SAFECO may, in its sole discretion, credit higher rates of interest, although SAFECO is not obligated to credit interest in excess of the guaranteed rate. SAFECO will credit interest to the amount allocated to the Fixed Account at a rate determined according to SAFECO's investment year method of assigning interest credits. Interest credits will be based on the original period of receipt of amounts allocated to the Fixed Account. Each amount allocated to the Fixed Account will be credited with the Guaranteed Interest Rate determined for that period during which the allocation to the Fixed Account is received by SAFECO.
SAFECO will credit the Guaranteed Interest Rate for a period of no less of than twelve months (the "Interest Guarantee Period"). The Initial Interest Guarantee Period begins with the date Purchase Payments are first allocated to the Fixed Account. For the next subsequent Interest Guarantee Period, the Guaranteed Interest Rate will be determined as soon as practicable prior to the end of the current Interest Guarantee Period. Currently, SAFECO establishes subsequent Guaranteed Interest Rates twice annually (April 1 and October 1). Under the Contracts, SAFECO has reserved the right to establish subsequent Guaranteed Interest Rates more frequently than twice annually, but in all cases the rates will be guaranteed for no less than twelve months. Any higher rate of interest will be quoted at an annual effective rate.
The Settlement Options that are available on a variable basis also are available on a fixed basis through the Fixed Account. (See "Settlement Options".) If, as of the Annuity Date, a Settlement Option has not been selected, SAFECO will make annuity payments under Option 3.
The Fixed Account Contract Value on any Valuation Date is the sum of the Purchase Payments allocated to the Fixed Account, plus any transfers from a Sub-Account, plus interest credited to the Fixed Account, less any previous withdrawals, related withdrawal charges, or Annual Administration Maintenance Charge allocated to the Fixed Account, or transfers to a Sub-Account or transfer charges allocated to the Fixed Account.
The entire Annual Administration Maintenance Charge may be deducted from the Contract Value in the Fixed Account, according to the order described above under "Deductions under the Contract." The Annual Administration Maintenance Charge is deducted from the Fixed Account by deducting the amount of the Annual Administration Maintenance Charge from the Contract Value in the Fixed Account. The deduction is made on the last day of each Contract Year and upon a complete withdrawal of all Contract Value. (See "Contract Administration Charges".)
Furthermore, if the Annual Administration Maintenance Charge is to be deducted from the Fixed Account, the Annual Administration Maintenance Charge will be reduced if (i) it is greater than the Purchase Payments received for the current Contract Year and (ii) the excess charge over those Purchase Payments would reduce the net interest on the Fixed Account to below the Guaranteed Interest Rate on the Fixed Account. In that case, the Annual Administration Maintenance Charge will be limited to the amount of Purchase Payments received during the Contract Year plus the amount of interest credited in excess of the guaranteed interest rate on the Fixed Account.
FIXED ACCOUNT TRANSFERS AND PARTIAL WITHDRAWALS
Amounts in the Fixed Account are generally subject to the same rights and limitations and will be subject to the same charges as are amounts allocated to the Sub-Accounts with respect to total and partial withdrawals. (See "Transfers Between Sub-Accounts" and "Redemptions".) Transfers out of the Fixed Account are limited to a minimum of at least $500 (or, if less, the entire amount in the Fixed Account) and a maximum of 10% of the Contract Value in the Fixed Account in each Contract Year. Transfers into the Fixed Account must be at least $50. In the alternative, an Owner may elect, once per Contract Year, to have pre-established automatic monthly or quarterly transfers made from the Fixed
The objective of the Contracts is to provide Contract Value and Settlement Options which will tend to reflect changes in the cost of living subsequent to the date of issue of the Contract. There is no assurance that this objective will be met. SAFECO seeks to accomplish this objective by allocating Net Purchase Payments, as directed by the Owner, to one or more of the Sub-Accounts.
Each Contract is issued to the Owner. If consistent with applicable tax laws, a Contract may be owned jointly by spouses ("joint Owners"). Unless the Owner names an Annuitant in the application for, or amendment to, the Contract, the Owner will be considered the Annuitant. The Annuitant will become the Owner on commencement of a Settlement Option. Unless joint Owners name an Annuitant in the application for, or amendment to, the Contract, the older of the two joint Owners will be considered the Annuitant, for purposes of determining the limitations on selection of an Annuity Date. In addition, under Settlement Option 3, joint Owners may become "joint Annuitants." (See "Settlement
Subject to the minimum initial and subsequent Purchase Payment limitations, an Owner may continue to make Purchase Payments prior to the commencement of annuity payments. The Contracts provide for a variable monthly life annuity to begin at some future selected date, called the Annuity Date, with a provision that unless another Settlement Option is selected Variable Annuity payments will be made pursuant to Settlement Option 3, unless the Beneficiary is a non-natural person, in which case Variable Annuity payments will be made under Settlement Option 1. The Owner may elect one of the other Settlement Options provided by the Contracts. (See "Settlement Options").
Each Contract contains a minimum guaranteed death benefit if the Owner dies prior to the Annuity Date, generally equal to the greater of (i) the Contract Value at the time of death or (ii) the last determined minimum guaranteed death benefit. Different death benefits may apply under special circumstances. For example, a different death benefit applies if the Beneficiary does not provide due proof of death and elect a Settlement Option or lump sum payment within six months of the Owner's death. The death benefits, surrender value, and Settlement Options under the Contract will not be less than the minimum benefits required by any statute of the state in which the Contract is delivered. (See "Payment on or after Death of Owner".)
The Owner may select a different form of Variable Annuity (see "Settlement Options") or change the Annuity Date (see "Payment Provisions"), by written notice to SAFECO received prior to any previously selected Annuity Date, except that any Annuity Date selected cannot be later than the date the Annuitant attains age 90. Once a Settlement Option has begun it is irrevocable. The Owner may elect that all or a portion of the Contract Value be applied to effect a fixed annuity. (See "Settlement Options".) An Owner also may, subject to certain restrictions, elect to redeem all or a portion of the Contract Value, less applicable charges. (See "Redemptions".) However, certain tax consequences may result from any such election. (See "Federal Tax Status".)
The minimum initial Purchase Payment under the Contract is $2,000 for a Qualified Contract and $5,000 for a Non-Qualified Contract. The minimum additional Purchase Payment is $250 under both a Qualified Contract and a Non-Qualified Contract. If a Systematic Investing Program is utilized the minimum additional Purchase Payment is $100.
If the amount available to be applied under a Settlement Option is $5,000, or less, SAFECO reserves the right to pay such amount in a lump sum cash distribution. If annuity payments would be or become less than $250, SAFECO has the right to change the frequency of payments to such intervals as will result in payment of at least $250. (See "The Annuity Period".)
Contracts may be redeemed in full or in part at any time prior to the Annuity Date, except that a partial redemption of less than $500 from any Sub-Account is not permitted, and the value of any Sub-Account after such partial redemption must be at least $500 or the entire value of the Sub-Account will be redeemed. (See "Redemptions".) The minimum amount that may be transferred from a Sub-Account is $500 and the minimum amount that may be transferred to a Sub-Account is $50. (See "Transfers".)
THE CONTRACT VALUE AND ACCUMULATION UNITS
During the period prior to the commencement of annuity payments, referred to herein as the Accumulation Period, a separate accumulation account is maintained under the Contracts for each Sub-Account into which Purchase Payments are directed. Each Net Purchase Payment is credited to each Sub-Account, or allocated among the Sub-Accounts, as directed by the Owner, in the form of Accumulation Units. Accumulation Units are credited separately to each Sub-Account. The number of Accumulation Units of each type credited to the Contract is determined by dividing each Net Purchase Payment by the value of an Accumulation Unit for that Sub-Account. The initial Purchase Payment will be credited to the Contract not later than two (2) business days following the date the properly completed application which accompanies the Purchase Payment is received at the Home Office. If an application is incomplete or incorrect, the applicant will be informed of the reasons for the delay, and the Purchase Payment will be returned to the applicant within five (5) business days of receipt unless the applicant specifically authorizes SAFECO to retain the Purchase Payment until the application is completed or corrected. Purchase Payments allocated to the Sub-Accounts must be received by 1:00 p.m., Pacific Time, to receive that day's Accumulation Unit value.
The value of any Sub-Account at any time is equal to the total number of Accumulation Units credited to that Sub-Account multiplied by the then applicable current value of an Accumulation Unit for that Sub-Account.
The value of an Accumulation Unit, for each Sub-Account, will vary depending upon the investment experience of, and the charges and expenses deducted from, that Sub-Account. The Accumulation Unit value for any Valuation Period is determined by multiplying the Accumulation Unit value for the Sub-Account, as of the immediately preceding Valuation Period, by the Net Investment Factor for the current Valuation Period. The Accumulation Unit value for a Valuation Period is the value determined at the end of such period.
VALUATION DATE AND VALUATION PERIOD
Each date on which the assets of the Sub-Accounts are valued is a Valuation Date. The assets of the Sub-Accounts are valued as of 4:00 p.m., Eastern Standard Time, on each Valuation Date. The period from the time the Accumulation Unit value is determined as of one Valuation Date to the time such value is determined as of the next Valuation Date is called a Valuation Period.
The net investment factor is a formula for measuring the change in Accumulation Unit value over a Valuation Period. It is determined for any Valuation Period: by dividing (a) the net asset value per share of the Available Fund as of the current Valuation Period, plus the per share amount of any dividend or capital-gains distributions made by the Available Fund, plus or minus the charge for taxes, if any, by (b) the net asset value per share of the Available Fund determined as of the end of the immediately preceding Valuation Period, and then subtracting from this result, (c) a the daily equivalent of the mortality and expense risk charge, and (d) a the daily equivalent of the Asset Related Administration Charge.
EXAMPLE OF CALCULATION OF ACCUMULATION UNIT VALUE
Suppose (a) the accumulation unit value for the preceding Valuation Period was $10.00; (b) the net asset value of a Fund share as of the end of the current Valuation Period is $10.50; (c) the per-share amount of a distribution from the Available Fund during such Valuation Period was $.15; (d) the per-share amount of a tax liability was $00.00; (e) the net asset value of a Fund share as of the end of the previous Valuation Period was $10.40; (f) the per-share amount of a tax liability was $00.00; (g) the number of days in the current Valuation Period is one; (h) the daily deduction for assuming mortality and expense risks is .00003425; and (i) the daily deduction for the Asset Related Administrative Charge is .00000411. The net investment factor for the current Valuation Period is calculated as follows:
$ (b) + (c) - (d) - (1 x (h)) - (1 x (i)) = Net Investment Factor
$10.50 + $.15 - $0.00 - (1 x .00003425) - (1 x .00000411) = 1.02400
The accumulation unit value for the preceding Valuation Period ($10.00) is then multiplied by the net investment factor for the current Valuation Period (1.02400), which produces an accumulation unit value of $10.2020 for the current Valuation Period.
The Annuity Period begins after the Annuity Date chosen by the Owner, which must be a date prior to the time the Annuitant reaches Age 90. Annuity payments under one of the Settlement Options begin after the Annuity Date. An Owner may choose to have either the variable portion of the Contract or the fixed portion of the Contract or both annuitized on the Annuity Date. If an Owner chooses to have Annuity payments begin only for the variable portion or the fixed portion of the Contract, subsequent Net Purchase Payments will continue to be credited only to the portion of the Contract not yet annuitized. In addition if an Owner chooses to have only the variable portion or fixed portion of the Contract annuitized, the Owner must chose a second Annuity Date for the other portion of the Contract which is prior to the Annuitant's 90th birthday.
The Variable Annuity payments under the Contracts will vary in amount, either up or down, to reflect the investment performance of the Available Funds, as elected by the Owner. Each of the Sub-Accounts and corresponding Available Funds is available during the Annuity Period. The Owner should carefully consider the volatility and general risk characteristics of each Sub-Account. The Sub-Accounts that experience greater volatility and risks may be unsuitable for the Owner during the Annuity Period, as they could entail a complete loss of Variable Annuity payments.
Variable Annuity payments will commence on the Annuity Date selected by the Owner. The Annuity Date may be changed provided written election to change is received at the Home Office prior to any previous Annuity Date, the commencement of any Settlement Option, and the Annuitant's 90th birthday. (See "Federal Tax Status" for limitations of the Annuity Date under certain Qualified Contracts.) SAFECO will determine the day of the month that Variable Annuity payments will be made.
At the time of election, the Owner should consider the question of allocation of Contract Value between the available Sub-Accounts or the Fixed Account for the purchase of a fixed-dollar annuity. Allocation between the Fixed Account and the Sub-Accounts may be altered by the Owner immediately prior to the Annuity Date. If the Owner does not elect otherwise, Sub-Account Accumulation Units, after applicable premium tax, will be applied to provide annuity payments that reflect the investment experience of such applicable Sub-Accounts.
The election of a Settlement Option must be made by the Beneficiary during the sixty (60) day period commencing with the date SAFECO receives notification of the Owner's death. If no election is made within the sixty (60) day period, then a single sum payment will be made to the Beneficiary. Any one of the Settlement Options described below may be elected by filing a written notice prior to the Annuity Date. (See "Settlement Options" for limitations under Qualified Contracts.) Once commenced the Settlement Options are irrevocable. If the Annuitant dies before the Annuity Date, the Owner must designate a new Annuitant within thirty (30) days of notice to SAFECO of the Annuitant's death or the Owner becomes the new Annuitant.
Upon annuitization, the Contract Value may be allocated among the available Sub-Accounts for the purchase of variable Settlement Options or fixed Settlement Options. Transfers immediately prior to annuitization will not be subject to a transfer charge. Moreover, assuming the Annuitant has not attained age 90, the Owner may elect to commence annuitization of either the Sub-Account Contract Value or the Fixed Account Contract Value and continue the Accumulation Period for the portion of the Contract not annuitized. If the amount to be applied under a Settlement Option is less than $5,000, SAFECO reserves the right to pay such amount in one sum instead. Also, if the annuity payments would be or become less than $250, SAFECO has the right to change the frequency of payments to such intervals as will result in payment of at least $250.
During the Annuity Period, SAFECO continues to deduct the mortality and expense risk charge (1.25%) and the Asset Related Administration Charge (0.15%), which are assessed during the Accumulation Period. The Annual Administration Maintenance Charge will not be deducted during the Annuity Period.
OPTION 1 -- Variable Life Annuity -- This is a Variable Annuity which provides monthly payments during the lifetime of the Annuitant with no monthly payments or other benefits payable after the date of his or her death. This Option offers a slightly higher level of monthly payments than Options 2 or 3, because no further payments are payable after the death of the Annuitant. It would be possible under this Option for only one annuity payment to be made if the Annuitant died before the due date of the second annuity payment, two if he or she died before the third annuity payment, etc.
OPTION 2 -- Variable Life Annuity with 120 or 240 Monthly Payments Guaranteed -- This is a Variable Annuity which provides monthly payments during the lifetime of the Annuitant and further provides that if, at the death of the Annuitant, payments have been made for less than the elected period guaranteed, which may be 120 or 240 months, the annuity payments will be continued during the remainder of the guaranteed period to the named Beneficiary. The Beneficiary may elect to have the present value of the guaranteed Annuity remaining as of the date the notice of death is received by SAFECO commuted at the assumed investment rate of 4% and paid in a single lump sum payment.
OPTION 3 -- Variable Joint and Survivor Life Annuity -- This is a Variable Annuity that provides monthly payments during the joint lifetime of the Annuitant and their spouse, and thereafter during the lifetime of the survivor with no monthly payments or other benefits payable after the death of the survivor. It would be possible under this Option for only one annuity payment to be made if the Annuitant and their spouse died before the due date of the second annuity payment, two if they died before the third annuity payment, etc.
If, as of the Annuity Date, a Settlement Option has not been selected, SAFECO will make payments under Option 3, if the Beneficiary is a natural person. If, as of the Annuity Date, a Settlement Option has not been selected, SAFECO will make payments under Option 1, if the Beneficiary is a non-natural person.
In lieu of variable payments, an election may be made to apply a portion, or all, of the proceeds of the Contract to purchase a fixed dollar Annuity. Fixed dollar Annuities are not described in this Prospectus. Information concerning a fixed dollar Annuity can be obtained from SAFECO or any of its sales representatives.
Under Qualified Contracts, Option 2 with 240 monthly payments guaranteed, and any other option that would impair the Qualified tax status of the Contract, may not be available.
The Contracts contain a schedule of annuity rates based upon an assumed investment return of 4% for the Settlement Options. The annuity rates show how much the first monthly Variable Annuity payment will be for each $1,000 applied to effect the annuity. Except as noted below, the rates vary with the form of annuity, the date of birth and sex of the Annuitant, and the date on which the annuity is effected.
The annuity rates for the Contracts are based on, among other things, an annual interest rate, referred to as the assumed investment return of 4%. The assumed investment return affects both the amount of the first annuity payment and the pattern of subsequent payments. If the actual investment return should exceed the assumed investment return, the Variable Annuity payments would increase and, conversely, if the actual investment return should be less than the assumed investment return the payments would decrease. A higher assumed investment return would produce a higher initial payment but more slowly rising subsequent payments (or more rapidly falling subsequent payments) than the selection of a lower assumed investment return.
The value of an Annuity Unit, for each Sub-Account, will vary depending upon the investment experience of, and the charges and expenses deducted from, that Sub-Account. For any Valuation Period the value of an Annuity Unit is determined by multiplying the value of an Annuity Unit in each Sub-Account, as of the immediately preceding Valuation Period by the Net Investment Factor for the Value Period for which the value is being calculated, and dividing the result by a factor to adjust for the assumed investment return described under "Annuity Purchase Rates" above. (See "Net Investment Factor".)
The number of Annuity Units to be credited to the Annuitant will be determined by dividing the first monthly payment due under the selected Settlement Option by the value of the Annuity Unit calculated as of the 15th day of the preceding month, or the first subsequent Valuation Date if the 15th of the preceding month is not a Valuation Date. The resulting number of Annuity Units remains fixed during the Annuity payment period and is used to compute each Annuity payment.
The first Annuity payment is made on the Annuity Date.
The dollar amount of the first monthly Variable Annuity payment under the Settlement Options is determined by applying the Contract Value, after deduction for premium taxes, if applicable, as of the 15th day of the preceding month, to the Variable Annuity tables contained in the Contract (which are guaranteed for the duration of the Contract). Thereafter, the dollar amount of each Variable Annuity payment is determined by multiplying the number of Annuity Units credited to the Annuitant by the value of the Annuity Unit, computed as described above, as of the 15th day of the preceding month.
PAYMENT ON OR AFTER DEATH OF OWNER
The Contract provides for a minimum guaranteed death benefit, provided that SAFECO receives due proof of death in a satisfactory form and election of a Settlement Option prior to six months from the date of the Owner's death. If the due proof of death or the election of a Settlement Option is received later than six months after the date of death of the Owner, SAFECO provides a death benefit that is subject to change based upon investment experience, as discussed below.
On the Valuation Date following receipt at the Home Office of the due proof of death and election of a Settlement Option before the Annuity Date and while the Contract was in force, SAFECO generally will pay to the designated Beneficiary a minimum guaranteed death benefit that is the greater of: (i) the Contract Value on the later of the date of due proof of death or the election of a Settlement Option; or (ii) the last determined minimum guaranteed death benefit.
The initial minimum guaranteed death benefit is equal to the initial Net Purchase Payment. The minimum guaranteed death benefit is reset at each sixth Contract Anniversary ("Six Year Contract Anniversary") to equal the greater of (i) the then current Contract Value or (ii) the current minimum guaranteed death benefit. The greater of the two values becomes the new minimum guaranteed death benefit. The minimum guaranteed death benefit is fixed for the remaining duration of the Contract as of the last Six Year Contract Anniversary preceding the Owner's 76th birthday.
If the Contract is owned by joint Owners, the minimum guaranteed death benefit, or any other applicable death benefit, is payable only on the death of the elder Owner. Moreover, following the death of the elder Owner, if the joint Owner elects to continue the Contract, there is no minimum guaranteed death benefit. The death benefit will be the Contract Value, which reflects Net Purchase Payments and withdrawals. Contract Value is subject to change as a result of investment experience.
Each form of minimum guaranteed death benefit is adjusted to reflect Net Purchase Payments and withdrawals. If an Owner makes withdrawals, the minimum guaranteed death benefit is reset to equal the previous minimum guaranteed death benefit multiplied by the ratio of the Contract Value after the withdrawal to the Contract Value before the withdrawal. The recomputed minimum guaranteed death benefit will be used in determining the new minimum guaranteed death benefit at the next Six Year Contract Anniversary. After the Owner's death, the minimum guaranteed death benefit will be reduced dollar for dollar by any withdrawals by the Beneficiary. The Beneficiary may only make withdrawals at the time of or prior to the election of a Settlement Option.
If due proof of death or the election of a payment option (a Settlement Option or lump sum payment) are made later than six months following the date of the Owner's death, the value as of the six month anniversary of the date of death will apply. Thus, for example, if notification of death is not received until nine (9) months after the date of death, the death benefit under (i) will be calculated as follows:
Upon notification of death, SAFECO will determine what the Contract Value was on the six-month anniversary of the date of death. Assuming that Contract Value was $90,000 on that date and the last determined minimum guaranteed death benefit was $100,000, SAFECO will contribute $10,000 to Contract Value as of that date and will guarantee the portion of the Contract Value attributable to SAFECO's contribution and pay interest thereon at the then prevailing money market rate until the date of election of a payment option. SAFECO will then calculate the effects of investment experience on the portion of the Contract Value existing on the six-month anniversary of the date of death, and hence, the death benefit will consist of the combined value of the guaranteed and nonguaranteed portions of the Contract Value from that six-month anniversary date to the date of election of a payment option. If on the six-month anniversary of the date of death the Contract Value exceeds the last determined minimum guaranteed death benefit, the entire Contract Value will be subject to market risk from that date to the date of election of a payment option and no portion of the Contract Value will be guaranteed. Any withdrawals made by the Beneficiary prior to electing a payment option will be deducted from the death benefit. The Beneficiary bears the risk and enjoys the rewards of negative or positive investment experience on any nonguaranteed portion of the Contract Value during the period from the six-month anniversary of the date of death and the date of election of a payment option. Beneficiaries should be encouraged to promptly notify SAFECO of the Owner's death.
In all cases, SAFECO will pay the Beneficiary a lump sum payment of the death benefit if the election of the Settlement Option is not made within sixty (60) days of the receipt of due proof of death.
In the event of the Annuitant's death prior to the Annuity Date, the Owner must designate a new Annuitant. If no designation is made within thirty (30) days of notification to SAFECO of the death of the Annuitant, the Owner will become the Annuitant. The election of a Settlement Option must be made by the Beneficiary during the sixty (60) day period commencing with the date of SAFECO's receipt of notice of the Owner's death. If no election is made within the sixty (60) day period, then a single lump sum payment will be made to the Beneficiary. In the event that the Beneficiary is a surviving spouse, the Contract can be continued. Upon the death of a co-Owner, the surviving Owner becomes the designated Beneficiary. Any other named Beneficiary will be a contingent Beneficiary.
With respect to non-qualified Contracts if the Owner dies on or after the Annuity Date and before the entire value of the Contract has been distributed, any remaining value must be distributed at least as rapidly as the method of distribution in effect at the time of the Owner's death. If the Owner dies before the Annuity Date, generally the entire value under the Contract must be distributed within five years after the date of the Owner's death or must be distributed over the designated Beneficiary's life or over a period not extending beyond the Beneficiary's life expectancy, in equal or substantially equal payments, with payments beginning within one year of the Owner's death.
THE DISTRIBUTION OF THE CONTRACTS
Contracts will be sold through broker-dealers who have entered into selling agreements with SAFECO Securities. Such broker-dealers are registered under the Securities Exchange Act of 1934, as amended, and are members of the National Association of Securities Dealers, Inc. and have representatives authorized by applicable law to sell variable annuities. Such broker-dealers will be allowed a maximum commission of 6% of Purchase Payments on the Contract. Under certain circumstances, broker-dealers may elect a smaller commission based on Purchase Payments with continuing payments based on Contract Value.
SAFECO, as the sponsor of the Separate Account, will vote Fund shares held in the Separate Account at regular and special meetings of shareholders of the Available Funds, but will follow voting instructions received from the person authorized to give such instruction.
The number of Fund shares for which a person is authorized to give instructions will be determined as of a date to be chosen by SAFECO not more than ninety (90) days prior to any meeting, and voting instructions will be solicited by written communication at least ten (10) days prior to such meeting.
Except as specified below, the Owner may instruct the voting of Fund shares prior to the Annuity Date. Under Contracts issued in connection with plans qualified under Section 408 of the Code, the Annuitant may instruct the voting of shares prior to the Annuity Date.
The number of shares attributable to a Contract prior to the Annuity Date is determined by dividing the value of the Contract Value for such Contract by the net asset value of one share of the respective Available Funds. The number of shares attributable to a Contract on and after the Annuity Date is determined by dividing the reserve (which generally will decrease) held by SAFECO in the Separate Account for such Contract by the net asset value of one share.
All Available Fund proxy material, together with an appropriate form to be used to give voting instructions, will be mailed to each person having such voting instruction privileges. Neither the Available Funds nor SAFECO is under a duty to inquire as to the instructions received or the authority of Owners or others to instruct the voting of shares. Shares for which no instructions are received, including shares owned by SAFECO, will be voted in the same proportion as the shares for which instructions are received from persons entitled to give such instructions by reason of all contracts participating in the Separate Account.
It should be recognized that the rules governing the tax treatment of annuity contracts are very complex, and cannot be easily summarized. The following discussion is not intended to be exhaustive, and it does not cover numerous special rules for annuities issued or contributions paid in past years if such annuities are exchanged for the Contract. A qualified tax advisor should be consulted for complete information.
FEDERAL TAX STATUS OF THE SEPARATE ACCOUNT
SAFECO is taxed as a life insurance company under the Code. The operations of the Separate Account are part of the total operations of SAFECO and are not taxed separately, although the operations of the Separate Account are treated separately for accounting and financial statement purposes and must be considered separately in computing SAFECO's tax liability. No taxes are payable by the Separate Account on the investment income and capital gains of the Separate Account. SAFECO reserves the right to deduct a charge from Separate Account assets if such tax treatment should change.
The Contracts will be taxed as an annuity as long as the diversification requirements of Section 817(h) of the Code and the Treasury Regulations thereunder are complied with. SAFECO intends to comply with such requirements. If the diversification requirements are not satisfied, there will be tax consequences for Owners. The Secretary of the Treasury may issue a regulation or a ruling which will prescribe the circumstances in which an Owner's control of the investments of a segregated asset account may cause the Owner, rather than the insurance company, to be treated as the owner of the assets of the account. The regulation or ruling could impose requirements that are not reflected in the Contract, relating, for example, to such elements of Owner control as Purchase Payment allocation, investment selection, transfer privileges and investments in a Sub-Account focusing on a particular investment sector. It has also been suggested that, in certain circumstances, control over the investment adviser might constitute prohibited Owner control. SAFECO believes that Owner control will not exist under the Contract. Because failure to comply with any such regulation or ruling presumably would cause earnings on an Owner's interest in the Separate Account to be includible in the Owner's gross income in the year earned, SAFECO has reserved certain rights to alter the Contract and investment alternatives so as to comply with such regulation or ruling. SAFECO believes that any such regulation or ruling would apply prospectively. Since the regulation or ruling has not been issued, there can be no assurance as to the content of such regulation or ruling or even whether application of the regulation or ruling will be prospective.
FEDERAL TAX STATUS OF QUALIFIED CONTRACTS
The comments in this section apply only to Contracts described in this Prospectus which are Qualified Contracts. Qualified Contracts include Individual Retirement Annuities issued pursuant to Section 408 of the Code, including rollovers from other Qualified Contracts and simplified employee pensions.
Benefits received from a Qualified Contract will often be paid from contributions that have never been included in the gross income of the participant. Benefits received from such a plan will be taxable as ordinary income whether received upon surrender, withdrawal, or death or disability of the annuitant. If the participant made contributions to the Qualified Contract with funds that have previously been included in gross income, special rules provide for the return of the contributions over the period that payments are received. Under certain circumstances, a 10 percent penalty tax may be imposed on distributions. The rules governing the imposition of this penalty are discussed in a later part of this section.
The rules governing the eligibility to participate, limitations on permissible contributions, and the treatment of distributions from Qualified Contracts are extremely complex. New Internal Revenue Service ("IRS") rules require that Federal income taxes be withheld, at a 20% rate, from any "eligible rollover distribution" which is not transferred directly to another qualified plan. All qualified plans are required to notify participants of the IRS rules before an "eligible rollover distribution" is made. The Separate Account has adopted procedures that will enable it to make or receive trustee to trustee transfers, which will exempt eligible distributions from the withholding requirements. Purchasers should also be aware that the Code generally requires that certain minimum distributions from Qualified Contracts be made in the year following the date when the purchaser reaches age 70 1/2, or following the death of the purchaser (a special rule applies for surviving spouses). The minimum distribution rules generally require that the purchaser of a Qualified Contract receive distributions at least annually over his or her life expectancy, or the joint life expectancy of the purchaser and his or her spouse. Purchasers of Qualified Contracts should seek competent tax advice on the tax rules governing their eligibility to participate, the limitations on contributions, and the treatment of distributions.
FEDERAL TAX STATUS OF NON-QUALIFIED CONTRACTS
The comments in this section apply only to Non-Qualified Contracts. The Federal income tax treatment of the Owner, Annuitant, or Beneficiary of a Variable Annuity contract is determined under the rules of Section 72 of the Internal Revenue Code. Under the existing provisions of the Code, an increase in the Accumulation Value is not taxable to an individual Owner until received by him, either as a cash redemption or as annuity payments. Under the rules explained below, any taxable gain on payments or redemption from the Contract are taxable as ordinary income. No payments by SAFECO under the Contracts are eligible for capital gains treatment.
In applying the rules explained below, an individual's investment in the Contract is equal to the sum of the Purchase Payments made by the individual on the Contract, reduced by that portion of any previous partial redemption(s) that were not treated as taxable income.
The Federal income taxation of distributions or payments from annuity contracts may vary depending upon the type of distribution received. If the distributions are received as a series of substantially equal payments, the gain on the Contract is spread out over the payment period. Under the "exclusion ratio" of Section 72 of the Code, a portion of each payment is excluded from income as a return of the investment in the Contract. The portion of each payment to be excluded is determined by dividing the investment in the Contract by the expected return in the case of fixed payments, and by the payment period in the case of variable payments. The total excludable amount is limited to the individual's investment in the Contract. Once the individual's investment in the Contract is returned under the exclusion ratio, all subsequent payments will be included in income. If payments end by reason of the death of the annuitant before the investment in the Contract has been returned under the exclusion ratio, the amount of the unrecovered investment in the Contract is a deduction on the return of the last taxable year of the annuitant. In the event of a complete redemption prior to the Annuity Date, any gain on the termination of the Contract will be taxed as ordinary income and the Owner may be subject to the 10 percent penalty tax provisions of the Code. The rules governing the imposition of this penalty are explained in a later paragraph of this section.
If amounts are received from partial redemption of the Contract prior to the annuity starting date, any partial redemption will be taxable to the Owner to the extent that the Contract's value at the time of the redemption exceeds the Owner's investment in the Contract and the Owner may be subject to the 10 percent penalty provisions of the Code. The rules governing the imposition of this penalty are explained in a later section.
If the Owner dies on or after the Annuity Date, the remaining portion of the Contract's value must be distributed at least as rapidly as under the method of distribution in effect at the Owner's death. If the Owner dies prior to the Annuity Date, the entire Contract Value must (a) be distributed within five years of the Owner's death, or (b) be distributed as annuity payments that do not extend beyond the life or life expectancy of the Owner's Beneficiary and that begin within one year of the Owner's death. If the Owner's spouse is the Beneficiary, the Contract may be continued in the name of the spouse as the Owner.
In determining the amount of taxable income in a distribution from an annuity contract, all annuity contracts issued by SAFECO to an individual during any calendar year are treated as a single contract.
FEDERAL TAX PENALTIES AND WITHHOLDING
A 10 percent penalty tax may be imposed on certain partial or complete redemptions of a Contract. The 10 percent penalty tax will not be imposed in certain instances, including those in which the redemption amount is received after the Annuitant reaches age 59 1/2, if the redemption amount is one of a series of substantially equal periodic payments made over the Annuitant's life, and is received following the death of the Owner, or is attributable to the Owner becoming disabled. For distributions from Qualified Contracts, the penalty does not apply for the reasons stated above.
Under a Qualified or Non-Qualified Contract SAFECO is required to withhold Federal income taxes from any income payments to the Owner unless the owner elects, for any reason, to have no withholding made from the payments. This withholding requirement also applies to Qualified Contracts which are hereinafter discussed. The Owner can change his election at any time by written notice to the Home Office.
Legal matters with respect to the organization of SAFECO, its authority to issue annuity contracts and the validity of the Contract, have been passed upon by its legal counsel. Katten Muchin & Zavis have advised SAFECO with regard to federal securities law matters.
There are no legal proceedings to which the Separate Account or SAFECO Securities is a party. On January 9, 1995 a class action seeking actual and punitive damages was brought by an owner of a qualified pension annuity contract. DeVoy v. SAFECO Life Insurance Company, Case No. 684407 pending in the Superior Court of California, County of San Diego. With respect to such contracts plaintiffs challenge both the representations as to interest rates and the calculation of interest. The Company is defending against the action. SAFECO is also engaged in various kinds of litigation which, in the opinion of SAFECO, is not of material importance in relation to the total capital and surplus of SAFECO.
The terms of any Contract may vary based upon the requirements of state insurance law in the jurisdiction in which the Contract is sold. Moreover, SAFECO reserves the right to amend the Contract to meet the requirements of any applicable federal or state laws or regulations. SAFECO will notify the Owner in writing of any such amendments.
RESTRICTIONS UPON TRANSFER OF OWNERSHIP AND ASSIGNMENT
An Owner's rights under a Contract may not be assigned or transferred to the extent such restriction is permitted by applicable law. A Contract, however, may be assigned for purposes of an exchange pursuant to Section 1035 of the Code. Any permissible assignment will not be binding upon SAFECO until it receives a written copy of the assignment and has determined that such assignment is legally required.
Ownership of a Contract issued to qualify under Section 408 of the Code may not be transferred, assigned or pledged.
SAFECO has filed a registration statement (the "Registration Statement") with the Commission under the Securities Act of 1933 relating to the Contracts offered by this Prospectus. This Prospectus has been filed as a part of the Registration Statement and does not contain all of the information set forth in the Registration Statement, and reference is hereby made to such Registration Statement for further information relating to SAFECO and the Contracts. The Registration Statement may be inspected and copied, and copies can be obtained at prescribed rates from the Commission.
SAFECO is subject to the laws of the State of Washington governing insurance companies and to regulation by the Washington Commissioner of Insurance. An annual statement in a prescribed form must be filed with that Commissioner on or before March 1 in each year covering the operations of SAFECO for the preceding year and its financial condition on December 31 of such year. Its books and assets are subject to review or examination by the Commissioner or his agents at all times, and a full examination of its operations is conducted by the National Association of Insurance Commissioners at least once in every five years. Washington law also prescribes permissible investments, but does not involve management or policy of SAFECO. The last such examination was conducted for the five year period ended December 31, 1990.
The financial statements of the Separate Account and SAFECO appearing in the Statement of Additional Information have been audited by Ernst & Young LLP, independent auditors, as set forth to the extent indicated in their reports thereon also appearing in the Statement of Additional Information. Such financial statements have been included therein in reliance on their reports given on their authority as experts in accounting and auditing.
Financial statements for SAFECO and the Separate Account may be found in the Statement of Additional Information. The financial statements of SAFECO that are included in the Statement of Additional Information should be considered primarily as bearing on the ability of SAFECO to meet its obligations under the Contracts. The Contracts are not entitled to participate in earnings, dividends or surplus of SAFECO. As no Contracts have yet been offered through the Separate Account, the financial statements for the Separate Account only reflect other variable annuity contracts already issued through the Separate Account.
(for Tax-Qualified and Non-Qualified Plans)
(the "Separate Account"), a separate account of SAFECO Life Insurance Company ("SAFECO")
This Statement of Additional Information is not a prospectus but supplements and should be read in conjunction with the Prospectus for the Contracts. A copy of the Prospectus may be obtained from SAFECO, P.O. Box 34690, Seattle, Washington 98124-1690, Telephone Number 1-800-426-7649.
The Date of the Prospectus to which this Statement of Additional Information relates is October 10, 1995.
The Date of this Statement of Additional Information is October 10, 1995.
The Contracts are offered on a continuous basis exclusively through broker-dealers who have entered into selling agreements with SAFECO Securities, Inc. ("SAFECO Securities"), a wholly-owned subsidiary of SAFECO Corporation, a publicly-owned insurance holding company. SAFECO is a wholly-owned subsidiary of SAFECO Corporation.
The following discussion of the method for determining the amount of monthly annuity payments under a variable payment plan is intended to be read in conjunction with these sections of the Prospectus for the Contracts: "Deductions under the Contracts"; "Divisions of the Separate Account and the Available Funds"; "The Accumulation Period"; and "The Annuity Period". This discussion assumes there is no Contingent Deferred Sales Charge or premium tax payable.
Amount of Annuity Payments. The amount of the first annuity payment under a Contract will be determined on the basis of the Settlement Option selected, the annuity purchase rate, the date of birth and sex of the annuitant, and the date on which the Annuity is effected. The amount of the first payment is the sum of the payments from each Sub-Account determined by applying the Contract Value, after deduction for premium taxes, if applicable, as of the 15th day of the preceding month, to the Variable Annuity tables contained in the Contract (which are guaranteed for the duration of the Contract). The tables are based on the 1983a Mortality Table Projected 20 Years with Projection Scale G; 50% Male and 50% Female, and, for variable annuity options, assumed investment rate of 4.00%. SAFECO guarantees these annuity tables for the duration of the Contracts.
The dollar amount of the Variable Annuity payments after the first payment will vary from month to month and will depend upon the number and value of Annuity Units credited to the Annuitant, which is dependent upon the Settlement Option selected. A Contract will not share in the divisible surplus of SAFECO.
The number of Annuity Units in each Sub-Account to be credited to the Annuitant is determined by dividing the amount of the first annuity payment from that Sub-Account by the value of an Annuity Unit as of the 15th day of the month preceding the Annuity Date. The number of Annuity Units thus credited each month to the Annuitant in each Sub-Account remains constant throughout the Annuity Period. However, the value of Annuity Units in each Sub-Account will fluctuate with the investment experience of the Sub-Account.
The dollar amount of each Variable Annuity payment after the first is the sum of the payments from each Sub-Account, which are determined by multiplying the fixed number of Annuity Units per Sub-Account by the value of an Annuity Unit (for that Sub-Account) as of the 15th day of the preceding month.
Annuity Unit Value. The value of an Annuity Unit for each Sub-Account on any date varies to reflect the investment experience of the Sub-Account, the assumed investment rate of 4% on which the annuity tables are based, and the deduction for charges assessed and imposed by SAFECO, including a mortality and expense risk charge, Asset Related Administration Charge, and, if applicable, a charge for premium taxes.
For any Valuation Period the value of an Annuity Unit is determined by multiplying the value of an Annuity Unit in each Sub-Account, as of the immediately preceding Valuation Period by the Net Investment Factor for the Value Period for which the value is being calculated, and dividing the result by a factor to adjust for the assumed investment return of 4% used in calculating the annuity rate tables.
Illustrations of Variable Annuity Payments. To illustrate the manner in which Variable Annuity payments are determined consider this example. Item (4) in the example shows the applicable monthly payment rate for a male, adjusted age 63, who has elected a life variable annuity payment plan with a guarantee period of 10 years with the assumed investment rate of 4%. (Option 2, as described in the Prospectus).
The $312,500 value at maturity provides a first payment from the Sub-Account of $1,702.72, and payments thereafter of the varying dollar value of 130.9785 Annuity Units. The amount of subsequent payments from the Sub-Account is determined by multiplying 130.9785 units by the value of an Annuity Unit in the Sub-Account on the applicable valuation date. For example, if that unit value is $13.2500, the monthly payment from the Sub-Account will be 130.9785 multiplied by $13.2500, or $1,735.46.
However, the value of the Annuity Unit depends entirely on the investment experience of the Sub-Account. Thus in the example above, if the net investment rate for the following month was less than the assumed investment rate of 4%, the Annuity Unit would decline in value. If the Annuity Unit value declined to $12.7500 the succeeding monthly payment would then be 130.9785 x $12.7500, or $1,669.98.
For the sake of simplicity the foregoing example assumes that all of the Annuity Units are in one Sub-Account. If there are Annuity Units in two or more Sub-Accounts, the annuity payment from each Sub-Account is calculated separately, in the manner illustrated, and the total monthly payment is the sum of the payments from the Sub-Accounts.
PERFORMANCE COMPARISONS. Performance Information for a Sub-Account may be compared, in reports and advertising, to: (i) Standard & Poor's Stock Index, Dow Jones Industrial Averages, Donahue Money Market Institutional Averages, or other unmanaged indices generally regarded as representative of the securities markets; (ii) other Variable Annuity separate accounts or other investment products traced by Lipper Analytical Services, Inc., the Variable Annuity Research and Data Service, or Morningstar, Inc., which are widely used independent research firms that rank mutual funds and other investment companies by overall performance, investment objectives and assets; and (iii) the Consumer Price Index (a measure of inflation) to assess the real rate of return from an investment in a Contract. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for annuity charges, investment management costs, brokerage costs and other transaction costs that are normally paid when directly investing in securities.
Total returns, yields, and other performance information may be quoted numerically or in a table, graph, or similar illustration. Reports and advertising also may contain other information, including the ranking of any Sub-Account derived from rankings of Variable Annuity separate accounts or other investment products traced by Lipper Analytical Services, Inc. or by rating services, companies, publications, or other persons which rank separate accounts or other investment products on overall performance or other criteria.
Yields. Some Sub-Accounts may advertise yields. Yields quoted in advertising reflect the change in value of a hypothetical investment in the Sub-Account over a stated period of time, not taking in to account capital gains or losses or the imposition of any Contingent Deferred Sales Charge. Yields are annualized and stated as a percentage.
Current yield and effective yield are calculated for the SAFECO Resource Money Market Sub-Account. Current Yield is based on the change in the value of a hypothetical investment (exclusive of capital changes) over a particular seven (7) day period, less a hypothetical charge reflecting deductions from values during the 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 figure carried to at least the nearest hundredth of one percent. Effective yield assumes that all dividends received during an annual period have been reinvested. This compounding effect causes effective yield to be higher than current yield. Calculation of effective yield begins with the same base period return used in the calculation of current yield, which is then annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return) + 1) ] - 1
Yield for the SAFECO Resource Bond Sub-Account and Federated Corporate Bond Sub-Account is based on all investment income (including dividends and interest) per accumulation unit earned during a particular thirty (30) day period, less expenses accrued during the period (net investment income). Yield is computed by dividing net investment income by the value of an accumulation unit on the last day of the period, according to the following formula:
Yield = 2[(a-b/cd + 1) - 1]
where a = net investment income earned during the period by the corresponding Available Fund portfolio, b = expenses accrued for the period (net of any reimbursements), c = the average daily number of accumulation units outstanding during the period, and d = the value (maximum offering price) per accumulation unit on the last day of the period.
Total Returns. Total return reflects all aspects of a Sub-Account's return, including the automatic reinvestment by the Sub-Account of all distributions and the deduction of all applicable charges to the Sub-Account on an annual basis, including mortality and expense risk charges, the Annual Administration Maintenance Charge, the Asset Related Administration Charge, and any other charges against Contract Value. Quotations also will assume a termination (surrender) at the end of the particular period and reflect the deduction of the Contingent Deferred Sales Charge, if applicable. Additional quotations may be given that do not assume a termination (surrender) and do not take into account deduction of the Contingent Deferred Sales Charge, since the Contracts are intended as long-term products.
Average annual total returns are calculated by determining the growth or decline in value of a hypothetical investment in the Sub-Account over certain periods, including 1, 5, and 10 years (up to the life of the Sub-Account), and then calculating the annually compounded percentage rate that would have produced the same result if the rate of growth or decline in value had been constant over the period. Investors should realize that the Sub-Account's experience is not constant over time, but changes from year to year, and that the average annual returns represent averaged figures as opposed to the year-to-year performance of a Sub-Account. Average annual returns are calculated pursuant to the following formula: P(1 + T)n = ERV, where P is a hypothetical initial payment of $1,000, T is the average annual total return, n is the number of years, and ERV is the withdrawal value at the end of the period.
Cumulative total returns are unaveraged and reflect the simple change in value of a hypothetical investment in the Sub-Account over a state period of time.
TABLE OF HISTORICAL HYPOTHETICAL PERFORMANCE INFORMATION
THE HISTORICAL VALUES ARE FOR THE RESPECTIVE LIVES OF THE AVAILABLE FUNDS AND REFLECT THE CHARGES APPLICABLE TO THE CONTRACT. NEITHER THE SEPARATE ACCOUNT NOR THE CONTRACT EXISTED FOR ALL PERIODS SHOWN.
The performance of the various Sub-Accounts will vary and the hypothetical results shown are not necessarily representative of future results. Performance for periods ending after those shown may vary substantially from the examples shown below. The performance of the various Sub-Accounts is calculated for a specified period of time by assuming an initial Purchase Payment of $1,000 allocated to each of the Sub-Accounts and a deduction of all charges and deductions. For those Sub-Accounts that commenced operations in 1994, the Annual Administration Maintenance Charge is not reflected, and it is deducted at the end of each Contract Year. (See "Charges and Deductions" for more information.) No withdrawals are assumed and therefore no CDSC applies. The percentage increases are determined by subtracting the initial Purchase Payment from the ending value and dividing the remainder by the beginning value.
Assuming an initial $1,000 allocated to each of the Sub-Accounts and deduction of all changes and deductions.
From time to time, additional quotations of total return based on the historical performance of the Available Funds also may be presented.
Reports and advertising also may show the effect of tax deferred compounding on a Sub-Account's investment returns, or returns in general, illustrated by graphs, charts, or otherwise, which may include a comparison, at various points in time, of the return from an investment in a Contract (giving effect to all fees and charges), or returns in general, on a tax-deferred basis (assuming one or more tax rates) with the return on a taxable basis, and which will disclose the tax characteristics of the investments shown, including the impact of withdrawals and surrenders.
VALUATION OF ASSETS OF THE SEPARATE ACCOUNT
The value of Fund shares held in each Sub-Account at the time of each valuation is the redemption value of such shares at such time.
The charge is made as a percentage of the amount withdrawn. For example, if an Owner subject to a 6% Contingent Deferred Sales Charge wishes to net $100 on the partial redemption of a Contract, he must make a total withdrawal of $106.38, of which $6.38 will be deducted as a Contingent Deferred Sales Charge. An Owner need only indicate the net amount he wishes to net on a partial redemption and SAFECO will determine the total or gross amount necessary to withdraw to net the desired amount.
To the extent that the Contingent Deferred Sales Charge is insufficient to cover all the distribution costs and related expenses, some portion of the proceeds from the mortality and expense risk charge may be utilized by SAFECO to meet such excess distribution expenses. SAFECO has represented in documents filed with the Securities and Exchange Commission that the mortality and expense risk charge is consistent with the mortality and expense risks assumed by SAFECO and is within the range of industry practice, based on its review of its requirements and industry practice. Moreover, SAFECO has represented that use of any proceeds from such charge to defray distribution expenses has a reasonable likelihood of benefiting the Separate Account and Owners.
Shares of the other Available Funds are made available to the Separate Account under substantially similar Participation Agreements ("Participation Agreements"). Each Participation Agreement is among the applicable Other Available Fund, and its Distributor, which is the principal underwriter for Other Available Fund shares, and SAFECO on behalf of the Separate Account. If state or federal law precludes the sale of any Other Available Fund's shares to the Separate Account, or in certain other circumstances, sales of shares to the Separate Account may be suspended and/or the Participation Agreement may be terminated as to the applicable Other Available Fund. Also, each Participation Agreement may be terminated by any party thereto on proper written notice. Notwithstanding termination of the Participation Agreement, the Other Available Funds and their Distributors generally are obligated to continue to make such Funds' shares available for Contracts outstanding on the date the Participation Agreement terminates, unless the Participation Agreement was terminated due to an irreconcilable conflict among contract owners of different separate accounts. If for any reason the shares of any Other Available Fund are no longer available for purchase by the Separate Account for outstanding Contracts, the parties to each Participation Agreement have agreed to cooperate to comply with the Investment Company Act of 1940, as amended, in arranging for the substitution of another funding medium as soon as reasonably practicable and without disruption of sales of shares to the Separate Account or any Sub-Account. Each of the Participation Agreements has been filed as an exhibit to the registration statement for the Contracts and differences between the terms of the various Participation Agreements are reflected in such agreements.
The financial statements of the Separate Account and of SAFECO Life Insurance Company included in this Statement of Additional Information have been audited by Ernst & Young LLP, independent auditors, as set forth to the extent indicated in their reports thereon also appearing in this Statement of Additional Information. Such financial statements have been included herein in reliance on their reports given on their authority as experts in accounting and auditing. The address of Ernst & Young LLP is 999 Third Avenue, Suite 3500, Seattle, Washington 98104.
SAFECO Corporation, directly or through its ownership of SAFECO and SAFECO Asset Management Company ("SAFECO Management"), a wholly owned subsidiary of SAFECO Corporation, owns beneficially 26.5%, 4.5%, 12.4%, 33.1% and 41.4% of the outstanding shares of SAFECO Resource Bond Fund, SAFECO Resource Equity Fund, SAFECO Resource Growth Fund, SAFECO Resource Money Market Fund, and SAFECO Resource Northwest Fund, respectively, each a separate portfolio of the SAFECO Resource Series Trust. SAFECO Management is the investment adviser to the each portfolio of the SAFECO Resource Series Trust.
TRANSFERS BETWEEN NON-QUALIFIED ANNUITIES. Under section 1035 of the Internal Revenue Code of 1986, as amended ("Code"), an Owner may exchange one annuity contract for another annuity contract in a tax-free exchange. To avoid recognizing income on the surrender of the annuity contract, the Owner must absolutely assign the old contract to SAFECO. SAFECO will surrender the old annuity contract and apply the proceeds to the Contract.
INDIVIDUAL RETIREMENT ANNUITIES (IRAS). The Code permits deductible and non-deductible contributions to be made under a Contract that qualifies as an IRA. The Contract (accompanied by the appropriate IRA rider) is designed to qualify as an IRA. The Code also allows a tax-free transfer (rollover) of certain distributions from qualified plans and Tax Sheltered Annuity arrangements ("TSAs") which are used to purchase an IRA.
If the Owner and the Owner's spouse are not currently covered by a retirement plan (including a Qualified Plan, TSA, or SEP-IRA), then each working spouse may make a deductible contribution of 100% of compensation up to $2,000 regardless of their adjusted gross income ("AGI"). In the case of spousal IRAs, an IRA certificate is issued for each spouse and the working spouse may contribute a total of $2,250 to both certificates (but no more than $2,000 to one certificate). For these purposes, a working spouse can make an election to be treated as having no compensation, thereby allowing the other working spouse to make a contribution to a spousal IRA.
No contributions are allowed for the tax year in which an individual becomes age 70 1/2 or any tax year after that year. A working spouse age 70 1/2 or over, however, can contribute 100% or compensation up to $2,000 to a spousal IRA until the year the non-working spouse reaches age 70 1/2.
If either the Owner or, if married, the Owner's spouse is covered by another retirement plan, the IRA deduction phases out between $25,000 and $35,000 of AGI for single person and $40,000 and $50,000 of AGI for married persons filing jointly. If the Owner is married, filing separately and covered by a retirement plan, the IRS deduction phases out between $0 to $10,000 of AGI.
If the Owner is not eligible to deduct part or all of the IRA contribution, he may still make non-deductible contributions. However, the deductible and non-deductible contributions combined cannot exceed the $2,000 limit (or the $2,250 spousal limit).
Deductible and non-deductible IRA contributions in excess of the lesser of (i) 100% of compensation or earned income, or (ii) $2,000 are subject to a 6% excise tax for the year in which made and for each year thereafter until withdrawn.
An individual may elect for each IRA certificate or account to make a tax-free rollover once a year among individual retirement arrangements (including rollovers from individual retirement bonds purchased before 1983). An individual also may make a rollover contribution into an IRA with the proceeds from a TSA or qualified plan.
Distributions from an IRA must commence by April 1 of the calendar year following the calendar year in which the Owner reaches age 70 1/2. Distributions must be made at least annually over the life or life expectancy of the Owner (or the joint lives or life expectancies of the Owner and a Beneficiary). The amount required to be distributed each year under this rule is referred to as the minimum distribution amount.
An Owner who does not receive the minimum distribution amount will be subject to a 50% excise tax on the difference between the minimum distribution amount and the amount actually distributed.
An Owner can revoke a Contract issued as an IRA by following the directions on the cover of the Contract. Because revocation may have adverse tax consequences, the Owner should consult with a tax expert. If the Contract is revoked, an Owner may contribute to a new IRA, provided that the eligibility requirements for IRA contributions are met at that time.
SIMPLIFIED EMPLOYEE PENSION PROGRAM (SEP-IRA). An employer can establish a SEP-IRA for its employees. Under an employer's SEP-IRA, contributions for each eligible employee can be made under a Contract issued as an IRA.
INCOME TAX WITHHOLDING. An Owner receiving periodic payments which total $9,120 or more per year will generally be subject to wage-bracket type withholding (as if such payments were payments of wages by an employer to an employee) unless the Owner elects no withholding. When a Owner makes no withholding election whatsoever, withholding will be made as if the Owner is married and claiming three withholding exemptions.
An Owner receiving a non-periodic distribution (whether a total or partial distribution) will generally be subject to withholding at a flat 10% rate. In certain cases, if the distribution is a qualified total distribution (as defined in the Code), a special withholding table will apply. In both cases the Owner will be permitted to elect not to have tax withheld.
All Owners receiving periodic and non-periodic payments will be further notified of the withholding requirements and of their right to make withholding elections affecting such payments. Special withholding rules apply to United States citizens residing outside the United States.
Recently enacted mandatory withholding provisions apply to distributions made from qualified plans after December 31, 1992. Mandatory withholding of 20% will apply to any distribution eligible for a tax-free rollover if the distribution is not transferred directly to an IRA.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of SAFECO Life Insurance Company and Participants of SAFECO Separate Account C:
We have audited the accompanying statement of assets and liabilities of SAFECO Separate Account C (comprising, respectively, the Equity, Growth, Northwest, Bond, Money Market, International, and Balanced Sub-Accounts), as of December 31, 1994, and the related statement of operations, statement of changes in net assets and accumulation unit data for the period from February 11, 1994 (commencement of operations) to December 31, 1994. These financial statements and accumulation unit data are the responsibility of the SAFECO Separate Account C's management. Our responsibility is to express an opinion on these financial statements and accumulation unit data 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 statements and accumulation unit data are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1994, by correspondence with the SAFECO Resource Series Trust and Scudder Variable Life Investment Fund. 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 and accumulation unit data referred to above present fairly, in all material respects, the financial position of each of the respective Sub-Accounts constituting SAFECO Separate Account C at December 31, 1994, the results of their operations, the changes in their net assets, and the accumulation unit data for the period referred to above, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
STATEMENT OF ASSETS AND LIABILITIES
See Notes to Financial Statements
*Commencement of Operations was February 11, 1994.
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
*Commencement of Operations was February 11, 1994.
See Notes to Financial Statements
SAFECO Separate Account C is registered under the Investment Company Act of 1940, as amended, as a segregated unit investment account of SAFECO Life Insurance Company (SAFECO), a wholly-owned subsidiary of SAFECO Corporation.
Separate Account C is divided into sub-accounts which are invested in shares of a designated portfolio of either the SAFECO Resource Series Trust or the Scudder Variable Life Investment Fund. Separate Account C became available to unitholders on February 11, 1994 (commencement of operations).
The five portfolios of the SAFECO Resource Series Trust are available to unitholders -- the Equity, Growth, Northwest (NW), Bond, and Money Market (MMKT) portfolios. Two portfolios of the Scudder Variable Life Investment Fund are also available to unitholders - the International (INTL) and Balanced (BAL) portfolios.
The assets of Separate Account C are the property of SAFECO and are not commingled with liabilities arising out of any other business of SAFECO.
SECURITY VALUATION -- Investments in mutual fund shares are carried in the statement of assets and liabilities at net asset value as reported by the Fund. Security transactions are recorded on the trade date. Realized gains or losses on securities transactions are determined using the First-In First-Out (FIFO) cost method.
DISTRIBUTIONS -- The net investment income and realized capital gains of Separate Account C are not distributed, but are retained and reinvested for the benefit of accumulation unit owners.
FEDERAL INCOME TAX -- Operations of Separate Account C are included in the federal income tax return of SAFECO, which is taxed as a "life insurance company" under the Internal Revenue Code. Under current federal income tax law, no income taxes are payable with respect to operations of Separate Account C.
UNIT VALUE CALCULATION -- For financial reporting purposes, amounts have been rounded to the nearest thousand dollars, except for per unit amounts, which may result in minor rounding differences. Per unit amounts are calculated based on precise amounts.
A mortality and expense risk charge is deducted by SAFECO from Separate Account C on a daily basis which is equal, on an annual basis, to 1.25% of the average daily net asset value of Separate Account C. The mortality risks assumed by SAFECO arise from its contractual obligation to make annuity payments after the annuity date for the life of the participant and to waive withdrawal charges in the event of the death of a participant. The expense risk assumed by SAFECO is that the costs of administering the contracts and Separate Account C will exceed the amount received from the administration charge. The mortality and expense risk charge is guaranteed by SAFECO and cannot be increased.
SAFECO deducts on each Valuation Date an amount which is equal on an annual basis to .15% of the average daily net asset value of the Separate Account for costs associated with the administration of the Sub-Accounts. Since this charge is an asset-based charge, the amount of the charge attributable to a particular contract may have no relationship to the administrative costs actually incurred by that contract. SAFECO does not intend to profit from this charge. This charge will be reduced to the extent that the amount of this charge is in excess of that necessary to reimburse SAFECO for its administrative expenses.
The following expenses are deducted from a contractholder's contract value by SAFECO and not directly from Separate Account C. As a fee for expenses associated with the administration of the contract owner's contract value, an annual charge of $30 is deducted by SAFECO from the accumulated value of each contract value on the last day of each Contract Year and in the event of a complete withdrawal, this charge is only deducted from contracts where the contract value is less than $50,000. SAFECO has the right to increase this fee to $35. In the event that an owner withdraws all or a portion of the contract value, a contingent deferred sales charge is imposed on the amount withdrawn in the first eight certificate years. Any premium tax levied by a state or government entity with respect to the Separate Account C contract will be charged against the contract. See the Prospectus "Expense Table" for further information.
*Commencement of Operations was February 11, 1994.
For the Year Ended December 31, 1994
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of SAFECO Life Insurance Company and subsidiaries as of December 31, 1994 and 1993, and the related statements of consolidated income, changes in stockholder's 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 SAFECO Life Insurance Company and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As described in Note 1 to the Consolidated Financial Statements, SAFECO Life Insurance Company and subsidiaries adopted certain new accounting standards in 1994 and 1993 as required by the Financial Accounting Standards Board.
/s/ ERNST & YOUNG LLP
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES (In Thousands Except Share Amounts)
See Notes to Consolidated Financial Statements
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
See Notes to Consolidated Financial Statements
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
See Notes to Consolidated Financial Statements
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS
For purposes of reporting cash flows, cash consists of balances on hand and on deposit in banks and financial institutions.
See Notes to Consolidated Financial Statements
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS- RECONCILIATION OF NET INCOME TO NET CASH
See Notes to Consolidated Financial Statements
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of SAFECO Life Insurance Company (the Company) and its wholly-owned subsidiaries, SAFECO National Life Insurance Company and First SAFECO National Life Insurance Company of New York. The Company is a wholly-owned subsidiary of SAFECO Corporation.
All significant intercompany transactions have been eliminated in the consolidated financial statements. Certain reclassifications have been made in the 1993 and 1992 financial statements to conform to current classifications.
ACCOUNTING FOR PREMIUMS. Life and health insurance premiums are reported as income when collected for traditional individual life policies and when earned for group and individual health policies. Funds received under pension deposit contracts, annuities and universal life policies are recorded as liabilities rather than premium income when received. Revenues for universal life products consist of front-end loads, mortality charges and expense charges assessed against individual policyholder account balances. These loads and charges are recognized as income when earned.
INVESTMENTS. The Company adopted Financial Accounting Standards Board (FASB) Statement 115, "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994, applying the provisions of the Statement to Investments held as of, or acquired after that date. See discussion of new accounting standards on page 9.
Fixed maturity investments (bonds and redeemable preferred stocks) which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost in the balance sheet. Fixed maturities classified as available-for-sale are carried at market value, with changes in unrealized gains and losses recorded directly to stockholder's equity, net of applicable income taxes and deferred policy acquisition costs valuation allowance. The Company has no fixed maturities classified as trading.
All marketable equity securities are classified as available-for-sale and carried at market value, with changes in unrealized gains and losses recorded directly to stockholder's equity, net of applicable income taxes.
When the collectibility of income on certain investments is considered doubtful, they are placed on non-accrual status and thereafter interest income is recognized only when payment is received. Investments that have declined in market value below cost and for which the decline is judged to be other than temporary are written down to fair value. Writedowns are made directly on an individual security basis and are included in realized investment losses in the Statement of Consolidated Income.
The cost of security investments sold is determined by the "identified cost" method.
Mortgage loans are carried at outstanding principal balances, less an allowance for loan losses.
REAL ESTATE AND DEPRECIATION. Income-producing real estate is classified as an investment. The Company provides straight-line depreciation on its buildings based upon their estimated useful lives.
Investment real estate that has declined in market value below cost and for which the decline is judged to be other than temporary is written down to estimated realizable value. The writedowns are included in realized investment losses in the Statement of Consolidated Income.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED POLICY ACQUISITION COSTS. Acquisition costs, consisting of commissions and certain other underwriting expenses, which vary with and are primarily related to the production of new business, are deferred.
Acquisition costs for annuities and universal life policies are amortized over the lives of the policies in proportion to the present value of estimated future gross profits. To the extent actual experience differs from assumptions, and to the extent estimates of future gross profits require revision, the unamortized balance of deferred policy acquisition costs is adjusted accordingly. There were no significant revisions made in 1994, 1993 or 1992.
Acquisition costs for traditional individual life insurance policies are amortized over the premium payment period of the related policies using assumptions consistent with those used in computing policy benefit liabilities.
FUTURE POLICY BENEFITS. Liabilities for universal life insurance policies, deferred annuity and pension deposit contracts are equal to the accumulated account value of such policies or contracts as of the valuation date. Liabilities for structured settlement annuities are based on interest rate assumptions using market rates at issue, graded downward over 40 years to a range of 5-1/2% to 8-3/4%.
Liabilities for future policy benefits under traditional individual life insurance policies have been computed on the level premium method using interest, mortality and persistency assumptions based on Company experience modified to provide for adverse deviation. Interest assumptions range from 8-1/2% graded to 3-1/4%.
POLICY AND CONTRACT CLAIMS. The liability for policy and contract claims is established on the basis of reported losses ("case basis" method). Provision is also made for claims incurred but not reported, based on historical experience. The estimates for claims incurred but not reported are continually reviewed and any necessary adjustments are reflected in current operations.
SEPARATE ACCOUNTS. The Company administers segregated asset accounts for pension and other clients. The assets of these Separate Accounts, which consist of common stocks, are the property of the Company. The liabilities of these Separate Accounts represent reserves established to meet withdrawal and future benefit payment provisions of contracts with these pension and other clients. The assets of the Separate Accounts, equal to the reserves and other contract liabilities of the Separate Accounts, are not chargeable with liabilities arising out of any other business the Company may conduct. Investment risks associated with market value changes are borne by the clients. Deposits, withdrawals, net investment income and realized and unrealized capital gains and losses on the assets of the Separate Account are not reflected in the Statement of Consolidated Income. Management fees and other charges assessed against the contracts are included in other revenue.
FEDERAL INCOME TAXES. The Company and its subsidiaries file a consolidated federal income tax return with SAFECO Corporation. Tax payments (credits) are made to or received from SAFECO Corporation on a separate tax return filing basis. The Company provides for federal income taxes based on financial reporting income and deferred federal income taxes on temporary differences between financial reporting and taxable income.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING STANDARDS. The Company adopted Financial Accounting Standards Board (FASB) Statements 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and 109, "Accounting for Income Taxes," in the first quarter of 1993. See the Statement of Consolidated Income for the effect on income of adoption of Statements 106 and 109. For additional disclosure relating to Statements 106 and 109, see Note 8 and Note 9, respectively.
The Company adopted FASB Statement 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. Adoption had no effect on net income.
The Company adopted FASB Statement 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in the first quarter of 1993. Adoption had no effect on net income. See Note 5 for disclosures relating to reinsurance.
In May of 1993, the FASB issued Statement 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on valuing impaired loans. The FASB also issued Statement 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," in October of 1994, which amends Statement 114. Both Statements are effective for 1995. Based on current analysis, the impact on the Company's net income and financial condition of adopting these Statements is not expected to be significant.
In May of 1993, the FASB issued Statement 115, "Accounting for Certain Investments in Debt and Equity Securities," which expands the use of fair value accounting for debt and equity securities. As of January 1, 1994, the Company adopted the provisions of this Statement for investments held as of, or acquired after that date. Statement 115 requires that debt and equity securities be classified as trading, available-for-sale, or held-to-maturity. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity (as narrowly defined by Statement 115) are classified as held-to-maturity and are reported at amortized cost. Fixed maturity securities classified as available-for-sale are carried at market value, with changes in unrealized gains and losses recorded directly to stockholder's equity, net of applicable income taxes and deferred policy acquisition costs valuation allowance. Under Statement 115, trading securities are carried at market value with immediate recognition in income of changes in market value. Since the Company does not have any securities held for trading, the adoption of this Statement had no effect on net income. All marketable equity securities are classified as available-for-sale and continue to be carried at market value, with changes in unrealized gains and losses recorded directly to stockholder's equity, net of applicable income taxes. As required by Statement 115, no restatement of prior period amounts has been made. See Note 2 for details of the effect on stockholder's equity of the adoption of Statement 115.
The FASB issued Statement 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," in October of 1994. Statement 119 requires the presentation of certain disclosures about derivative financial instruments and is effective for 1994. The Company has made the additional required disclosures for 1994 in Note 4.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of fixed maturities and marketable equity securities classified as available-for-sale at December 31, 1994 follows:
A summary of fixed maturities classified as held-to-maturity at December 31, 1994 follows:
A summary of all fixed maturities at December 31, 1993 follows:
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 1, the Company adopted the provisions of FASB Statement 115 as of January 1, 1994. The net effect on stockholder's equity of the adoption of Statement 115 was an increase of $279,957,000 as of January 1, 1994. The net increase was comprised of the following amounts: aggregate market value in excess of amortized cost of fixed maturities classified as available-for-sale of $458,471,000, less deferred policy acquisition costs valuation allowance of $27,768,000 and deferred income taxes at 35% of $150,746,000.
The aggregate market value of marketable equity securities was in excess of cost by $10,333,000 at December 31, 1993. This amount included gross unrealized gains of $10,354,000 and gross unrealized losses of $21,000.
The amortized cost and estimated market value of fixed maturities at December 31, 1994, by contractual maturity, are presented below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 1994 and 1993, the Company held below investment grade fixed maturities of $174 million and $152 million at amortized cost, respectively. The respective market values of these investments were approximately $156 million and $152 million. These holdings amounted to 2.0% of the Company's investments in fixed maturities at December 31, 1994 and 1993.
The carrying value of investments in fixed maturities and mortgage loans that did not produce income during the year ended December 31, 1994 is less than one percent of the total of such investments.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain bonds amounting to $4,161,000 and $4,066,000 at December 31, 1994 and 1993, respectively, were on deposit with various regulatory authorities to meet requirements of insurance and financial codes.
At December 31, 1994 and 1993, mortgage loans constituted approximately 5.9% and 5.7% of total assets, respectively, and are secured by first mortgage liens on income-producing commercial real estate, primarily in the retail, industrial and office building sectors. The majority of the properties are located in the western United States, with 43.7% of the total in California. Individual loans generally do not exceed $5 million. For each of these years, less than 2% of the loans were non-performing.
The proceeds from sales of investment securities and related gains and losses for 1994 are as follows:
The proceeds from sales of investments in fixed maturities and related gains and losses for 1993 and 1992 are as follows:
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the realized gains and losses, the changes in unrealized gains and losses, and applicable income taxes on all investments:
The Company is obligated under a real estate lease with an affiliate, General America Corporation, which expires in 2010. The minimum annual rental commitments under this obligation are $2,211,000. At December 31, 1994, unfunded mortgage loan commitments approximated $9,360,000. The Company had no other material commitments at December 31, 1994.
In January 1995, a class action seeking actual and punitive damages, DeVoy v. SAFECO Life Insurance Company, Case No. 684407 in the Superior Court of California, County of San Diego, was brought against the Company by an owner of a qualified pension annuity contract. With respect to such contracts, the plaintiffs have challenged both the representations as to interest rates and the calculation of interest. The Company is defending against the action.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESTIMATED FAIR VALUES. Fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in developing the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amount that could be realized in a current market exchange. The use of different market assumptions and/or estimating methodologies may have a material effect on the estimated fair value amounts.
Carrying value is a reasonable estimate of fair value for cash, policy loans, short-term investments, accounts receivable and other liabilities.
Fair value amounts for investments in fixed maturities and marketable equity securities are the same as market value. Market value generally represents quoted market prices for securities traded in the public market place or analytically determined values for securities not publicly traded.
The fair values of mortgage loans have been estimated by discounting the projected cash flows using the current rate at which loans would be made to borrowers with similar credit ratings and for the same maturities.
The fair value of investment contracts with defined maturities is estimated by discounting projected cash flows using rates that would be offered for similar contracts with the same remaining maturities. For investment contracts with no defined maturity, fair value is estimated to be the present surrender value. These investment contracts are included in Funds Held Under Deposit Contracts.
Other insurance-related financial instruments are exempt from fair value disclosure requirements.
Estimated fair values of financial instruments at December 31 are as follows:
DERIVATIVE FINANCIAL INSTRUMENTS. The Company's investments in mortgage-backed securities of $2.2 billion are primarily residential collateralized mortgage obligations and pass-throughs ("CMOs") . CMOs, while technically defined as derivative instruments, are exempt from FAS 119 disclosure requirements. The Company's investment in CMOs comprised of the riskier, highly-volatile type (e.g., interest only, inverse floaters, etc.) has been intentionally limited to only a small amount (i.e., less than 1% of total CMOs at December 31, 1994).
The Company's involvement in other investment-type derivatives is also, intentionally, of a very limited nature. Such derivatives include currency-linked bonds and fixed-rate loan commitments. Individually, and in the aggregate, these derivatives are not material and thus no additional disclosures are warranted.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. POLICY AND CONTRACT LIABILITIES
REINSURANCE. The Company protects itself from excessive losses by ceding reinsurance to other companies, using automatic and facultative treaties. Reinsurance contracts do not relieve the Company from its obligations to policyholders. A continuing liability exists in the event a reinsurance company is unable to meet its obligations to the Company. The financial condition of its reinsurers is evaluated by the Company to minimize its exposure to losses from reinsurer insolvencies.
The balance sheet caption "Reinsurance Recoverables" is comprised of the following amounts:
The effects of reinsurance on the premium and policy benefit amounts in the Statement of Consolidated Income are as follows:
POLICY AND CONTRACT CLAIMS. Loss reserves and health claims, which are generally incurred and paid in full within a one-year period, amount to less than 1% of total policy and contract liabilities. Therefore, no additional disclosures are warranted.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and its subsidiaries are required to file annual statements with state regulatory authorities prepared on an accounting basis as prescribed or permitted by such authorities (statutory basis). Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed.
Statutory net income differs from income reported in accordance with generally accepted accounting principles primarily because policy acquisition costs are expensed when incurred, reserves are based on different assumptions and income tax expense reflects only taxes paid or currently payable.
Statutory net income and stockholder's equity, by company, are as follows:
The Company has received written approval from the Washington State Insurance Department to treat certain loans (all made at market rates) to related SAFECO Corporation subsidiaries as admitted assets. The allowance of such loans has not materially enhanced surplus at December 31, 1994.
Insurance companies are restricted by certain states as to the amount of dividends they may pay within a given calendar year to their parent without regulatory consent. That restriction is the greater of statutory net gain from operations for the previous year or 10% of policyholder surplus at the close of the previous year, subject to a maximum limit equal to statutory earned surplus. The amount of retained earnings available for the payment of dividends to SAFECO Corporation without prior regulatory approval was $51,033,000 at December 31, 1994.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SAFECO Corporation and subsidiary companies (the Companies) administer defined contribution, defined benefit and profit sharing bonus plans covering substantially all employees. The defined contribution plans include profit sharing retirement plans and a savings plan. Benefits are earned under the defined benefit plan for each year of service after 1988, based on the employee's compensation level plus a stipulated rate of return on the benefit balance. It is SAFECO Corporation's policy to fund the defined benefit plan on a current basis to the full extent deductible under federal income tax regulations. The cost of these plans to the Company was $6,329,000, $7,962,000 and $6,519,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
The Companies also provide certain healthcare and life insurance benefits ("other postretirement benefits") for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Companies. The cost of these benefits is shared with the retiree.
Effective January 1, 1993, the Company adopted FASB Statement 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under Statement 106, the Company now accrues for other postretirement benefits during the years that employees provide services. Prior to adoption of Statement 106, other postretirement benefits were accounted for on a pay-as-you-go (cash) basis. The transition obligation (i.e., the accumulated postretirement benefit obligation) of $3,777,000 was recorded as a cumulative effect adjustment in the first quarter of 1993 which, net of tax, resulted in a reduction of net income of $2,493,000.
Components of the net periodic other postretirement benefit cost are as follows:
Under the cash basis of accounting for these other postretirement benefits, the expense for the year ended December 31, 1992 was $109,000.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the funded status of the plan:
Other postretirement benefit cost is determined using actuarial assumptions at the beginning of the year. The funded status is determined using assumptions at the end of the year. The discount rate used was 8-1/2%, 7-1/2% and 8% at December 31, 1994, December 31, 1993 and January 1, 1993, respectively. The accumulated postretirement benefit obligation at December 31, 1994 was determined using a healthcare cost trend rate of 12% for 1995, declining by 1% per year to 6% and remaining at that level thereafter. The ultimate trend rate of 6% represents a 1% reduction from the 7% rate used for the prior year's valuation. A one percentage point increase in the assumed healthcare cost trend rate for each year would increase the accumulated other postretirement benefit obligation as of December 31, 1994 by $341,000 and the annual net periodic other postretirement benefit cost for the year then ended by $71,000.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of January 1, 1993, the Company adopted the liability method of accounting for income taxes pursuant to FASB Statement 109, "Accounting for Income Taxes." This accounting change was implemented through a cumulative effect adjustment which reduced the net deferred tax liability (and increased net income in the first quarter of 1993) by $9,092,000. Prior year financial statements and related disclosures which follow the guidelines provided in APB 11 were not restated. Under the liability method, deferred tax assets and liabilities are determined based on the differences between their financial reporting and their tax bases and are measured using the enacted tax rates.
Differences between income tax computed by applying the U.S. federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income before income taxes and the provision for federal income taxes are as follows:
The tax effect of temporary differences which give rise to the deferred tax assets and deferred tax liabilities are as follows:
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax benefit of $10,154,000 for 1994 represents the decrease in the net deferred tax liability of $81,799,000 excluding a decrease of $71,645,000 related to unrealized depreciation of investment securities.
The deferred federal income tax benefit of $26,135,000 for 1993 represents a decrease in the net deferred federal income tax liability of $25,704,000 excluding an increase of $431,000 related to unrealized appreciation of marketable equity securities. The tax related to the increase in appreciation of marketable equity securities approximated $543,000 during 1993. Of that amount, $112,000, which related to the 1% increase in the federal income tax rate, was charged directly to income with the remainder charged directly to stockholder's equity.
Deferred federal income taxes for 1992 were provided on the difference between the Company's taxable income and income for financial reporting purposes according to the guidelines provided in APB 11. The components of the deferred federal income tax benefit using these guidelines are as follows:
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A major portion of investment income, realized gains or losses and assets is specifically identifiable with an industry segment. The remainder of these amounts has been allocated in proportion to the investment income identified with each segment.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A major portion of investment income, realized gains or losses and assets is specifically identifiable with an industry segment. The remainder of these amounts has been allocated in proportion to the investment income identified with each segment.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A major portion of investment income, realized gains or losses and assets is specifically identifiable with an industry segment. The remainder of these amounts has been allocated in proportion to the investment income identified with each segment. | 497 | 497 | 1996-01-16T00:00:00 | 1996-01-12T17:42:58 |
0000950131-96-000089 | 0000950131-96-000089_0000.txt | <DESCRIPTION>AMENDMENT NO. 4 TO FORM S-3
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1996
THE SECURITIES ACT OF 1933 (ORIGINATOR OF THE TRUSTS DESCRIBED HEREIN) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF JOEL H. GOTTESMAN, ESQ. (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, COPIES TO: CHARLES F. SAWYER, ESQ. CATHY M. KAPLAN, ESQ. DORSEY & WHITNEY P.L.L.P. BROWN & WOOD 220 SOUTH SIXTH STREET ONE WORLD TRADE CENTER MINNEAPOLIS, MINNESOTA 55402 NEW YORK, NEW YORK 10048 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement as determined by market conditions. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the 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] 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(b) 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. [_]
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Of this amount, $137,931.04 has been previously paid and $12,068.96 is being paid herewith. (3) No additional consideration will be paid for the Limited Guaranty; accordingly, no additional filing fee is being paid herewith pursuant to Rule 457(n). 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.
+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 SUPPLEMENT AND THE ACCOMPANYING 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--Preliminary Prospectus Supplement Dated January 16, 1996
(To Prospectus dated January , 1996)
GREEN TREE RECREATIONAL, EQUIPMENT & CONSUMER TRUST 1996-A $ (APPROXIMATE) % CERTIFICATES, CLASS A-1 $ (APPROXIMATE) % CERTIFICATES, CLASS A-2 $ (APPROXIMATE) % CERTIFICATES, CLASS A-3
The Certificates offered hereby will represent interests in Green Tree Recreational, Equipment & Consumer Trust 1996-A (the "Trust"), to be formed by Green Tree Financial Corporation ("Green Tree"). The Trust Property will include a pool of retail installment sales contracts and promissory notes (the "Contracts") for the purchase of a variety of consumer products and all payments due thereunder on or after February 1, 1996 (the "Cutoff Date"). The Contracts were originated or purchased by Green Tree in the ordinary course of its business. The Trust Property will also include an assignment of Green Tree's security interests in the products financed thereby (the "Products") and certain other property, as more fully described herein. The aggregate principal balance of the Contracts on the Cutoff Date was $431,146,642.43. Green Tree will also act as Servicer of the Contracts. Terms used and not otherwise defined herein have the meanings ascribed thereto in the Prospectus dated January , 1996 attached hereto (the "Prospectus").
The Certificates will consist of five classes. The Class A-1 Certificates will evidence in the aggregate a % (approximate) undivided interest in the Trust; the Class A-2 Certificates will evidence in the aggregate a % (approximate) undivided interest in the Trust; the Class A-3 Certificates will evidence in the aggregate a % (approximate) undivided interest in the Trust; the Class A-4 Certificates will evidence in the aggregate a % (approximate) undivided interest in the Trust; and the Class B Certificates will evidence in the aggregate a % (approximate) undivided interest in the Trust.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES, SEE "RISK FACTORS" ON PAGE S-10 HEREIN AND ON PAGE 11 IN THE ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF GREEN TREE OR ANY AFFILIATE, EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(1) Plus accrued interest, if any, from and including January , 1996. (2) Before deducting estimated expenses of $ payable by Green Tree.
The Certificates are offered hereby by the Underwriters named below, subject to receipt and acceptance by the Underwriters and their right to reject any order in whole or in part. It is expected that delivery of the Certificates will be made on or about January , 1996.
LEHMAN BROTHERS MORGAN STANLEY & CO.
Principal and interest are payable on the 15th day of each month (or, if the 15th day is not a business day, the next business day thereafter) (a "Distribution Date"), beginning in March 1996. The rights of the holders of the Class A-2, Class A-3, Class A-4 and Class B Certificates to receive distributions on each Distribution Date will be subordinated to such rights of the Class A-1 Certificateholders; such rights of the holders of the Class A-3, Class A-4 and Class B Certificates will be subordinated to such rights of the Class A-2 Certificateholders; such rights of the holders of the Class A-4 and Class B Certificates will be subordinated to such rights of the Class A-3 Certificateholders; and such rights of the Class B Certificateholders will be subordinated to such rights of the Class A-4 Certificateholders.
The Class B Certificateholders will have the benefit of a Limited Guaranty of Green Tree to protect against losses that would otherwise be absorbed by the Class B Certificates. To the extent that available funds in the Collection Account are insufficient to distribute to the holders of the Class B Certificates the Class B Formula Distribution Amount (as described herein), Green Tree will be obligated to make a Guaranty Payment equal to the amount of such deficiency.
The Certificates initially will be represented by certificates registered in the name of Cede & Co., the nominee of The Depository Trust Company (" DTC"). The interests of beneficial owners of the Certificates will be represented by book entries on the records of the participating members of DTC. Definitive Certificates will be available only under the limited circumstances described herein.
There currently is no secondary market for the Certificates. The Underwriters expect, but are not obligated, to make a market in the Certificates. There is no assurance that any such market will develop or continue.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. TO THE EXTENT ANY STATEMENTS IN THIS PROSPECTUS SUPPLEMENT CONFLICT WITH STATEMENTS IN THE PROSPECTUS, THE STATEMENTS IN THIS PROSPECTUS SUPPLEMENT SHALL CONTROL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Unless and until Definitive Certificates are issued, unaudited monthly and annual reports, containing information concerning the Trust and prepared by the Servicer, will be sent on behalf of the Trust to First Trust National Association, as Trustee, and Cede & Co., as registered holder of the Certificates and the nominee of DTC. See "Description of the Certificates-- Statements to Certificateholders," herein and "Certain Information Regarding the Securities--Book-Entry Registration" and "--Reports to Securityholders" in the accompanying Prospectus. Certificate Owners may receive such reports, upon written request, together with a certification that they are Certificate Owners and payment of reproduction and postage expenses associated with the distribution of such reports, from the Trustee at 180 East Fifth Street, St. Paul, Minnesota 55101, Attention: Corporate Trust Administration, Structured Finance. Such reports will not constitute financial statements prepared in accordance with generally accepted accounting principles. The Servicer, on behalf of the Trust, will file with the Commission periodic reports concerning the Trust to the extent required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder. However, in accordance with the Exchange Act and the rules and regulations of the Commission thereunder, Green Tree expects that the Trust's obligation to file such reports will be terminated following the end of 1996.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Green Tree, on behalf of the Trust, hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Trust's annual report pursuant to section 13(a) or section 15(d) of the Exchange Act shall be deemed to be a new registration statement relating to the Certificates offered hereby, and the offering of such Certificates at that time shall be deemed to be the initial bona fide offering thereof.
SUMMARY OF THE TERMS OF THE CERTIFICATES
The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus Supplement and in the accompanying Prospectus. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to such terms elsewhere in this Prospectus Supplement or the accompanying Prospectus.
Issuer........................ Green Tree Recreational, Equipment & Consumer Trust 1996-A (the "Trust"), to be formed on or about January , 1996 (the "Closing Date"), by Green Tree Financial Corporation ("Green Tree") pursuant to a Pooling and Servicing Agreement, dated as of January 1, 1996 (the "Agreement"), between Green Tree, as Seller and as Servicer (in such capacity referred to herein as the "Servicer") and First Trust National Association, as Trustee.
Servicer...................... Green Tree Financial Corporation. See "Green Tree Financial Corporation" in the accompanying Prospectus.
Trustee....................... First Trust National Association, St. Paul, Minnesota (the "Trustee"). See "Description of the Trust Documents--The Trustee" in the accompanying Prospectus.
Cutoff Date Pool Principal $431,146,642.43 (Approximate. Subject to a Balance....................... permitted variance of plus or minus 5%).
Original Class A-1 Principal $ (Approximate. Subject to a permitted Balance....................... variance of plus or minus 5%).
Original Class A-2 Principal $ (Approximate. Subject to a permitted Balance....................... variance of plus or minus 5%).
Original Class A-3 Principal $ (Approximate. Subject to a permitted Balance....................... variance of plus or minus 5%).
Original Class A-4 Principal $ (Approximate. Subject to a permitted Balance....................... variance of plus or minus 5%).
Original Class B Principal $ (Approximate. Subject to a permitted Balance....................... variance of plus or minus 5%).
Class A-1 Pass-Through Rate... % per annum, computed on the basis of a 360- day year of twelve 30-day months.
Class A-2 Pass-Through Rate... % per annum, computed on the basis of a 360- day year of twelve 30-day months.
Class A-3 Pass-Through Rate... % per annum, computed on the basis of a 360- day year of twelve 30-day months.
Class A-4 Pass-Through Rate... % per annum, computed on the basis of a 360- day year of twelve 30-day months.
Class B Pass-Through Rate..... % per annum, computed on the basis of a 360- day year of twelve 30-day months.
Distribution Date............. The 15th day of each month (or, if such 15th day is not a business day, the next succeeding business day), beginning March 15, 1996.
Record Date................... The business day immediately preceding the related Distribution Date.
Description of Certificates... The Class A-1, Class A-2, Class A-3, Class A-4 and Class B Certificates (together, the interests in the Trust. The rights of the holders of each Class of Certificates will be subordinated to the rights of the holders of each Class of Certificates with a prior numeric or alphabetical designation, in the manner and to the extent described herein.
Distributions................. On each Distribution Date, distributions on the Certificates will be made first to the holders of the Class A-1 Certificates, then to the holders of the Class A-2 Certificates, then to the holders of the Class A-3 Certificates, then to the holders of the Class A-4 Certificates and then to the holders of the Class B Certificates, in the manner described below.
A. Class A-1 Interest...... Interest on the outstanding Class A-1 Principal Balance will accrue at the Class A-1 Pass- Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-1 Principal Balance" as of any Distribution Date will be the Original Class A-1 Principal Balance minus all amounts previously distributed to the Class A-1 Certificateholders in respect of principal.
Interest will be paid on the Class A-1 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date (as described under "Description of the Certificates" herein). In the event the Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-1 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class A-1 Pass-Through Rate, to the extent legally permissible. See "Description of the Certificates."
B. Class A-1 Principal..... Class A-1 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest payable on the Class A- 1 Certificates, an amount equal to the sum of % of the Formula Principal Distribution Amount for such Distribution Date plus the Unpaid Class A-1 Principal Shortfall (as described under "Description of the Certificates--Class A-1 Principal"), if any, from prior Distribution Dates.
The "Formula Principal Distribution Amount" with respect to any Distribution Date will be an amount equal to the sum of the following amounts with respect to the related Monthly Period, in each case computed in accordance with the method specified in each Contract: (i) all scheduled payments of principal due on
each outstanding Contract during the related Monthly Period, (ii) the Scheduled Principal Balance (as defined below) of each Contract which, during the related Monthly Period, was purchased by Green Tree pursuant to the Agreement on account of a breach of a representation or warranty, (iii) all Partial Principal Prepayments applied and all Principal Prepayments in Full received during the related Monthly Period, and (iv) the Scheduled Principal Balance of each Contract that became a Liquidated Contract (as defined below) during the related Monthly Period. A "Monthly Period" with respect to a Distribution Date is the calendar month immediately preceding the month in which the Distribution Date occurs. The Scheduled Principal Balance of a Contract for any Monthly Period is its principal balance as specified in its amortization schedule, after giving effect to any previous Partial Principal Prepayments and to the scheduled payment due on its scheduled payment date (the "Due Date") in that month, but without giving effect to any adjustments due to bankruptcy or similar proceedings. A Liquidated Contract is a defaulted Contract as to which all amounts that the Servicer expects to recover through the date of disposition of the Product securing such Contract have been recovered. See Distributions" herein.
C. Class A-2 Interest...... Interest on the outstanding Class A-2 Principal Balance will accrue at the Class A-2 Pass- Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-2 Principal Balance" as of any Distribution Date will be the Original Class A-2 Principal Balance minus all amounts previously distributed to the Class A-2 Certificateholders in respect of principal.
Interest will be paid on the Class A-2 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-1 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-2 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class A-2 Pass-Through Rate, to the extent legally permissible. See "Description of the Certificates."
D. Class A-2 Principal..... Class A-2 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A-1 Certificates and after payment of all interest payable on the Class A-2 Certificates, the sum of % of the Formula
Distribution Amount for such Distribution Date plus the Unpaid Class A-2 Principal Shortfall, if any, from prior Distribution Dates.
E. Class A-3 Interest...... Interest on the outstanding Class A-3 Principal Balance will accrue at the Class A-3 Pass- Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-3 Principal Balance" as of any Distribution Date will be the Original Class A-3 Principal Balance minus all amounts previously distributed to the Class A-3 Certificateholders in respect of principal.
Interest will be paid on the Class A-3 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-2 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-3 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class A-3 Pass-Through Rate, to the extent legally permissible. See "Description of the Certificates" herein.
F. Class A-3 Principal..... Class A-3 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A-2 Certificates and after payment of all interest payable on the Class A-3 Certificates, the sum of % of the Formula Principal Distribution Amount for such Distribution Date plus the Unpaid Class A-3 Principal Shortfall, if any, from prior Distribution Dates.
G. Class A-4 Interest...... Interest on the outstanding Class A-4 Principal Balance will accrue at the Class A-4 Pass- Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-4 Principal Balance" as of any Distribution Date will be the Original Class A-4 Principal Balance minus all amounts previously distributed to the Class A-4 Certificateholders in respect of principal.
Interest will be paid on the Class A-4 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-3 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-4 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next
Distribution Date. Any amount so carried forward will bear interest at the Class A-4 Pass-Through Rate, to the extent legally permissible. See "Description of the Certificates" herein.
H. Class A-4 Principal..... Class A-4 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A-3 Certificates and after payment of all interest payable on the Class A-4 Certificates, the sum of % of the Formula Principal Distribution Amount for such Distribution Date plus the Unpaid Class A-4 Principal Shortfall, if any, from prior Distribution Dates.
I. Class B Interest........ Interest on the outstanding Class B Principal Balance will accrue at the Class B Pass-Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class B Principal Balance" as of any Distribution Date will be the Original Class B Principal Balance minus all amounts previously distributed to the Class B Certificateholders in respect of principal.
Interest will be paid on the Class B Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-4 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class B Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class B Pass-Through Rate, to the extent legally permissible. See "Description of the Certificates" herein.
J. Class B Principal....... Class B Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A-4 Certificates and after payment of all interest payable on the Class B Certificates, the sum of % of the Formula Principal Distribution Amount for such Distribution Date plus the Unpaid Class B Principal Shortfall, if any, from prior Distribution Dates.
Spread Account................ The Class A-1, Class A-2, Class A-3 and Class A-4 Certificateholders will have the benefit of a Spread Account to be held in a segregated trust account by the Trustee. On any Distribution Date, if the Amount Available in the Collection Account (after making all distributions on each Class of Certificates with a prior numeric designation) is insufficient to distribute all interest and principal then payable on any such Class of Certificates, the Trustee will withdraw the amount of the deficiency (or the amount on deposit in the Spread Account, if less) and deposit such amount in the Collection Account. On any Distribution Date, an amount of funds in the Spread Account equal to .2% of the aggregate principal balance of the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates will not be available to cover a shortfall in principal distributable on any Class of Certificates, but would only be available to cover a shortfall in interest distributable on the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificates. The remainder of the funds in the Spread Account would be available to cover any shortfall in interest or principal on the Class A-1, Class A-2, Class A-3 or Class A-4 Certificates.
On the Closing Date, the amount on deposit in the Spread Account will be zero. On each Distribution Date the Trustee will deposit all funds remaining in the Collection Account, after distribution of all interest and principal then payable on the Certificates, in the Spread Account, unless the amount on deposit in the Spread Account equals $ (subject to reduction as provided in, and to the other terms and conditions contained in, the Agreement). The Spread Account is not, and shall not under any circumstances be deemed to be, included in the Trust. See "Description of the Certificates--The Spread Account" herein.
Limited Guaranty.............. In order to mitigate the effect of the subordination of the Class B Certificates and the effect of liquidation losses on the Contracts, the Class B Certificateholders are entitled to receive on each Distribution Date the amount equal to the Guaranty Payment, if any, under Green Tree's Limited Guaranty. The Guaranty Payment for any Distribution Date will equal the difference, if any, between the Class B Formula Distribution Amount (equal to accrued and unpaid interest on the Class B Certificates, plus % of the Formula Principal Distribution Amount, plus any Unpaid Class B Principal Shortfall for such Distribution Date, and plus any Class B Principal Liquidation Loss not previously paid (as described under "Description of the Certificates--Losses on Liquidated Contracts" herein) and the remaining Amount Available in the Collection Account after distribution of all interest and principal payable on the Class A-4 Certificates.
The Trust Property............ The Trust's assets (the "Trust Property") will include, among other things, a pool (the "Contract Pool") of retail installment sales contracts and promissory notes (the "Contracts") for the purchase of a variety of consumer products (the "Products"), and all payments due thereon on or after February 1, 1996 (the "Cutoff Date"). The Trust Property will also include an assignment of Green Tree's security interests in the Products and of the right to receive proceeds from claims on certain insurance policies covering the Products or the Obligors, the Collection Account, including all investments therein, all income from the investment of funds therein and all proceeds thereof, a security interest in the funds in the Spread Account, and certain other rights under the Agreement. The Contracts will be transferred by Green Tree to the Trust pursuant to the Agreement, and Green Tree will be obligated to repurchase Contracts upon the occurrence of certain breaches of representations and warranties thereunder (a "Repurchase Event"). See "The Trust" herein.
Contracts..................... The Contracts were originated or purchased by Green Tree in the ordinary course of business. As of the Cutoff Date, the Contract Pool had a weighted average annual percentage rate of 13.01% and a weighted average remaining maturity of 75 months. As of the Cutoff Date, no Contract had a scheduled maturity prior to March 1996 and no Contract was more than 59 days past due. The final scheduled payment date on the Contract with the latest maturity occurs in January 2016. The Contracts are prepayable at any time without penalty to the purchaser or co-purchasers of the Product or other person or persons who are obligated to make
payments thereunder (each, an "Obligor"). See "The Contract Pool" herein and "The Contracts" in the accompanying Prospectus.
Contracts..................... Green Tree or the Servicer may purchase all the Contracts on any Distribution Date following the first Monthly Period as of which the Pool Scheduled Principal Balance has declined to 10% or less of the Cutoff Date Principal Balance, subject to certain provisions in the Agreement. See "Description of the Trust Documents-- Termination" in the accompanying Prospectus.
Tax Status.................... In the opinion of counsel to Green Tree, the Trust will be classified as a grantor trust for federal income tax purposes and not as an association which is taxable as a corporation. Certificateholder will be treated for such purposes as the owner of an undivided interest in the Contracts and other Trust Property. Accordingly, each Certificateholder must report on its federal income tax return its share of the income from the Contracts and other Trust Property and, subject to limitations on deductions by individuals, estates and trusts, may deduct its share of the reasonable fees paid by the Trust, determined in accordance with such Certificateholder's tax accounting method. In addition, it is anticipated that the Certificates may constitute stripped bonds within the meaning of the Code. See "Certain Federal Income Tax Consequences" herein and in the accompanying Prospectus.
ERISA Considerations.......... Subject to the conditions described herein, the Class A-1 Certificates may be purchased by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). No transfer of a Class A-2, Class A-3, Class A-4 or Class B Certificate will be permitted to be made to any employee benefit plan subject to ERISA or to the Internal Revenue Code of 1986, as amended (the "Code"), unless the opinion of counsel described under "ERISA Considerations" herein is delivered to the Trustee. See "ERISA Considerations" herein and in the Prospectus.
Ratings....................... It is a condition to the issuance of the Certificates that:
the Class A-1 Certificates be rated in the highest rating category by at least one
the Class A-2 Certificates be rated in one of the two highest rating categories by the Rating
the Class A-3 Certificates be rated in one of the three highest rating categories by the
the Class A-4 Certificates be rated in one of the four highest rating categories by the
the Class B Certificates be rated in one of the four highest rating categories by the Rating Agency.
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the Rating Agency. The rating of the Class B Certificates will be based in part on an assessment of Green Tree's ability to make payments under the Limited Guaranty. Any reduction in the Rating Agency's rating of Green Tree's debt securities may result in a similar reduction in the rating of the Class B Certificates.
Prospective Certificateholders should consider, in addition to the factors described under "Risk Factors" in the Prospectus, the following factors in connection with the purchase of the Certificates:
DELINQUENCY, LOAN LOSS AND REPOSSESSION EXPERIENCE
Green Tree began originating conditional sale contracts for recreational vehicles in 1985 and for motorcycles in May 1988, but has less extensive underwriting and servicing experience with other types of products financed by the Contracts. Although Green Tree has calculated and presented herein its delinquency and net loss experience with respect to its servicing portfolio of consumer and equipment contracts, there can be no assurance that the information presented will reflect actual experience with respect to the Contracts. In addition, there can be no assurance that the future delinquency, loan loss or repossession experience of the Trust with respect to the Contracts will be better or worse than that set forth herein with respect to Green Tree's servicing portfolio. See "The Contract Pool--Delinquency, Loan Loss and Repossession Information" and "--Selection Criteria" herein.
The following information supplements and, to the extent inconsistent therewith, supersedes the information contained in the accompanying Prospectus. Prospective Certificateholders should consider, in addition to the information below, the information under "The Trusts" in the accompanying Prospectus.
Green Tree will establish the Trust pursuant to the Agreement, by selling and assigning the Contracts and the other Trust Property to the Trustee in exchange for the Certificates. Prior to such sale and assignment, the Trust will have no assets or obligations. The Trust will not engage in any business activity other than acquiring and holding the Trust Property, issuing the Certificates and distributing payments thereon.
Each Certificate will represent a fractional undivided interest in the Trust. The Trust Property will include, among other things, (i) the Contract Pool; (ii) all payments due thereon on or after the Cutoff Date (excluding certain insurance premiums, late fees and other servicing charges); (iii) such amounts as from time to time may be held in the Collection Account (including all investments in the Collection Account and all income from the investment of funds therein and all proceeds thereof); (iv) a security interest in the funds in the Spread Account; (v) an assignment of the security interests of Green Tree in the Products; (vi) an assignment of the right to receive proceeds from claims on certain insurance policies covering the Products or the Obligors; and (vii) certain other rights under the Agreement. See "The Contracts" and "Description of the Trust Documents--Collections" in the accompanying Prospectus.
Green Tree, as custodian on behalf of the Trust, will hold the original installment sales contract or promissory note as well as copies of documents and instruments relating to each Contract and evidencing the security interest in the Product securing each Contract (the "Contract Files"). In order to protect the Trust's ownership interest in the Contracts, Green Tree will file a UCC-1 financing statement in Minnesota to give notice of the Trust's ownership of the Contracts and the related Trust Property.
First Trust National Association is the Trustee under the Agreement. First Trust is a national banking association the principal offices of which are located at 180 East Fifth Street, St. Paul, Minnesota 55101.
The Contract Pool consists of Contracts having an aggregate principal balance as of the Cutoff Date of $431,146,642.43 (the "Cutoff Date Pool Principal Balance"). The Contracts were originated between February 1985 and January 1996. All of the Contracts are retail installment sales contracts and promissory notes purchased by Green Tree from Dealers who regularly originate and sell such contracts to Green Tree, or originated by Green Tree directly.
DELINQUENCY, LOAN LOSS AND REPOSSESSION INFORMATION
The following tables set forth information relating to Green Tree's delinquency, loan loss and repossession experience for each period indicated with respect to all consumer product and equipment contracts it has purchased and continues to service. This information includes the experience with respect to all consumer product contracts in Green Tree's portfolio of consumer product contracts serviced during each such period, including consumer product and equipment contracts which do not meet the criteria for selection as a Contract. Green Tree began originating conditional sale contracts for recreational vehicles in 1985 and for motorcycles in 1988, but has less extensive underwriting and servicing experience with other types of products financed by the Contracts. Accordingly, the delinquency, loan loss and repossession experience presented below largely represents experience only with recreational vehicle and motorcycle contracts. In addition, because of the rapid growth of Green Tree's portfolio of consumer product and equipment contracts, the experience shown in more recent periods may not be indicative of the experience to be expected from a more seasoned portfolio.
(1) Excludes contracts already in repossession. (2) The period of delinquency is based on the number of days payments are contractually past due (assuming 30-day months). Consequently, a contract due on the first day of a month is not 30 days delinquent until the first day of the next month. (3) By number of contracts.
(1) As of period end. Includes contracts already in repossession. (2) As a percentage of the total number of contracts being serviced as of period end. (3) The calculation of net loss includes unpaid interest to the date of repossession and all expenses of repossession and liquidation. (4) As a percentage of the principal balance of contracts being serviced as of period end.
The consumer product contracts in Green Tree's servicing portfolio include consumer product contracts other than the Contracts, including consumer product contracts which do not meet the criteria for selection as a Contract. There can be no assurance that the delinquency, loan loss or repossession experience of the Trust with respect to the Contracts will be better than, worse than or comparable to the experience set forth above. See "Risk Factors--Delinquency, Loan Loss and Repossession Experience" herein.
The Contracts (i) had a remaining maturity, as of the Cutoff Date, of at least 2 months, but not more than 240 months, (ii) had an original maturity of at least 12 months, but not more than 240 months, (iii) had an original principal balance of at least $1,050.00 and not more than $398,050.00, (iv) had a remaining principal balance as of the Cutoff Date of at least $1,001.15 and not more than $395,934.27 and (v) had a contractual rate of interest ("Contract Rate") of at least 6.56% and not more than 25.37%. Neither Green Tree nor the Servicer may substitute other consumer product contracts for the Contracts at any time during the term of the Agreement.
(1) Based on scheduled payments due after the Cutoff Date and assuming no prepayments on the Contracts.
GEOGRAPHIC CONCENTRATION OF THE CONTRACTS
(1) Based on the address of the Obligor set forth in Green Tree's records.
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS
YEAR OF ORIGINATION OF CONTRACTS
*Indicates an amount greater than zero but less than .005% of the Cutoff Date Pool Principal Balance.
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS
The following information supplements the information in the Prospectus under the heading "Yield and Prepayment Considerations."
The Servicer and Green Tree each have the option to purchase from the Trust all remaining Contracts, and thereby effect early retirement of the Certificates, on any Distribution Date when the Pool Scheduled Principal Balance is less than 10% of the Cutoff Date Pool Principal Balance. See "Description of the Trust Documents--Termination" in the Prospectus.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of prepayments on the Contracts on the weighted average life of the Certificates under the stated assumptions and is not a prediction of the prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of issuance of a security until each dollar of principal of such security will be repaid to the investor. The weighted average life of the Certificates will be influenced by the rate at which principal on the Contracts is paid. Principal payments on the Contracts may be in the form of scheduled amortization or prepayments (including, for this purpose, liquidations due to default).
The "Base Case" prepayment model used in the table below represents Green Tree management's best estimate of the weighted average projected prepayment speed of the Contracts. This estimate was prepared based on Green Tree's and industry prepayment experience with contracts financing the purchase of each type of Product. Based on this experience, Green Tree management's best estimate of projected prepayment speeds varied by the type of Product financed, both as to relative prepayment rate and the appropriate model of prepayment rate:
The Base Case prepayment model is Green Tree management's best estimate of the prepayment rates that may be experienced on the Contracts. Because Green Tree began originating and servicing contracts for many of the Products only recently, such estimate is based in part on industry experience with similar contracts rather than Green Tree's experience. There can be no assurance that Contracts for the purchase of any type of Product will experience prepayments at such projected rates or in the manner assumed by the prepayment model used for that type of Contract, or that the Contracts in the aggregate will experience prepayments similar to the overall prepayment rate or in the manner projected in the Base Case.
The weighted average lives in the following table were determined assuming that (i) scheduled interest and principal payments on the Contracts are received in a timely manner and prepayments are made at the percentages of the Base Case prepayment model set forth in the table; (ii) either Green Tree or the Servicer exercises its right of optional termination described above; (iii) the Cutoff Date Pool Principal Balance is $431,146,642.43 and the Contracts have the characteristics described under "The Contract Pool"; (iv) no interest shortfalls will arise in connection with prepayments in full of the Contracts; (v) distributions are made on the Certificates on the 15th day of each month commencing in March 1996; and (vi) the Certificates are issued on January , 1996. No representation is made that the Contracts will not experience delinquencies or losses.
Investors are urged to make their investment decisions on a basis that includes their determination as to anticipated prepayment rates under a variety of the assumptions discussed herein.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE BASE CASE PREPAYMENT MODEL SET FORTH BELOW:
The following information supplements and, to the extent inconsistent therewith, supersedes the information contained in the accompanying Prospectus. Prospective Certificateholders should consider, in addition to the information below, the information in the accompanying Prospectus under "The Certificates," "Certain Information Regarding the Securities," and "Description of the Trust Documents."
The Certificates offered hereby will be issued pursuant to the Agreement, a form of which has been filed as an exhibit to the Registration Statement of which this Prospectus Supplement forms a part. The following summary of the Certificates and the Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the Certificates, the Agreement and the Prospectus. Where particular provisions of or terms used in the Agreement are referred to, the actual provisions (including definitions of terms) are incorporated by reference as part of such summary. Capitalized terms used in this summary of the Agreement and not defined herein or in the Prospectus have the meanings assigned in the Agreement.
On each Distribution Date, distributions on the Certificates will be made from the Amount Available in the Collection Account first to the holders of the Class A-1 Certificates, then to the holders of the Class A-2 Certificates, then to the holders of the Class A-3 Certificates, then to the holders of the Class A-4 Certificates and then to the holders of the Class B Certificates, in the manner and order of priority described below.
Interest on the outstanding Class A-1 Principal Balance will accrue at the Class A-1 Pass-Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-1 Principal Balance" as of any Distribution Date will be the Original Class A-1 Principal Balance minus all amounts previously distributed to the Class A-1 Certificateholders in respect of principal, and minus any Class A-1 Principal Liquidation Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Class A-1 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date. In the event the Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-1 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class A-1 Pass-Through Rate, to the extent legally permissible.
Class A-1 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest payable on the Class A-1 Certificates, an amount equal to the sum of % of the Formula Principal Distribution Amount for such Distribution Date plus the Unpaid Class A-1 Principal Shortfall, if any, for such Distribution Date. The "Formula Principal Distribution Amount" with respect to any Distribution Date will be an amount equal to the sum of the following amounts with respect to the related Monthly Period, in each case computed in accordance with the method specified in each Contract: (i) all scheduled payments of principal due on each outstanding Contract during the related Monthly Period, (ii) the Scheduled Principal Balance (as defined below) of each Contract which, during the related Monthly Period, was purchased by Green Tree pursuant to the Agreement on account of a breach of a representation or warranty, (iii) all Partial Principal Prepayments applied and all Principal Prepayments in Full received during the related Monthly Period, and (iv) the Scheduled Principal Balance of each Contract that became a Liquidated Contract (as defined below) during the related Monthly Period. A "Monthly Period" with respect to a Distribution Date is the calendar month immediately preceding the month in which the Distribution Date occurs. The Scheduled Principal Balance of a Contract for any Monthly Period is its principal balance as specified in its amortization schedule, after giving effect to any previous Partial Principal Prepayments and to the scheduled payment due on its scheduled payment date (the "Due Date") in that month, but without giving effect to any adjustments due to bankruptcy or similar proceedings. A Liquidated Contract is a defaulted Contract as to which all amounts that the Servicer expects to recover through the date of disposition of the Product securing such Contract have been recovered. The "Unpaid Class A-1 Principal Shortfall" for any Distribution Date will equal any amount required to be paid in respect of principal on the Class A-1 Certificates on any prior Distribution Date but not paid on any intervening Distribution Date, less any Class A-1 Principal Liquidation Loss.
Interest on the outstanding Class A-2 Principal Balance will accrue at the Class A-2 Pass-Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-2 Principal Balance" as of any Distribution Date will be the Original Class A-2 Principal Balance minus all amounts previously distributed to the Class A-2 Certificateholders in respect of principal, and minus any Class A-2 Principal Liquidation Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Class A-2 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-1 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-2 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class A-2 Pass-Through Rate, to the extent legally permissible.
Class A-2 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A-1 Certificates and after payment of all interest payable on the Class A-2 Certificates, the sum of % of the Formula Principal Distribution Amount for such Distribution Date, plus any Unpaid Class A-2 Principal Shortfall (as defined below) for such Distribution Date.
The "Unpaid Class A-2 Principal Shortfall" for any Distribution Date will equal any amount required to be paid in respect of principal on the Class A-2 Certificates on any prior Distribution Date but not paid on any intervening Distribution Date, less any Class A-2 Principal Liquidation Loss.
Interest on the outstanding Class A-3 Principal Balance will accrue at the Class A-3 Pass-Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-3 Principal Balance" as of any Distribution Date will be the Original Class A-3 Principal Balance minus all amounts previously distributed to the Class A-3 Certificateholders in respect of principal, and minus any Class A-3 Principal Liquidation Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Class A-3 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-2 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-3 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class A-3 Pass-Through Rate, to the extent legally permissible.
Class A-3 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A-2 Certificates and after payment of all interest payable on the Class A-3 Certificates, the sum of % of the Formula Principal Distribution Amount for such Distribution Date, plus any Unpaid Class A-3 Principal Shortfall (as defined below) for such Distribution Date.
The "Unpaid Class A-3 Principal Shortfall" for any Distribution Date will equal any amount required to be paid in respect of principal on the Class A-3 Certificates on any prior Distribution Date but not paid on any intervening Distribution Date, less any Class A-3 Principal Liquidation Loss.
Interest on the outstanding Class A-4 Principal Balance will accrue at the Class A-4 Pass-Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class A-4 Principal Balance" as of any Distribution Date will be the Original Class A-4 Principal Balance minus all amounts previously distributed to the Class A-4 Certificateholders in respect of principal, and minus any Class A-4 Principal Liquidation Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Class A-4 Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-3 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class A-4 Certificates, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class A-4 Pass-Through Rate, to the extent legally permissible.
Class A-4 Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A-3 Certificates and after payment of all interest payable on the Class A-4 Certificates, the sum of % of the Formula Principal Distribution Amount for such Distribution Date, plus any Unpaid Class A-4 Principal Shortfall (as defined below) for such Distribution Date.
The "Unpaid Class A-4 Principal Shortfall" for any Distribution Date will equal any amount required to be paid in respect of principal on the Class A-4 Certificates on any prior Distribution Date but not paid on any intervening Distribution Date, less any Class A-4 Principal Liquidation Loss.
Interest on the outstanding Class B Principal Balance will accrue at the Class B Pass-Through Rate from January , 1996, or from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date. The "Class B Principal Balance" as of any Distribution Date will be the Original Class B Principal Balance minus all amounts previously distributed to the Class B Certificateholders in respect of principal, and minus any Class B Principal Liquidation Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Class B Certificates to the extent of the Amount Available in the Collection Account on such Distribution Date, after payment of all interest and principal then payable on the Class A-4 Certificates. In the event such remaining Amount Available in the Collection Account is not sufficient to make a full distribution of interest on the Class B Certificates and Green Tree for any reason fails to pay such amount under the Limited Guaranty, the amount of the shortfall will be carried forward and added to the amount of interest payable on the next Distribution Date. Any amount so carried forward will bear interest at the Class B Pass-Through Rate, to the extent legally permissible.
Class B Certificateholders will be entitled to receive on each Distribution Date as payment of principal, to the extent of the Amount Available in the Collection Account after payment of all interest and principal payable on the Class A Certificates and after payment of all interest payable on the Class B Certificates, the sum of % of the Principal Payment for such Distribution Date, plus any Unpaid Class B Principal Shortfall (as defined below) for such Distribution Date.
The "Unpaid Class B Principal Shortfall" for any Distribution Date will equal any amount required to be paid in respect of principal on the Class B Certificates on any prior Distribution Date but not paid by Green Tree under the Limited Guaranty or out of the Amount Available on such prior Distribution Date or any intervening Distribution Date, less any Class B Principal Liquidation Loss.
The Class A-1, Class A-2, Class A-3 and Class A-4 Certificateholders will have the benefit of a Spread Account to be held in a segregated trust account by the Trustee. On any Distribution Date, if the Amount Available in the Collection Account (after making all distributions on each Class of Certificates with a prior numeric designation) is insufficient to distribute all interest and principal then payable on any such Class of Certificates, the Trustee will withdraw the amount of the deficiency (or the amount on deposit in the Spread Account, if less) and deposit such amount in the Collection Account. On any Distribution Date, an amount of funds in the Spread Account equal to .2% of the aggregate principal balance of the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates will not be available to cover a shortfall in principal distributable on any Class of Certificates, but would only be available to cover a shortfall in interest distributable on the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates. The remainder of the funds in the Spread Account would be available to cover any shortfall in interest or principal on the Class A-1, Class A-2, Class A-3 or Class A-4 Certificates.
On the Closing Date, the amount on deposit in the Spread Account will be zero. On each Distribution Date the Trustee will deposit all funds remaining in the Collection Account, after distribution of all interest and principal then payable on the Certificates, in the Spread Account, unless the amount on deposit in the Spread Account equals $ (subject to reduction as provided in, and to the other terms and conditions contained in, the Agreement). Funds in the Spread Account will be invested in Eligible Investments that mature no later than the next Distribution Date, and earnings on such investments will be distributed monthly to the owner of the Spread Account, which will be a subsidiary of Green Tree. The Spread Account is not, and shall not under any circumstances be deemed to be, included in the Trust. Accordingly, any amount remaining in the Spread Account upon termination of the Trust will be distributed to the owner of the Spread Account.
In order to mitigate the effect of the subordination of the Class B Certificates and the effect of liquidation losses and delinquencies on the Contracts, the Class B Certificateholders are entitled to receive on each Distribution Date the amount equal to the Guaranty Payment, if any, under Green Tree's Limited Guaranty. The Guaranty Payment for any Distribution Date will equal the difference, if any, between the Class B Formula Distribution Amount (equal to accrued and unpaid interest on the Class B Certificates, plus % of the Formula Principal Distribution Amount for such Distribution Date, plus any Unpaid Class B Principal Shortfall, plus any Class B Principal Liquidation Loss) and the remaining Amount Available in the Collection Account after distribution of all interest and principal payable on the Class A-4 Certificates.
The Limited Guaranty will be an unsecured general obligation of Green Tree and will not be supported by any letter of credit or other credit enhancement arrangement. The Limited Guaranty will not benefit in any way, or result in any payment to, the Class A-1, Class A-2, Class A-3 or Class A-4 Certificateholders.
As compensation for servicing the Contracts and providing the Limited Guaranty, Green Tree will be entitled to receive the Monthly Servicing and Guaranty Fee on each Distribution Date, equal to the Amount Available remaining after payment of the Class B Formula Distribution Amount and any deposit into the Spread Account required on that Distribution Date.
As described above, the distribution of principal to each Class of Certificates is intended to equal such Class's percentage of the Formula Principal Distribution Amount, which in turn includes the Scheduled Principal Balance of each Contract that became a Liquidated Contract during the month preceding the month of such distribution. If the Net Liquidation Proceeds from such Liquidated Contract are less than the Scheduled Principal Balance of such Liquidated Contract, the deficiency will, in effect, be absorbed first by the Monthly Servicing and Guaranty Fee otherwise payable to Green Tree, then by the Class B Certificateholders (although Green Tree will be obligated to make a Guaranty Payment equal to any shortfall in the distribution to the Class B Certificateholders), and then by each other Class of Certificates in inverse numerical order.
If the Amount Available in the Collection Account for any Distribution Date, after making all required distributions of interest and principal to more senior Classes of Certificates, is insufficient to make a full distribution of interest and/or principal to a Class of Certificates, such deficiency will be carried forward and added to the amount to be distributed to such Class on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less than the aggregate Certificate Balance after giving effect to all distributions of principal on such Distribution Date, then the Class B Certificate Balance will be reduced by the amount of such deficiency (a "Class B Principal Liquidation Loss"). Green Tree will be obligated to pay the amount of any such Class B Principal Liquidation Loss under the Limited Guaranty. If Green Tree should fail to pay such amount, however, the amount distributable on the Class B Certificates on future Distribution Dates would include interest on any such Class B Principal Liquidation Loss at the Class B Pass- Through Rate (and, to the extent legally permissible, interest on any unpaid interest at the Class B Pass-Through Rate) accrued from the date such Class B Principal Liquidation Loss was incurred, and the amount of such Class B Principal Liquidation Loss.
Similarly, if the Class B Principal Balance were reduced to zero (which would be caused only by Class B Principal Liquidation Losses, whether or not Green Tree makes any required payments under the Limited Guaranty) and the Pool Scheduled Principal Balance on any Distribution Date were less than the aggregate Certificate Balance after giving effect to distributions of principal on such Distribution Date, then the Class A-4 Certificate Balance would be reduced by the amount of such deficiency (a "Class A-4 Principal Liquidation Loss"). The amount distributable on the Class A-4 Certificates on future Distribution Dates would include interest on any such Class A-4 Principal Liquidation Loss at the Class A-4 Pass-Through Rate (and, to the extent legally permissible, interest on such unpaid interest at the Class A-4 Pass-Through Rate) accrued from the date such Class A-4 Principal Liquidation Loss was incurred, and the amount of such Class A-4 Principal Liquidation Loss. Each more senior Class of Certificates would similarly be subject to reduction in its Certificate Balance if the aggregate Certificate Balance of all more junior Classes of Certificates were reduced to zero and the Pool Scheduled Principal Balance were less than the aggregate Certificate Balance, and would similarly be entitled on future Distribution Dates to receive interest on any such Principal Liquidation Loss at the applicable Pass-Through Rate, and the amount of such Principal Liquidation Loss. The respective percentages of the Formula Principal Distribution Amount distributable to each Class of Certificates on each Distribution Date will not be affected by any Principal Liquidation Loss experienced by a Class of Certificates. Accordingly, even if a Class of Certificates has experienced a Principal Liquidation Loss, such Class will continue to be entitled to receive its respective percentage of the Formula Principal Distribution Amount (or, if the Amount Available in the Collection Account is insufficient to make such distribution, such Class will be entitled to receive the amount of such deficiency on subsequent Distribution Dates as an Unpaid Principal Shortfall).
On each Distribution Date, the Trustee will include with the distribution to each Certificateholder a statement (based on the information in the Servicer's Certificate), setting forth the following information for the related Monthly Period:
(i) the amount of the distribution allocable to interest for each Class;
(ii) the amount of the distribution allocable to principal for each
(iii) the Certificate Balance and the Pool Factor for each Class after giving effect to the amounts distributed in respect of principal on such
(iv) the Unpaid Principal Shortfall, if any, and the Principal Liquidation Loss, if any, for each Class; and
(v) the amount of the Monthly Servicing and Guaranty Fee paid to the Servicer with respect to such Monthly Period.
The amounts set forth pursuant to clauses (i) and (ii) above will be expressed as a dollar amount per $1,000 of original principal balance of a Certificate.
Unless and until Definitive Certificates are issued, such reports will be sent on behalf of the Trust to the Trustee and Cede & Co., as registered holder of the Certificates and the nominee of DTC. Certificate Owners may receive copies of such reports upon written request, together with a certification that they are Certificate Owners and payment of reproduction and postage expenses associated with the distribution of such reports, from the Trustee. See "Reports to Certificateholders" herein and "Reports to Securityholders" and "Certain Information Regarding the Securities--Statements to Securityholders" in the accompanying Prospectus.
Within the required period of time after the end of each calendar year, the Trustee will furnish to each person who at any time during such calendar year was a Certificateholder, a statement as to the aggregate amounts of interest and principal paid to such Certificateholder, information regarding the amount of servicing compensation received by the Servicer and such other information as the Seller deems necessary to enable such Certificateholder to prepare its tax returns. See "Certain Federal Income Tax Consequences" in the accompanying Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Dorsey & Whitney P.L.L.P., counsel to the Seller, will deliver its opinion that, assuming ongoing compliance with the terms of the Pooling and Servicing Agreement, the Trust will be classified as a grantor trust for federal income tax purposes and not as an association which is taxable as a corporation.
For further information regarding federal income tax consequences of investing in the Certificates, see "Certain Federal Income Tax Consequences-- Grantor Trust Series" in the Prospectus. Specifically, because the Certificates may constitute stripped bonds, within the meaning of the Code, potential investors should review the discussion under "Certain Federal Income Tax Consequences--GRANTOR TRUST SERIES--Stripped Certificates" in the Prospectus.
The following information supplements, and to the extent inconsistent therewith supersedes, the information in the Prospectus under "ERISA Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), imposes certain restrictions on employee benefit plans that are subject to ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans. Employee benefit plans that are governmental plans (as defined in section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are not subject to ERISA requirements. Accordingly, assets of such plans may be invested in the Class A Certificates without regard to the ERISA restrictions described above, subject to applicable provisions of other federal and state laws. However, any such governmental or church plan which is qualified under section 401(a) of the Code and exempt from taxation under section 501(a) of the Code is subject to the prohibited transaction rules set forth in section 503 of the Code.
The U.S. Department of Labor ("DOL") has granted substantially identical administrative exemptions to Lehman Brothers Inc. (Prohibited Transaction Exemption 91-14; Exemption Application No. D-7958, 56 Fed. Reg. 7413 (1991)) and to Morgan Stanley & Co. Incorporated (Prohibited Transaction Exemption 90- 24, Exemption Application No. D-8019, 55 Fed. Reg. 20548 (1990)) (collectively referred to as the "Exemption") from certain of the prohibited transaction rules of ERISA and the Code with respect to the initial purchase, the holding and the subsequent resale by Plans of certificates representing interests in asset-backed pass-through trusts that consist of certain receivables, loans and other obligations that meet the conditions and requirements of the Exemption. The receivables covered by the Exemption include consumer installment sales, contracts and installment loan agreements such as the Contracts. The Exemption will apply to the acquisition, holding, and resale of the Class A-1 Certificates by a Plan, provided that specified conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to the Class A-1 Certificates are the following:
(1) The acquisition of the Class A-1 Certificates by a Plan is on terms (including the price for the Class A-1 Certificates) that are at least as favorable to the Plan as they would be in an arm's-length transaction with
(2) The rights and interests evidenced by the Class A-1 Certificates acquired by the Plan are not subordinated to the rights and interests evidenced by other certificates of the Trust;
(3) The Class A-1 Certificates acquired by the Plan have received a rating at the time of such acquisition that is in one of the three highest generic rating categories from either Moody's, S&P, Fitch or Duff & Phelps
(4) The trustee of the Plan is not an affiliate of any member of the Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection with the distribution of the Class A-1 Certificates represents not more than reasonable compensation for underwriting the Class A-1 Certificates. The sum of all payments made to and retained by Green Tree pursuant to the sale of the Contracts to the Trust represents not more than the fair market value of such Contracts. The sum of all payments made to and retained by the Servicer represents not more than reasonable compensation for the Servicer's services under the Agreement and reimbursement of the Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A-1 Certificates is an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption would provide relief from certain self- dealing/conflict of interest prohibited transactions only if, among other requirements, (i) in the case of the acquisition of Class A-1 Certificates in connection with the initial issuance, at least fifty (50) percent of the Class A-1 Certificates are acquired by persons independent of the Restricted Group (as defined below), (ii) the Plan's investment in Class A-1 Certificates does not exceed twenty-five (25) percent of all of the Class A-1 Certificates outstanding at the time of the acquisition and (iii) immediately after the acquisition, no more than twenty-five (25) percent of the assets of the Plan are invested in certificates representing an interest in one or more trusts containing assets sold or serviced by the same entity. The Exemption does not apply to Plans sponsored by Green Tree, the Underwriters, the Trustee, the Servicer, any obligor with respect to Contracts included in the Trust
(5) percent of the aggregate unamortized principal balance of the assets in the Trust or any affiliate of such parties (the "Restricted Group").
Green Tree believes that the Exemption will apply to the acquisition and holding of Class A-1 Certificates sold by the Underwriters and by Plans and that all conditions of the Exemption other than those within the control of the investors have been met. In addition, as of the date hereof, no obligor with respect to Contracts included in the Trust constitutes more than five (5) percent of the aggregate unamortized principal balance of the assets of the Trust. Any Plan fiduciary who proposes to cause a Plan to purchase Class A Certificates should consult with its own counsel with respect to the potential consequences under ERISA and the Code of the Plan's acquisition and ownership of the Class A-1 Certificates. Assets of a Plan or individual retirement account should not be invested in the Class A-1 Certificates unless it is clear that the assets of the Trust will not be plan assets or unless it is clear that the Exemption or a prohibited transaction class exemption will apply and exempt all potential prohibited transactions. See "ERISA Considerations" in the Prospectus.
No transfer of Class A-2, Class A-3, Class A-4 or Class B Certificates will be permitted to be made to a Plan unless such Plan, at its expense, delivers to the Trustee and Green Tree an opinion of counsel (in form satisfactory to the Trustee and Green Tree) to the effect that the purchase or holding of a Class A-2, Class A-3, Class A-4 or Class B Certificate by such Plan will not result in the assets of the Trust being deemed to be "plan assets" and subject to the prohibited transaction provisions of ERISA and the Code and will not subject the Trustee, Green Tree or the Servicer to any obligation or liability in addition to those undertaken in the Agreement. Unless such opinion is delivered, each person acquiring a Class A-2, Class A-3, Class A-4 or Class B Certificate or any interest therein will be deemed to represent to the Trustee, Green Tree and the Servicer that such person is neither a Plan, nor acting on behalf of a Plan, subject to ERISA or to Section 4975 of the Code.
The Underwriters named below have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from Green Tree the respective principal amounts of Certificates set forth opposite their names below:
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the Certificates offered hereby, if any of such Certificates are purchased.
Green Tree has been advised by Lehman Brothers Inc., the Representative of the several Underwriters, that the Underwriters propose initially to offer the Certificates to the public at the public offering price set forth on the cover page of this Prospectus Supplement and to certain dealers at such price less a concession not in excess of % of the principal amount of the Class A-1 Certificates, % of the Class A-2 Certificates, % of the Class A-3 Certificates, % of the Class A-4 Certificates and % of the Class B Certificates, and that the Underwriters and such dealers may reallow a discount of not in excess of % of the principal amount of the Class A-1 Certificates, % of the Class A-2 Certificates, % of the Class A-3 Certificates, % of the Class A-4 Certificates and % of the Class B Certificates, to other dealers. The public offering price and the concession and discount to dealers may be changed by the Representative after the initial public offering of the Certificates offered hereby.
Green Tree has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended.
Green Tree does not intend to apply for listing of the Certificates on a national securities exchange, but has been advised by the Underwriters that the Underwriters currently intend to make a market in the Certificates, as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the Certificates and any such market may be discontinued at any time at the sole discretion of the Underwriters. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the Certificates.
Certain matters with respect to the legality of the Certificates and with respect to the federal income tax matters discussed under "Certain Federal Income Tax Consequences" will be passed upon for Green Tree by Dorsey & Whitney P.L.L.P., Minneapolis, Minnesota. The validity of the Certificates will be passed upon for the Underwriters by Brown & Wood, New York, New York.
+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 +
SUBJECT TO COMPLETION, DATED JANUARY 16, 1996
GREEN TREE RECREATIONAL, EQUIPMENT & CONSUMER TRUSTS
The Asset-Backed Certificates (the "Certificates") and the Asset-Backed Notes (the "Notes" and, collectively with the Certificates, the "Securities") described herein may be sold from time to time in one or more series, in amounts, at prices and on the terms to be determined at the time of sale and to be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Each series of Securities will include either one or more classes of Certificates or, if Notes are issued as part of a series, one or more classes of Notes and one or more classes of Certificates, as set forth in the related Prospectus Supplement.
The Certificates and the Notes, if any, of any series of Securities will be issued by a trust (a "Trust") to be formed with respect to such series by Green Tree Financial Corporation ("Green Tree"). The assets of each Trust (the "Trust Property") will include a pool of retail installment sales contracts and promissory notes (the "Contracts") for the purchase of a variety of consumer products, as further described under "Green Tree Financial Corporation" herein (collectively, the "Products"). The Trust Property will also include certain monies paid or payable under the Contracts after the Cutoff Date set forth in the related Prospectus Supplement (the "Cutoff Date"), an assignment of Green Tree's security interests in the Products financed thereby, and certain other property, as more fully described herein and in the related Prospectus Supplement. In addition, if so specified in the related Prospectus Supplement, the Trust Property will include monies on deposit in one or more trust accounts to be established with an Indenture Trustee, which may include a Pre-Funding Account which would be used to purchase additional Contracts (the "Subsequent Contracts") from the Seller from time to time during the Pre-Funding Period specified in the related Prospectus Supplement.
Each Trust will be formed pursuant to either (i) a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") to be entered into between Green Tree, as Seller and Servicer, and the Trustee specified in the related Prospectus Supplement (the "Trustee") or (ii) a Trust Agreement (the "Trust Agreement") to be entered into among the Seller, the Trustee and certain other parties as specified in the related Prospectus Supplement. If the Trust is formed pursuant to a Trust Agreement, a Sale and Servicing Agreement (the "Sale and Servicing Agreement") will be entered into among Green Tree, as Seller and Servicer and the Trustee. The Pooling and Servicing Agreement or the Trust Agreement and the Sale and Servicing Agreement are collectively referred to herein as the "Trust Documents." The Notes, if any, of a series will be issued and secured pursuant to an Indenture (the "Indenture") between the Trust and the Indenture Trustee specified in the related Prospectus Supplement (the "Indenture Trustee").
Except as otherwise provided in the related Prospectus Supplement, each class of Securities of any series will represent the right to receive a specified amount of payments of principal and interest on the related Contracts in the manner described herein and in the related Prospectus Supplement. The right of each class of Securities to receive payments may be senior or subordinate to the rights of one or more of the other classes of such series. A series may include two or more classes of Certificates or Notes which differ as to the timing and priority of payment, interest rate or amount of distributions in respect of principal or interest or both. A series may include one or more classes of Certificates or Notes entitled to distributions in respect of principal, with disproportionate, nominal or no interest distributions, or to interest distributions, with disproportionate, nominal or no distributions in respect of principal. Distributions on Certificates of any series will be subordinated in priority to payments due on the related Notes, if any, to the extent described herein and in the related Prospectus Supplement. The Certificates will represent fractional undivided interests in the related Trust.
Each class of Securities will represent the right to receive distributions or payments in the amounts, at the rates, and on the dates set forth in the related Prospectus Supplement. The rate of distributions in respect of principal on Certificates and payment in respect of principal on Notes, if any, of any class will depend on the priority of payment of such class and the rate and timing of payments (including prepayments, liquidations and repurchases of Contracts) on the related Contracts.
If specified in the related Prospectus Supplement, a financial guaranty insurance policy, letter of credit, surety bond, Green Tree guaranty, cash reserve fund, or other form of credit enhancement, or any combination thereof, may be provided with respect to a Trust or any class of Securities.
Unless otherwise provided in the related Prospectus Supplement, the Certificates and the Notes, if any, of any series initially will be represented by certificates and notes registered in the name of Cede & Co., the nominee of The Depository Trust Company ("DTC"). The interests of beneficial owners of the Securities will be represented by book entries on the records of the participating members of DTC. Definitive Securities will be available only under limited circumstances.
There currently is no secondary market for the Securities. There can be no assurance that any such market will develop or, if it does develop, that it will continue. The Securities will not be listed on any securities exchange.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" AT PAGE 11 HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
THE CERTIFICATES REPRESENT INTERESTS IN AND THE NOTES REPRESENT OBLIGATIONS OF THE RELATED TRUST AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF GREEN TREE (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT) OR ANY AFFILIATE OF GREEN TREE.
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.
Retain this Prospectus for future reference. This Prospectus may not be used to consummate sales of securities offered hereby unless accompanied by a Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS , 1996.
Green Tree, as originator of each Trust, has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (together with all amendments and exhibits thereto, referred to herein as the "Registration Statement") under the Securities Act of 1933, as amended, with respect to the Securities offered pursuant to this Prospectus. For further information, reference is made to the Registration Statement which is available for inspection without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission at Seven World Trade Center, Suite 1300, New York, New York 10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and copies of which may be obtained from the Commission at prescribed rates.
Unless otherwise provided in the related Prospectus Supplement, unless and until Definitive Certificates or Definitive Notes are issued, unaudited monthly and annual reports, containing information concerning each Trust and prepared by the Servicer, will be sent on behalf of the Trust to the Trustee for the Certificateholders, the Indenture Trustee for the Noteholders and Cede & Co., as registered holder of the Certificates and the Notes and the nominee of DTC. See "Certain Information Regarding the Securities--Statements to Securityholders" and "--Book-Entry Registration." Certificateholders and Noteholders are collectively referred to herein as the "Securityholders." Certificate Owners or Note Owners may receive such reports, upon written request, together with a certification that they are Certificate Owners or Note Owners and payment of reproduction and postage expenses associated with the distribution of such reports, from the Trustee, with respect to Certificate Owners, or the Indenture Trustee, with respect to Note Owners, at the addresses specified in the related Prospectus Supplement. Such reports will not constitute financial statements prepared in accordance with generally accepted accounting principles. Green Tree does not intend to send any of its financial reports to Securityholders. The Servicer, on behalf of each Trust, will file with the Commission periodic reports concerning each Trust to the extent required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder. However, in accordance with the Exchange Act and the rules and regulations of the Commission thereunder, Green Tree expects that each Trust's obligation to file such reports will be terminated following the end of the year in which such Trust is formed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1994, and Quarterly Reports on Form 10-Q for the periods ended March 31, June 30 and September 30, 1995, which have been filed with the Commission, are hereby incorporated by reference in this Prospectus and the related Prospectus Supplement.
All documents filed by the Servicer on behalf of each Trust pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the related Securities shall be deemed to be incorporated by reference into this Prospectus and the related Prospectus Supplement and to be a part hereof and thereof from the respective dates of filing of such documents. Any statement contained herein or in a document all or any portion of which is deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus and the related Prospectus Supplement to the extent that a statement contained herein or in any other subsequently filed document which also 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 Prospectus or the related Prospectus Supplement.
Green Tree will provide without charge to any person to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the foregoing documents incorporated herein by reference (other than certain exhibits to such documents). Requests for such copies should be directed to Chief Financial Officer, Green Tree Financial Corporation, 1100 Landmark Towers, 345 St. Peter Street, Saint Paul, Minnesota 55102-1639, telephone number (612) 293-3400.
The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus and by reference to the information with respect to the Securities contained in the related Prospectus Supplement to be prepared and delivered in connection with the offering of each series of Securities. Certain capitalized terms used in this Prospectus Summary are defined elsewhere in this Prospectus and in the related Prospectus Supplement.
CERTAIN LEGAL ASPECTS RELATING TO THE OWNERSHIP AND ENFORCEABILITY OF THE
With respect to each series of Securities, the transfer of the Contracts to the related Trust will be subject to the requirements of the Uniform Commercial Code (the "UCC") as in effect in Minnesota. The Seller will take or cause to be taken such action as is required to perfect the Trust's rights in the Contracts.
Unless otherwise provided in the related Prospectus Supplement, Green Tree will hold the Contract Files (as defined below) on behalf of each Trust. To facilitate servicing and save administrative costs, the documents will not be physically segregated from other similar documents that are in Green Tree's possession. UCC financing statements will be filed in Minnesota reflecting the sale and assignment of the Contracts to the Trustee, and Green Tree's accounting records and computer systems will also reflect such sale and assignment. In addition, the Contracts will be stamped or otherwise marked to indicate that such Contracts have been sold to the related Trust. Despite these precautions, if, through inadvertence or otherwise, any of the Contracts were sold to another party (or a security interest therein were granted to another party) that purchased (or took such security interest in) any of such Contracts in the ordinary course of its business and took possession of such Contracts, the purchaser (or secured party) would acquire an interest in the Contracts superior to the interest of the related Trust if the purchaser (or secured party) acquired (or took a security interest in) the Contracts for new value and without actual knowledge of such Trust's interest.
Due to the administrative burden and expense, the documents reflecting Green Tree's security interest in the Products will not be amended to reflect the assignment of the security interests in the Products by Green Tree to the Trustee. In the absence of such an amendment, the Trustee may not have a perfected security interest in the Products. Moreover, statutory liens for repairs or unpaid taxes may have priority even over perfected security interests in the Products. See "Description of the Trust Documents--Sale and Assignment of the Contracts" and "Certain Legal Aspects of the Contracts."
GREEN TREE'S EXPERIENCE WITH THE PRODUCTS
Green Tree began originating and servicing retail installment contracts for recreational vehicles in 1985 and for motorcycles in 1988 but has less extensive underwriting and servicing experience with the other types of products financed by Contracts that will be included in a Trust. Green Tree's extensive experience in originating and servicing consumer financing contracts for certain types of products, including manufactured housing, may not be directly applicable to the servicing of consumer financing contracts secured by other types of products.
RISKS TO INVESTORS UPON ANY INSOLVENCY OF GREEN TREE
Green Tree intends that any transfer of Contracts to the related Trust will constitute a sale, rather than a pledge of the Contracts to secure indebtedness of Green Tree. However, if Green Tree were to become a debtor under the federal bankruptcy code or similar applicable state laws (collectively, "Insolvency Laws"), a creditor or trustee in bankruptcy of Green Tree or Green Tree as debtor-in-possession might argue that such sale of Contracts by Green Tree was a pledge of the Contracts rather than a sale. This position, if presented to or accepted by a court, could cause the related Trust to experience a delay in or reduction of collections on the Contracts.
A case decided by the United States Court of Appeals for the Tenth Circuit, Octagon Gas Systems, Inc. v. Rimmer, contains language to the effect that accounts sold by an entity that subsequently became bankrupt remained property of the debtor's bankruptcy estate. Although the Contracts constitute chattel paper rather than accounts under the UCC, sales of chattel paper, like sales of accounts, are governed by Article 9 of the UCC. If Green Tree were to become a debtor under any Insolvency Law and a court were to follow the reasoning of the Tenth Circuit Court of Appeals and apply such reasoning to chattel paper, a Trust could experience a delay in or reduction of collections on the Contracts.
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES; LIMITED ASSETS
To the extent specified in the related Prospectus Supplement, distributions of interest and principal on some or all classes of Securities of a series may be subordinated in priority of payment to interest and principal due on the Notes (if any) of such series and/or to distributions of interest and principal on other classes of Securities of such series. In addition, holders of certain classes of Securities of any series may have the right to take actions that are detrimental to the interests of the holders of Securities of certain other classes of Securities of such series. For example, holders of a class of more senior Securities may be entitled to instruct the Indenture Trustee or Trustee to liquidate the Trust Property when it is not in the interest of holders of more junior classes of Securities of such series to do so. Conversely, certain actions may require the consent of a majority of Security Owners of all classes of a series, which may mean that Security Owners of more junior classes can prevent the Security Owners of more senior classes of such series from taking action. Moreover, no Trust will have any significant assets or sources of funds other than the Contracts and, to the extent provided in the related Prospectus Supplement, a Pre-Funding Account and any credit enhancement specified in the related Prospectus Supplement. The Notes, if any, of any series will represent obligations solely of, and the Certificates of such series will represent interests solely in, the related Trust, and, except as specified in the related Prospectus Supplement, neither the Notes nor the Certificates of any such series will be insured or guaranteed by Green Tree, the Servicer, the applicable Owner Trustee, the applicable Indenture Trustee or any other person or entity. Consequently, holders of the Securities of any series must rely for payment upon payments on the related Contracts and, if and to the extent available, amounts on deposit in the Pre-Funding Account, if any, and any credit enhancement, if any, as specified in the related Prospectus Supplement. If specified in the related Prospectus Supplement, credit enhancement for a class of Securities of a series may cover one or more other classes of Securities of such series, and accordingly may be exhausted for the benefit of some classes and thereafter be unavailable for such other classes.
The weighted average life of the Securities will be reduced by full or partial prepayments on the Contracts. The Contracts will generally be prepayable at any time without penalty. Prepayments (or, for this purpose, equivalent payments to the related Trust) may result from payments by Obligors, liquidations due to default, the receipt of proceeds from physical damage or credit insurance, repurchases by Green Tree as a result of certain uncured breaches of the warranties made by it with respect to the Contracts, purchases by the Servicer as a result of certain uncured breaches of the covenants with respect to the Contracts made by it in the related Agreement, or Green Tree or the Servicer exercising its option to purchase all of the remaining Contracts.
Unless otherwise specified in the related Prospectus Supplement, the amounts paid to Securityholders in respect of principal on any Distribution Date will include all prepayments on the Contracts during the corresponding Monthly Periods. The Certificate Owners and the Note Owners will bear all reinvestment risk resulting from the timing of payments of principal on the Securities.
LIMITED LIQUIDITY OF THE SECURITIES
There is currently no market for the Securities of any series. Although Green Tree expects that the underwriters of any particular series will intend to make a secondary market for such Securities, they will have no obligation to do so. There can be no assurance that any such market will develop or, if it does develop, that it will provide Certificate Owners or Note Owners with liquidity of investment or will continue for the life of the Securities. The Securities will not be listed on any securities exchange.
Unless otherwise specified in the related Prospectus Supplement, the Securities will be issued in book-entry, rather than physical, form and, as a result, in certain circumstances, the liquidity of the Securities in the secondary market and the ability of the Certificate Owners and Note Owners to pledge them may be adversely affected. See "Plan of Distribution" and "Certain Information Regarding the Securities--Book-Entry Registration."
With respect to each series of Securities, Green Tree will establish a Trust pursuant to the related Trust Documents. Prior to the sale and assignment of the related Contracts pursuant to the related Trust Documents, the Trust will have no assets or obligations. The Trust will not engage in any business activity other than acquiring and holding the Trust Property, issuing the Certificates and the Notes, if any, of such series and distributing payments thereon.
Each Certificate will represent a fractional undivided interest in, and each Note, if any, will represent an obligation of, the related Trust. The Trust Property of each Trust will include, among other things, (i) a Contract Pool; (ii) all monies paid or payable thereon on or after the Cutoff Date (as specified in the related Prospectus Supplement); (iii) such amounts as from time to time may be held in the Collection Account (including all investments in the Collection Account and all income from the investment of funds therein and all proceeds thereof) and certain other accounts (including the proceeds thereof); (iv) an assignment of the security interests of Green Tree in the Products securing the related Contracts; (v) an assignment of the right to receive proceeds from claims on certain insurance policies covering the related Products or Obligors; and (vi) certain other rights under the related Trust Documents. See "The Contracts" and "Description of the Trust Documents-- Collections." The Trust Property will also include, if so specified in the related Prospectus Supplement, monies on deposit in a Pre-Funding Account to be established with the Indenture Trustee or the Trustee, which will be used to purchase Subsequent Contracts from the Seller from time to time (and as frequently as daily) during the Pre-Funding Period specified in the related Prospectus Supplement. Any Subsequent Contracts so purchased will be included in the related Contract Pool forming part of the Trust Property, subject to the prior rights of the related Indenture Trustee and the Noteholders therein. In addition, to the extent specified in the related Prospectus Supplement, a form of credit enhancement may be issued to or held by the Trustee or the Indenture Trustee for the benefit of holders of one or more classes of Securities.
The Servicer will service the Contracts held by each Trust and will receive fees for such services. See "Description of the Trust Documents--Servicing Compensation." Unless otherwise specified in the related Prospectus Supplement, Green Tree, on behalf of each Trust, will hold the original installment sales contract or promissory note as well as copies of documents and instruments relating to each Contract and evidencing the security interest in the Product securing each Contract (the "Contract Files"). In order to protect the Trust's ownership interest in the Contracts, Green Tree will file a UCC-1 financing statement in Minnesota to give notice of such Trust's ownership of the related Contracts and the related Trust Property.
The Trustee for each Trust will be specified in the related Prospectus Supplement. The Trustee's liability in connection with the issuance and sale of the Securities of such series will be limited solely to the express obligations of such Trustee set forth in the related Trust Documents. A Trustee may resign at any time, in which event the General Partner (if the related Trust is structured as an owner trust) or the Servicer or its successor (if the related Trust is structured as a grantor trust) will be obligated to appoint a successor trustee. The General Partner (if the related Trust is structured as an owner trust) or the Servicer (if the related Trust is structured as a grantor trust) may also remove the Trustee if the Trustee ceases to be eligible to continue as Trustee under the related Trust Documents or if the Trustee becomes insolvent. In such circumstances, the General Partner (if the related Trust is structured as an owner trust) or the Servicer (if the related Trust is structured as a grantor trust) will be obligated to appoint a successor trustee. Any resignation or removal of a Trustee and appointment of a successor trustee will be subject to any conditions or approvals specified in the related Prospectus Supplement and will not become effective until acceptance of the appointment by the successor trustee.
Each pool of Contracts with respect to a Trust (a "Contract Pool") will consist of retail installment sales contracts and promissory notes (collectively, the "Contracts") to finance the purchase of Products (described below). The Contracts will be originated or purchased by Green Tree on an individual basis in the ordinary course of business. Except as otherwise specified in the related Prospectus Supplement, the Contracts will be fully amortizing and will bear interest at a fixed or variable rate (the "Contract Rate").
The Products financed by the Contracts included in a Contract Pool are expected to include all the types of consumer products Green Tree is then financing for retail customers (subject to the availability of such contracts and subject to any eligibility criteria specified in the Trust Documents). Currently, Green Tree provides financing for the purchase of motorcycles; marine products (including boats, boat trailers and outboard motors); pianos and organs; horse trailers; sport vehicles (including snowmobiles, personal watercraft and all-terrain vehicles); trucks; personal aircraft; and recreational vehicles. Any Trust whose Securities are offered pursuant to this Prospectus will include only Contracts secured by the foregoing types of Products. The types of Products securing a Contract Pool and the relative concentrations of each such type will be specified in the related Prospectus Supplement. Because Green Tree has less extensive experience in underwriting and servicing retail installment sales contracts for items such as the Products, Green Tree has no basis upon which to distinguish the expected delinquency, default or prepayment experience of Contracts secured by different types of Products.
Green Tree is a Delaware corporation that, as of September 30, 1995, had stockholders' equity of approximately $914,860,000. Through its various divisions, Green Tree purchases, pools, sells and services retail conditional sales contracts for manufactured housing and retail installment sales contracts for home improvements, a variety of consumer products and equipment finance, and provides credit to manufactured housing dealers for purposes of purchasing manufactured home inventory from manufacturers. Green Tree conducts its business throughout the United States through 50 manufactured housing offices, 80 home improvement locations and 3 regional wholesale lending centers, as well as centralized operations in St. Paul, Minnesota and Rapid City, South Dakota. Its principal executive offices are located at 1100 Landmark Towers, St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400). Green Tree's Annual Report on Form 10-K for the year ended December 31, 1994, most recent Proxy Statement and, when available subsequent quarterly and annual reports are available from Green Tree upon written request.
Green Tree arranges to purchase certain contracts originated by dealers of Products located throughout the United States ("Dealers"). Green Tree's personnel contact dealers and explain Green Tree's available financing plans, terms, prevailing rates and credit and financing policies. If the dealer wishes to utilize Green Tree's available customer financing, the dealer must make an application for dealer approval.
All contracts that Green Tree purchases are written on forms provided or approved by Green Tree and are purchased on an individually approved basis in accordance with Green Tree's guidelines. The dealer submits the customer's credit application and purchase order to Green Tree's office where an analysis of the creditworthiness of the proposed buyer is made. The analysis includes a review of the applicant's paying habits, length and likelihood of continued employment and certain other procedures. Green Tree's underwriting guidelines for consumer products focus primarily on the obligor's ability to repay the loan rather than the collateral value of the product financed. The maximum loan amount for an obligor will depend on a variety of factors, including the type of product, whether the product is new or used, the obligor's debt-to- income ratio, and the manufacturer's invoice price of the product (plus certain dealer-installed accessories, sales taxes, title fees, registration fees, and certain other items). For products other than airplanes and trucks, the maximum permissible debt-to-income ratio (based on the monthly loan payments) is between 55% and 65%, the maximum loan-to-invoice ratio (for new products) ranges from 100% to 125%, and the maximum loan-to-sales-price ratio (for used products) is typically 90% (subject to further limitation based on a standard assumed value for such a used product). Green Tree's underwriting guidelines for truck loans emphasize the trucking experience of the obligor and the projected operating revenues of the truck, rather than the obligor's current income, because the obligor's income as owner-operator of the truck is generally expected to be the source of funds to make payments on the contract and because Green Tree believes that the obligor's past trucking experience is success as an owner-operator of the truck. A loan for the purchase of an airplane is generally subject to limitations of a 45% debt-to-income ratio and a maximum loan amount of $10,000,000, although most airplane loans are not expected to exceed $200,000. Green Tree management may revise these guidelines from time to time, and the underwriting guidelines may be exceeded in certain cases with the approval of Green Tree management. Accordingly, some of the Contracts included in a Trust may not conform in all respects to the criteria described above. Green Tree will generally finance premiums for the term of the contract on optional credit life, accident and health and extended warranty insurance, up to 20% of the sales price of the Product, and may finance premiums for required physical damage insurance on the product. If the application meets Green Tree's guidelines and the credit is approved, Green Tree purchases the contract when the customer accepts delivery of the Product.
Currently, Green Tree's consumer finance and equipment finance divisions finance the purchase of motorcycles; marine products (including boats, boat trailers and outboard motors); pianos and organs; horse trailers; sport vehicles (including snowmobiles, personal watercraft and all-terrain vehicles); trucks; personal aircraft; and recreational vehicles. The Products financed by Contracts included in any Trust whose Securities are offered pursuant to this Prospectus will include only the products listed above.
Each Prospectus Supplement will include Green Tree's loss and delinquency experience with respect to its entire servicing portfolio of consumer product contracts. However, there can be no assurance that such experience will be indicative of the performance of the Contracts included in a particular Contract Pool.
Unless otherwise specified in the related Prospectus Supplement, many of the Contracts will be simple interest retail installment sales contracts and promissory notes. Payments on simple interest obligations are applied first to interest accrued through the payment date, and the remainder is applied to reduce the unpaid principal balance. Accordingly, if an Obligor pays an installment before its due date, the portion of the payment allocable to interest for the period will be less than if the payment had been made on the due date, the portion of the payment applied to reduce the principal balance will be correspondingly greater, and the principal balance will be amortized more rapidly than scheduled. Conversely, if an Obligor pays an installment after its due date, the portion of the payment allocable to interest will be greater than if the payment had been made on the due date, the portion of the payment applied to reduce the principal balance will be correspondingly less, and the principal balance will be amortized slower than scheduled, in which case a larger portion of the principal balance may be due on the final scheduled payment date. Any interest shortfalls resulting from early payment or prepayment of a Contract will be funded by collections on other Contracts or, to the extent collections are insufficient, by payments under the applicable form of credit enhancement, if any, described in the related Prospectus Supplement.
The Contracts will be prepayable, without premium or penalty, by Obligors at any time. Prepayments (or, for this purpose, equivalent payments to a Trust) also may result from liquidations due to default, receipt of proceeds from insurance policies, repurchases by Green Tree due to breach of a representation or warranty, or as a result of Green Tree or the Servicer exercising its option to purchase the Contract Pool. See "Description of the Trust Documents." The rate of prepayments on the Contracts may be influenced by a variety of economic, social and other factors. No assurance can be given that prepayments on the Contracts will conform to any estimated or actual historical experience, and no prediction can be made as to the actual prepayment rates which will be experienced on the Contracts. Certificateholders and Noteholders will bear all reinvestment risk resulting from the timing of payments of principal on the Certificates or the Notes, as the case may be.
The "Certificate Pool Factor" for each class of Certificates will be an eight-digit decimal which the Servicer will compute indicating the Certificate Balance with respect to such Certificates as of each Distribution Date (after giving effect to all distributions of principal made on such Distribution Date), as a fraction of the Original Principal Balance of such Certificates. The "Note Pool Factor" for each class of Notes, if any, will be an eight-digit decimal which the Servicer will compute indicating the remaining outstanding principal balance with respect to such Notes as of each Distribution Date (after giving effect to all distributions of principal on such Distribution Date) as a fraction of the initial outstanding principal balance of such class of Notes. Each Certificate Pool Factor and each Note Pool Factor will initially be 1.00000000; thereafter, the Certificate Pool Factor and the Note Pool Factor will decline to reflect reductions in the Certificate Balance of the applicable class of Certificates or reductions in the outstanding principal balance of the applicable class of Notes, as the case may be. The amount of a Certificateholder's pro rata share of the Certificate Balance for the related class of Certificates can be determined by multiplying the original denomination of the Certificateholder's Certificate by the then applicable Certificate Pool Factor. The amount of a Noteholder's pro rata share of the aggregate outstanding principal balance of the applicable class of Notes can be determined by multiplying the original denomination of such Noteholder's Note by the then applicable Note Pool Factor.
With respect to each Trust and pursuant to the related Trust Documents, on each Distribution Date or Payment Date, as the case may be, the related Certificateholders and Noteholders will receive periodic reports from the Trustee stating the Certificate Pool Factor or the Note Pool Factor, as the case may be, and containing various other items of information. Unless and until Definitive Certificates or Definitive Notes are issued, such reports will be sent on behalf of the Trust to the Trustee and the Indenture Trustee (if any) and Cede & Co., as registered holder of the Certificates and the Notes and the nominee of DTC. Certificate Owners and Note Owners may receive such reports, upon written request, together with a certification that they are Certificate Owners or Note Owners and payment of any expenses associated with the distribution of such reports, from the Trustee and the Indenture Trustee (if any) at the addresses specified in the related Prospectus Supplement. See "Certain Information Regarding the Securities--Statements to Securityholders."
Unless otherwise specified in the related Prospectus Supplement, the net proceeds to be received by the Trust from the sale of each series of Securities will be used to pay to Green Tree the purchase price for the Contracts and to make the deposit of the Pre-Funded Amount into the Pre- Funding Account, if any, to repay warehouse lenders and/or to provide for other forms of credit enhancement specified in the related Prospectus Supplement. The net proceeds to be received by Green Tree will be used to pay its warehouse loans, and any additional proceeds will be added to Green Tree's general funds and used for its general corporate purposes.
With respect to each Trust, one or more classes of Certificates of a given series will be issued pursuant to Trust Documents to be entered into between Green Tree, as Seller and as Servicer, and the Trustee, forms of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. The following summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the material provisions of the Trust Documents. Where particular provisions of or terms used in the Trust Documents are referred to, the actual provisions (including definitions of terms) are incorporated by reference as part of this summary.
Unless otherwise specified in the related Prospectus Supplement, each class of Certificates will initially be represented by a single Certificate registered in the name of the nominee of DTC (together with any successor depository selected by the Seller, the "Depository"). See "Certain Information
Entry Registration." Unless otherwise specified in the related Prospectus Supplement, the Certificates evidencing interests in a Trust will be available for purchase in denominations of $1,000 initial principal amount and integral multiples thereof, except that one Certificate evidencing an interest in such Trust may be issued in a denomination that is less than $1,000 initial principal amount. Certificates may be transferred or exchanged without the payment of any service charge other than any tax or governmental charge payable in connection with such transfer or exchange. Unless otherwise specified in the related Prospectus Supplement, the Owner Trustee will initially be designated as the registrar for the Certificates.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The timing and priority of distributions, seniority, allocations of loss, Pass-Through Rate and amount of or method of determining distributions with respect to principal and interest (or, where applicable, with respect to principal only or interest only) on the Certificates of any series will be described in the related Prospectus Supplement. Distributions of interest on the Certificates will be made on the dates specified in the related Prospectus Supplement (each, a "Distribution Date") and, unless otherwise specified in the related Prospectus Supplement, will be made prior to distributions with respect to principal. A series may include one or more classes of Stripped Certificates entitled to (i) distributions in respect of principal with disproportionate, nominal or no interest distribution, or (ii) interest distributions, with disproportionate, nominal or no distributions in respect of principal. Each class of Certificates may have a different Pass-Through Rate, which may be a fixed, variable or adjustable Pass-Through Rate (and which may be zero for certain classes of Stripped Certificates), or any combination of the foregoing. The related Prospectus Supplement will specify the Pass-Through Rate for each class of Certificate, or the initial Pass- Through Rate and the method for determining the Pass-Through Rate. Unless otherwise specified in the related Prospectus Supplement, interest on the Certificates will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Unless otherwise specified in the related Prospectus Supplement, distributions in respect of the Certificates will be subordinate to payments in respect of the Notes, if any, as more fully described in the related Prospectus Supplement. Distributions in respect of principal of any class of Certificates will be made on a pro rata basis among all of the Certificateholders of such class.
In the case of a series of Certificates which includes two or more classes of Certificates, the timing, sequential order, priority of payment or amount of distributions in respect of principal, and any schedule or formula or other provisions applicable to the determination thereof, of each such class shall be as set forth in the related Prospectus Supplement.
A series of Securities may include one or more classes of Notes issued pursuant to the terms of an Indenture, a form of which has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. Unless otherwise specified in the related Prospectus Supplement, no Notes will be issued as a part of any series. The following summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the Notes and the Indenture, and the following summary will be supplemented in whole or in part by the related Prospectus Supplement. Where particular provisions of or terms used in the Indenture are referred to, the actual provisions (including definition of terms) are incorporated by reference as part of this summary.
Unless otherwise specified in the related Prospectus Supplement, each class of Notes will initially be represented by a single Note registered in the name of the nominee of the Depository. See "Certain Information Regarding the Securities--Book-Entry Registration." Unless otherwise specified in the related Prospectus Supplement, Notes will be available for purchase in denominations of $1,000 and integral multiples thereof. Notes may be transferred or exchanged without the payment of any service charge other than any tax or governmental charge payable in connection with such transfer or exchange. Unless otherwise provided in the related Prospectus Supplement, the Indenture Trustee will initially be designated as the registrar for the Notes.
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of loss, Interest Rate and amount of or method of determining payments of principal and interest on the Notes will be described in the related Prospectus Supplement. The right of holders of any class of Notes to receive payments of principal and interest may be senior or subordinate to the rights of holders of any class or classes of Notes of such series, or any class of Certificates, as described in the related Prospectus Supplement. Unless otherwise provided in the related Prospectus Supplement, payments of interest on the Notes will be made prior to payments of principal thereon. A series may include one or more classes of Stripped Notes entitled to (i) principal payments with disproportionate, nominal or no interest payment, or (ii) interest payments with disproportionate, nominal or no principal payments. Each class of Notes may have a different Interest Rate, which may be a fixed, variable or adjustable Interest Rate (and which may be zero for certain classes of Stripped Notes), or any combination of the foregoing. The related Prospectus Supplement will specify the Interest Rate for each class of Notes, or the initial Interest Rate and the method for determining the Interest Rate. One or more classes of Notes of a series may be redeemable under the circumstances specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments in respect of interest to Noteholders of all classes within a series will have the same priority. Under certain circumstances, the amount available for such payments could be less than the amount of interest payable on the Notes on any of the dates specified for payments in the related Prospectus Supplement (each, a "Payment Date"), in which case each class of Noteholders will receive their ratable share (based upon the aggregate amount of interest due to such class of Noteholders) of the aggregate amount available to be distributed in respect of interest on the Notes.
In the case of a series of Securities which includes two or more classes of Notes, the sequential order and priority of payment in respect of principal and interest, and any schedule or formula or other provisions applicable to the determination thereof, of each such class will be set forth in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, payments in respect of principal and interest of any class of Notes will be made on a pro rata basis among all of the Notes of such class.
A form of Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. Green Tree will provide a copy of the applicable Indenture (without exhibits) upon request to a holder of Notes issued thereunder.
Modification of Indenture Without Noteholder Consent. Each Trust and related Indenture Trustee (on behalf of such Trust) may, without consent of the related Noteholders, enter into one or more supplemental indentures for any of the following purposes: (i) to correct or amplify the description of the collateral or add additional collateral; (ii) to provide for the assumption of the Note and the Indenture obligations by a permitted successor to the Trust; (iii) to add additional covenants for the benefit of the related Noteholders; (iv) to convey, transfer, assign, mortgage or pledge any property to or with the Indenture Trustee; (v) to cure any ambiguity or correct or supplement any provision in the Indenture or in any supplemental indenture; (vi) to provide for the acceptance of the appointment of a successor Indenture Trustee or to add to or change any of the provisions of the Indenture or any supplemental indenture which may be inconsistent with any other provision of the Indenture as shall be necessary and permitted to facilitate the administration by more than one trustee; (vii) to modify, eliminate or add to the provisions of the Indenture in order to comply with the Trust Indenture Act of 1939, as amended; and (viii) to add any provisions to, change in any manner, or eliminate any of the provisions of, the Indenture or modify in any manner the rights of Noteholders under such Indenture; provided that any action specified in this clause (viii) shall not, as evidenced by an opinion of counsel, adversely affect in any material respect the interests of any related Noteholder unless Noteholder consent is otherwise obtained as described below.
Modifications of Indenture With Noteholder Consent. With respect to each Trust, with the consent of the holders representing a majority of the principal balance of the outstanding related Notes (a "Note Majority"), the Owner Trustee and the Indenture Trustee may execute a supplemental indenture to add provisions, to change in any manner or eliminate any provisions of, the related Indenture, or modify in any manner the rights of the related Noteholders.
Without the consent of the holder of each outstanding related Note affected thereby, however, no supplemental indenture may: (i) change the due date of any installment of principal of or interest on any Note or reduce the principal amount thereof, the interest rate specified thereon or the redemption price with respect thereto or change the manner of calculating any such payment, any place of payment where, or the coin or currency in which any Note or any interest thereon is payable; (ii) impair the right to institute suit for the enforcement of certain provisions of the Indenture regarding payment; (iii) reduce the percentage of the aggregate amount of the outstanding Notes the consent of the holders of which is required for any such supplemental indenture or the consent of the holders of which is required for any waiver of compliance with certain provisions of the Indenture or of certain defaults thereunder and their consequences as provided for in the Indenture; (iv) modify or alter the provisions of the Indenture regarding the voting of Notes held by the related Trust, any other obligor on the Notes, the Seller or an affiliate of any of them; (v) reduce the percentage of the aggregate outstanding amount of the Notes the consent of the holders of which is required to direct the Indenture Trustee to sell or liquidate the Contracts if the proceeds of such sale would be insufficient to pay the principal amount and accrued but unpaid interest on the outstanding Notes; (vi) decrease the percentage of the aggregate principal amount of the Notes required to amend the sections of the Indenture which specify the applicable percentage of aggregate principal amount of the Notes necessary to amend the Indenture or certain other related agreements; or (vii) permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture with respect to any of the collateral for the Notes or, except as otherwise permitted or contemplated in the Indenture, terminate the lien of the Indenture on any such collateral or deprive the holder of any Note of the security afforded by the lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each Trust, unless otherwise specified in the related Prospectus Supplement, "Events of Default" under the Indenture will consist of: (i) a default for five days or more in the payment of any interest on any Note; (ii) a default in the payment of the principal of or any installment of the principal of any Note when the same becomes due and payable; (iii) a default in the observance or performance in any material respect of any covenant or agreement of the Trust made in the Indenture, or any representation or warranty made by the Trust in the Indenture or in any certificate delivered pursuant thereto or in connection therewith having been incorrect as of the time made, and the continuation of any such default or the failure to cure such breach of a representation or warranty for a period of 30 days after notice thereof is given to the Trust by the Indenture Trustee or to the Trust and the Indenture Trustee by the holders of at least 25% in principal amount of the Notes then outstanding; or (iv) certain events of bankruptcy, insolvency, receivership or liquidation of the Trust. However, the amount of principal due and payable on any class of Notes on any Payment Date (prior to the Final Scheduled Payment Date, if any, for such class) will generally be determined by amounts available to be deposited in the Note Distribution Account for such Payment Date. Therefore, unless otherwise specified in the related Prospectus Supplement, the failure to pay principal on a class of Notes generally will not result in the occurrence of an Event of Default unless such class of Notes has a Final Scheduled Payment Date, and then not until such Final Scheduled Payment Date for such class of Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event of Default should occur and be continuing with respect to the Notes of any series, the related Indenture Trustee or a Note Majority may declare the principal of the Notes to be immediately due and payable. Such declaration may, under certain circumstances, be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the Notes of any series have been declared due and payable following an Event of Default with respect thereto, the related Indenture Trustee may institute proceedings to collect amounts due or foreclose on Trust Property, exercise remedies as a secured party, sell the related Contracts or elect to have the Trust maintain possession of such Contracts and continue to apply collections on such Contracts as if there had been no declaration of acceleration. Unless otherwise specified in the related Prospectus Supplement, the Indenture Trustee, however, will be prohibited from selling the related Contracts following an Event of Default, unless (i) the holders of all the outstanding related Notes consent to such sale; (ii) the proceeds of such sale are sufficient to pay in full the principal of and the accrued interest on such outstanding Notes at the date of such sale; or (iii) the Indenture Trustee determines that the proceeds of the
Contracts would not be sufficient on an ongoing basis to make all payments on the Notes as such payments would have become due if such obligations had not been declared due and payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3% of the aggregate outstanding amount of the Notes. Unless otherwise specified in the related Prospectus Supplement, following a declaration upon an Event of Default that the Notes are immediately due and payable, (i) Note Owners will be entitled to ratable repayment of principal on the basis of their respective unpaid principal balances and (ii) repayment in full of the accrued interest on and unpaid principal balances of the Notes will be made prior to any further payment of interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of the Indenture Trustee, if an Event of Default occurs and is continuing with respect to a series of Notes, the Indenture Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders of such Notes, if the Indenture Trustee reasonably believes it will not be adequately indemnified against the costs, expenses and liabilities which might be incurred by it in complying with such request. Subject to the provisions for indemnification and certain limitations contained in the Indenture, a Note Majority in a series will have the right to direct the time, method and place of conducting any proceeding or any remedy available to the Indenture Trustee, and a Note Majority may, in certain cases, waive any default with respect thereto, except a default in the payment of principal or interest or a default in respect of a covenant or provision of the Indenture that cannot be modified without the waiver or consent of all of the holders of such outstanding Notes.
No holder of a Note of any series will have the right to institute any proceeding with respect to the related Indenture, unless (i) such holder previously has given to the Indenture Trustee written notice of a continuing Event of Default, (ii) the holders of not less than 25% in principal amount of the outstanding Notes of such series have made written request of the Indenture Trustee to institute such proceeding in its own name as Indenture Trustee, (iii) such holder or holders have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such proceeding, and (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 60-day period by the holders of a majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice of the Event of Default within 90 days after it occurs. Except in the case of a failure to pay principal of or interest on any Note, the Indenture Trustee may withhold the notice if and so long as it determines in good faith that withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by accepting the related Notes, will covenant that they will not at any time institute against the Seller or the related Trust any bankruptcy, reorganization or other proceeding under any federal or state bankruptcy or similar law.
Neither the Indenture Trustee nor the Trustee in its individual capacity, nor any holder of a Certificate including, without limitation, the Seller, nor any of their respective owners, beneficiaries, agents, officers, directors, employees, affiliates, successors or assigns will, in the absence of an express agreement to the contrary, be personally liable for the payment of the related Notes or for any agreement or covenant of the related Trust contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may not consolidate with or merge into any other entity, unless (i) the entity formed by or surviving such consolidation or merger is organized under the laws of the United States or any state, (ii) such entity expressly assumes the Trust's obligation to make due and punctual payments upon the Notes and the performance or observance of every agreement and covenant of the Trust under the Indenture, (iii) no Event of Default shall have occurred and be continuing immediately after such merger or consolidation, (iv) the Trustee has been advised that the then current rating of the related Notes or Certificates then in effect would not be reduced or withdrawn by the Rating Agencies as a result of such merger or consolidation, (v) the Trustee has received an opinion of counsel to the effect that such consolidation or merger would have no material adverse tax consequence to the Trust or to any related Note Owner or Certificate Owner.
Each Trust will not, among other things, (i) except as expressly permitted by the Indenture, the Trust Documents or certain related documents for such Trust (collectively, the "Related Documents"), sell, transfer, exchange or otherwise dispose of any of the assets of the Trust, (ii) claim any credit on or make any deduction from the principal and interest payable in respect of the related Notes (other than amounts withheld under the Code or applicable state law) or assert any claim against any present or former holder of such Notes because of the payment of taxes levied or assessed upon the Trust, (iii) dissolve or liquidate in whole or in part, (iv) permit the validity or effectiveness of the related Indenture to be impaired or permit any person to be released from any covenants or obligations with respect to the related Notes under such Indenture except as may be expressly permitted thereby, or (v) except as expressly permitted by the Related Documents, permit any lien, charge, excise, claim, security interest, mortgage or other encumbrance to be created on or extend to or otherwise arise upon or burden the assets of the Trust or any part thereof, or any interest therein or proceeds thereof.
No Trust may engage in any activity other than as specified under the section of the related Prospectus Supplement entitled "The Trust." No Trust will incur, assume or guarantee any indebtedness other than indebtedness incurred pursuant to the related Notes and the related Indenture or otherwise in accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually with the related Indenture Trustee a written statement as to the fulfillment of its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required to mail each year to all related Noteholders a brief report relating to its eligibility and qualification to continue as Indenture Trustee under the related Indenture, any amounts advanced by it under the Indenture, the amount, interest rate and maturity date of certain indebtedness owing by the Trust to the Indenture Trustee in its individual capacity, the property and funds physically held by the Indenture Trustee as such and any action taken by it that materially affects the Notes and that has not been previously reported. Note Owners may receive such reports upon written request, together with a certification that they are Note Owners and payment of reproduction and postage expenses associated with the distribution of such reports, from the Indenture Trustee at the address specified in the related Prospectus Supplement.
Satisfaction and Discharge of Indenture. The Indenture will be discharged with respect to the collateral securing the related Notes upon the delivery to the related Indenture Trustee for cancellation of all such Notes or, with certain limitations, upon deposit with the Indenture Trustee of funds sufficient for the payment in full of all of such Notes.
The Indenture Trustee for a series of Notes will be specified in the related Prospectus Supplement. The Indenture Trustee may resign at any time, in which event the Seller will be obligated to appoint a successor trustee. Green Tree may also remove the Indenture Trustee if the Indenture Trustee ceases to be eligible to continue as such under the Indenture or if the Indenture Trustee becomes insolvent. In such circumstances, Green Tree will be obligated to appoint a successor trustee. Any resignation or removal of the Indenture Trustee and appointment of a successor trustee will be subject to any conditions or approvals, if any, specified in the related Prospectus Supplement and will not become effective until acceptance of the appointment by a successor trustee.
CERTAIN INFORMATION REGARDING THE SECURITIES
Unless otherwise provided in the related Prospectus Supplement, the Securities of each series will be registered in the name of Cede & Co., the nominee of DTC. DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC accepts securities for deposit from its participating organizations ("Participants") and facilitates the clearance and settlement of securities transactions between Participants in such securities through electronic book-entry changes in accounts of Participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks and trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly ("indirect participants").
Certificate Owners and Note Owners who are not Participants but desire to purchase, sell or otherwise transfer ownership of Securities may do so only through Participants (unless and until Definitive Certificates or Definitive Notes, each as defined below, are issued). In addition, Certificate Owners and Note Owners will receive all distributions of principal of, and interest on, the Securities from the Trustee or the Indenture Trustee, as applicable, through DTC and Participants. Certificate Owners and Note Owners will not receive or be entitled to receive certificates representing their respective interests in the Securities, except under the limited circumstances described below and such other circumstances, if any, as may be specified in the related Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that the only Certificateholder of the Certificates and the only Noteholder of the Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and Note Owners will not be recognized by the Trustee as Certificateholders or by the Indenture Trustee as Noteholders as those terms are used in the related Trust Documents or Indenture. Certificate Owners and Note Owners will be permitted to exercise the rights of Certificateholders or Noteholders, as the case may be, only indirectly through Participants and DTC.
With respect to any series of Securities, while the Securities are outstanding (except under the circumstances described below), under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers among Participants on whose behalf it acts with respect to the Securities and is required to receive and transmit distributions of principal of, and interest on, the Securities. Participants with whom Certificate Owners or Note Owners have accounts with respect to Securities are similarly required to make book-entry transfers and receive and transmit such distributions on behalf of their respective Certificate Owners and Note Owners. Accordingly, although Certificate Owners and Note Owners will not possess Securities, the Rules provide a mechanism by which Certificate Owners and Note Owners will receive distributions and will be able to transfer their interests.
With respect to any series of Securities, unless otherwise specified in the related Prospectus Supplement, Certificates and Notes (if any) will be issued in registered form to Certificate Owners and Note Owners, or their nominees, rather than to DTC (such Certificates and Notes being referred to herein as "Definitive Certificates" and "Definitive Notes," respectively), only if (i) DTC, the Seller or the Servicer advises the Trustee or the Indenture Trustee, as the case may be, in writing that DTC is no longer willing or able to discharge properly its responsibilities as nominee and depository with respect to the Certificates or the Notes, and the Seller, the Servicer, the Trustee or the Indenture Trustee, as the case may be, is unable to locate a qualified successor, (ii) the Seller or the Administrator (if any) at its sole option has advised the Trustee or the Indenture Trustee, as the case may be, in writing that it elects to terminate the book-entry system through DTC and (iii) after the occurrence of a Servicer Termination Event, the holders representing a majority of the Certificate Balance (a "Certificate Majority") or a Note Majority advises the Trustee or the Indenture Trustee, as the case may be, through DTC, that continuation of a book-entry system is no longer in their best interests. Upon issuance of Definitive Certificates or Definitive Notes to Certificate Owners or Note Owners, such Certificates or Notes will be transferable directly (and not exclusively on a book-entry basis) and registered holders will deal directly with the Trustee or the Indenture Trustee, as the case may be, with respect to transfers, notices and distributions.
DTC has advised the Seller that, unless and until Definitive Certificates or Definitive Notes are issued, DTC will take any action permitted to be taken by a Certificateholder or a Noteholder under the related Trust
Documents or Indenture only at the direction of one or more Participants to whose DTC accounts the Certificates or Notes are credited. DTC has advised the Seller that DTC will take such action with respect to any fractional interest of the Certificates or the Notes only at the direction of and on behalf of such Participants beneficially owning a corresponding fractional interest of the Certificates or the Notes. DTC may take actions, at the direction of the related Participants, with respect to some Certificates or Notes which conflict with actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as physical certificates or notes may adversely affect the liquidity of Certificates or Notes in the secondary market and the ability of the Certificate Owners or Note Owners to pledge them. In addition, since distributions on the Certificates and the Notes will be made by the Trustee or the Indenture Trustee to DTC and DTC will credit such distributions to the accounts of its Participants, with the Participants further crediting such distributions to the accounts of indirect participants or Certificate Owners or Note Owners, Certificate Owners and Note Owners may experience delays in the receipt of such distributions.
On or prior to each Distribution Date, the Servicer will prepare and provide to the Trustee a statement to be delivered to the related Certificateholders on such Distribution Date. On or prior to each Distribution Date, the Servicer will prepare and provide to the Indenture Trustee a statement to be delivered to the related Noteholders on such Distribution Date. Such statements will be based on the information in the related Servicer's Certificate setting forth certain information required under the Trust Documents (the "Servicer's Certificate"). Unless otherwise specified in the related Prospectus Supplement, each such statement to be delivered to Certificateholders will include the following information as to the Certificates with respect to such Distribution Date or the period since the previous Distribution Date, as applicable, and each such statement to be delivered to Noteholders will include the following information as to the Notes with respect to such Distribution Date or the period since the previous Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with respect to each class of Securities;
(ii) the amount of the distribution allocable to principal on or with respect to each class of Securities;
(iii) the Certificate Balance and the Certificate Pool Factor for each class of Certificates and the aggregate outstanding principal balance and the Note Pool Factor for each class of Notes, after giving effect to all payments reported under (ii) above on such date;
(iv) the amount of the Servicing Fee paid to the Servicer with respect to the related Monthly Period or Periods, as the case may be;
(v) the Pass-Through Rate or Interest Rate for the next period for any class of Certificates or Notes with variable or adjustable rates;
(vi) the amount, if any, distributed to Certificateholders and Noteholders applicable to payments under the related form of credit
(vii) such other information as may be specified in the related Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi) with respect to Certificates or Notes will be expressed as a dollar amount per $1,000 of the initial Certificate Balance or the initial principal balance of the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued, such reports with respect to a series of Securities will be sent on behalf of the related Trust to the Trustee, the Indenture Trustee and Cede & Co., as registered holder of the Certificates and the Notes and the nominee of DTC. Certificate Owners and Note Owners may receive copies of such reports upon written request, together with a certification that they are Certificate
Owners or Note Owners, as the case may be, and payment of reproduction and postage expenses associated with the distribution of such reports, from the Trustee or the Indenture Trustee, as applicable. See "Reports to Securityholders" and "--Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the end of each calendar year during the term of a Trust, the Trustee and the Indenture Trustee, as applicable, will mail to each holder of a class of Securities who at any time during such calendar year has been a Securityholder, and received any payment thereon, a statement containing certain information for the purposes of such Securityholder's preparation of federal income tax returns. DTC will convey such information to its Participants, who in turn will convey such information to their related indirect participants in accordance with arrangements among DTC and such participants. Certificate Owners and Note Owners may receive such reports upon written request, together with a certification that they are Certificate Owners or Note Owners and payment of reproduction and postage expenses associated with the distribution of such information, from the Trustee, with respect to Certificate Owners, or from the Indenture Trustee, with respect to Note Owners, at the addresses specified in the related Prospectus Supplement. See "Certain Federal Income Tax Consequences."
Unless otherwise provided in the related Prospectus Supplement, with respect to each series of Certificates, at such time, if any, as Definitive Certificates have been issued, the Trustee will, upon written request by three or more Certificateholders or one or more holders of Certificates evidencing not less than 25% of the Certificate Balance, within five Business Days after provision to the Trustee of a statement of the applicants' desire to communicate with other Certificateholders about their rights under the related Trust Documents or the Certificates and a copy of the communication that the applicants propose to transmit, afford such Certificateholders access during business hours to the current list of Certificateholders for purposes of communicating with other Certificateholders with respect to their rights under the Trust Documents. Unless otherwise specified in the related Prospectus Supplement, the Trust Documents will not provide for holding any annual or other meetings of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, with respect to each series of Notes, if any, at such time, if any, as Definitive Notes have been issued, the Indenture Trustee will, upon written request by three or more Noteholders or one or more holders of Notes evidencing not less than 25% of the aggregate principal balance of the related Notes, within five Business Days after provision to the Indenture Trustee of a statement of the applicants' desire to communicate with other Noteholders about their rights under the related Indenture or the Notes and a copy of the communication that the applicants propose to transmit, afford such Noteholders access during business hours to the current list of Noteholders for purposes of communicating with other Noteholders with respect to their rights under the Indenture. Unless otherwise specified in the related Prospectus Supplement, the Indenture will not provide for holding any annual or other meetings of Noteholders.
DESCRIPTION OF THE TRUST DOCUMENTS
Except as otherwise specified in the related Prospectus Supplement, the following summary describes certain terms of either (i) the Pooling and Servicing Agreements or (ii) the Sale and Servicing Agreements and the Trust Agreements (in either case collectively referred to as the "Trust Documents") pursuant to which Green Tree will sell and assign such Contracts to a Trust and the Servicer will agree to service such Contracts on behalf of the Trust, and pursuant to which such Trust will be created and Certificates will be issued. Forms of the Trust Documents have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. Green Tree will provide a copy of such agreements (without exhibits) upon request to a holder of Securities described therein. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the Trust Documents. Where particular provisions or terms used in the Trust Documents are referred to, the actual provisions (including definitions of terms) are incorporated by reference as part of such summary.
SALE AND ASSIGNMENT OF THE CONTRACTS
On the Closing Date, Green Tree will sell and assign to the Trustee, without recourse, Green Tree's entire interest in the related Contracts and the proceeds thereof, including its security interests in the related Products. Each Contract transferred by Green Tree to the Trust will be identified in a schedule appearing as an exhibit to the related Trust Documents (the "Schedule of Contracts"). Concurrently with such sale and assignment, the Trustee will execute and deliver the related certificates representing the Certificates to or upon the order of the Seller, and the Trustee will execute and the Indenture Trustee will authenticate and deliver the Notes, if any, to or upon the order of the Seller.
Except as otherwise specified in the related Prospectus Supplement, Green Tree will make certain warranties in the Trust Documents with respect to each Contract as of the Closing Date, including that: (a) as of the Cutoff Date, the most recent scheduled payment was made or was not delinquent more than 59 days; (b) no provision of a Contract has been waived, altered or modified in any respect, except by instruments or documents contained in the Contract file; (c) each Contract is a legal, valid and binding obligation of the Obligor and is enforceable in accordance with its terms (except as may be limited by laws affecting creditors' rights generally); (d) no Contract is subject to any right of rescission, set-off, counterclaim or defense; (e) for Contracts with an original balance greater than $7,500, the related Product is covered by insurance naming Green Tree as an additional insured party; (f) each Contract has been originated by a dealer or Green Tree in the ordinary course of such dealer's or Green Tree's business and, if originated by a dealer, was purchased by Green Tree in the ordinary course of business; (g) no Contract was originated in or is subject to the laws of any jurisdiction whose laws would make the transfer of the Contract or an interest therein to the Trustee pursuant to the Trust Documents or pursuant to the Notes or Certificates unlawful; (h) each Contract complies with all requirements of law; (i) no Contract has been satisfied, subordinated in whole or in part or rescinded and the Product securing the Contract has not been released from the lien of the Contract in whole or in part; (j) each Contract creates a valid and enforceable first priority security interest in favor of Green Tree in the Product covered thereby and such security interest has been assigned by Green Tree to the Trustee; (k) all parties to each Contract had capacity to execute such Contract; (l) no Contract has been sold, assigned or pledged to any other person and prior to the transfer of the Contracts by Green Tree to the Trustee, Green Tree had good and marketable title to each Contract free and clear of any encumbrance, equity, loan, pledge, charge, claim or security interest, and was the sole owner and had full right to transfer such Contract to the Trustee; (m) as of the Cutoff Date, there was no default, breach, violation or event permitting acceleration under any Contract (except for payment delinquencies permitted by clause (a) above), no event which with notice and the expiration of any grace or cure period would constitute a default, breach, violation or event permitting acceleration under such Contract, and Green Tree has not waived any of the foregoing; (n) as of the Closing Date there were, to the best of Green Tree's knowledge, no liens or claims which have been filed for work, labor or materials affecting the Product securing a Contract, which are or may be liens prior or equal to the lien of the Contract; (o) each Contract is a fully-amortizing loan with a fixed Contract Rate and provides for level payments over the term of such Contract; (p) each Contract contains customary and enforceable provisions such as to render the rights and remedies of the Holder thereof adequate for realization against the collateral of the benefits of the security; (q) the description of each Contract set forth in the list delivered to the Trustee is true and correct; and (r) there is only one original of each Contract (other than the copy in the possession of the Obligor).
The warranties of Green Tree will be made as of the execution and delivery of the related Trust Documents and will survive the sale, transfer and assignment of the related Contracts and other Trust Property to the Trust but will speak only as of the date made.
Green Tree will be obligated to repurchase for the Repurchase Price (as defined below) any Contract on the first business day after the first Determination Date which is more than 90 days after Green Tree becomes aware, or should have become aware, or Green Tree's receipt of written notice from the Trustee or the Servicer, of a breach of any representation or warranty of Green Tree in the Trust Documents that materially adversely affects the Trust's interest in any Contract if such breach has not been cured. The Repurchase Price for any Contract will be the remaining principal amount outstanding on such Contract on the date of repurchase plus accrued and unpaid interest thereon at its Contract Rate to the date of such repurchase. This repurchase obligation constitutes the sole remedy available to the Trust and the Securityholders for a breach of a warranty under the Trust Documents with respect to the Contracts (but not with respect to any other breach by Green Tree of its obligations under the Trust Documents).
Upon the purchase by Green Tree of a Contract due to a breach of a representation or warranty, the Trustee will convey such Contract and the related Trust Property to Green Tree.
Unless otherwise specified in the related Prospectus Supplement, Green Tree initially will be appointed to act as custodian for the Contract Files of each Trust. Prior to the appointment of any custodian other than Green Tree, the Trust and such institution specified in the related Prospectus Supplement shall enter into a custodian agreement pursuant to which such institution will agree to hold the Contract Files on behalf of the related Trust. Any such custodian agreement may be terminated by the Trust on 30 days' notice to such institution.
To facilitate servicing and save administrative costs, the documents will not be physically segregated from other similar documents that are in Green Tree's possession. UCC financing statements will be filed in Minnesota reflecting the sale and assignment of the Contracts to the Trustee, and Green Tree's accounting records and computer systems will also reflect such sale and assignment. In addition, the Contracts will be stamped or otherwise marked to indicate that such Contracts have been sold to the related Trust. Despite these precautions, if, through inadvertence or otherwise, any of the Contracts were sold to another party (or a security interest therein were granted to another party) that purchased (or took such security interest in) any of such Contracts in the ordinary course of its business and took possession of such Contracts, the purchaser (or secured party) would acquire an interest in the Contracts superior to the interest of the related Trust if the purchaser (or secured party) acquired (or took a security interest in) the Contracts for new value and without actual knowledge of such Trust's interest. See "Certain Legal Aspects of the Contracts--Rights in the Contracts."
With respect to each Trust, the Servicer will establish one or more Collection Accounts in the name of the Trustee or, in the case of any series including one or more classes of Notes, in the name of the Indenture Trustee for the benefit of the related Securityholders. If so specified in the related Prospectus Supplement, the Trustee will establish and maintain for each series an account, in the name of the Trustee on behalf of the related Certificateholders, in which amounts released from the Collection Account and any Pre-Funding Account and any amounts received from any source of credit enhancement for distribution to such Certificateholders will be deposited and from which all distributions to such Certificateholders will be made (the "Certificate Distribution Account"). With respect to any series including one or more classes of Notes, the Indenture Trustee will establish and maintain for each series an account, in the name of the Indenture Trustee on behalf of the related Noteholders, in which amounts released from the Collection Account and any Pre-Funding Account and any amounts received from any source of credit enhancement for payment to such Noteholders will be deposited and from which all distributions to such Noteholders will be made (the "Note Distribution Account"). The Collection Account, the Certificate Distribution Account (if any), and the Note Distribution Account (if any), are referred to herein collectively as the "Designated Accounts." Any other accounts to be established with respect to a Trust will be described in the related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with the Trustee, the Indenture Trustee and/or other depository institutions. "Eligible Account" means any account which is (i) an account maintained with an Eligible Institution (as defined below); (ii) an account or accounts the deposits in which are fully insured by either the Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC; (iii) a "segregated trust account" maintained with the corporate trust department of a federal or state chartered or trust company with trust powers and acting in its fiduciary capacity for the benefit of the Trustee, which depository institution or trust company has capital and surplus (or, if such depository institution or trust company is a subsidiary of a bank holding company system, the capital and surplus of the bank holding company) of not less than $50,000,000 and the securities of such depository institution (or, if such depository institution is a subsidiary of a bank holding company system and such depository institution's securities are not rated, the securities of the bank holding company) has a credit rating from each rating agency rating such series of Notes and/or Certificates (a "Rating Agency") in one of its generic credit rating categories which signifies investment grade; or (iv) an account that will not cause any Rating Agency to downgrade or withdraw its then-current rating assigned to the Certificates, as confirmed in writing by each Rating Agency. "Eligible Institution" means any depository institution organized under the laws of the United States or any state, the deposits of which are insured to the full extent permitted by law by the Bank Insurance Fund (currently administered by the Federal Deposit Insurance Corporation), whose short-term deposits have been rated in one of the two highest rating categories or such other rating category as will not adversely affect the ratings assigned to the Notes and/or Certificates of such series. On the Closing Date specified in the related Prospectus Supplement, the Servicer will cause to be deposited in the Collection Account all payments on the Contracts received by the Servicer after the Cutoff Date and on or prior to the second Business Day preceding the Closing Date.
The Servicer will deposit all payments on the Contracts held by any Trust received directly by the Servicer from Obligors and all proceeds of Contracts collected directly by the Servicer during each Monthly Period into the Collection Account no later than one Business Day after receipt. Notwithstanding the foregoing and unless otherwise provided in the related Prospectus Supplement, the Servicer may utilize an alternative remittance schedule, if the Servicer provides to the Trustee and the Indenture Trustee written confirmation from each Rating Agency that such alternative remittance schedule will not result in the downgrading or withdrawal by such Rating Agency of the rating(s) then assigned to the Securities. Green Tree will also deposit into the Collection Account on or before the Deposit Date the Purchase Amount of each Contract to be purchased by it for breach of a representation or warranty.
For any series of Securities, funds in the Designated Accounts and any other accounts identified in the related Prospectus Supplement will be invested, as provided in the related Trust Documents, at the direction of the Servicer in United States government securities and certain other high-quality investments meeting the criteria specified in the related Trust Documents ("Eligible Investments"). Eligible Investments shall mature no later than the Business Day preceding the applicable Distribution Date for the Monthly Period to which such amounts relate. Investments in Eligible Investments will be made in the name of the Trustee or the Indenture Trustee, as the case may be, and such investments will not be sold or disposed of prior to their maturity.
Unless otherwise specified in the related Prospectus Supplement, collections or recoveries on a Contract (other than late fees or certain other similar fees or charges) received during a Monthly Period and Purchase Amounts deposited with the Trustee prior to a Distribution Date will be applied first to any outstanding Monthly Advances made by the Servicer with respect to such Contract, and then to interest and principal on the Contract in accordance with the terms of the Contract.
The Servicer will make reasonable efforts, consistent with the customary servicing procedures employed by the Servicer with respect to Contracts owned or serviced by it, to collect all payments due with respect to the Contracts held by any Trust and, in a manner consistent with the Trust Documents, will follow its customary collection procedures with respect to secured consumer loans that it services for itself and others.
Under the Trust Documents, the Servicer will be required to use its best efforts to repossess or otherwise comparably convert the ownership of any Product securing a Contract with respect to which the Servicer has determined that payments thereunder are not likely to be resumed as soon as practicable after default on such Contract. The Servicer is authorized to follow such of its normal collection practices and procedures as it deems necessary or advisable to realize upon any Contract. The Servicer may repossess and sell the Product securing such Contract at judicial sale, or take any other action permitted by applicable law. See "Certain Legal Aspects of the Contracts." The Servicer will be entitled to recover all reasonable expenses incurred by it in connection therewith. The proceeds of such realization (net of such expenses) will be deposited in the Collection Account at the time and in the manner described above under "--Collections."
The Trust Documents will provide that the Servicer will indemnify and defend the Trustee, the Indenture Trustee, the Trust and the Securityholders against, among other things, any and all costs, expenses, losses, damages, claims and liabilities, including reasonable fees and expenses of counsel and expenses of litigation, or in respect of any action taken or failed to be taken by the Servicer with respect to any portion of the Trust Property in violation of the provisions of the Trust Documents. The Servicer's obligations to indemnify the Trustee, the Indenture Trustee, the Trust and the Securityholders for the Servicer's actions or omissions will survive the removal of the Servicer but will not apply to any action or omission of a successor Servicer.
Unless otherwise specified in the related Prospectus Supplement, with respect to each series of Securities, the Servicer will be entitled to receive the Servicing Fee for each Monthly Period in an amount equal to the product of one-twelfth of the Servicing Rate and the Aggregate Principal Balance as of the first day of such Monthly Period. The Servicer also will be entitled to collect and retain any late fees or other administrative fees or similar charges allowed by the terms of the Contracts or applicable law. Unless otherwise provided in the related Prospectus Supplement, the "Servicing Rate" will equal .75% per annum calculated on the basis of a 360-day year consisting of twelve 30-day months. As long as Green Tree is the Servicer, the Servicing Fee and any additional servicing compensation will be paid out of collections on or with respect to the Contracts after the required distributions to Noteholders and Certificateholders. If Green Tree is no longer the Servicer, the Servicing Fee and any additional servicing compensation will be paid out of collections on or with respect to the Contracts prior to distributions to Certificateholders and Noteholders. Unless otherwise specified in the related Prospectus Supplement, a "Monthly Period" with respect to any Distribution Date is the calendar month immediately preceding the month in which the Distribution Date occurs.
Green Tree, as Servicer, will be required to pay all expenses incurred by it in connection with its servicing activities (including fees, expenses and disbursements of the Trustee, the Indenture Trustee, the Custodian and independent accountants, taxes imposed on the Servicer and expenses incurred in connection with distributions and reports to Certificateholders and Noteholders), except certain expenses incurred in connection with realizing upon the Contracts.
With respect to each Trust, beginning on the Distribution Date specified in the related Prospectus Supplement, distributions of principal and interest (or, where applicable, of principal or interest only) on each class of Securities entitled thereto will be made by the Trustee or the Indenture Trustee, as applicable, to the Certificateholders and the Noteholders. The timing, calculation, allocation, order, source, priorities of and requirements for all distributions to each class of Certificateholders and all payments to each class of Noteholders will be set forth in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, on the third Business Day prior to each Distribution Date (the "Determination Date"), the Servicer will determine the Amount Available and the amounts to be distributed on the Notes and Certificates for such Distribution Date. Except as otherwise specified in the related Prospectus Supplement, the "Amount Available" for any Distribution Date will be equal to (i) the funds on deposit in the Collection Account at the close of business on the last day of the related Monthly Period, plus (ii) any Advances to be made by the Servicer with respect to delinquent payments, plus (iii) any Repurchase Amounts to be deposited by Green Tree with respect to Contracts to be repurchased due to a representation or warranty, minus (iv) any amounts paid by Obligors in the related Monthly Period, but to be applied in respect of a regular monthly payment due in a subsequent Monthly Period (an "Advance Payment"), minus (v) any amounts incorrectly deposited in the Collection Account.
Except as otherwise specified in the related Prospectus Supplement, on each Distribution Date, prior to making distributions in respect of the Notes and Certificates, the Amount Available will be applied, first, if Green Tree is no longer the Servicer, to pay the servicing fee to the successor Servicer, and second, to reimburse the Servicer (including Green Tree) for any Advances made with respect to a prior Monthly Period and subsequently recovered and for any Advances previously made that the Servicer has determined are Uncollectible Advances.
The amounts and types of enhancement arrangements and the provider thereof, if applicable, with respect to each class of Securities will be set forth in the related Prospectus Supplement. If and to the extent provided in the related Prospectus Supplement, enhancement may be in the form of a financial guaranty insurance policy, letter of credit, Green Tree guaranty, cash reserve fund, derivative product, or other form of enhancement, or any combination thereof, as may be described in the related Prospectus Supplement. If specified in the applicable Prospectus Supplement, enhancement for a class of Securities of a Series may cover one or more other classes of Securities in such Series, and accordingly may be exhausted for the benefit of a particular class and thereafter be unavailable to such other classes. Further information regarding any provider of enhancement, including financial information when material, will be included in the related Prospectus Supplement.
The presence of enhancement may be intended to enhance the likelihood of receipt by the Certificateholders and the Noteholders of the full amount of principal and interest due thereon and to decrease the likelihood that the Certificateholders and the Noteholders will experience losses, or may be structured to provide protection against changes in interest rates or against other risks, to the extent and under the conditions specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, the enhancement for a class of Securities will not provide protection against all risks of loss and will not guarantee repayment of the entire principal and interest thereon. If losses occur which exceed the amount covered by any enhancement or which are not covered by any enhancement, Securityholders will bear their allocable share of deficiencies. In addition, if a form of enhancement covers more than one class of Securities of a Series, Securityholders of any such class will be subject to the risk that such enhancement will be exhausted by the claims of Securityholders of other classes.
Unless otherwise specified in the related Prospectus Supplement, the Servicer will be obligated to make Advances each month of any scheduled payments on the Contracts included in a Trust that were due but not received during the prior Monthly Period. The Servicer will be entitled to reimbursement of an Advance from Available Funds in the Collection Account for the related Trust. The Servicer will be obligated to make an Advance only to the extent that it determines that such Advance will be recoverable from subsequent funds available therefor in the Collection Account for the related Trust.
On or before May 1 of each year the Servicer will deliver to each Trustee and each Indenture Trustee a report of a nationally recognized accounting firm stating that such firm has examined certain documents and records relating to the servicing of secured consumer contracts serviced by the Servicer under pooling and servicing agreements or sale and servicing agreements similar to the Trust Documents and stating that, on the basis of such procedures, such servicing has been conducted in compliance with the applicable Trust Documents, except for any exceptions set forth in such report. A copy of such statement may be obtained by any Certificate Owner or Note Owner upon compliance with the requirements described above. See "Certain Information Regarding the Securities--Statements to Securityholders" above.
CERTAIN MATTERS REGARDING THE SERVICER
Unless otherwise provided in the related Prospectus Supplement, Green Tree's appointment as Servicer under the related Trust Documents will continue until such time as it resigns or is terminated as Servicer, or until such time, if any, as a Servicer Termination Event shall have occurred under the related Trust Documents. The related Trust Documents will provide that the Servicer may not resign from its obligations and duties as Servicer thereunder, except upon a determination (as evidenced by an opinion of independent counsel, delivered and acceptable to the Trustee and the Indenture Trustee), that by reason of a change in legal requirements its performance of such duties would cause it to be in violation of such legal requirements in a manner which would result in a material adverse effect on the Servicer. No such resignation will become effective until a successor Servicer has assumed the servicing obligations and duties under the related Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, any corporation or other entity into which the Servicer may be merged or consolidated, resulting from any merger or consolidation to which the Servicer is a party, which acquires by conveyance, transfer or lease substantially all of the assets of the Servicer or succeeds to all or substantially all the business of the Servicer, where the Servicer is not the surviving entity, which corporation or other entity assumes every obligation of the Servicer under each Trust Document, will be the successor to the Servicer under the related Trust Documents; provided, however, that (i) such entity is an Eligible Servicer, and (ii) immediately after giving effect to such transaction, no Servicer Termination Event and no event which, after notice or lapse of time, or both, would become a Servicer Termination Event shall have occurred and be continuing.
INDEMNIFICATION AND LIMITS ON LIABILITY
Unless otherwise specified in the related Prospectus Supplement, the Trust Documents will provide that the Servicer will be liable only to the extent of the obligations specifically undertaken by it under the Trust Documents and will have no other obligations or liabilities thereunder. The Trust Documents will further provide that neither the Servicer nor any of its directors, officers, employees and agents will have any liability to the Trust, the Certificateholders or the Noteholders, except as provided in the Trust Documents, for any action taken or for refraining from taking any action pursuant to the Trust Documents, other than any liability that would otherwise be imposed by reason of the Servicer's breach of the Trust Documents or willful misfeasance, bad faith or negligence (including errors in judgment) in the performance of its duties, or by reason of reckless disregard of obligations and duties under the Trust Documents or any violation of law.
The Servicer may, with the prior consent of the Trustee and the Indenture Trustee, if any, delegate duties under the related Trust Documents to any of its affiliates. In addition, the Servicer may at any time perform the specific duty of repossessing Products through subcontractors who are in the business of servicing consumer receivables. The Servicer may also perform other specific duties through subcontractors; provided, however, that no such delegation of such duties by the Servicer shall relieve the Servicer of its responsibility with respect thereto.
Except as otherwise specified in the related Prospectus Supplement, Servicer Termination Events under the Trust Documents will include (i) any failure by the Servicer to deliver to the Indenture Trustee for distribution to the Noteholders or to the Trustee for distribution to the Certificateholders any required payment which continues unremedied for 5 days (or such other period specified in the related Prospectus Supplement) after the giving of written notice; (ii) any failure by the Servicer duly to observe or perform in any material respect any other of its covenants or agreements in the Trust Documents that materially and adversely affects the interests of Securityholders, which, in either case, continues unremedied for 30 days after the giving of written notice of such failure of breach; (iii) any assignment or delegation by the Servicer of its duties or rights under the Trust Documents, except as specifically permitted under the Trust Documents, or any attempt to make such an assignment or delegation; (iv) certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings regarding the Servicer; and (v) the Servicer is no longer an eligible Servicer (as defined in the Trust Documents). Notice as used herein shall mean notice to the Servicer by the Trustee or Green
Tree, or to Green Tree, the Servicer, if any, and the Trustee by the holders of Securities representing interests aggregating not less than 25% of the outstanding principal balance of the Securities issued by such Trust.
Unless otherwise specified in the related Prospectus Supplement, if a Servicer Termination Event occurs and is continuing, the Trustee, the Indenture Trustee (if any), or the holders of at least 25% in aggregate principal balance of the outstanding Securities issued by such Trust, by notice then given in writing to the Servicer (and to the Trustee and the Indenture Trustee if given by the Securityholders) may terminate all of the rights and obligations of the Servicer under the Trust Documents. Immediately upon the giving of such notice, and, in the case of a successor Servicer other than the Trustee, the acceptance by such successor Servicer of its appointment, all authority of the Servicer will pass to the Trustee or other successor Servicer. The Trustee, the Indenture Trustee and the successor Servicer may set off and deduct any amounts owed by the Servicer from any amounts payable to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination, the Trustee or other successor Servicer specified in the related Prospectus Supplement (the "Backup Servicer") will be the successor in all respects to the Servicer and will be subject to all the responsibilities, restrictions, duties and liabilities of the Servicer under the related Trust Documents; provided, however, that the successor Servicer shall have no liability with respect to any obligation which was required to be performed by the prior Servicer prior to the date that the successor Servicer becomes the Servicer or any claim of a third party (including a Securityholder) based on any alleged action or inaction of the prior Servicer. Notwithstanding such termination, the Servicer shall be entitled to payment of certain amounts payable to it prior to such termination, for services rendered prior to such termination. No such termination will affect in any manner Green Tree's obligation to repurchase certain Contracts for breaches of representations or warranties under the Trust Documents. In the event that the Trustee would be obligated to succeed the Servicer but is unwilling or unable so to act, it may appoint, or petition to a court of competent jurisdiction for the appointment of a Servicer. Pending such appointment, the Trustee is obligated to act in such capacity. The Trustee and such successor may agree upon the servicing compensation to be paid, which in no event may be greater than the compensation to the Servicer under the Trust Documents.
Upon any termination of, or appointment of a successor to, the Servicer, the Trustee and the Indenture Trustee (if any) will each give prompt written notice thereof to Certificateholders and Noteholders, respectively, at their respective addresses appearing in the Certificate Register or the Note Register and to each Rating Agency.
Unless otherwise provided in the related Prospectus Supplement, the Trust Documents may be amended by the Seller, the Servicer, the Trustee and the Indenture Trustee, if any, but without the consent of any of the Securityholders, to cure any ambiguity or to correct or supplement any provision therein, provided that such action will not, in the opinion of counsel (which may be internal counsel to Green Tree or the Servicer) reasonably satisfactory to the Trustee and the Indenture Trustee, materially and adversely affect the interests of the Securityholders. The Trust Documents may also be amended by Green Tree, the Servicer and the Trustee and the Indenture Trustee (if any), and a Certificate Majority and a Note Majority (if applicable), for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Trust Documents or of modifying, in any manner, the rights of the Certificateholders or the Noteholders. No such amendment may (i) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on the related Contracts or distributions that are required to be made on any related Certificate or Note or the related Pass-Through Rate or Interest Rate or (ii) reduce the percentage of the Certificate Balance evidenced by Certificates or of the aggregate principal amount of Notes then outstanding required to consent to any such amendment, without the consent of the holders of all Certificates or all Notes, as the case may be, then outstanding.
The obligations created by the Trust Documents will terminate upon the date calculated as specified in the Trust Documents, generally upon (i) the later of the final payment or other liquidation of the last Contract subject thereto and the disposition of all property acquired upon repossession of any Product and (ii) the payment to the
Securityholders of all amounts held by the Servicer or the Trustee and required to be paid to the Securityholders pursuant to the Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, with respect to each series of Securities, in order to avoid excessive administrative expense, Green Tree and the Servicer each will be permitted, at its option, to purchase from the Trust, on any Distribution Date immediately following any Monthly Period as of the last day of which the Aggregate Principal Balance is equal to or less than 10% (or such other percentage as may be specified in the related Prospectus Supplement) of the Cutoff Date Principal Balance, all remaining Contracts in the related Trust and the other remaining Trust Property at a price equal to the aggregate of the Purchase Amounts therefor and the appraised value of any other remaining Trust Property. The exercise of this right will effect an early retirement of the related Certificates and Notes.
If a General Partner is named in the related Prospectus Supplement, unless otherwise specified in the related Prospectus Supplement, the Trust Agreement will provide that, in the event that the General Partner becomes insolvent, withdraws or is expelled as a General Partner or is terminated or dissolved, the Trust will terminate in 90 days and effect redemption of the Notes (if any) and prepayment of the Certificates following the winding-up of the affairs of the related Trust, unless within such 90 days the remaining General Partner, if any, and holders of a majority of the Certificates of such series agree in writing to the continuation of the business of the Trust and to the appointment of a successor to the former General Partner, and the Owner Trustee is able to obtain an opinion of counsel to the effect that the Trust will not thereafter be an association (or publicly traded partnership) taxable as a corporation for federal income tax purposes.
Unless otherwise specified in the related Prospectus Supplement, with respect to each series of Securities, the Trustee will give written notice of the final distribution with respect to the Certificates to each Certificateholder of record and the Indenture Trustee will give written notice of the final payment with respect to the Notes (if any), to each Noteholder of record. The final distribution to any Certificateholder and the final payment to any Noteholder will be made only upon surrender and cancellation of such holder's Certificate or Note at the office or agency of the Trustee, with respect to Certificates, or of the Indenture Trustee, with respect to Notes, specified in the notice of termination. Any funds remaining in the Trust, after the Trustee or the Indenture Trustee has taken certain measures to locate a Certificateholder or Noteholder, as the case may be, and such measures have failed, will be distributed to The United Way, and the Certificateholders and Noteholders, by acceptance of their Certificates and Notes, will waive any rights with respect to such funds.
The Trustee or Owner Trustee, as applicable, for each Trust will be specified in the related Prospectus Supplement. The Trustee, in its individual capacity or otherwise, and any of its affiliates may hold Certificates or Notes in their own names or as pledgee. In addition, for the purpose of meeting the legal requirements of certain jurisdictions, the Trustee, with the consent of the Servicer, shall have the power to appoint co-trustees or separate trustees of all or any part of the related Trust. In the event of such appointment, all rights, powers, duties and obligations conferred or imposed upon the Trustee by the related Trust Documents will be conferred or imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in any jurisdiction where the Trustee is incompetent or unqualified to perform certain acts, singly upon such separate trustee or co-trustee who shall exercise and perform such rights, powers, duties and obligations solely at the direction of the Trustee.
The Trustee of any Trust may resign at any time, in which event the General Partner, if any, specified in the related Prospectus Supplement or, if no such General Partner is specified, the Servicer or its successor will be obligated to appoint a successor trustee. The General Partner, if any, specified in the related Prospectus Supplement (or, if no such General Partner is specified, the Servicer) may also remove the Trustee, if the Trustee ceases to be eligible to serve, becomes legally unable to act, is adjudged insolvent or is placed in receivership or similar proceedings. In such circumstances, the General Partner, if any, specified in the related Prospectus Supplement or, if no such General Partner is specified, the Servicer will be obligated to appoint a successor trustee. Any resignation or removal of the Trustee and appointment of a successor trustee will not become effective until acceptance of the appointment by the successor trustee.
The Trustee will make no representation as to the validity or sufficiency of any Trust Document, the Certificates or the Notes (other than its execution of the Certificates and the Notes), the Contracts or any related documents, and will not be accountable for the use or application by the Servicer of any funds paid to the Servicer in respect of the Certificates, the Notes or the Contracts prior to deposit in the related Collection Account.
The Trustee will be required to perform only those duties specifically required of it under the Trust Documents. Generally, those duties will be limited to the receipt of the various certificates, reports or other instruments required to be furnished by the Servicer to the Trustee under the Trust Documents, in which case it will only be required to examine such certificates, reports or instruments to determine whether they conform substantially to the requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights or powers vested in it by the Trust Documents or to institute, conduct, or defend any litigation thereunder or in relation thereto at the request, order or direction of any of the Certificateholders or Noteholders, unless such Certificateholders or Noteholders have offered the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. No Certificateholder nor any Noteholder will have any right under the Trust Documents to institute any proceeding with respect to such Trust Documents, unless such holder has given the Trustee written notice of default and unless the holders of Certificates evidencing not less than 25% of the Certificate Balance or the holders of Notes evidencing not less than 25% of the aggregate principal balance of the Notes then outstanding, as the case may be, have made written request to the Trustee to institute such proceeding in its own name as Trustee thereunder and have offered to the Trustee reasonable indemnity, and the Trustee for 30 days after the receipt of such notice, request and offer to indemnify has neglected or refused to institute any such proceedings.
If an Administrator is specified in the related Prospectus Supplement, such Administrator will enter into an agreement (the "Administration Agreement") pursuant to which such Administrator will agree, to the extent provided in such Administration Agreement, to provide the notices and to perform other administrative obligations required by the related Indenture and the Trust Agreement.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The Contracts are "chattel paper" as defined in the UCC as in effect in the State of Minnesota. Pursuant to the UCC, an ownership interest in chattel paper may be perfected by possession or by filing a UCC-1 financing statement in the state where the seller's principal executive office is located. Accordingly, financing statements covering the Contracts will be filed by Green Tree in Minnesota.
The Servicer will be obligated from time to time to take such actions as are necessary to continue the perfection of each Trust's interest in the related Contracts and the proceeds thereof. Green Tree will warrant in the Trust Documents with respect to the Contracts held by the related Trust and the Trustee will pledge the right to enforce such warranty to the Indenture Trustee as collateral for the Notes, if any, that, as of the Closing Date, such Contracts have not been sold, pledged or assigned by Green Tree to any other person, and that it has good and indefeasible title thereto and is the sole owner thereof free of any Liens and that, immediately upon the transfer of the Contracts to such Trust pursuant to the related Trust Document, the Trust will have good and indefeasible title to and will be the sole owner of the Contracts, free of any Liens. In the event of an uncured breach of any of such warranties in the Trust Documents that materially and adversely affects the related Trust's, Certificateholders' or Noteholders' interest in any Contract (a "Repurchase Event"), Green Tree will be obligated to repurchase such Contract.
Unless otherwise provided in the related Prospectus Supplement, Green Tree will hold the Contract Files on behalf of each Trust. To facilitate servicing and save administrative costs, the documents will not be physically segregated from other similar documents that are in Green Tree's possession. UCC financing statements will be filed in Minnesota reflecting the sale and assignment of the Contracts to the Trustee, and Green Tree's accounting records and computer systems will also reflect such sale and assignment. In addition, the Contracts will be stamped or otherwise marked to indicate that such Contracts have been sold to the related Trust. Despite these precautions, if, through inadvertence or otherwise, any of the Contracts were sold to another party (or a security interest therein were granted to another party) that purchased (or took such security interest in) any of such Contracts in the ordinary course of its business and took possession of such Contracts, the purchaser (or secured party) would acquire an interest in the Contracts superior to the interest of the related Trust if the purchaser (or secured party) acquired (or took a security interest in) the Contracts for new value and without actual knowledge of such Trust's interest. See "Description of the Trust Documents--Custody of Contract Files."
SECURITY INTERESTS IN THE PRODUCTS (OTHER THAN AIRCRAFT)
Security interests in some Products must be perfected by notation of the secured party's lien on the certificate of title or by actual possession of the certificate of title, depending on the law of the state wherein the purchaser resides. Security interests in certain other Products must be perfected by the filing of a UCC financing statement, naming the Obligor as debtor and Green Tree as secured party. The practice of Green Tree is to take such action as is required to perfect its security interest under the laws of the state in which the Product is located. In the event of clerical errors, administrative delays or otherwise, such actions may not have been taken with respect to a Product and such security interest may be subordinate to the interests of, among others, subsequent purchasers of the Products, holders of perfected security interests in the Product, and the trustee in bankruptcy of the Obligor. However, such failure would give rise to a Repurchase Event and obligate Green Tree to repurchase the affected Contract if the interests of the related Certificateholders, Noteholders or Trust were materially and adversely affected.
Pursuant to the related Trust Document, Green Tree will assign the security interests in the Products to the Owner Trustee on behalf of the related Trust. However, because of the administrative burden and expense that would be entailed in doing so, none of Green Tree, the Seller, the Trustee or the Servicer will be required, except to the extent provided below, to amend the certificates of title or UCC financing statements to identify the Trustee as the new secured party and, accordingly, Green Tree will continue to be named as the secured party on the certificates of title or UCC financing statements relating to the Products. The Servicer will be required to note the interest of the related Trust on the certificates of title for the Products or to amend the UCC financing statements only upon a Servicer Termination Event. In most states, an assignment such as that under the related Trust Documents should be an effective transfer of a security interest without amendment of any lien noted on the related certificate of title or financing statement, and the assignee should succeed to the assignor's status as the secured party. In the absence of fraud or forgery by the Obligor or administrative error by state recording officials, the notation of the lien of Green Tree on the certificate of title or the UCC financing statement should be sufficient to protect the related Trust against the rights of subsequent purchasers of a Product or subsequent lenders who take a security interest in the related Product. However, in the absence of such an amendment, the security interest of the related Trust in the related Products might be defeated by, among others, the trustee in bankruptcy of Green Tree or the Obligor. However, such failure would give rise to a Repurchase Event and obligate Green Tree to repurchase the affected Contract if the interests of the related Certificateholders, Noteholders or Trust were materially and adversely affected.
In most states, a perfected security interest in a Product subject to certificate of title or a financing statement continues for four months after the Product is moved to a different state and thereafter until the owner re- registers the Product in the new state, but in no event beyond the surrender of the certificate of title. A majority of states require surrender of a certificate of title to re-register a Product. Accordingly, the secured party must surrender possession if it holds the certificate of title to such Product. In the case of Products registered in states which provide for notation of a lien but not possession of the certificate of title by the holder of the security interest in the related Product, the secured party should receive notice of surrender if the security interest in the Product is noted on the certificate of title. Accordingly, the secured party should have the opportunity to re-perfect its security interest in the Product in the state of relocation. In states that do not require a certificate of title for registration of a Product, re-registration could defeat perfection.
In the ordinary course of servicing its secured consumer contract portfolio, it is the practice of Green Tree to effect such re-perfection upon receipt of notice of re-registration or information from the Obligor as to relocation. Similarly, when an Obligor sells a Product subject to a certificate of title, Green Tree must surrender possession of the certificate of title or receive notice as a result of its lien noted thereon and accordingly should have an opportunity to require satisfaction of the related Contract before release of the lien.
Under the laws of most states, liens for repairs performed on a Product and liens for unpaid taxes take priority over even a perfected security interest in a Product. Green Tree in the related Trust Document will represent that, immediately prior to the sale, assignment and transfer thereof to the related Trust, each Contract held by such Trust was secured by a valid, subsisting and enforceable first priority perfected security interest in favor of Green Tree, as secured party. However, liens for taxes, judicial liens or liens arising by operation of law could arise at any time during the term of a Contract. In addition, the laws of certain states and federal law permit the confiscation of motor vehicles and certain other consumer products by governmental authorities under certain circumstances if used in unlawful activities, which may result in the loss of a secured party's perfected security interest in the confiscated product. No notice will be given to the Owner Trustee, Indenture Trustee, Certificateholders or Noteholders in the event such a lien or confiscation arises, and if such lien arises or confiscation occurs after the date of issuance of any series of Certificates and Notes, neither Green Tree nor the Servicer will be required to repurchase or purchase the related Contract.
In order for a security interest in a United States-registered aircraft to be valid, it must be perfected in accordance with the Federal Aviation Act. The UCC has been preempted by the Federal Aviation Act with respect to the method and location of filing against goods such as aircraft, engines, propellers, appliances and certain spare parts to the extent that it is possible to record against them at the Federal Aviation Administration ("FAA") Aircraft Registry located in Oklahoma City, Oklahoma (the "Registry").
If the aircraft is registered with the FAA, the mortgage or other security agreement must be filed for recordation with the Registry in order to be perfected against third parties, including a trustee in bankruptcy. Despite the Federal Aviation Act's preemption of the UCC, it is customary to sign and file UCC financing statements in addition to filing at the Registry because any de-registration of the aircraft (which can occur automatically in certain circumstances) may result in the applicability of the UCC to perfection of such liens.
Security interests perfected by filing with the Registry may nevertheless be subject to (1) purchase money security interests which may be filed up to ten days (21 days in some states) after a debtor receives possession and which will then have, in most states, priority in the aircraft (unless it is property held as inventory) over a conflicting security interest in the same aircraft, and (2) the rights of buyers in the ordinary course of business from persons in the business of selling goods of that kind.
Exceptions also include possessory mechanic's and storage liens, which may or may not need to be filed and which usually have priority over a mortgage, whether or not such liens are incurred before or after the mortgage is recorded. Non-possessory mechanic's liens, which exist under many state laws, probably do not take priority over mortgages previously filed with the Registry. In some states, a non-possessory mechanic's lien on an aircraft is required to be filed at the Registry.
Federal tax liens are filed according to Federal law in the appropriate location in each state and cannot be filed at the Registry. When so filed, Federal tax liens can have priority over subsequent FAA recorded mortgages in aircraft with many exceptions, including the exception of a purchase money security interest. It is an open issue whether unrecorded liens arising out of FAA penalties have priority over filed security interests in a registered aircraft.
The principal effect of recordation is that each mortgage or other conveyance that is filed with the Registry for recordation affecting the applicable aircraft, engine, propeller, appliance or spare parts (so long as they are maintained at any designated locations) is valid and perfected from the time of filing as to all persons with whatever priority is given by state law. If not filed for recordation, such a mortgage or other conveyance will not be valid against third persons except persons having actual notice thereof. The date of filing for recordation at the Registry is the date of validity and perfection of the mortgage or other conveyance, even though recordation by the Registry may not occur for several weeks or months after delivery to the Registry. The case law is not clear as to the effect of a rejection of the documents when they are examined by the Registry several weeks after filing. The usual practice is to retain expert FAA counsel to ensure, among other things, that the documents are in due form for recording, that the record is free and clear of liens and that the documents are filed correctly. Title companies are also available to check the FAA records and file documents.
If the laws of a state govern the validity of the mortgage or other security agreement and the aircraft is not registered with the Registry, under the UCC, the perfection of the mortgage or any security interest in other collateral would be made according to, and with the effect given by, the law (including the conflict of laws rules) of the jurisdiction in which the debtor is located.
In the event of default by an Obligor, the owner of a retail installment sales contract or installment loan has all the remedies of a secured party under the UCC, except where specifically limited by other state laws. The remedies of a secured party under the UCC include the right to repossession by self-help means, unless such means would constitute a breach of the peace. Self-help repossession is the method employed by Green Tree in most cases and is accomplished simply by taking possession of the Product. In the event of default by the Obligor, some jurisdictions require that the Obligor be notified of the default and be given a time period within which the Obligor may cure the default prior to repossession. In cases where the Obligor objects or raises a defense to repossession, or if otherwise required by applicable state law, a court order must be obtained from the appropriate state court, and the Product must then be repossessed in accordance with that order. If a breach of the peace cannot be avoided, judicial action is required. A secured party may be held responsible for damages caused by a wrongful repossession of a Product, including a wrongful repossession conducted by an agent of the secured party. In many states, a Product may be repossessed without notice to the Obligor, but only if the repossession can be accomplished without a breach of the peace.
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and various other state laws require a secured party who has repossessed the collateral securing an obligation to provide an obligor with reasonable notice of the date, time and place of any public sale and/or the date after which any private sale of the collateral may be held. The obligor has the right to redeem the collateral prior to actual sale by paying the secured party the entire unpaid time balance of the obligation (less any unaccrued finance charges) plus accrued default charges, reasonable expenses for repossessing, holding and preparing the collateral for disposition and arranging for its sale, plus, to the extent provided in the financing documents, reasonable attorneys' fees, or in some states, by payment of delinquent installments or the unpaid principal balance of the related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of Products generally will be applied first to the expenses of repossession and resale and then to the satisfaction of the related Contract. While some states impose prohibitions or limitations on deficiency judgments if the net proceeds from resale do not cover the full amount of the indebtedness, a deficiency judgment can be sought in other states that do not prohibit or limit such judgments, subject to satisfaction of statutory procedural requirements by the holder of the obligation. However, any deficiency judgment would be a personal judgment against the Obligor for the shortfall, and a defaulting Obligor can be expected to have very little capital or sources of income available following repossession. Therefore, in cases, it may not be useful to seek a deficiency judgment or, if one is obtained, it may be settled at a significant discount or not paid at all. Green Tree generally seeks to recover any deficiency existing after repossession and sale of a Product.
Occasionally, after resale of a repossessed Products, and payment of all expenses and indebtedness, there is a surplus of funds. In that case, the law of most states requires the secured party to remit the surplus to any holder of another lien with respect to the Product, if proper notification of demand for proceeds is received prior to distribution, or, if no such lienholder exists, to remit the surplus to the former owner of the Product.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
The Relief Act imposes certain limitations upon the actions of creditors with respect to persons serving in the Armed Forces of the United States and, to a more limited extent, their dependents and guarantors and sureties of debt incurred by such persons. An obligation incurred by a person prior to entering military service cannot bear interest at a rate in excess of 6% during the person's term of military service, unless the obligee petitions a court which determines that the person's military service does not impair his or her ability to pay interest at a higher rate. Further, a secured party may not repossess during a person's military service a Product subject to an installment sales contract or a promissory note entered into prior to the person's entering military service, for a loan default which occurred prior to or during such service, without court action. The Relief Act imposes penalties for knowingly repossessing property in contravention of its provisions. Additionally, dependents of military personnel are entitled to the protection of the Relief Act, upon application to a court, if such court determines the obligation of such dependent has been materially impaired by reason of the military service. To the extent an obligation is unenforceable against the person in military service or a dependent, any guarantor or surety of such obligation will not be liable for performance.
Numerous Federal and state consumer protection laws and related regulations impose substantive and disclosure requirements upon lenders and servicers involved in consumer finance. Some of the Federal laws and regulations include the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, and the Federal Reserve Board's Regulations B and Z.
In addition to Federal law, state consumer protection statutes regulate, among other things, the terms and conditions of retail installment contracts and promissory notes pursuant to which purchasers finance the acquisition of consumer products. These laws place finance charge ceilings on the amount that a creditor may charge in connection with financing the purchase of a consumer product. These laws also impose other restrictions on consumer transactions and require contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply. In some cases, this liability could affect the ability of an assignee, such as the related Trust, to enforce consumer finance contracts such as the Contracts. The "Credit Practices" Rule of the Federal Trade Commission (the "FTC") imposes additional restrictions on contract provisions and credit practices.
The FTC's so-called holder-in-due-course rule has the effect of subjecting persons that finance consumer credit transactions (and certain related lenders and their assignees) to all claims and defenses which the purchaser could assert against the seller of the goods and services. An assignee's affirmative liability to pay money to such aggrieved purchaser in the event of a successful claim is limited to amounts paid by the purchaser under the consumer credit contract. However, the assignee's ability to collect any balance remaining due thereunder is subject to these claims and defenses. Accordingly, each Trust, as assignee of the related Contracts, will be subject to claims or defenses, if any, that the purchaser of the related Product may assert against the seller of such Product.
Courts have applied general equitable principles to secured parties pursuing repossession or litigation involving deficiency balances. These equitable principles may have the effect of relieving an Obligor from some or all of the legal consequences of a default.
Green Tree will warrant in the related Trust Document that as of the date of origination each Contract held by the related Trust complied with all requirements of applicable law in all material respects. Accordingly, if such Trust's interest in a Contract were materially and adversely affected by a violation of any such law, such violation would constitute a Repurchase Event and would obligate Green Tree to repurchase the Contract unless the breach were cured. See "Description of the Trust Documents--Sale and Assignment of the Contracts."
In addition to the laws limiting or prohibiting deficiency judgments, numerous other statutory provisions, including Federal bankruptcy laws and related state laws, may interfere with or affect the ability of a lender to realize upon collateral or enforce a deficiency judgment. For example, in a proceeding under Chapter 13 of the U.S. Bankruptcy Code of 1978, as amended, a court may prevent a lender from repossessing collateral, and, as part of the rehabilitation plan, reduce the amount of the secured indebtedness to the market value of the collateral at the time of bankruptcy (as determined by the court), leaving the party providing financing as a general unsecured creditor for the remainder of the indebtedness. A bankruptcy court may also reduce the monthly payments due under a contract, change the rate of interest and time of repayment of the indebtedness or substitute collateral securing such indebtedness.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax consequences relating to the purchase, ownership, and disposition of the Securities. The discussion is based upon the current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations promulgated thereunder and judicial or ruling authority, all of which are subject to change, which change may be retroactive. The discussion does not deal with federal income tax consequences applicable to all categories of investors, some of which may be subject to special rules. Investors are encouraged to consult their own tax advisors with respect to the federal, state, local, and any other tax consequences of the purchase, ownership, and disposition of the Securities.
The Trust created with respect to each series of Securities will be provided with an opinion of Dorsey & Whitney P.L.L.P., counsel to the Seller ("Counsel"), regarding certain federal income tax matters discussed below. Such an opinion, however, is not binding on the Internal Revenue Service (the "Service") or the courts. The opinion of Counsel will specifically address only those issues specifically identified below as being covered by such opinion; however, the opinion of Counsel also will state that the additional discussion set forth below accurately sets forth Counsel's advice with respect to material tax issues. No ruling on any of the issues discussed below will be sought from the Service.
Many aspects of the federal tax treatment of the purchase, ownership and disposition of the Securities of any series will depend upon whether the Trust created with respect to such series is structured as an owner trust (treated as a partnership for federal income tax purposes) or as a grantor trust. The Prospectus Supplement for each series of Securities will indicate whether the Trust created for such series will be treated as a partnership or as a grantor trust. The following discussion deals first with series with respect to which the Trust has been structured as an owner trust (treated as a partnership), and then with series with respect to which the Trust has been structured as a grantor trust.
TAX STATUS OF THE TRUST
With respect to each series of Securities which includes both Notes and Certificates, Counsel will deliver its opinion that the Trust will not be an association or publicly traded partnership taxable as a corporation for federal income tax purposes. As a result, in the opinion of Counsel, the Trust itself will not be subject to federal income tax but, instead, each Certificateholder will be required to take into account its distributive share of items of income and deduction (including deductions for distributions of interest to the Noteholders) of the Trust as though such items had been realized directly by the Certificateholder. This opinion will be based on the assumption that the terms of the Trust Agreement and related documents will be complied with, and on counsel's conclusions that (1) the Trust will not have certain characteristics necessary for a business trust to be classified as an association taxable as a corporation and (2) the nature of the income of the Trust will exempt it from the rule that certain publicly traded partnerships are taxable as corporations. There are, however, no cases or Service rulings on transactions involving a trust issuing both debt and equity interests with terms similar to those of the Notes and the Certificates. As a result, the Service may disagree with all or a part of this discussion.
If the Trust were taxable as a corporation for federal income tax purposes, the Trust would be subject to corporate income tax on its taxable income. The Trust's taxable income would include all its income on the Contracts, possibly reduced by its interest expense on the Notes. Any such corporate income tax could materially reduce cash available to make payments on the Notes and distributions on the Certificates.
Treatment of the Notes as Indebtedness. The Owner Trustee, on behalf of the Trust, will agree, and the Noteholders will agree by their purchase of Notes, to treat the Notes as debt for federal income tax purposes. Counsel will deliver its opinion that the Notes will be classified as debt for federal income tax purposes. The discussion below assumes this characterization of the Notes is correct.
Interest Income on the Notes. Interest on the Notes will be taxable as ordinary interest income when received by Noteholders utilizing the cash-basis method of accounting and when accrued by Noteholders utilizing the accrual method of accounting. Under the applicable regulations, the Notes would be considered issued with original issue discount ("OID") if the "stated redemption price at maturity" of a Note (generally equal to its principal amount as of the date of issuance plus all interest other than "qualified stated interest" payable prior to or at maturity) exceeds the original issue price (in this case, the initial offering price at which a substantial amount of the Notes are sold to the public). Any OID would be considered de minimis under the OID regulations if it does not exceed 1/4% of the stated redemption price at maturity of a Note multiplied by the number of full years until its maturity date. It is anticipated that the Notes will not be considered issued with more than de minimis OID. Under the OID regulations, an owner of a Note issued with a de minimis amount of OID must include such OID in income, on a pro rata basis, as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than de minimis OID, it is possible that they will be so issued or will be deemed to be issued with OID. This deemed OID could arise, for example, if interest payments on the Notes are not deemed to be "qualified stated interest" because the Notes do not provide for default remedies ordinarily available to holders of debt instruments or because no penalties are imposed as a result of any failure to make interest payments on the Notes. Based upon existing authority, however, the Trust will treat interest payments on the Notes as qualified stated interest under the OID regulations. If the Notes are issued or are deemed to be issued with OID, all or a portion of the taxable income to be recognized with respect to the Notes would be includible in the income of Noteholders as OID. Any amount treated as OID would not, however, be includible again when the amount is actually received. If the yield on a class of Notes were not materially different from its coupon, this treatment would have no significant effect on Noteholders using the accrual method of accounting. However, cash method Noteholders may be required to report income with respect to the Notes in advance of the receipt of cash attributable to such income.
A Noteholder must include OID in income as interest over the term of the Notes under a constant yield method. In general, OID must be included in income in advance of the receipt of cash representing that income. Each Noteholder is encouraged to consult its own tax advisor regarding the impact of the OID rules if the Notes are issued with OID.
Market Discount. The Notes, whether or not issued with original issue discount, will be subject to the "market discount rules" of Section 1276 of the Code. In general, these rules provide that if a Noteholder purchases the Note at a market discount (i.e., a discount from its original issue price plus any accrued original issue discount) that exceeds a de minimis amount specified in the Code, and thereafter recognizes gain upon a disposition, the lesser of (i) such gain or (ii) the accrued market discount will be taxed as ordinary interest income. Market discount also will be recognized and taxable as ordinary interest income as payments of principal are received on the Notes to the extent that the amount of such payments does not exceed the accrued market discount. Generally, the accrued market discount will be the total market discount on the Note multiplied by a fraction, the numerator of which is the number of days the Noteholder held the Note and the denominator of which is the number of days after the date the Noteholder acquired the Note until and including its maturity date. The Noteholder may elect, however, to determine accrued market discount under the constant-yield method, which election shall not be revoked without the consent of the Service.
Limitations imposed by the Code which are intended to match deductions with the taxation of income may defer deductions for interest on indebtedness incurred or continued, or short-sale expenses incurred, to purchase or carry a Note with accrued market discount. A Noteholder may elect to include market discount in gross income as it accrues and, if such Noteholder makes such an election, is exempt from this rule. The adjusted basis of a Note subject to such election will be increased to reflect market discount included in gross income, thereby reducing any gain or increasing any loss on a sale or taxable disposition. Any such election to include market discount in gross income as it accrues shall apply to all debt instruments held by the Noteholder at the beginning of the first taxable year to which the election applies or thereafter acquired and is irrevocable without the consent of the Service.
Amortizable Bond Premium. In general, if a Noteholder purchases a Note at a premium (i.e., an amount in excess of the amount payable upon the maturity thereof), such Noteholder will be considered to have purchased such Note with "amortizable bond premium" equal to the amount of such excess. Such Noteholder may elect to deduct the amortizable bond premium as it accrues under a constant-yield method over the remaining term of the Note. Such Noteholder's tax basis in the Note will be reduced by the amount of the amortizable bond premium deducted. Amortizable bond premium with respect to a Note will be treated as an offset to interest income on such Note, and a Noteholder's deduction for amortizable bond premium with respect to a Note will be limited in each year to the amount of interest income derived with respect to such Note for such year. Any election to deduct amortizable bond premium shall apply to all debt instruments (other than instruments the interest on which is excludible from gross income) held by the Noteholder at the beginning of the first taxable year to which the election applies or thereafter acquired and is irrevocable without the consent of the Service. Bond premium on a Note held by a Noteholder who does not elect to deduct the premium will decrease the gain or increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. If a Noteholder sells a Note, the Noteholder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale and the Noteholder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a particular Noteholder generally will equal the Noteholder's cost for the Note, increased by any market discount, OID and gain previously included by such Noteholder in income with respect to the Note and decreased by principal payments previously received by such Noteholder and the amount of bond premium previously amortized with respect to the Note. Any such gain or loss will be capital gain or loss if the Note was held as a capital asset, except for gain representing accrued interest and accrued market discount not previously included in income, and will be long-term capital gain or loss if the Note was held for more than one year. Capital losses generally may be used only to offset capital gains.
Foreign Holders. Generally, interest paid to a Noteholder who is a nonresident alien individual or a foreign corporation and who does not hold the Note in connection with a United States trade or business will be treated as "portfolio interest" and therefore will be exempt from the 30% withholding tax. Such a Noteholder will be entitled to receive interest payments on the Notes free of United States federal income tax provided that such Noteholder periodically provides the Indenture Trustee (or other person who would withhold tax) with a statement certifying under penalty of perjury that such Noteholder is not a United States person and providing the name and address of such Noteholder and will not be subject to federal income tax on gain from the disposition of a Note unless the Noteholder is an individual who is present in the United States for 183 days or more during the taxable year in which the disposition takes place and certain other requirements are met.
Tax Administration and Reporting. The Indenture Trustee will furnish to each Noteholder with each distribution a statement setting forth the amount of such distribution allocable to principal and to interest. Reports will be made annually to the Service and to holders of record that are not excepted from the reporting requirements regarding such information as may be required with respect to interest and original issue discount, if any, with respect to the Notes.
Backup Withholding. Under certain circumstances, a Noteholder may be subject to "backup withholding" at a 31% rate. Backup withholding may apply to a Noteholder who is a United States person if the holder, among other circumstances, fails to furnish his Social Security number or other taxpayer identification number to the Indenture Trustee. Backup withholding may apply, under certain circumstances, to a Noteholder who is a foreign person if the Noteholder fails to provide the Indenture Trustee or the Noteholder's securities broker with the statement necessary to establish the exemption from federal income and withholding tax on interest on the Note. Backup withholding, however, does not apply to payments on a Note made to certain exempt recipients, such as corporations and tax-exempt organizations, and to certain foreign persons. Noteholders should consult their tax advisors for additional information concerning the potential application of backup withholding to payments received by them with respect to a Note.
Possible Alternative Treatment of the Notes. If, contrary to the opinion of Counsel, the Service successfully asserted that the Notes did not represent debt for federal income tax purposes, the Notes might be treated as equity interests in the Trust. If so treated, the Trust might be taxable as a corporation with the adverse consequences described above (and the taxable corporation would not be able to reduce its taxable income by deductions for interest expense on Notes recharacterized as equity). Alternatively, and most likely in the view of Counsel, the Trust might be treated as a publicly traded partnership that would not be taxable as a corporation because it would meet certain qualifying income tests. Nonetheless, treatment of the Notes as equity interests in such a partnership could have adverse tax consequences to certain holders. For example, income to foreign holders generally would be subject to federal tax and federal tax return filing and withholding requirements, and individual holders might be subject to certain limitations on their ability to deduct their share of Trust expenses.
Treatment of the Trust as a Partnership. The Seller, the General Partner and the Owner Trustee will agree, and the Certificateholders will agree by their purchase of Certificates, to treat the Trust as a partnership for purposes of federal and state income tax, franchise tax and any other tax measured in whole or in part by income, with the assets of the partnership being the assets held by the Trust, the partners of the partnership being the Certificateholders and the General Partner, and the Notes being debt of the partnership. The proper characterization of the arrangement involving the Trust, the Certificates, the Notes, the General Partner, the Seller and the Servicer, however, is not certain because there is no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example, because the Certificates have certain features characteristic of debt, the Certificates might be considered debt of the Trust. Any such characterization would not result in materially adverse tax consequences to Certificateholders as compared to the consequences from treatment of the Certificates as equity in a partnership, described below. The following discussion assumes that the Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to federal income tax. Rather, each Certificateholder will be required to separately take into account such holder's allocated share of income, gains, losses, deductions and credits of the Trust. The Trust's income will consist primarily of interest and finance charges earned on the Contracts (including appropriate adjustments for market discount, OID and bond premium) and any gain upon collection or disposition of the Contracts. The Trust's deductions will consist primarily of interest accruing with respect to the Notes, servicing and other fees, and losses or deductions upon collection or disposition of the Contracts.
The tax items of a partnership are allocable to the partners in accordance with the Code, Treasury regulations and the partnership agreement (here, the Trust Agreement and related documents). The Trust Agreement will provide, in general, that the Certificateholders will be allocated taxable income of the Trust for each month equal to the sum of (i) the interest that accrues on the Certificates in accordance with their terms for such month, including interest accruing at the Pass-Through Rate for such month and interest on amounts previously due on the Certificates but not yet distributed; (ii) any Trust income attributable to discount on the Contracts that corresponds to any excess of the principal amount of the Certificates over their initial issue price; (iii) Prepayment Premium payable to the Certificateholders for such month; and (iv) any other amounts of income payable to the Certificateholders for such month. Although it is not anticipated that the Certificates will be issued at a price which exceeds their principal amount, such allocations of Trust income to the Certificateholders will be reduced by any amortization by the Trust of premium on Contracts that corresponds to any such excess of the issue price of Certificates over their principal amount. All remaining taxable income of the Trust will be allocated to the General Partner. Based on the economic arrangement of the parties, this approach for allocating Trust income should be permissible under applicable Treasury regulations, although no assurance can be given that the Service would not require a greater amount of income to be allocated to Certificateholders. Moreover, even under the foregoing method of allocation, Certificateholders may be allocated income equal to the entire Pass-Through Rate plus the other items described above even though the Trust might not have sufficient cash to make current cash distributions of such amount. Thus, cash basis holders will in effect be required to report income from the Certificates on the accrual basis, and Certificateholders may become liable for taxes on Trust income even if they have not received cash from the Trust to pay such taxes. In addition, because tax allocations and tax reporting will be done on a uniform basis for all Certificateholders but Certificateholders may be purchasing Certificates at different times and at different prices, Certificateholders may be required to report on their tax returns taxable income that is greater or less than the amount reported to them by the Trust.
A Certificateholder's share of expenses of the Trust (including fees to the Servicer but not interest expense) will be miscellaneous itemized deductions. An individual, an estate, or a trust that holds a Certificate either directly or through a pass-through entity will be allowed to deduct such expenses under Section 212 of the Code only to the extent that, in the aggregate and combined with certain other itemized deductions, they exceed 2% of the adjusted gross income of the Certificateholder. In addition, Section 68 of the Code provides that the amount of itemized deductions (including those provided for in Section 212 of the Code) otherwise allowable for the taxable year for an individual whose adjusted gross income exceeds a threshold amount determined under the Code ($117,950 in 1996, in the case of a joint return) will be reduced by the lesser of (i) 3% of the excess of adjusted gross income over the specified threshold amount or (ii) 80% of the amount of itemized deductions otherwise allowable for such taxable year. To the extent that a Certificateholder is not permitted to deduct servicing fees allocable to a Certificate, the taxable income of the Certificateholder attributable to that Certificate will exceed the net cash distributions related to such income. Certificateholders may deduct any loss on disposition of the Contracts to the extent permitted under the Code.
Discount and Premium. It is believed that the Contracts were not issued with OID, and, therefore, the Trust should not have OID income. The purchase price paid by the Trust for the Contracts may exceed the remaining principal balance of the Contracts at the time of purchase. If the Trust is deemed to acquire the Contracts at such a premium or at a market discount, the Trust will elect to offset any such premium against interest income on the Contracts or to include any such discount in income currently as it accrues over the life of the Contracts. The Trust will make this premium or market discount calculation on an aggregate basis but may be required to recompute it on a Contract-by- Contract basis. As indicated above, a portion of such premium deduction or market discount income may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not recognize gain or loss with respect to distributions from the Trust. A Certificateholder will recognize gain, however, to the extent that any money distributed exceeds the Certificateholder's adjusted basis in its Certificates (as described below under "Disposition of Certificates") immediately before the distribution. A Certificateholder will recognize loss upon termination of the Trust or termination of the Certificateholder's interest in the Trust if the Trust only distributes money to the Certificateholder and the amount distributed is less than the Certificateholder's adjusted basis in the Certificates. Any such gain or loss generally will be capital gain or loss if the Certificates are held as capital assets and will be long-term gain or loss if the holding period of the Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, the Trust will be deemed to terminate for federal income tax purposes if 50% or more of the capital and profits interests in the Trust are sold or exchanged within a 12- month period. If such a termination occurs, the Trust will be considered to distribute its assets to the partners, who would then be treated as recontributing those assets to the Trust, as a new partnership. Such deemed distribution and recontribution should not result in material adverse tax consequences to Certificateholders (although it may accelerate the recognition of income from the Trust for Certificateholders whose taxable year is different than that of the Trust). Because the Trust may not have the necessary data, the Trust will not comply with certain technical requirements that may apply when such a constructive termination occurs. As a result, the Trust may be subject to certain tax penalties and may incur additional expenses if it is required to comply with those requirements.
Disposition of Certificates. If a Certificateholder sells a Certificate, the Certificateholder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale and the seller's tax basis in the Certificate. A Certificateholder's tax basis in a Certificate generally will equal the Certificateholder's cost increased by the Certificateholder's share of Trust income and decreased by any distributions received with respect to such Certificate. In addition, both the tax basis in the Certificate and the amount realized on a sale of a Certificate would include the Certificateholder's share of the Notes and other liabilities of the Trust. A Certificateholder acquiring Certificates at different prices may be required to maintain a single aggregate adjusted tax basis in such Certificates, and, upon sale or other disposition of some of the Certificates, allocate a portion of such aggregate tax basis to the Certificates sold (rather than maintain a separate tax basis in each Certificate for purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Certificateholder's share of unrecognized accrued market discount on the Contracts would generally be treated as ordinary income to the Certificateholder and would give rise to special tax reporting requirements. The Trust does not expect to have any other assets that would give rise to such special reporting requirements. Thus, to avoid those special reporting requirements, the Trust will elect to include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of income (not including income attributable to disallowed itemized deductions described above) over the life of the Certificates that exceeds the aggregate cash distributions with respect thereto, such excess generally will give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's taxable income and losses will be determined monthly, and the tax items for a particular calendar month will be apportioned among the Certificateholders in proportion to the principal amount of Certificates owned by them as of the close of the related Record Date. As a result, a Certificateholder purchasing a Certificate may be allocated tax items (which will affect the Certificateholder's tax liability and tax basis) attributable to periods before the Certificateholder actually owns the Certificate. The use of such a convention may not be permitted by existing regulations. If a monthly convention is not permitted (or only applies to transfers of less than all of the Certificateholder's interest), taxable income or losses of the Trust may be reallocated among the Certificateholders. The General Partner is authorized to revise the Trust's method of allocation between transferors and transferees to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells a Certificate at a profit or loss, the purchasing Certificateholder will have a higher or lower basis in the Certificate than the selling Certificateholder had. The tax basis of the Trust's assets will not be adjusted to reflect that higher or lower basis unless the Trust files an election under Section 754 of the Code. In order to avoid the administrative complexities that would be involved in keeping accurate accounting records, as well as potentially onerous information reporting requirements, the Trust will not make such election. As a result, Certificateholders may be allocated a greater or lesser amount of Trust income than would be appropriate based on their own purchase price for Certificates.
Administrative Matters. Pursuant to an administration agreement (the "Administration Agreement"), the Trustee will monitor the performance of the following responsibilities of the Trust by other service providers. The Trust is required to keep or have kept complete and accurate books of the Trust. Such books will be maintained for financial reporting and tax purposes on an accrual basis and the fiscal year of the Trust will be the calendar year. The Trust will file a partnership information return (IRS Form 1065) with the Service for each taxable year of the Trust and will report each Certificateholder's allocable share of items of Trust income and expense to Certificateholders and the Service on Schedule K-1. The Trust will provide the Schedule K-1 information to nominees that fail to provide the Trust with certain required information statements relating to identification of beneficial owners of Certificates and such nominees will be required to forward such information to such beneficial owners. Generally, Certificateholders must file tax returns that are consistent with the information return filed by the Trust or be subject to penalties unless the Certificateholder notifies the Service of all such inconsistencies.
Green Tree or a subsidiary identified in the related Prospectus Supplement will be designated as the tax matters partner in the Trust Agreement and, as such, will be responsible for representing the Certificateholders in any dispute with the Service. The Code provides for administrative examination of a partnership as if the partnership were a separate and distinct taxpayer. Generally, the statute of limitations for partnership items does not expire before three years after the date on which the partnership information return is filed. Any adverse determination following an audit of the return of the Trust by the appropriate taxing authorities could result in an adjustment of the returns of the Certificateholders, and, under certain circumstances, a Certificateholder may be precluded from separately litigating a proposed adjustment to the items of the Trust. An adjustment could also result in an audit of a Certificateholder's returns and adjustments of items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the Trust will be considered to be engaged in a trade or business in the United States for purposes of federal withholding taxes with respect to non-U.S. persons because there is no clear authority dealing with that issue under facts substantially similar to those described herein. Although it is not expected that the Trust will be engaged in a trade or business in the United States for such purposes, the Trust will withhold as if it were so engaged in order to protect the Trust from possible adverse consequences of a failure to withhold. It is expected that the Trust will withhold on the portion of its taxable income that is allocable to foreign Certificateholders pursuant to Section 1446 of the Code, as if such income were effectively connected to a U.S. trade or business, at a rate of 35% for foreign holders that are taxable as corporations and 39.6% for all other foreign Certificateholders. Subsequent adoption of Treasury regulations or the issuance of other administrative pronouncements may require the Trust to change its withholding procedures. In determining a Certificateholder's nonforeign status, the Trust may rely on Form W-8, Form W-9 or the Certificateholder's certification of nonforeign status signed under penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual or corporate income tax return (including, in the case of a corporation, the branch profits tax) on its share of the Trust's income. Each foreign Certificateholder must obtain a taxpayer identification number from the Service and submit that number to the Trust on Form W-8 in order to assure appropriate crediting of the taxes withheld. A foreign Certificateholder generally will be entitled to file with the Service a claim for refund with respect to taxes withheld by the Trust, taking the position that no taxes are due because the Trust is not engaged in a U.S. trade or business. However, the Service may assert that additional taxes are due, and no assurance can be given as to the appropriate amount of tax liability.
Backup Withholding. Under certain circumstances, a Certificateholder may be subject to "backup withholding" at a 31% rate. See the discussion above under "Tax Consequences to Noteholders--Backup Withholding."
Proposed Tax Legislation. Legislation previously introduced in Congress would apply special rules to "large partnerships," defined as partnerships with at least 250 partners during a taxable year (counting towards such total each owner during the year of a partnership interest that is transferred during the year). Under the legislation, certain computations are made at the partnership level rather than the partner level. In particular, taxable income is calculated at the partnership level and is calculated generally in the same manner as for an individual, except that 70% of miscellaneous itemized deductions (such as expenses for the production of nonbusiness income) are disallowed. As a result, all partners in a large partnership (including corporations) might have a portion of their share of partnership deductions disallowed. Moreover, large partnerships would become subject to new audit procedures; among other things, an adjustment to taxable income of the partnership for a prior year would flow through to current partners in the year the audit was settled, and the partnership itself (rather than the partners) would be subject to any applicable interest or penalties. Under the previous proposal, these rules would apply to partnership taxable years ending on or after December 31, 1994. No prediction can be made whether such legislation will be enacted, the form in which it might be enacted, or the ultimate effective date of such legislation.
TAX STATUS OF THE TRUST
With respect to each series of Securities which includes only Certificates, unless otherwise specified in the related Prospectus Supplement, Counsel will deliver its opinion that the Trust will be classified as a grantor trust for federal income tax purposes and not as an association which is taxable as a corporation. The Trust will be classified as a trust regardless of whether the Seller is considered to retain an interest in the Contracts, as discussed below. While such a retained interest might be viewed as a second class of beneficial interest in the Trust and Treasury Regulations Section 301.7701- 4(c) generally provides that an investment trust with more than one class of ownership interest will be classified as an association taxable as a corporation or a partnership, that regulation would treat the Trust as a grantor trust because there will be no power under the Pooling and Servicing Agreement to vary the investment of the Certificateholders, the purpose of the Trust will be to facilitate direct investment in the Contracts, and the existence of multiple classes of ownership interests in the Trust will be incidental to that purpose.
Because the Trust will be classified as a grantor trust, each Certificateholder will, in the opinion of Counsel, be treated for federal income tax purposes as the owner of an undivided interest in the Contracts and other Trust Property. Accordingly, subject to the discussion below of certain limitations on deductions and the "stripped bond" rules of the Code, each Certificateholder must report on its federal income tax return its pro rata share of the entire income from the Contracts and other Trust Property, and may deduct its pro rata share of the fees paid by the Trust, at the same time as such items would be reported under the Certificateholder's tax accounting method if it held directly a pro rata interest in the assets of the Trust and received and paid directly the amounts received and paid by the Trust. A Certificateholder's share of expenses of the Trust will be miscellaneous itemized deductions subject to certain limits on deductibility. See the discussion above under "OWNER TRUST SERIES--Tax Consequences to Certificateholders--Partnership Taxation."
A purchaser of a Certificate will be treated as purchasing an interest in each Contract in the Trust at a price determined by allocating the purchase price paid for the Certificate among all Contracts in proportion to their fair market values at the time of purchase of the Certificate. To the extent that the portion of the purchase price of a Certificate allocated to a Contract is greater than or less than the portion of the principal balance of the Contract allocable to the Certificate, that interest in the Contract will be deemed to premium or discount, respectively. See the discussions above under "OWNER TRUST SERIES--Tax Consequences to Noteholders--Market Discount" and "-- Amortizable Bond Premium."
The treatment of any discount will depend on whether the discount represents original issue discount or market discount. It is not anticipated that the Contracts will have original issue discount, unless they are subject to the "stripped bond" rules of the Code described below. If the Contracts are subject to the stripped bond rules of the Code, the market discount rules discussed above may not apply.
Subordinated Certificates. If the subordinated Certificateholders receive distributions of less than their share of the Trust's receipts of principal or interest (the "Shortfall Amount") because of the subordination of the subordinated Certificates, holders of subordinated Certificates would probably be treated for federal income tax purposes as if they had (i) received as distributions their full share of such receipts, (ii) paid over to the senior Certificateholders an amount equal to such Shortfall Amount, and (iii) retained the right to reimbursement of such amounts to the extent available from future collections on the Contracts.
Under this analysis, (a) subordinated Certificateholders would be required to accrue as current income any interest or OID income of the Trust that was a component of the Shortfall Amount, even though such amount was in fact paid to the senior Certificateholders, (b) a loss would only be allowed to the subordinated Certificateholders when their right to receive reimbursement of such Shortfall Amount became worthless (i.e., when it becomes clear that amount will not be available from any source to reimburse such loss), and (c) reimbursement of such Shortfall Amount prior to such a claim of worthlessness would not be taxable income to subordinated Certificateholders because such amount was previously included in income. Those results should not significantly affect the inclusion of income for subordinated Certificateholders on the accrual method of accounting, but could accelerate inclusion of income to subordinated Certificateholders on the cash method of accounting by, in effect, placing them on the accrual method. Moreover, the character and timing of loss deductions is unclear.
Under current Service interpretations of applicable Treasury Regulations, the Seller would be able to sell or otherwise dispose of any subordinated Certificates. Accordingly, the Seller may offer subordinated Certificates for sale to investors.
Stripped Certificates. Certain classes of Certificates may be subject to the stripped bond rules of Section 1286 of the Code and for purposes of this discussion will be referred to as "Stripped Certificates." In general, a Stripped Certificate will be subject to the stripped bond rules where there has been a separation of ownership of the right to receive some or all of the principal payments on a Contract from ownership of the right to receive some or all of the related interest payments. Certificates will constitute Stripped Certificates and will be subject to these rules under various circumstances, including the following: (i) if any servicing compensation is deemed to exceed a reasonable amount; (ii) if two or more classes of Certificates are issued representing the right to non-pro rata percentages of the interest or principal payments on the Contracts; or (iii) if Certificates are issued which represent the right to interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be considered to be a single debt instrument issued on the day it is purchased for purposes of calculating any original issue discount. Original issue discount with respect to a Stripped Certificate, if any, must be included in ordinary gross income for federal income tax purposes as it accrues in accordance with the constant-yield method that takes into account the compounding of interest and such accrual of income may be in advance of the receipt of any cash attributable to such income. See "OWNER TRUST SERIES--Tax Consequences to Noteholders--Interest Income on the Notes" above. For purposes of applying the original issue discount provisions of the Code, the issue price of a Stripped Certificate will be the purchase price paid by the holder thereof and the stated redemption price at maturity may include the aggregate amount of all payments to be made with respect to the Stripped Certificate whether or not denominated as interest. The amount of original issue discount with respect to a Stripped Certificate may be treated as zero under the original issue discount de minimis rules described above. Under rules similar to those provided in Rev. Proc. 91-49, applicable only to mortgages secured by real property, a Certificateholder may be required to account for any discount on a Stripped Certificate as market discount rather than original issue discount if either (i) the amount of original issue discount with respect to the Certificate was treated as zero under the original issue discount de minimis rule when the Certificate was stripped or (ii) no more than 100 basis points (including any amount of servicing in excess of reasonable servicing) is stripped off of the Contracts.
When an investor purchases more than one class of Stripped Certificates, it is currently unclear whether for federal income tax purposes such classes of Stripped Certificates should be treated separately or aggregated for purposes of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to some or all of the foregoing tax consequences. For example, a holder of a Stripped Certificate may be treated as the owner of (i) as many stripped bonds or stripped coupons as there are scheduled payments of principal and/or interest on each Contract or (ii) a separate installment obligation for each Contract representing the Stripped Certificate's pro rata share of principal and/or interest payments to be made with respect thereto. In addition, if a Trust issues more than one class of Certificates with different Pass-Through Rates, a holder of such a Certificate may be treated as the owner of a stripped bond with a rate equal to the lowest such Pass-Through Rate and a stripped coupon representing the excess, if any, of the Pass-Through Rate on such Certificate over the lowest Pass-Through Rate. As a result of these possible alternative characterizations, investors should consult their own tax advisors regarding the proper treatment of Stripped Certificates for federal income tax purposes.
The Servicing Fee to be received by the Servicer and the fee for the enhancement, if any, provided with respect to a series of Certificates may be questioned by the Service with respect to certain Certificates or Contracts as exceeding a reasonable fee for the services being performed in exchange therefor, and a portion of such servicing compensation could be recharacterized as an ownership interest retained by the Servicer or other party in a portion of the interest payments to be made pursuant to the Contracts. In this event, a Certificate might be treated as a Stripped Certificate subject to the stripped bond rules of Section 1286 of the Code and the original issue discount provisions rather than to the market discount and premium rules.
Disposition of Certificates. If a Certificate is sold, gain or loss will be recognized equal to the difference between the amount realized on the sale and the Certificateholder's adjusted tax basis in the Certificate. See the discussion above under "OWNER TRUST SERIES--Tax Consequences to Noteholders-- Disposition of Notes."
Foreign Holders. Generally, interest paid to a Certificateholder who is a nonresident alien individual or a foreign corporation and who does not hold the Certificates in connection with a United States trade or business will be treated as "portfolio interest." See the discussion above under "OWNER TRUST SERIES--Tax Consequences to Noteholders--Foreign Holders."
The Trustee will furnish to each Certificateholder with each distribution a statement setting forth the amount of such distribution allocable to principal and to interest. In addition, the Trustee will furnish, within a reasonable time after the end of each calendar year, to each Certificateholder who was a Certificateholder at any time during such year, information regarding the amount of servicing compensation received by the Servicer and such other factual information as the Seller deems necessary to enable Certificateholders to prepare their tax returns. Reports will be made annually to the Internal Revenue Service and to holders of record that are not excepted from the reporting requirements regarding information as may be required with respect to interest and original issue discount, if any, with respect to the Certificates.
Under certain circumstances, a Certificateholder may be subject to "backup withholding" at a 31% rate. See the discussion above under "OWNER TRUST SERIES--Tax Consequences to Noteholders--Backup Withholding."
Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit sharing or other employee benefit plan from engaging in certain transactions involving "plan assets" with persons that are "parties in interest" under ERISA or "disqualified persons" under the Code with respect to the plan. ERISA also imposes certain duties and certain prohibitions on persons who are fiduciaries of plans subject to ERISA. Under ERISA, generally any person who exercises any authority or control with respect to the management or disposition of the assets of a plan is considered to be a fiduciary of such plan. A violation of these "prohibited transaction" rules may generate excise tax and other liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust might be deemed to constitute prohibited transactions under ERISA and the Code with respect to a Benefit Plan that purchased Securities if assets of the related Trust were deemed to be assets of the Benefit Plan. Under a regulation issued by the United States Department of Labor (the "Plan Assets Regulation"), the assets of a Trust would be treated as plan assets of a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan acquired an "equity interest" in the Trust and none of the exceptions contained in the Plan Assets Regulation was applicable. An equity interest is defined under the Plan Assets Regulation as an interest other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. The likely treatment of Notes and Certificates will be discussed in the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Securities should consult its tax and/or legal advisors regarding whether the assets of the Trust would be considered plan assets, the possibility of exemptive relief from the prohibited transaction rules and other issues and their potential consequences.
On the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement") with respect to each Trust, the Seller will agree to sell to each of the underwriters named therein and in the related Prospectus Supplement, and each of such underwriters will severally agree to purchase from the Seller, the principal amount of each class of Securities of the related series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree, subject to the terms and conditions set forth therein, to purchase all the Securities described therein which are offered hereby and by the related Prospectus Supplement if any of such Securities are purchased. In the event of a default by any such underwriter, each Underwriting Agreement will provide that, in certain circumstances, purchase commitments of the nondefaulting underwriters may be increased, or the Underwriting Agreement may be terminated.
Each Prospectus Supplement will either (i) set forth the price at which each class of Securities being offered thereby will be offered to the public and any concessions that may be offered to certain dealers participating in the offering of such Securities or (ii) specify that the related Securities are to be resold by the underwriters in negotiated transactions at varying prices to be determined at the time of such sale. After the initial public offering of any Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that Green Tree will indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
The Indenture Trustee, if any, may, from time to time, invest the funds in the Designated Accounts in Eligible Investments acquired from the underwriters.
Under each Underwriting Agreement, the closing of the sale of any class of Securities subject thereto will be conditioned on the closing of the sale of all other such classes.
The place and time of delivery for the Securities in respect of which this Prospectus is delivered will be set forth in the related Prospectus Supplement.
Certain matters with respect to the validity of the Certificates and the Notes will be passed upon for the Seller by Dorsey & Whitney P.L.L.P., Minneapolis, Minnesota. The validity of the Certificates and the Notes will be passed upon for the underwriters named in the related Prospectus Supplement by Brown & Wood, New York, New York.
The consolidated financial statements of the Company as of December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994 incorporated by reference herein have been audited by KPMG Peat Marwick LLP, independent accountants, as stated in their opinion given upon their authority as experts in accounting and auditing.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND ANY INFOR- MATION OR REPRESENTATION NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY GREEN TREE OR ANY UNDERWRITER. THIS PROSPEC- TUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH THE PROSPECTUS SUPPLEMENT RE- LATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO- SPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF GREEN TREE OR THE TRUST SINCE THE DATE HEREOF.
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT) ALL DEALERS EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPAT- ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT- MENTS OR SUBSCRIPTIONS.
$ % CERTIFICATES, CLASS A-1 $ % CERTIFICATES, CLASS A-2 $ % CERTIFICATES, CLASS A-3 $ % CERTIFICATES, CLASS A-4 $ % CERTIFICATES, CLASS B
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred in connection with the offering of the Asset-Backed Certificates and the Asset-Backed Notes, other than underwriting discounts and commissions, described in this Registration Statement:
* All fees and expenses, other than the Securities and Exchange Commission Registration Fee, are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Green Tree Financial Corporation is incorporated under the laws of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any persons, including officers and directors, who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation, by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise). The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceedings, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, for criminal proceedings, had no reasonable cause to believe that his conduct was illegal. A Delaware corporation may identify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director actually and reasonably incurred.
The Certificate of Incorporation and Bylaws of Green Tree Financial Corporation provide, in effect, that, subject to certain limited exceptions, such corporation will indemnify its officers and directors to the extent permitted by the Delaware General Corporation Law.
The Exhibits filed as part of this Registration Statement are:
**To be filed by amendment.
The undersigned registrant on behalf of the Trust hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Owner Trust'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.
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.
The undersigned registrant hereby undertakes:
(1) 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 of the time it was declared effective.
(2) For the purpose 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.
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 prospectus required by section 10(a)(3) of the
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change to such information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change in the information set forth in the registration
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.
(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.
The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under section 305(b)(2) of the Trust Indenture Act.
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. 4 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAINT PAUL, STATE OF MINNESOTA, ON THE 16TH DAY OF JANUARY, 1996.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
* Chairman of the November 30, ------------------------------------- Board and Chief 1995 LAWRENCE M. COSS Executive Officer
/s/ John W. Brink Executive Vice November 30, JOHN W. BRINK Treasurer and Chief
* Vice President and November 30,
**To be filed by amendment. | S-3/A | S-3/A | 1996-01-16T00:00:00 | 1996-01-16T17:16:00 |
0000950146-96-000037 | 0000950146-96-000037_0002.txt | Form of Opinion of Piper & Marbury
Flagship Bank and Trust Company 306 Main Street, P.O. Box 487
Re: Agreement and Plan of Reorganization by and among Chittenden Corporation, Chittenden Acquisition Bank and The Bank of Western Massachusetts
We have acted as counsel for Chittenden Corporation, a Vermont corporation ("Purchaser"), in connection with the Agreement and Plan of Reorganization, dated as of September 19, 1995 (the "Plan of Reorganization"), by and among Purchaser, Chittenden Acquisition Bank, a Massachusetts corporation ("Newco"), and Flagship Bank and Trust Company, a Massachusetts bank (the "Company"), providing, among other things, for the merger of the Company with and into Newco (the "Merger"). You have requested our opinion as to the tax-free nature of the transaction. Unless otherwise defined herein, capitalized terms used herein shall have the same meanings assigned to them in the Plan of Reorganization. In connection with the Plan of Reorganization, a registration statement under the Securities Act of 1933 (the "Registration Statement") has been filed with the Securities and Exchange Commission.
Purchaser, a bank holding company, is the common parent of an affiliated group of corporations filing a consolidated return for federal income tax purposes on a calendar year. Purchaser has authorized 30,000,000 shares of $1.00 par value common stock ("Purchaser Common Stock") and 200,000 shares of $100.00 par value preferred stock. As of the date hereof, there were approximately 8,278,789 shares of Purchaser Common Stock issued and outstanding and no shares of preferred stock outstanding. The Purchaser Common Stock is publicly traded over-the-counter and is listed on the NASDAQ Exchange. As of the date hereof, no shareholders owned more than five percent of the Purchaser Common Stock. Purchaser's principal assets consist of all of the outstanding capital stock of Chittenden Trust Company, a Vermont commercial bank, engaged in the commercial banking business in the state of Vermont and all of the outstanding capital stock of The Bank of Western Massachusetts, a Massachusetts trust company, engaged in the commercial banking business in the state of Massachusetts.
Newco was organized solely for purposes of effecting the acquisition of the Company. Prior to the Merger, Newco will not have conducted any business activity. Purchaser owns all of the outstanding shares of Newco capital stock.
The Company, a trust company organized and existing under the Massachusetts law applicable to banking corporations, conducts commercial banking operations in Massachusetts. The Company has authorized capital stock consisting of (i) 5,000,000 shares of Common Stock, par value $2.815 per share, (the "Company Common Stock"), and (ii) 10,000 shares of Preferred Stock, par value $1.00 per share. As of the date hereof, 1,086,600 shares of Company Common Stock were issued and outstanding and owned by approximately 358 shareholders. As of the date hereof, no shares of Preferred Stock were outstanding. As of the date hereof, no persons other than those listed below owned more than five percent of the Company Common Stock.
The foregoing individuals are hereinafter referred to as "Five Percent Shareholders." The Company Common Stock is not publicly traded.
The Company has outstanding (i) options to purchase 116,236 shares of Company Common Stock that were granted to employees of the Company at various times and exercise prices (the "Employee Options") and (ii) an option to purchase 359,939 shares of Company Common Stock at a price of $20.00 per share that was granted to Purchaser on September 19, 1995 (the "Lock-up Option"). The Lock-up Option can be exercised by Purchaser only upon the occurrence of certain events relating to the acquisition or proposed acquisition of more than 20% of the Company Common Stock by a person or group other than Purchaser or its affiliates or the proposed acquisition by a person or group other than Purchaser or its affiliates of all or substantially all of the Company's assets through a business combination or otherwise.
The managements of Purchaser and the Company have determined that the following transactions would produce a resulting bank with increased product capabilities, service and geographic scope of operations, would result in the Company being able to attract commercial banking business that it could not attract on a stand-alone basis and would produce a resulting organization having economies of scale and more favorable access to capital markets:
(1) Pursuant to an agreement and plan or reorganization, the Company will be merged with and into Newco, with Newco surviving. Pursuant to the agreement, upon the Merger of the Company into Newco, each share of Company Common Stock (excluding shares held by dissenting shareholders, if any) shall be converted into 1.2 shares of Purchaser Common Stock. Company shareholders who do not vote in favor of the Merger and comply with all of the relevant provisions of Sections 86 through 98 of the Massachusetts Business Corporation Act ("Dissenters") will be paid such amounts as are prescribed under the foregoing provisions by the Purchaser. No fractional shares of Purchaser Common Stock shall be issued in the Merger. Any holder of Company Common Stock who would otherwise have been entitled to receive a fractional share shall receive in lieu thereof an amount of cash equal to the product of the fraction he would have received multiplied by the average closing price of Purchaser Common Stock for the 20 consecutive trading days ending on the 5th trading day prior to the last Federal regulatory approval required for the consummation of the Merger.
(2) Newco, the surviving bank in the Merger, will change its name to the Company and will continue the historic business of the Company under Newco's charter and bylaws.
(3) At the effective time of the Merger, each outstanding Employee Option will be converted into an option to purchase a number of shares of Purchaser Common Stock equal to the product of the number of shares of Company Common Stock that would have been acquired upon an exercise of the Employee Option immediately before the effective time multiplied by 1.2.
With respect to the merger of the Company into Newco in exchange for Purchaser Common Stock, we have assumed that:
(a) The fair market value of the Purchaser Common Stock (including any fractional interest) received by a Company Common Stockholder in exchange for Company Common Stock will be approximately equal to the fair market value of the Company Common Stock surrendered in the exchange.
(b) There is no plan or intention by the Five Percent Shareholders, and, to the best knowledge of the managements of Purchaser and the Company, there is no plan or intention on the part of the remaining Company shareholders to sell or otherwise dispose of a number of shares of Purchaser Common Stock received in the Merger that would reduce the former Company common stockholders' ownership of Purchaser stock to a number of shares having, in the aggregate, a value, as of the date of the Merger, of less than 50 percent of the fair market value of the Company stock outstanding as of the same date. For purposes of the preceding sentence, all shares of the Company Common Stock exchanged for cash (including the Company Common Stock held by Dissenters and shares exchanged for cash in lieu of fractional shares of Purchaser Common Stock) will be considered outstanding stock of the Company as of the date of the Merger. Moreover, shares of Company Common Stock and shares of Purchaser Common Stock held by the Company shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger are taken into account for purpose of the first sentence of this paragraph.
(c) Newco will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by the Company immediately prior to the Merger. For purposes of the preceding sentence, amounts paid by the Company to shareholders who received cash or other property, amounts paid by the Company to holders of the stock options and warrants, the Company assets used to pay its reorganization expense, and all redemptions and distributions (except for regular, normal dividends) made by the Company immediately preceding the transfer, will be considered as assets of the Company held immediately prior to the Merger.
(d) Prior to the Merger, Purchaser will be in control of Newco within the meaning of section 368(c) of the Internal Revenue Code of 1986 (the "Code").
(e) Following the Merger, Newco will not issue additional shares of its stock that would result in Purchaser losing control of Newco within the meaning of section 368(c) of the Code.
(f) Purchaser has no plan or intention to redeem or otherwise reacquire any of its stock issued in the transaction.
(g) Purchaser has no plan or intention to sell or otherwise dispose of the stock of Newco, to liquidate Newco, to merge Newco into another corporation, or to cause Newco to sell or dispose of any of the assets acquired from the Company in the Merger, other than in the ordinary course of business or transfers described in section 368(a)(2)(C) of the Code.
(h) All liabilities of the Company at the time of the Merger, except for those related to expenses incurred by the Company in connection with the Merger that are assumed by Newco and the liabilities to which the transferred assets of the Company are subject, will have been incurred by the Company in the ordinary course of business.
(i) Following the Merger, the historic business of the Company will be continued by Newco in a substantially unchanged manner.
(j) The Company, Purchaser, Newco, and their respective shareholders shall each pay their own expenses, if any, incurred in connection with the transaction.
(k) There is no intercorporate indebtedness existing between the Company, Purchaser, or Newco that was issued, acquired or will be settled at a discount.
(l) None of the Company, Purchaser, or Newco, is an investment company as defined in sections 368(a)(2)(F)(iii) and (iv) of the Code.
(m) The fair market value of the assets of the Company transferred to Newco in the Merger will exceed the sum of the liabilities assumed by Newco in the Merger plus the amount of the Company's liabilities to which the transferred assets are subject.
(n) Neither Purchaser nor Newco will have owned any shares of Company Common Stock prior to the Merger.
(o) The payment of cash to the Company shareholders in lieu of fractional shares of Purchaser Common Stock is solely for the purpose of avoiding the expense and inconvenience to Purchaser of issuing fractional shares and does not represent separately bargained for consideration. The total cash consideration paid in the Merger to the Company shareholders in lieu of issuing fractional shares of Purchaser Common Stock will not exceed one percent of the total consideration received by the Company shareholders in the Merger. The fractional share interests of each Company shareholder will be aggregated, and no Company shareholder will receive cash in lieu of fractional shares in an amount equal to or greater than the value of one full share of Purchaser Common Stock.
(p) No compensation to be paid by Purchaser or Newco to any shareholder- employee of the Company will be separate consideration for or allocable to such shareholder's shares of the Company Common Stock; none of the Purchaser Common Stock to be received by any shareholder-employee is separate consideration for or allocable to any employment agreement; and the compensation paid to any shareholder-employee will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services.
Based on the foregoing, we are of the opinion that:
(1) Provided that the merger of the Company with and into Newco qualifies as a statutory merger under the applicable state law, the acquisition by Newco of substantially all of the assets of the Company in exchange for shares of Purchaser stock, cash, and the assumption by Newco of the liabilities of the Company plus the liabilities to which the Company assets are subject will constitute a reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of the Code. The reorganization will not be disqualified because voting stock of Purchaser was used in the Merger. Purchaser, Newco, and the Company will each be "a party to a reorganization" within the meaning of section 368(b).
(2) No gain or loss will be recognized by the Company on the transfer of substantially all of the assets of the Company pursuant to the Merger in exchange for Purchaser Common Stock and the assumption by Newco of the liabilities to which the transferred assets are subject.
(3) No gain or loss will be recognized by Purchaser or Newco on the receipt by Newco of substantially all of the assets of the Company in exchange for Purchaser stock, cash, and the assumption by Newco of the liabilities of the Company and the liabilities to which the transferred assets are subject.
(4) The basis of the Company assets in the hands of Newco will be the same as the basis of those assets in the hands of the Company immediately prior to the transaction.
(5) The basis of the Newco stock in the hands of Purchaser will be Purchaser's basis in the Newco stock immediately before the Merger, increased by the basis of the Company assets acquired by Newco and decreased by the sum of the amount of liabilities of the Company assumed by Newco plus the amount of liabilities, if any, to which the acquired assets of the Company are subject.
(6) The holding period of the assets of the Company in the hands of Newco will include, in each instance, the period during which such assets were held by the Company.
(7) A holder of Company Common Stock who receives solely shares of Purchaser Common Stock in exchange for his Company Common Stock (including fractional shares of Purchaser Common Stock deemed issued as described below) will not recognize any gain or loss upon the exchange.
(8) A Dissenter who receives solely cash in exchange for his shares of Company Common Stock will recognize gain or loss equal to the difference between the amount of cash received and the adjusted basis of his Company shares. Such gain or loss will be capital gain or loss provided that (i) he holds his Company shares as capital assets and (ii) he is not considered to be the constructive owner of any shares of Purchaser stock held by any other person.
(9) A holder of Company Common Stock who receives cash in lieu of a fractional share of Purchaser Common Stock will be treated as if he received a fractional share of Purchaser Common Stock pursuant to the Merger and Purchaser then redeemed such fractional share for the cash. Such a holder will recognize capital gain or loss on the constructive redemption of the fractional share in an amount equal to the difference between the cash received and the adjusted basis of the fractional share.
(10) The basis of the Purchaser Common Stock received by the Company shareholders (including fractional shares of Purchaser Common Stock deemed issued as described above) will be the same as the basis of the Company Common Stock surrendered in exchange therefor.
(11) The holding period of the Purchaser Common Stock received by the Company shareholders will include the period during which the Company Common Stock surrendered in exchange therefor was held, provided that the Company Common Stock is held as a capital asset in the hands of the Company shareholders on the date of the exchange.
(12) Newco will succeed to and take into account, as of the date of the transaction, the items of the Company described in section 381(c) of the Code. These items will be taken into account by Newco subject to the provisions and limitations specified in sections 381, 382(b), 383, and 384 and the regulations thereunder.
(13) Newco will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of the Company as of the date or dates of transfer in accordance with section 381(c)(2) of the Code and section 1.381(c)(2)1 of the income tax regulations. Any deficit in earnings and profits of the Company or Newco will be used only to offset earnings and profits accumulated after the date or dates of transfer.
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 caption "Validity of CC Common Stock" in the Prospectus/Proxy Statement included in the Registration Statement.
This opinion is furnished for your benefit and that of the holders of Company Common Stock and may not be relied upon by any other person without our express written consent. Our opinion is limited to matters expressly set forth herein. No opinion is to be implied or inferred beyond the matters expressly so stated.
Form of Opinion of Bingham, Dana & Gould
Flagship Bank and Trust Company
Re: Agreement and Plan of Reorganization by and among Flagship Bank and Trust Company, Chittenden Corporation, and Chittenden
We have acted as special counsel for Flagship Bank and Trust Company, a Massachusetts trust company (the "Company") in connection with the Agreement and Plan of Reorganization, dated as of September 19, 1995 (the "Plan of Reorganization"), entered into by the Company and Chittenden Corporation, a Vermont Corporation ("Purchaser"), and to be joined in as of the same date by Chittenden Acquisition Bank ("Newco"), a Massachusetts trust company to be formed as a wholly owned subsidiary of Purchaser. The Plan of Reorganization includes the related Plan of Merger entered into by the Company and Purchaser, dated as of September 19, 1995, and to be joined in by Newco as of the same date, providing among other things for the merger of the Company with and into Newco (the "Merger"). In connection with the foregoing, a combined Purchaser registration statement and Company proxy statement (the "Proxy Statement and Prospectus") is being filed with the Securities and Exchange Commission, dated January 9, 1996.
You have requested our opinion as to the tax-free nature of the Merger under applicable provisions of the federal Internal Revenue Code of 1986, as amended (the "Code"). For purposes of this opinion letter, each capitalized term used herein without express definition or definition by reference herein, shall have the same meaning as is assigned to such capitalized term in the Plan of Reorganization.
Management of Purchaser advise us as follows:
Purchaser, a bank holding company, is the common parent of an affiliated group of corporations filing a consolidated return for federal income tax purposes on a calendar year. Purchaser has authorized 30,000,000 shares of $1.00 par value common stock ("Purchaser Common Stock") and 200,000 shares of $100.00 par value preferred stock. As of the date hereof, there were approximately 8,278,789 shares of Purchaser Common Stock issued and outstanding and no shares of preferred stock outstanding. The Purchaser Common Stock is publicly traded over-the-counter and is listed on the NASDAQ Exchange. As of the date hereof, no shareholder owned more than five percent of the Purchaser Common Stock. Purchaser's principal assets consist of all of the outstanding capital stock of Chittenden Trust Company, a Vermont commercial bank engaged in the commercial banking business in the state of Vermont, and all of the outstanding capital stock of The Bank of Western Massachusetts, a Massachusetts trust company engaged in the commercial banking business in the commonwealth of Massachusetts.
Newco is to be organized as a subsidiary of Purchaser, solely to enable Purchaser to acquire the Company by means of the Merger. Purchaser will own and continue to own all of the outstanding shares of Newco capital stock. Prior to the Merger, Newco will not have conducted any business activity.
Management of the Company advise us as follows:
The Company, a trust company organized and existing under the Massachusetts law applicable to banking corporations, conducts commercial banking operations in Massachusetts. The Company has authorized capital stock consisting of (i) 5,000,000 shares of Common Stock, par value $2.815 per share, (the "Company Common Stock") and (ii) 10,000 shares of Preferred Stock, par value $1.00 per share. As of the date hereof, 1,085,600 shares of Company Common Stock are issued and outstanding and owned by approximately 358 shareholders. As of the date hereof, no shares of Preferred Stock are outstanding. As of the date hereof, no persons other than those listed below own more than five percent of the Company Common Stock. The individuals so listed are hereinafter referred to as "Five Percent Shareholders".
The Company has outstanding (i) options to purchase 116,236 shares of Company Common Stock that were granted to employees of the Company at various times and exercise prices (the "Employee Options" and (ii) an option to purchase 359,939 shares of Company Common Stock at a price of $20.00 per share that was granted to Purchaser on September 19, 1995 (the "Lock-up Option"). The Lock-up Option can be exercised by the Purchaser only upon the occurrence of certain events relating to the acquisition or proposed acquisition of more than 20% of the Company Common Stock by a person or group other than the Purchaser or its affiliates or the proposed acquisition by a person or group other than the Purchaser or its affiliates of all or substantially all of the Company's assets through a business combination or otherwise.
Managements of Purchaser and the Company, respectively, advise us as follows:
The managements of Purchaser and the Company have determined that the following transactions would produce a resulting bank with increased product capabilities, service and geographic scope of operations, would result in the Company being able to attract commercial banking business that it could not attract on a stand-alone basis and would produce a resulting organization having economies of scale and more favorable access to capital markets:
(1) Pursuant to an agreement and plan of reorganization, the Company will be merged with and into Newco, with Newco surviving. Pursuant to the Plan of Reorganization and the Plan of Merger, upon the Merger of the Company into Newco, each share of Company Common Stock (excluding shares held by dissenting shareholders, if any) shall be converted into 1.2 shares of Purchaser Common Stock. Company shareholders who do not vote in favor of the Merger and do comply with all of the relevant provisions of Sections 86 through 98 of the Massachusetts Business Corporation Act ("Dissenters") will be paid such amounts as are prescribed under the foregoing provisions by the Purchaser. No fractional shares of Purchaser Common Stock shall be issued in the Merger. Any holder of Company Common Stock who would otherwise have been entitled to receive a fractional share shall receive in lieu thereof an amount of cash equal to the product of such holder's fractional interest multiplied by the average closing price of such holder's Purchaser Common Stock on the NASDAQ NMS for the 20 consecutive trading days ending on the 5th trading day prior to the last Federal regulatory approval required for the consummation of the Merger.
(2) Newco, the surviving bank in the merger, will change its name to "Flagship Bank and Trust Company" and will continue the historic business of the Company under Newco's charter and bylaws.
(3) At the effective time of the Merger, each outstanding Employee Option will be converted into an option to purchase a number of shares of Purchaser Common Stock equal to the product of the number of shares of Company Common Stock that would have been acquired upon an exercise of the Employee Option immediately before the effective time multiplied by 1.2.
With respect to the merger of the Company into Newco in exchange for Purchaser common stock, we have assumed that:
(a) The number of shares of Purchaser Common Stock received by each Company shareholder in exchange for his or her Company Common Stock was determined in arms-length negotiations between Purchaser, and Newco and the Company.
(b) There is no plan or intention by the Five Percent Shareholders, and, to the best knowledge of the managements of Purchaser and the Company, there is no plan or intention on the part of the remaining Company shareholders to sell or otherwise dispose of a number of shares of Purchaser Common Stock received in the Merger that would reduce the former Company common stockholders' ownership of Purchaser stock to a number of shares having, in the aggregate, a value, as of the date of the Merger, of less than 50 percent of the fair market value of the Company stock outstanding as of the same date. For purposes of the preceding sentence, all shares of the Company Common Stock exchanged for cash (including the Company Common Stock held by Dissenters and shares exchanged for cash in lieu of fractional shares of Purchaser Common Stock) will be considered outstanding stock of the Company as of the date of the Merger. Moreover, shares of Company Common Stock and shares of Purchaser Common Stock held by the Company shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger are taken into account for purpose of the first sentence of this paragraph.
(c) Newco will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by the Company immediately prior to the Merger. For purposes of the preceding sentence, amounts paid by the Company to shareholders who received cash, amounts paid by the Company to holders of the stock options and warrants, the Company assets used to pay its reorganization expense, and all redemptions and distributions (except for regular, normal dividends) made by the Company immediately preceding the transfer, will be considered as assets of the Company held immediately prior to the Merger.
(d) Prior to the Merger, Purchaser will be in control of Newco within the meaning of section 368(c) of the Internal Revenue Code of 1986 (the "Code").
(e) Following the Merger, Newco will not issue additional shares of its stock that would result in Purchaser losing control of Newco within the meaning of section 368(c) of the Code.
(f) Purchaser has no plan or intention to redeem or otherwise reacquire any of its stock issued in the transaction.
(g) Purchaser has no plan or intention to sell or otherwise dispose of the stock of Newco, to liquidate Newco, to merge Newco into another corporation, or to cause Newco to sell or dispose of any of the assets acquired from the Company in the Merger, other than in the ordinary course of business or transfers described in section 368(a)(2)(C) of the Code.
(h) All liabilities of the Company at the time of the merger, except for those related to expenses incurred by the Company in connection with the Merger, will have been incurred by the Company in the ordinary course of business or will be associated with the assets transferred to Newco in the Merger.
(i) Following the Merger, the historic business of the Company will be continued by Newco in a substantially unchanged manner.
(j) The Company, Purchaser, Newco, and their respective shareholders shall each pay their own expenses, if any, incurred in connection with the transaction.
(k) There is no intercorporate indebtedness existing between the Company, Purchaser, or Newco that was issued, acquired or will be settled at a discount.
(l) None of the Company, Purchaser, or Newco, is an investment company as defined in sections 368(a)(2)(F)(iii) and (iv) of the Code.
(m) The fair market value of the assets of the Company transferred to Newco in the Merger will exceed the sum of the liabilities assumed by Newco in the Merger plus the amount of the Company's liabilities to which the transferred assets are subject.
(n) Neither Purchaser nor Newco will have owned any shares of the Company Common Stock prior to the Merger.
(o) The payment of cash to the Company shareholders in lieu of fractional shares of Purchaser stock is solely for the purpose of avoiding the expense and inconvenience to Purchaser of issuing fractional shares and does not represent separately bargained for consideration. The total cash consideration paid in the Merger to the Company shareholders in lieu of issuing fractional shares of Purchaser stock will not exceed one percent of the total consideration received by the Company shareholders in the Merger. The fractional share interests of each Company shareholder will be aggregated, and no Company shareholder will receive cash in lieu of fractional shares in an amount equal to or greater than the value of one full share of Purchaser stock.
(p) No compensation to be paid by Purchaser or Newco, to any shareholder- employee of the Company will be separate consideration for or allocable to such shareholder's shares of the Company stock; none of the Purchaser Common Stock to be received by any shareholder-employee is separate consideration for or allocable to any employment agreement; and the compensation paid to any shareholder-employee will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services."
Based on the foregoing, we are of the opinion that:
(1) Provided that the merger of the Company with and into Newco qualifies as a statutory merger under the applicable state law, the acquisition by Newco of substantially all of the assets of the Company in exchange for shares of Purchaser stock, cash, and the assumption by Newco of the liabilities of the Company plus the liabilities to which the Company assets are subject will constitute a reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of the Code. The Reorganization will not be disqualified because voting stock of Purchaser was used in the merger. Purchaser, Newco, and the Company will each be "a party to a reorganization" within the meaning of section 368(b).
(2) No gain or loss will be recognized by the Company on the transfer of substantially all of the assets of the Company pursuant to the Merger in exchange for Purchaser Common Stock and the assumption by Newco of the liabilities of the Company and the liabilities to which the transferred assets are subject.
(3) No gain or loss will be recognized by Purchaser or Newco on the receipt by Newco of substantially all of the assets of the Company in exchange for Purchaser stock, cash, and the assumption by Newco of the liabilities of the Company and the liabilities to which the transferred assets are subject.
(4) The basis of the Company assets in the hands of Newco will be the same as the basis of those assets in the hands of the Company immediately prior to the transaction.
(5) The basis of the Newco stock in the hands of Purchaser will be Purchaser's basis in the Newco stock immediately before the Merger, increased by the basis of the Company assets acquired by Newco and decreased by the sum of the amount of liabilities of the Company assumed by Newco plus the amount of liabilities, if any, to which the acquired assets of the Company are subject.
(6) The holding period of the assets of the Company in the hands of Newco will include, in each instance, the period during which such assets were held by the Company.
(7) A holder of Company Common Stock who receives solely shares of Purchaser Common Stock in exchange for his Company Common Stock (including fractional shares of Purchaser Common Stock deemed issued as described below) will not recognize any gain or loss upon the exchange.
(8) A Dissenter who receives solely cash in exchange for his shares of Company Common Stock will recognize gain or loss equal to the difference between the amount of cash received and the adjusted basis of his Company shares. Such gain or loss will be capital gain or loss provided that (i) he holds his Company shares as capital assets and (ii) he is not considered to be the constructive owner of any shares of Purchaser stock held by any other person.
(9) A holder of Company Common Stock who receives cash in lieu of a fractional share of Purchaser Common Stock will be treated as if he received a fractional share of Purchaser Common Stock pursuant to the Merger and Purchaser then redeemed such fractional share for the cash. Such a holder will recognize capital gain or loss on the constructive redemption of the fractional share in an amount equal to the difference between the cash received and the adjusted basis of the fractional share.
(10) The basis of the Purchaser Common Stock received by the Company shareholders who receive solely Purchaser Common Stock (including fractional shares of Purchaser Common Stock deemed issued as described above) will be the same as the basis of the Company Common Stock surrendered in exchange therefor.
(11) The holding period of the Purchaser Common Stock received by a Company shareholder will include the period during which the Company stock surrendered in exchange therefor was held, provided that the Company stock is held as a capital asset in the hands of the Company shareholder on the date of the exchange.
(12) Newco will succeed to and take into account, as of the date of the transaction, the items of the company described in section 381(c) of the Code. These items will be taken into account by Newco subject to the provisions and limitations specified in sections 381, 382(b), 383, and 384 and the regulations thereunder.
(13) Newco will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of the Company as of the date or dates of transfer in accordance with section 381(c)(2) of the Code and section 1.381(c)(2)-1 of the income tax regulations. Any deficit in earnings and profits of the Company or Newco will be used only to offset earnings and profits accumulated after the date or dates of transfer."
This opinion is furnished for your benefit and that of the holders of Company Common Stock and may not be relied upon by any other person without our express written consent. Our opinion is limited to matters expressly set forth herein. No opinion is to be implied or inferred beyond the matters expressly so stated.
We hereby consent to the filing of this opinion as an exhibit to the Proxy Statement and Prospectus dated January 9, 1996, and to the reference to our firm under the caption, "Certain Federal Income Tax Consequences" in the Proxy Statement and Prospectus dated January 9, 1996. | S-4/A | EX-8 | 1996-01-16T00:00:00 | 1996-01-16T11:07:00 |
0000025191-96-000002 | 0000025191-96-000002_0000.txt | [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the 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 (IRS Employer incorporation or organization) Identification No.)
155 N. Lake Avenue, Pasadena, California 91101 (Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at January 15, 1996 Common Stock $.05 par value 102,054,364
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. 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 adjustments) considered necessary for a fair presentation have been included. Operating results for the nine month period ended November 30, 1995 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the annual report on Form 10-K for the fiscal year ended February 28, 1995 of Countrywide Credit Industries, Inc. (the "Company").
In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, which the Company adopted effective March 1, 1995. SFAS No. 122 amended SFAS No. 65, Accounting for Certain Mortgage Banking Activities. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter and nine months ended November 30, 1995 are not directly comparable to prior periods. See Note E.
Certain amounts reflected in the consolidated financial statements for the three and nine month periods ended November 30, 1994 have been reclassified to conform to the presentation for the three and nine months ended November 30, 1995. NOTE B - NOTES PAYABLE
Revolving Credit Facility and Commercial Paper
As of November 30, 1995, Countrywide Funding Corporation ("CFC"), the Company's mortgage banking subsidiary, had an unsecured credit agreement (revolving credit facility) with forty-seven commercial banks permitting CFC to borrow an aggregate maximum amount of $3.01 billion, less commercial paper backed by the agreement. The amount available under the facility is subject to a borrowing base, which consists of mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility contains various financial covenants and restrictions, certain of which limit the amount of dividends that can be paid by the Company or CFC. The interest rate on direct borrowings is based on a variety of sources, including the prime rate and the London Interbank Offered Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies, depending on CFC's credit ratings. The weighted average borrowing rate on direct and commercial paper borrowings for the nine months ended November 30, 1995 was 5.82%. The weighted average borrowing rate on commercial paper outstanding as of November 30, 1995 was 5.82%. Under certain circumstances, including the failure to maintain specified minimum credit ratings, borrowings under the revolving credit facility and commercial paper may become secured by mortgage loans held for sale, receivables for mortgage loans shipped and mortgage servicing rights. The facility expires in May 1998.
As of November 30, 1995, all of the outstanding fixed-rate notes had been effectively converted by interest rate swap agreements to floating-rate notes. The weighted average borrowing rate on medium-term note borrowings for the nine months ended November 30, 1995, including the effect of the interest rate swap agreements, was 6.79%. In addition, as of November 30, 1995, $1.5 million and $235 million were available for future issuances under the Series C and Series D shelf registrations, respectively.
As of November 30, 1995, the Company had entered into short-term financing arrangements to sell mortgage-backed securities ("MBS") under agreements to repurchase. The weighted average borrowing rate for the nine months ended November 30, 1995 was 5.95%. The weighted average borrowing rate on repurchase agreements outstanding as of November 30, 1995 was 5.84%. The repurchase agreements were collateralized by MBS. All MBS underlying repurchase agreements are held in safekeeping by broker-dealers, and all agreements are to repurchase the same or substantially identical MBS.
As of November 30, 1995, CFC had uncommitted revolving credit facilities with two government-sponsored entities and an affiliate of an investment banking firm. The credit facilities are secured by conforming mortgage loans which are in the process of being pooled into MBS. Interest rates are based on LIBOR, federal funds and/or the prevailing rates for MBS repurchase agreements. The weighted average borrowing rate for all three facilities for the nine months ended November 30, 1995 was 6.03%. The balance outstanding under the facilities at November 30, 1995 was $167 million.
NOTE C - SUBSEQUENT EVENTS
On December 11, 1995, the Company declared a cash dividend of $0.08 per common share payable January 22, 1996 to shareholders of record on December 29, 1995.
NOTE D - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
NOTE E - IMPLEMENTATION OF NEW ACCOUNTING STANDARD
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122, which the Company adopted effective March 1, 1995. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended November 30, 1995 of $8.1 million, or $0.08 per share. The overall increase to earnings for the nine months ended November 30, 1995 was $27.7 million, or $0.28 per share.
SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was charged to earnings when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 was an increase in net earnings of $23.8 million, or $0.23 per share, and $67.3 million, or $0.68 per share, for the quarter and nine months ended November 30, 1995, respectively.
With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. The separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization by $15.7 million, or $0.15 per share and $39.6 million, or $0.40 per share, for the quarter and nine months ended November 30, 1995, respectively.
SFAS No. 122 also requires that all capitalized mortgage servicing rights ("MSRs") be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. For purposes of measuring impairment, MSRs are stratified on the basis of interest rate and type of interest rate (fixed or adjustable). In addition to normal amortization of the servicing assets amounting to $46.4 million and $116.7 million for the quarter and nine months ended November 30, 1995, respectively, the Company reduced the servicing assets by an additional $109.9 million and $239.0 million of impairment during the quarter and nine months ended November 30, 1995, respectively. The entire amount of such impairment was offset by a pre-tax net gain of $119.4 million and $254.4 million for the quarter and nine months ended November 30, 1995, respectively, in the Company's servicing hedge which is designed to protect its servicing investment. For the quarter and nine months ended November 30, 1995, respectively, the net gain included net unrealized gains of $96.2 million and $188.7 million and realized gains of $23.2 million and $65.7 million from the sale of various financial instruments that comprise the servicing hedge. As a part of the adoption of SFAS No. 122, the Company revised its servicing hedge accounting policy, effective March 1, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the servicing hedge.
NOTE F - SERVICING HEDGE
NOTE G - VALUATION ALLOWANCE FOR CAPITALIZED MORTGAGE SERVICING RIGHTS
The following summarizes the aggregate activity in the valuation allowances for capitalized mortgage servicing rights.
(Dollar amounts in thousands) Aggregate Balances
At February 28, 1995 $ - At November 30, 1995 $57,050
NOTE H - RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for the nine months ended November 30, 1995 and 1994 were 2.08 and 1.79, respectively. For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes, plus fixed charges. Fixed charges include interest expense on debt and the portion of rental expenses which is considered to be representative of the interest factor (one-third of operating leases). Since the major portion of the Company's interest costs is incurred to finance mortgage loans which generate interest income, and since interest income and interest expense are generated simultaneously, management believes that a more meaningful measure of its debt service requirements is the ratio of earnings to net fixed charges. Under this alternative formula, net fixed charges are defined as interest expense on debt, other than debt incurred to finance the Company's mortgage loan inventory, plus the interest element (one-third) of operating leases. Under such alternative formula, these ratios for the nine months ended November 30, 1995 and 1994 were 9.30 and 3.54, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarter Ended November 30, 1995 Compared to Quarter Ended November 30, 1994
Revenues for the quarter ended November 30, 1995 increased 69% to $225.6 million from $133.7 million for the quarter ended November 30, 1994. Net earnings increased 228% to $53.0 million for the quarter ended November 30, 1995 from $16.2 million for the quarter ended November 30, 1994. Effective March 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the quarter ended November 30, 1995 are not directly comparable to periods prior to the implementation date. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the quarter ended November 30, 1995 of $8.1 million, or $0.08 per share. In addition to the accounting change, the increase in revenues and net earnings for the quarter ended November 30, 1995 compared to the quarter ended November 30, 1994 was attributable to an increase in the size of the Company's servicing portfolio, higher production volume and improved pricing margins.
The total volume of loans produced increased 44% to $9.3 billion for the quarter ended November 30, 1995 from $6.5 billion for the quarter ended November 30, 1994. Refinancings totaled $3.4 billion, or 36% of total fundings, for the quarter ended November 30, 1995, as compared to $1.3 billion, or 20% of total fundings, for the quarter ended November 30, 1994. Fixed-rate loan production totaled $7.3 billion, or 79% of total fundings, for the quarter ended November 30, 1995, as compared to $3.6 billion, or 55% of total fundings, for the quarter ended November 30, 1994. Production in the Company's Consumer Markets Division increased to $1.9 billion for the quarter ended November 30, 1995 compared to $1.3 billion for the quarter ended November 30, 1994. Production in the Company's Wholesale Division amounted to $2.1 billion for each of the quarters ended November 30, 1995 and November 30, 1994. The Company's Correspondent Division purchased $5.3 billion in mortgage loans for the quarter ended November 30, 1995 compared to $3.1 billion for the quarter ended November 30, 1994. The factors which affect the relative volume of production among the Company's three divisions include pricing decisions and the relative competitiveness of such pricing, the level of real estate and mortgage lending activity in each Division's markets, and the success of each Division's sales and marketing efforts.
At November 30, 1995 and 1994, the Company's pipeline of loans in process was $4.5 billion and $4.4 billion, respectively. In addition, at November 30, 1995, the Company had committed to make loans in the amount of $1.2 billion, subject to property identification and borrower qualification ("LOCK N' SHOPSM Pipeline"). At November 30, 1994, the LOCK N' SHOP Pipeline was $2.7 billion. Historically, approximately 43% to 75% of the pipeline of loans in process has funded. For the quarters ended November 30, 1995 and 1994, the Company received 113,280 and 82,355 new loan applications, respectively, at an average daily rate of $193 million and $149 million, respectively. The following actions were taken during the quarter ended November 30, 1995 on the total applications received during that quarter: 62,140 loans (55% of total applications received) were funded and 16,340 applications (14% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the quarter ended November 30, 1994 on the total applications received during that quarter: 43,123 loans (52% of total applications received) were funded and 8,702 applications (11% of total applications received) were either rejected by the Company or withdrawn by the applicant. The factors that affect the percentage of applications received and funded during a given time period include the movement and direction of interest rates, the average length of loan commitments issued, the creditworthiness of applicants, the production divisions' loan processing efficiency and loan pricing decisions.
Loan origination fees increased during the quarter ended November 30, 1995 as compared to the quarter ended November 30, 1994 due to higher loan production that resulted from a decrease in the level of mortgage interest rates. The percentage increase in loan origination fees was less than the percentage increase in total production. This is primarily because production by the Correspondent Division (which, due to lower cost structures, charges lower origination fees per dollar loaned) comprised a greater percentage of total production in the quarter ended November 30, 1995 than in the quarter ended November 30, 1994. Gain (loss) on sale of loans improved during the quarter ended November 30, 1995 as compared to the quarter ended November 30, 1994 primarily due to improved pricing margins and the impact of adopting SFAS No. 122. SFAS No. 122 requires the recognition of originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), as assets by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. This accounting methodology, in turn, increases the gain (or reduces the loss) on sale of loans as compared to the accounting results obtained under SFAS No. 65, the previously applicable accounting standard. Under SFAS No. 65, the cost of OMSRs was not recognized as an asset and was included in the gain or loss recorded when the related loan was sold. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the quarter ended November 30, 1995 was an increase in gain on sale of loans of $39.7 million.
With respect to PMSRs, SFAS No. 122 has a different cost allocation methodology than SFAS No. 65. In contrast to a cost allocation based on relative market value as set forth in SFAS No. 122, the prior requirement was to allocate the costs incurred in excess of the market value of the loans without the servicing rights to PMSRs. During the quarter ended November 30, 1995, the separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $26.3 million. In general, loan origination fees and gain (loss) on sale of loans are affected by numerous factors including loan pricing decisions, interest rate volatility, the general direction of interest rates and the volume of loans produced.
Net interest income (interest earned net of interest charges) increased to $22.1 million for the quarter ended November 30, 1995 from $16.2 million for the quarter ended November 30, 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($10.0 million and $5.1 million for the quarters ended November 30, 1995 and 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($18.4 million and $4.6 million for the quarters ended November 30, 1995 and 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($30.5 million and $15.7 million for the quarters ended November 30, 1995 and 1994, respectively). The Company earns interest on, and incurs interest expense to carry, mortgage loans held in its warehouse. The increase in net interest income from the mortgage loan warehouse was attributable to an increase in the average amount of the mortgage loan warehouse due to increased production, offset somewhat by a lower net earnings rate. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio and an increase in the payments of interest to certain investors pursuant to customary servicing arrangements with regard to paid-off loans in excess of the interest earned on these loans through their respective payoff dates ("Interest Costs Incurred on Payoffs"). The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate and an increase in the average custodial balances (caused by growth of the servicing portfolio and an increase in prepayments) from the quarter ended November 30, 1994 to the quarter ended November 30, 1995.
During the quarter ended November 30, 1995, loan administration income was positively affected by the continued growth of the loan servicing portfolio. At November 30, 1995, the Company serviced $132.8 billion of loans (including $2.2 billion of loans subserviced for others) compared to $105.4 billion (including $0.7 billion of loans subserviced for others) at November 30, 1994, a 26% increase. The growth in the Company's servicing portfolio during the quarter ended November 30, 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments and scheduled amortization of mortgage loans. The weighted average interest rate of the mortgage loans in the Company's servicing portfolio at November 30, 1995 was 7.8% compared to 7.4% at November 30, 1994. It is the Company's strategy to build and retain its servicing portfolio because of the returns the Company can earn from such investment and because the Company believes that servicing income is countercyclical to loan production income.
During the quarter ended November 30, 1995, the prepayment rate of the Company's servicing portfolio was 13%, as compared to 7% for the quarter ended November 30, 1994. In general, the prepayment rate is affected by the relative level of mortgage interest rates, activity in the home purchase market and the relative level of home prices in a particular market. The increase in the prepayment rate is primarily attributable to increased refinance activity caused by decreased mortgage interest rates in the quarter ended November 30, 1995 from the quarter ended November 30, 1994. The primary means used by the Company to reduce the sensitivity of its earnings to changes in interest rates is through a strong loan production capability and a growing servicing portfolio. To mitigate the effect on earnings of higher amortization and impairment (which are deducted from loan servicing income) resulting from increased prepayment activity, the Company acquires financial instruments, including derivative contracts, that increase in value when interest rates decline (the "Servicing Hedge"). These financial instruments include call options on interest rate futures and MBS, interest rate floors and certain tranches of collateralized mortgage obligations ("CMOs").
The CMOs, which consist primarily of principal-only ("P/O") securities, have been purchased at deep discounts to their par values. As interest rates decline, prepayments on the collateral underlying the CMOs should increase. These changes should result in a decline in the average lives of the P/O securities and an increase in the present values of their cash flows.
The Servicing Hedge instruments utilized by the Company are designed to protect the value of the investment in servicing rights from the effects of increased prepayment activity that generally results from declining interest rates. To the extent that interest rates increase, the value of the servicing rights increases while the value of the hedge instruments declines. However, the Company is not exposed to loss beyond its initial outlay to acquire the hedge instruments. During the quarter ended November 30, 1995, the Company recognized a net gain of $119.4 million from its Servicing Hedge. The net gain included unrealized gains of $96.2 million and realized gains of $23.2 million from the sale of various financial instruments that comprise the Servicing Hedge. As a part of the adoption of SFAS No. 122, the Company has revised its servicing hedge accounting policy, effective March 1, 1995, to adjust the basis of the servicing assets for unrealized gains or losses in the derivative financial instruments comprising the Servicing Hedge. There can be no assurance the Company's Servicing Hedge will generate gains in the future, or that if gains are generated, they will fully offset impairment of the Servicing Assets.
The Company recorded amortization and impairment of its servicing assets in the quarter ended November 30, 1995 totaling $156.3 million (consisting of normal amortization amounting to $46.4 million and impairment of $109.9 million), compared to $23.3 million of amortization in the quarter ended November 30, 1994. SFAS No. 122 requires that all capitalized mortgage servicing rights be evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. Under SFAS No. 65, the impairment evaluation could be made using either discounted or undiscounted cash flows. No uniform required level of disaggregation was specified. The Company used a disaggregated undiscounted method. The factors affecting the amount of amortization and impairment recorded in an accounting period include the level of prepayments during the period, the change in prepayment expectations and the amount of Servicing Hedge gains.
During the quarter ended November 30, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $1.3 billion at a price of 1.41% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the quarter ended November 30, 1994, the Company acquired bulk servicing rights for loans with principal balances aggregating $4.5 billion at a price of $80.9 million or 1.79% of the aggregate outstanding principal balance of the servicing portfolios acquired.
The amount of salaries increased during the quarter ended November 30, 1995 primarily due to the increased number of employees resulting from increased production volume and a larger servicing portfolio. Incentive bonuses earned during the quarter ended November 30, 1995 increased primarily due to larger loan production and increased loan production personnel, and growth in the Company's non-mortgage banking subsidiaries operations.
Occupancy and other office expenses for the quarter ended November 30, 1995 increased to $26.8 million from $25.3 million for the quarter ended November 30, 1994. The increase was primarily due to increased postage and telephone usage associated with loan servicing activities.
Guarantee fees (fees paid to guarantee timely and full payment of principal and interest on MBS and whole loans sold to permanent investors and to transfer the credit risk of the loans in the servicing portfolio) for the quarter ended November 30, 1995 increased 44% to $31.7 million from $21.9 million for the quarter ended November 30, 1994. This increase resulted primarily from an increase in the servicing portfolio.
Marketing expenses for the quarter ended November 30, 1995 increased 20% to $6.8 million from $5.7 million for the quarter ended November 30, 1994. The increase in marketing expenses reflected the Company's implementation of a new marketing plan.
Other operating expenses for the quarter ended November 30, 1995 increased from the quarter ended November 30, 1994 by $5.4 million, or 60%. This increase was primarily due to an increased provision for bad debts resulting from a larger servicing portfolio, home equity loans held in portfolio pending securitization and increased production.
Profitability of Loan Production and Servicing Activities
In the quarter ended November 30, 1995, the Company's pre-tax earnings from its loan production activities (which include loan origination and purchases, warehousing and sales) were $17.3 million. In the quarter ended November 30, 1994, the Company's comparable pre-tax loss was $41.2 million. The increase of $58.5 million was primarily attributable to increased loan production, improved pricing margins, the effect of the adoption of SFAS No. 122 previously discussed and a change of $11.3 million in the Company's internal method of allocating overhead between its production and servicing activities. In the quarter ended November 30, 1995, the Company's pre-tax income from its loan servicing activities (which include administering the loans in the servicing portfolio, selling homeowners and other insurance and acting as tax payment agent) was $66.3 million as compared to $64.4 million in the quarter ended November 30, 1994. The increase of $1.9 million was principally due to an increase in the servicing portfolio, partially offset by the change in the Company's internal overhead allocation method and the increase in Interest Costs Incurred on Payoffs.
Nine Months Ended November 30, 1995 Compared to Nine Months Ended November
Revenues for the nine months ended November 30, 1995 increased 33% to $613.8 million from $462.0 million for the nine months ended November 30, 1994. Net earnings increased 100% to $138.1 million for the nine months ended November 30, 1995 from $69.0 million for the nine months ended November 30, 1994. Since SFAS No. 122 prohibits retroactive application, historical accounting results have not been restated and, accordingly, the accounting results for the nine months ended November 30, 1995 are not directly comparable to prior periods. The overall impact on the Company's financial statements of adopting SFAS No. 122 was an increase in net earnings for the nine months ended November 30, 1995 of $27.7 million, or $0.28 per share. In addition to the accounting change, the increase in revenues and net earnings for the nine months ended November 30, 1995 compared to the nine months ended November 30, 1994 was attributable to an increase in the size of the Company's servicing portfolio and improved pricing margins, partially offset by the non-recurring gain on the sale of servicing in the prior year which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year.
The total volume of loans produced increased 13% to $25.0 billion for the nine months ended November 30, 1995 from $22.1 billion for the nine months ended November 30, 1994. Refinancings totaled $7.1 billion, or 28% of total fundings, for the nine months ended November 30, 1995, as compared to $7.4 billion, or 34% of total fundings, for the nine months ended November 30, 1994. Fixed-rate mortgage loan production totaled $18.5 billion, or 74% of total fundings, for the nine months ended November 30, 1995, as compared to $15.0 billion, or 68% of total fundings, for the nine months ended November 30, 1994. Production in the Company's Consumer Markets Division decreased to $5.3 billion for the nine months ended November 30, 1995 from $6.0 billion for the nine months ended November 30, 1994. Production in the Company's Wholesale Division decreased to $5.9 billion for the nine months ended November 30, 1995 from $7.1 billion for the nine months ended November 30, 1994. The Company's Correspondent Division purchased $13.8 billion in mortgage loans for the nine months ended November 30, 1995 compared to $9.0 billion for the nine months ended November 30, 1994.
For the nine months ended November 30, 1995 and 1994, the Company received 330,267 and 243,151 new loan applications, respectively, at an average daily rate of $183 million and $145 million, respectively. The following actions were taken during the nine months ended November 30, 1995 on the total applications received during that nine months: 219,972 loans (67% of total applications received) were funded and 69,811 applications (21% of total applications received) were either rejected by the Company or withdrawn by the applicant. The following actions were taken during the nine months ended November 30, 1994 on the total applications received during that nine months: 161,136 loans (66% of total applications received) were funded and 47,028 applications (19% of total applications received) were either rejected by the Company or withdrawn by the applicant.
Loan origination fees decreased during the nine months ended November 30, 1995 as compared to the nine months ended November 30, 1994 primarily because production by the Correspondent Division comprised a greater percentage of total production in the nine months ended November 30, 1995 than in the nine months ended November 30, 1994. Gain (loss) on sale of loans improved during the nine months ended November 30, 1995 as compared to the nine months ended November 30, 1994 primarily due to the impact of adopting SFAS No. 122 and improved pricing margins. The separate impact of recognizing OMSRs as assets in the Company's financial statements in accordance with SFAS No. 122 for the nine months ended November 30, 1995 was an increase in gain on sale of loans of $112.1 million. The separate impact of the application of the SFAS No. 122 cost allocation method, along with the effect of changes in market conditions, was to reduce PMSR capitalization, and therefore negatively impact gain (loss) on sale of loans, by $65.9 million during the nine months ended November 30, 1995.
Net interest income (interest earned net of interest charges) decreased to $52.3 million for the nine months ended November 30, 1995 from $61.8 million for the nine months ended November 30, 1994. Consolidated net interest income is principally a function of: (i) net interest income earned from the Company's mortgage loan warehouse ($21.6 million and $32.3 million for the nine months ended November 30, 1995 and 1994, respectively); (ii) interest expense related to the Company's investment in servicing rights ($42.7 million and $13.4 million for the nine months ended November 30, 1995 and 1994, respectively) and (iii) interest income earned from the custodial balances associated with the Company's servicing portfolio ($73.4 million and $42.9 million for the nine months ended November 30, 1995 and 1994, respectively). The decrease in net interest income from the mortgage loan warehouse was primarily attributable to a lower net earnings rate. The increase in interest expense on the investment in servicing rights resulted primarily from a larger servicing portfolio. The increase in net interest income earned from the custodial balances was related to an increase in the earnings rate and an increase in the average custodial balances from the nine months ended November 30, 1994 to the nine months ended November 30, 1995.
During the nine months ended November 30, 1995, loan administration income was positively affected by the continued growth of the loan servicing portfolio. The growth in the Company's servicing portfolio during the nine months ended November 30, 1995 was the result of loan production volume and the acquisition of bulk servicing rights, partially offset by prepayments, partial prepayments, and scheduled amortization of mortgage loans.
The prepayment rate of the Company's servicing portfolio was 11% for each of the nine month periods ended November 30, 1995 and 1994.
During the nine months ended November 30, 1995, the Company recognized a net gain of $254.4 million from its Servicing Hedge. The net gain included unrealized gains of $188.7 million and realized gains of $65.7 million from the sale of various financial instruments that comprise the Servicing Hedge.
The Company recorded amortization and impairment of its servicing assets in the nine months ended November 30, 1995 totaling $355.7 million (consisting of normal amortization amounting to $116.7 million and impairment of $239.0 million), compared to $71.4 million of amortization in the nine months ended November 30, 1994.
During the nine months ended November 30, 1995, the Company acquired bulk servicing rights for loans with principal balances aggregating $4.7 billion at a price of $62.2 million or 1.32% of the aggregate outstanding principal balance of the servicing portfolios acquired. During the nine months ended November 30, 1994, the Company acquired bulk servicing rights for loans with principal balances aggregating $13.1 billion at a price of $192.7 million or 1.47% of the aggregate outstanding principal balance of the servicing portfolios acquired.
During the nine months ended November 30, 1994, the Company sold servicing rights for loans with principal balances of $5.9 billion and recognized a gain of $56.9 million. No servicing rights were sold during the nine months ended November 30, 1995.
The amount of salaries increased during the nine months ended November 30, 1995 primarily due to the increased number of employees resulting from a larger servicing portfolio and growth in the Company's non-mortgage banking subsidiaries.
Occupancy and other office expenses for the nine months ended November 30, 1995 increased slightly to $77.9 million from $76.9 million for the nine months ended November 30, 1994. The increase was primarily attributable to loan servicing activities.
Guarantee fees for the nine months ended November 30, 1995 increased 39% to $86.0 million from $61.7 million for the nine months ended November 30, 1994. This increase resulted primarily from an increase in the servicing portfolio.
Marketing expenses for the nine months ended November 30, 1995 increased 9% to $19.4 million from $17.9 million for the nine months ended November 30, 1994, reflecting the Company's implementation of a new marketing plan.
In the nine months ended November 30, 1994, the Company incurred an $8.0 million charge related to the consolidation and relocation of branch and administrative offices that occurred as a result of the reduction in staff caused by declining production. No such charge was incurred in the nine months ended November 30, 1995.
Other operating expenses for the nine months ended November 30, 1995 increased from the nine months ended November 30, 1994 by $7.8 million, or 27%. This increase was primarily due to an increased provision for bad debts resulting from a larger servicing portfolio, home equity loans held in portfolio pending securitization and increased production.
Profitability of Loan Production and Servicing Activities
In the nine months ended November 30, 1995, the Company's pre-tax earnings from its loan production activities were $33.8 million. In the nine months ended November 30, 1994, the Company's comparable pre-tax loss was $58.6 million. The increase of $92.4 million was primarily attributable to improved pricing margins, the effect of the adoption of SFAS No. 122 previously discussed and a change of $31.8 million in the Company's internal method of allocating overhead between its production and servicing activities. In the nine months ended November 30, 1995, the Company's pre-tax income from its loan servicing activities was $187.2 million as compared to $164.4 million in the nine months ended November 30, 1994. The increase of $22.8 million was principally due to the increase in the size of the servicing portfolio, partially offset by the change in the Company's internal overhead allocation method discussed above and a non-recurring gain on the sale of servicing in the prior year (which was offset, in part, by a non-recurring write-off of the servicing hedge in the prior year).
Inflation affects the Company in the areas of loan production and servicing. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Historically, as interest rates increase, loan production, particularly from loan refinancings, decreases, although in an environment of gradual interest rate increases, purchase activity may actually be stimulated by an improving economy or the anticipation of increasing real estate values. In such periods of reduced loan production, production margins may decline due to increased competition resulting from overcapacity in the market. In a higher interest rate environment, servicing-related earnings are enhanced because prepayment rates tend to slow down. This extends the average life of the Company's servicing portfolio and reduces both amortization of the servicing assets and Interest Costs Incurred on Payoffs. In addition, the rate of interest earned from the custodial balances tends to increase. Conversely, as interest rates decline, loan production, particularly from loan refinancings, increases. However, during such periods, prepayment rates tend to accelerate (principally on the portion of the portfolio having a note rate higher than the then-current interest rates), thereby decreasing the average life of the Company's servicing portfolio and adversely impacting its servicing-related earnings. This is primarily due to increased amortization and impairment of the Servicing Assets (which may be offset by income from the Servicing Hedge), a decreased rate of interest earned from the custodial balances, and increased Interest Costs Incurred on Payoffs.
The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general national pattern of sales and resales of homes, although refinancings tend to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer seasons and decline to lower levels from mid-November through February. In addition, delinquency rates typically rise in the winter months, which results in higher servicing costs. However, late charge income has historically been sufficient to offset such incremental expenses.
The Company's principal financing needs are the financing of loan funding activities and the investment in servicing rights. To meet these needs, the Company currently utilizes commercial paper supported by its revolving credit facility, medium-term notes, MBS repurchase agreements, subordinated notes, unsecured notes, pre-sale funding facilities, cash flow from operations and direct borrowings from its revolving credit facility. In June 1995, the Company completed a public offering of its common stock through the issuance and sale of 10,000,000 shares at a price of $21 per share. In addition, in the past the Company has utilized whole loan repurchase agreements, servicing-secured bank facilities, privately-placed financings and public offerings of preferred stock. See Note B to the Company's Consolidated Financial Statements included herein for more information on the Company's financings.
Certain of the debt obligations of the Company and CFC contain various provisions that may affect the ability of the Company and CFC to pay dividends and remain in compliance with such obligations. These provisions include requirements concerning net worth, current ratio and other financial covenants. These provisions have not had, and are not expected to have, an adverse impact on the ability of the Company and CFC to pay dividends.
The Company continues to investigate and pursue alternative and supplementary methods to finance its growing operations through the public and private capital markets. These may include such methods as mortgage loan sale transactions designed to expand the Company's financial capacity and reduce its cost of capital and the securitization of servicing income cash flows.
In connection with its derivative contracts, the Company may be required to deposit cash or certain government securities or obtain letters of credit to meet margin requirements. The Company considers such potential margin requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company sells to investors the mortgage loans it originates and purchases but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investment vehicle. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity.
Operating Activities In the nine months ended November 30, 1995, the Company's operating activities used cash of approximately $1.8 billion on a short-term basis to fund the increase in its warehouse of mortgage loans. The Company's operating activities also generated $344 million of positive cash flow, which was principally allocated to the long-term investment in servicing as discussed below under "Investing Activities."
Investing Activities The primary investing activity for which cash was used during the nine months ended November 30, 1995 was the investment in servicing rights. Net cash used by investing activities increased to $670 million for the nine months ended November 30, 1995 from $593 million for the nine months ended November 30, 1994.
Financing Activities Net cash provided by financing activities amounted to $2.1 billion and $600 million for the nine months ended November 30, 1995 and 1994, respectively. The increase in net cash provided was primarily the result of higher net short-term borrowings by the Company during the nine months ended November 30, 1995 and from the issuance and sale of common stock.
Applications and Pipeline of Loans in Process
During the nine months ended November 30, 1995, the Company received new loan applications at an average daily rate of $183 million and at November 30, 1995, the Company's pipeline of loans in process was $4.5 billion. This compares to a daily application rate during the nine months ended November 30, 1994 of $149 million and a pipeline of loans in process at November 30, 1994 of $4.4 billion. During the nine months ended November 30, 1995, interest rates decreased, resulting in an increase in demand for mortgage loans. The size of the pipeline is generally an indication of the level of future fundings, as historically 43% to 75% of the pipeline of loans in process has funded. In addition, the Company's LOCK N' SHOP Pipeline at November 30, 1995 was $1.2 billion and at November 30, 1994 was $2.7 billion. Future application levels and loan fundings are dependent on numerous factors, including the level of demand for mortgage credit, the extent of price competition in the market, the direction of interest rates, seasonal factors and general economic conditions. For the month ended December 31, 1995, the average daily amount of applications received was $192 million, and at December 31, 1995, the pipeline of loans in process was $4.4 billion and the LOCK N' SHOP pipeline was $863 million.
Mortgage interest rates generally increased in 1994 and have declined in 1995. The environment of rising interest rates resulted in lower production (particularly from refinancings) and greater price competition, which adversely impacted earnings from loan production activities and may continue to do so in the future. The Company took steps to maintain its productivity and efficiency, particularly in the loan production area, by reducing staff and embarking on a program to reduce production-related and overhead costs. However, the rising interest rates enhanced earnings from the Company's loan servicing portfolio as amortization and impairment of the servicing assets and Interest Costs Incurred on Payoffs decreased from levels experienced during the periods of declining interest rates and the rate of interest earned from the custodial balances associated with the Company's servicing portfolio increased. The decline in interest rates during the nine months ended November 30, 1995 resulted in impairment (as specified in SFAS No. 122) of $239.0 million and a servicing hedge gain of $254.4 million. In addition, the Company has further increased the size of its servicing portfolio, thereby increasing its servicing revenue base, by acquiring servicing contracts through bulk purchases. During the nine months ended November 30, 1995, the Company purchased such servicing contracts with principal balances amounting to $4.7 billion. Prepayments in the Company's servicing portfolio were $9.3 billion during the nine months ended November 30, 1995 and $1.6 billion during the month ended December 31, 1995.
The Company's primary competitors are commercial banks and savings and loans and mortgage banking subsidiaries of diversified companies, as well as other mortgage bankers. Particularly in California, savings and loans and other portfolio lenders have competed with the Company by offering aggressively priced adjustable-rate mortgage products which grow in popularity when interest rates rise. Generally, the Company has experienced significant price competition among mortgage lenders which has resulted in downward pressure on loan production earnings.
Some regions in which the Company operates, particularly some regions of California, have been experiencing slower economic growth, and real estate financing activity in these regions has been negatively impacted. As a result, home lending activity for single- (one-to-four) family residences in these regions may also have experienced slower growth. The Company's California mortgage loan production (measured by principal balance) constituted 31% of its total production during the nine months ended November 30, 1995 and 32% for the nine months ended November 30, 1994. The Company is continuing its efforts to expand its production capacity outside of California. Since California's mortgage loan production constituted a significant portion of the Company's production during the period, there can be no assurance that the Company's operations will not continue to be adversely affected to the extent California continues to experience slower or negative economic growth resulting in decreased residential real estate lending activity or market factors further impact the Company's competitive position in the state.
The Company's servicing portfolio delinquency rate increased to 3.52% at December 31, 1995 and 3.20% at November 30, 1995, up from 1.94% at November 30, 1994. This increase was primarily the result of portfolio mix changes and aging. The proportion of government and high loan-to-value conventional loans, which tend to experience higher delinquency rates than low loan-to-value conventional loans, has increased from 37% of the portfolio at November 30, 1994 to 45% at December 31, 1995. In addition, the weighted average age of the portfolio is 25 months at December 31, 1995, up from 19 months at November 30, 1994. Delinquency rates tend to increase as loans age, reaching a peak at three to five years of age. However, because the loans in the portfolio are serviced on a non-recourse basis, the Company's exposure to credit loss resulting from increased delinquency rates is substantially limited. Further, related late charge income has historically been sufficient to offset incremental servicing expenses resulting from an increased delinquency rate.
Because the Company services substantially all conventional loans on a non-recourse basis, foreclosure losses are generally the responsibility of the investor or insurer and not the Company. Accordingly, any increase in foreclosure activity should not result in significant foreclosure losses to the Company. However, the Company's expenses may be increased somewhat as a result of the additional staff efforts required to foreclose on a loan. Similarly, government loans serviced by the Company (24% of the Company's servicing portfolio at November 30, 1995) are insured or partially guaranteed against loss by the Federal Housing Administration or the Veterans Administration. In the Company's view, the limited unreimbursed costs that may be incurred by the Company on government foreclosed loans are not material to the Company's consolidated financial statements.
As previously discussed, the Company recorded a net gain of $254.4 million during the nine months ended November 30, 1995 from its Servicing Hedge which is designed to protect its servicing investment from the effects of increased prepayment activity that generally results from declining interest rates. There can be no assurance the Company's Servicing Hedge will generate gains in the future, or that if gains are generated, they will fully offset impairment of the Servicing Assets.
Item 6. Exhibits and Reports on Form 8-K
11.1 Statement Regarding Computation of Per Share Earnings.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
12.2 Computation of the Ratio of Earnings to Net Fixed Charges. 27 Financial Data Schedules (included only with the electronic filing with the SEC). (b) Reports on Form 8-K. No reports on Form 8-K were filed during this reporting 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.
DATE: January 16, 1996 /s/ Stanford L. Kurland
DATE: January 16, 1996 /s/ Carlos M. Garcia Officer and Chief Accounting Officer | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T14:31:44 |
0000950129-96-000040 | 0000950129-96-000040_0002.txt | <DESCRIPTION>THIRD AMENDMENT TO NON-EMP. DIR. STOCK OPTION PLAN
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
WHEREAS, the Board of Directors of Team, Inc. during a meeting held on December 14, 1995, adopted a resolution amending the Team, Inc. Non-Employee Directors' Stock Option Plan ("Plan") to increase the maximum number of shares which may be offered pursuant to the Plan from 205,000 to 220,000, and a resolution increasing the limited exercise period of Options by a Director after termination of his term in office, or by his legal representative after
NOW, THEREFORE, by order of the Board of Directors:
1. Paragraph 4 of the Plan has been amended in its entirety to read as follows:
"4. Common Stock Subject to Options. The aggregate number of shares of the Company's Common Stock which may be issued upon exercise of Options granted under the Plan shall not exceed 220,000, subject to adjustment under the provisions of Paragraph 7. The shares of Common Stock to be issued upon the exercise of Options may be authorized but unissued shares, shares issued and reacquired by the Company or shares bought on the market for the purposes of the Plan. In the event any Option shall, for any reason, terminate or expire or be surrendered without having been exercised in full, the shares subject to such Option but not purchased thereunder shall again be available for Options to be granted under the Plan."
2. The first sentence of subparagraph 6(g), and the entirety of subparagraph 6(h) have been amended to read as follows:
(g) Termination of Directorship. Upon an Optionee's Termination of Directorship, such Optionee's Option privileges shall be limited to the shares which were immediately purchasable by such Optionee at the date of such Termination of Directorship, and such Option privileges shall expire unless exercised by such Optionee on or before the second annual anniversary date of the date of such Termination of Directorship. . . .
(h) Death of Optionee. If an Optionee dies while such Optionee is a member of the Board, such Optionee's Option to purchase the total number of shares covered by the applicable Option Agreement shall thereupon become fully exercisable and shall remain exercisable by such Optionee's personal representative until the close of business on the first annual anniversary date of the Optionee's death, at which time they shall expire.
EFFECTIVE as of December 14, 1995. | 10-Q | EX-10.2 | 1996-01-16T00:00:00 | 1996-01-16T14:49:40 |
0000814680-96-000002 | 0000814680-96-000002_0000.txt | <DESCRIPTION>POST-EFFECTIVE AMENDMENT ON FORM N-1A
As filed with the Securities and Exchange Commission on January 16, 1996
1933 Act File No. 33-14567; 1940 Act File No. 811-5188
UNDER THE SECURITIES ACT OF 1933 _X__
INVESTMENT COMPANY ACT OF 1940 _X__
(Exact Name of Registrant as Specified in Charter)
Twentieth Century Tower, 4500 Main Street, Kansas City, MO 64111 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 816-531-5575
Twentieth Century Tower, 4500 Main Street, Kansas City, MO 64111 (Name and address of Agent for service)
Approximate Date of Proposed Public Offering: April 1, 1996
It is proposed that this filing become effective:
____ immediately upon filing pursuant to paragraph (b) of Rule 485 ____ on [date] pursuant to paragraph (b) of Rule 485 ____ 60 days after filing pursuant to paragraph (a) of Rule 485 ____ on [date] pursuant to paragraph (a)(1) of Rule 485 ____ 75 days afer filing pursuant to paragraph (a)(2) of Rule 485 _X__ on April 1, 1996, pursuant to paragraph (a)(2) of Rule 485
The Registrant has registered an indefinite number or amount of securities under the Securities Act of 1933 pursuant to Rule 24f-2. The Rule 24f-2 notice for the fiscal year ended December 31, 1994, was filed on February 28, 1995.
TCI Portfolios, Inc. ("TCI Portfolios") is a mutual fund that offers its shares only to insurance companies to fund the benefits of variable annuity or variable life insurance contracts. The fund currently offers five portfolios or series. TCI Growth is described in this prospectus. The other series are described in separate prospectuses. TCI Growth is sometimes hereinafter referred to as the "fund." You should consult the prospectus of the separate account of the specific insurance product that accompanies this prospectus to see which series of TCI Portfolios are available for purchase for such insurance product.
The investment objective of TCI Growth is capital growth. The fund will seek to achieve its investment objective by investing primarily in common stocks that are considered by management to have better-than-average prospects for appreciation. There can be no assurance that the fund will achieve its investment objective. Shares of the fund may be purchased only by insurance companies for the purpose of funding variable annuity or variable life insurance contracts. This prospectus should be read in conjunction with the prospectus of the separate account of the specific insurance product that accompanies this prospectus.
Additional information is included in the statement of additional information dated April 1, 1996, and filed with the Securities and Exchange Commission. It is incorporated in this prospectus by reference. To obtain a copy, or to make any other inquiries, call or write:
4500 Main Street * P.O. Box 419385 Kansas City, Mo. 64141-6385 * 1-800-345-3533 Local and international calls: 816-531-5575 Telecommunications device for the deaf: 1-800-345-1833 * In Missouri: 816-753-0070
This prospectus gives you information about TCI Portfolios that you should know before investing. Keep it for future reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Investment Policies of the Fund..........................................4
ADDITIONAL INFORMATION YOU SHOULD KNOW
Purchase and Redemption of Shares.....................................8 When Share Price is Determined........................................9 How Share Price is Determined.........................................9
NO PERSON IS AUTHORIZED BY TCI PORTFOLIOS TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN OTHER PRINTED OR WRITTEN MATERIAL ISSUED BY THE COMPANY, AND YOU SHOULD NOT RELY ON ANY OTHER INFORMATION OR REPRESENTATION.
INVESTMENT POLICIES OF THE FUND
TCI Portfolios has adopted certain investment restrictions applicable to the fund that are set forth in the statement of additional information. Those restrictions, as well as the investment objective of the fund, as identified on the front cover page, and any other investment policies designated as "fundamental" in this prospectus or in the statement of additional information, cannot be changed without the approval of the shareholders entitled to cast a majority of the outstanding votes of the corporation, as defined by the Investment Company Act. The fund has implemented additional investment policies and practices to guide its activities in the pursuit of its investment objective. These policies and practices, which are described throughout this prospectus, are not designated as fundamental policies and may be changed without shareholder approval. The investment objective of TCI Growth is capital growth. The fund will seek to achieve its investment objective by investing in common stocks (including securities convertible into common stocks and other equity equivalents) and other securities that meet certain fundamental and technical standards of selection and have, in the opinion of the fund's investment manager, better than average potential for appreciation. The fund tries to stay fully invested in such securities, regardless of the movement of stock prices generally. The fund may invest in cash and cash equivalents temporarily or when it is unable to find securities meeting its criteria of selection. It may purchase securities only of companies that have a record of at least three years' continuous operation.
TCI Portfolios will offer its shares only to insurance companies for the purpose of funding variable annuity or variable life insurance contracts. Although TCI Portfolios does not foresee any disadvantages to contract owners due to the fact that it offers its shares as an investment medium for both variable annuity and variable life products, the interests of various contract owners participating in the funds of TCI Portfolios might at some time be in conflict due to future differences in tax treatment of variable products or other considerations. Consequently, TCI Portfolios' board of directors will monitor events in order to identify any material irreconcilable conflicts that may possibly arise and to determine what action, if any, should be taken in response to such conflicts. If a conflict were to occur, an insurance company separate account might be required to withdraw its investments in the funds of TCI Portfolios and those funds might be forced to sell securities at disadvantageous prices to fund such withdrawal.
For additional information regarding the fund and its investment policies, see "Investment Restrictions Applicable to all Series of Shares" in the statement of additional information.
The fund may invest in repurchase agreements when such transactions present an attractive short-term return on cash that is not otherwise committed to the purchase of securities pursuant to the investment policy of the fund. A repurchase agreement occurs when, at the time the fund purchases an interest-bearing obligation, the seller (a bank or broker-dealer registered under the Securities Exchange Act of 1934) agrees to repurchase it on a specified date in the future at an agreed-upon price. The repurchase price reflects an agreed-upon interest rate during the time the fund's money is invested in the security. Since the security purchased constitutes security for the repurchase obligation, a repurchase agreement can be considered as a loan collateralized by the security purchased. The fund's risk is the ability of the seller to
agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. To the extent the value of the security decreases, the fund could experience a loss.
The fund will limit repurchase agreement transactions to transactions with those commercial banks and broker-dealers whose creditworthiness has been reviewed and found satisfactory by the fund's management pursuant to criteria adopted by the fund's board of directors.
In order to realize additional income, the fund may lend its portfolio securities to persons not affiliated with it and who are deemed to be creditworthy. Such loans must be secured continuously by cash collateral maintained on a current basis in an amount at least equal to the market value of the securities loaned, or by irrevocable letters of credit. During the existence of the loan, the fund must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral. The fund must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable the fund to vote the securities. Interest and dividends on loaned securities may not exceed 10% of the annual gross income of the fund (without offset for realized capital gains). The portfolio lending policy described in this paragraph is a fundamental policy that may be changed only by a vote of a majority of the shareholders of TCI Portfolios. TCI Portfolios is indemnified against loss on the loans by United States Trust Company of New York.
The fund may invest an unlimited amount of its assets in the securities of foreign issuers when these securities meet its standards of selection. The fund may make such investments either directly in foreign securities, or indirectly by purchasing depositary receipts or depositary shares or similar instruments for foreign securities ("DRs"). DRs are securities that are issued in and are listed on exchanges or quoted in over-the-counter markets in one country but represent shares of issuers domiciled in another country.
Investments in foreign securities may present certain risks, including those resulting from fluctuations in currency exchange rates, future political and economic developments, currency restrictions and devaluations, securities clearance and settlement procedures, exchange control regulations, reduced availability of public information concerning issuers, and the fact that foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic issuers.
Some of the securities held by the fund may be denominated in foreign currencies. Other securities, such as DRs, may be denominated in U.S. dollars or the currency of the country where issued (if not U.S. dollars), but have a value that is dependent upon the performance of a foreign security, as valued in the currency of its home country. As a result, the value of its portfolio will be affected by changes in the exchange rate between foreign currencies and the U.S. dollar, as well as by changes in the market value of the securities themselves. The performance of foreign currencies relative to the dollar may be an important factor in the overall performance of the fund. In order to protect against adverse movements in exchange rates between currencies, the fund may, for hedging purposes only, enter into forward currency exchange contracts. A forward currency exchange contract obligates
purchase or sell a specific currency at a future date at a specific price. The fund may elect to enter into a forward currency exchange contract with respect to a specific purchase or sale of a security, or with respect to the fund's portfolio positions generally. By entering into a forward currency exchange contract with respect to the specific purchase or sale of a security denominated in a foreign currency, the fund can "lock in" an exchange rate between the trade and settlement dates for that purchase or sale. This practice is sometimes referred to as "transaction hedging." The fund may enter into transaction hedging contracts with respect to all or a substantial portion of its trades. When the manager believes that a particular currency may decline in value compared to the U.S. dollar, the fund may enter into a foreign currency exchange contract to sell an amount of foreign currency equal to the value of some or all of the fund's portfolio securities either denominated in, or whose value is tied to, that currency. This practice is sometimes referred to as "portfolio hedging." The fund may not enter into a portfolio hedging transaction where the fund would be obligated to deliver an amount of foreign currency in excess of the aggregate value of the fund's portfolio securities or other assets denominated in, or whose value is tied to, that currency. The fund will make use of portfolio hedging to the extent deemed appropriate by the investment manager. However, it is anticipated that the fund will enter into portfolio hedges much less frequently than transaction hedges. If the fund enters into a forward contract, the fund, when required, will instruct its custodian bank to segregate cash or liquid high-grade securities in a separate account in an amount sufficient to cover its obligation under the contract. Those assets will be valued at market daily, and if the value of the segregated securities declines, additional cash or securities will be added so that the value of the account is not less than the amount of the fund's commitment. At any given time, no more than 10% of the fund's assets will be committed to a segregated account in connection with portfolio hedging transactions. Predicting the relative future values of currencies is very difficult, and there is no assurance that any attempt to protect the fund against adverse currency movements through the use of forward currency exchange contracts will be successful. In addition, the use of forward currency exchange contracts may limit the potential gains that might result from a positive change in the relationship between the foreign currency and the U.S. dollar.
To the extent permitted by its investment objectives and policies, each of the funds may invest in securities that are commonly referred to as "derivative" securities. Certain derivative securities are more accurately described as "index/structured securities." Index/structured securities are derivative securities whose value or performance is linked to other equity securities (such as DRs), currencies, interest rates, indexes or other financial indicators ("reference indexes"). No fund may invest in an index/structured security unless the reference index or the instrument to which it relates is an eligible investment for the fund. The return, interest rate or, unlike most fixed income securities, the principal amount payable at maturity of an index/structured security may increase or decrease, depending upon changes in the reference index. Index/structured securities may be positively or negatively indexed. That means that an increase in the reference index may produce an increase or decrease in the return, interest rate or value at maturity of the security. No purchases will be made of index/structured securities having "leverage" characteristics. This means that no investments will be made in securities whose change in return, interest rate or value at maturity is a multiple of the change in the reference index. Because their performance is tied to a refer-
ence index, a fund investing in index/structured securities, in addition to being exposed to the credit risk of the issuer of the security, will also bear the market risk of changes in the reference index. The board of directors has approved management's policy regarding investments in derivative securities. That policy specifies factors that must be considered in connection with a purchase of derivative securities. The policy also establishes a committee that must review certain proposed purchases before the purchases can be made. Management will report on fund activity in derivative securities to the board of directors as necessary. In addition, the board will review management's policy for investments in derivative securities annually.
The fund may engage in short sales if, at the time of the short sale, the fund owns or has the right to acquire an equal amount of the security being sold short at no additional cost. The fund may make a short sale when it wants to sell the security it owns at a current attractive price, but also wishes to defer recognition of gain or loss for federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code.
The fund may sometimes purchase new issues of securities on a when-issued basis without limit when, in the opinion of the investment manager, such purchases will further the investment objectives of the fund. The price of when-issued securities is established at the time the commitment to purchase is made. Delivery of and payment for these securities typically occur 15 to 45 days after the commitment to purchase. Market rates of interest on debt securities at the time of delivery may be higher or lower than those contracted for on the when-issued security. Accordingly, the value of such security may decline prior to delivery, which could result in a loss to the fund. A separate account consisting of cash or high-quality liquid debt securities in an amount at least equal to the when-issued commitments will be established and maintained with the custodian. No income will accrue to the fund prior to delivery.
The fund may invest up to 15% of its assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of fund shares), including restricted securities. Although securities which may be resold only to qualified institutional buyers in accordance with the provisions of Rule 144A under the Securities Act of 1933 are considered "restricted securities," the fund may purchase Rule 144A securities without regard to the percentage limitations described above when Rule 144A securities present an attractive investment opportunity, otherwise meet the fund's criteria of selection, and also meet the liquidity guidelines established for Rule 144A securities. With respect to securities eligible for resale under Rule 144A, the staff of the Securities and Exchange Commission has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of directors to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the board of directors is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the board of directors of TCI Portfolios has delegated the day-to-day function of determining the liquidity of 144A securities to the investment manager. The board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted. Since the secondary market for such securi-
ties will be limited to certain qualified institutional investors, their liquidity may be limited accordingly and the fund may from time to time hold a Rule 144A security that is illiquid. In such an event, TCI Portfolios will consider appropriate remedies to minimize the effect on the fund's liquidity.
From time to time TCI Portfolios (or the insurance companies that use TCI Portfolios to fund the benefits of variable annuity or variable life insurance contracts) may advertise performance data. Fund performance may be shown by presenting one or more performance measurements, including cumulative total return and average annual total return. Cumulative total return data is computed by considering all elements of return, including reinvestment of dividends and capital gains distributions, over a stated period of time. Average annual total return is determined by computing the annual compounded return over a stated period of time that would have produced the fund's cumulative total return over the same period if the fund's performance had remained constant throughout.
TCI Portfolios may also include in advertisements data comparing performance with the performance of non-related investment media, published editorial comments and performance rankings compiled by independent organizations (such as Lipper Analytical Services or Donoghue's Money Fund Report) and publications that monitor the performance of mutual funds. Performance information may be quoted numerically or may be represented in a table, graph or other illustration. In addition, fund performance may be compared to well-known indices of market performance, including the Standard & Poor's (S&P) 500 Index, The Dow Jones Industrial Average, Donoghue's Money Fund Average, the Shearson Lehman Intermediate Government Bond Index, the constant maturity five-year U.S. Treasury Note Index and the Bank Rate Monitor National Index of 21/2 -year CD rates. Fund performance may also be compared to other funds in the Twentieth Century family. It may also be combined or blended with other funds in the Twentieth Century family, and that combined or blended performance may be compared to the same indices to which the individual funds may be compared.
All performance information advertised by TCI Portfolios is historical in nature and is not intended to represent or guarantee future results. The value of fund shares when redeemed may be more or less than their original cost. PERFORMANCE FIGURES ADVERTISED BY TCI PORTFOLIOS SHOULD NOT BE USED FOR COMPARATIVE PURPOSES BECAUSE THESE FIGURES WILL NOT INCLUDE CHARGES AND DEDUCTIONS IMPOSED BY THE INSURANCE COMPANY SEPARATE ACCOUNT UNDER THE VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS.
ADDITIONAL INFORMATION YOU SHOULD KNOW
For instructions on how to purchase and redeem shares, read the prospectus of your insurance company's separate account. Shares of TCI Portfolios are sold and redeemed by TCI Portfolios at their net asset value next determined after receipt by the insurance company separate account of the order from the variable annuity or variable life insurance contract owner to purchase or to redeem. There are no sales commissions or redemption charges. However, certain sales or deferred sales charges and other charges may apply to the variable annuity or life insurance contracts. Those charges are disclosed in the separate account prospectus.
WHEN SHARE PRICE IS DETERMINED
The price of TCI Portfolios' shares is their net asset value. Net asset value is determined at the close of business of the New York Stock Exchange, usually 3 p.m. Central time, on each day that the Exchange is open. Requests to redeem shares and investments received by the separate account before the close of business of the Exchange are effective, and will receive the price determined, on the day received. Redemption requests and investments received thereafter are effective on, and receive the price determined as of, the close of the Exchange the next day the Exchange is open.
HOW SHARE PRICE IS DETERMINED
The valuation of assets for determining net asset value may be summarized as follows: The portfolio securities of the fund, except as otherwise noted, listed or traded on a stock exchange are valued at the latest sale price on the exchange where they are primarily traded. If no sale is reported, the mean of the latest bid and asked prices is used. Securities traded over the counter are priced at the mean of the latest bid and asked prices, but will be valued at the last sale price if required by regulations of the Securities and Exchange Commission. When market quotations are not readily available, securities and other assets are valued at fair value as determined in good faith by the board of directors. Debt securities not traded on a principal securities exchange are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the board of directors. Pursuant to a determination by TCI Portfolios' board of directors that such value represents fair value, debt securities with maturities of 60 days or less are valued at amortized cost. When a security is valued at amortized cost, it is valued at its cost when purchased, and thereafter by 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. The value of an exchange-traded foreign security is determined in its national currency as of the close of trading on the foreign exchange on which it is traded or as of the close of business of the New York Stock Exchange, if that is earlier. That value is then converted to U.S. dollars at the prevailing foreign exchange rate. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day that the New York Stock Exchange is open. If an event were to occur after the value of a security was established but before the net asset value per share was determined which was likely to materially change the net asset value, then that security would be valued at fair value as determined by the board of directors. Trading of securities in foreign markets may not take place on every New York Stock Exchange business day. In addition, trading may take place in various foreign markets on Saturdays or on other days when the New York Stock Exchange is not open and on which the fund's net asset value is not calculated. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in such calculation and the value of the fund's portfolio may be affected on days when shares of the fund may not be purchased or redeemed.
Distributions from net investment income and realized securities gains, if any, generally are declared and paid once a year, but the fund may make distributions on a more frequent basis to comply with the distribution
Internal Revenue Code, in all events in a manner consistent with the provisions of the Investment Company Act. All distributions from the fund will be reinvested in additional shares. The board of directors may elect not to distribute capital gains in whole or in part to take advantage of loss carryovers.
TCI Portfolios intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code. For a discussion of the tax status of your variable contract, refer to the prospectus of your insurance company's separate account.
Under the laws of the State of Maryland, the board of directors is responsible for managing the business and affairs of TCI Portfolios. Acting pursuant to an investment advisory agreement entered into with TCI Portfolios, Investors Research Corporation ("Investors Research") serves as the investment manager of TCI Portfolios. Its principal place of business is Twentieth Century Tower, 4500 Main Street, Kansas City, Missouri 64111. Investors Research has been providing investment advisory services to investment companies and institutional investors since 1958. Certain investments may be appropriate for TCI Portfolios and also for other clients advised by Investors Research. Investment decisions are made with the intention of achieving the respective investment objectives of Investors Research's clients after consideration of such factors as their current holdings, availability of cash for investment, and the size of their investment generally. A particular security may be bought or sold for only one client or in different amounts and at different times for more than one but less than all clients. In addition, purchases or sales of the same security may be made for two or more clients on the same date. Such transactions will be allocated among clients in a manner believed by Investors Research to be equitable to each. In some cases, this procedure could have an adverse effect on the price or amount of the securities purchased or sold by TCI Portfolios. Investors Research supervises and manages the investment portfolio of the fund and directs the purchase and sale of its investment securities. Investors Research utilizes a team of portfolio managers, assistant portfolio managers and analysts acting together to manage the assets of the fund. The team meets regularly to review portfolio holdings and to discuss purchase and sale activity. The team adjusts holdings in the fund's portfolio as they deem appropriate in pursuit of the fund's investment objectives. Individual portfolio manager members of the team may also adjust portfolio holdings of the funds as necessary between team meetings. The portfolio manager members of the TCI Growth team and their principal business experience for the last five years are as follows: JAMES E. STOWERS III, president and portfolio manager, joined Investors Research in 1981. Mr. Stowers has been a portfolio manager member of the TCI Growth team since its inception in 1987. ROBERT C. PUFF, JR., executive vice president and chief investment officer, has been a portfolio manager since joining Investors Research in 1983. In his position as Chief Investment Officer, Mr. Puff oversees the investment activities of all of the teams that manage TCI Portfolios funds. CHRISTOPHER K. BOYD, vice president and portfolio manager, joined Investors Research in March 1988 as an investment analyst, a position he held until December 1990. At that time he was promoted to assistant portfolio manager and then was promoted to portfolio manager in December 1992. DEREK FELSKE, vice president and portfolio manager, joined Investors Research in September 1993 as a portfolio manager. From May 1991 to September 1993, Mr. Felske served as a member of the portfolio management team of RCM
Capital Management, San Francisco, California. Prior to May 1991, Mr. Felske attended the University of Pennsylvania Wharton School of Business, where he obtained an MBA in finance. The activities of Investors Research are subject only to directions of TCI Portfolios' board of directors. Investors Research pays all the expenses of TCI Portfolios except brokerage, taxes, interest, fees, expenses of the non-interested person directors (including counsel fees) and extraordinary expenses. For the foregoing services, Investors Research is paid a fee of 1% of the average net assets of the fund during the year. The fee is paid and computed on the first business day of each month by multiplying 1% of the average daily closing net asset values of the shares of the fund during the previous month by a fraction, the numerator of which is the number of days in the previous month and the denominator of which is 365 (366 in leap years). Many investment companies pay smaller investment management fees. However, most if not all of such companies also pay, in addition to an investment management fee, certain of their own expenses, while almost all of TCI Portfolios' expenses, as noted above, are paid by Investors Research.
TCI Portfolios and Investors Research have adopted a Code of Ethics (the "Code"), which restricts personal investing practices by employees of Investors Research and its affiliates. Among other provisions, the Code requires that employees with access to information about the purchase or sale of securities in the fund's portfolios obtain preclearance before executing personal trades. With respect to portfolio managers and other investment personnel, the Code prohibits acquisition of securities in an initial public offering, as well as profits derived from the purchase and sale of the same security within 60 calendar days. These provisions are designed to ensure that the interests of fund shareholders come before the interests of the people who manage those funds. Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri 64111, acts as transfer agent and dividend paying agent of TCI Portfolios. It provides facilities, equipment and personnel to TCI Portfolios and is paid for such services by Investors Research. Certain administrative and record keeping services that would otherwise be performed by Twentieth Century Services, Inc. may be performed by the insurance company that purchases TCI Portfolios' shares, and Investors Research may pay the insurance company for such services.
Investors Research and Twentieth Century Services, Inc., are both wholly owned by Twentieth Century Companies, Inc. James E. Stowers Jr., chairman and chief executive officer of TCI Portfolios, controls Twentieth Century Companies, Inc. by virtue of his ownership of a majority of its common stock.
TCI Portfolios was organized as a Maryland corporation on June 4, 1987. It is a diversified, open-end management investment company. Its business and affairs are managed by its officers under the direction of its board of directors.
The principal office of TCI Portfolios is 4500 Main Street, P.O. Box 419385, Kansas City, Missouri 64141-6385. All inquiries may be made by mail to that address or by phone to 816-531-5575. TCI Portfolios issues five series of common stock with a par value of $.01 per share. The assets belonging to each series of shares are held separately by the custodian, and in effect each series is a separate fund. Each share of each series, when issued, is fully paid and non-assessable.
Each share, irrespective of series, is entitled to one vote for each dollar of net asset value applicable to such share on all questions, except that certain matters must be voted on by the series of shares affected, and matters affecting only one series are voted upon only by that series. Shares have non-cumulative voting rights, which means that holders of more than 50% of the
net asset value of the shares voting for election of directors can elect all of the directors if they choose to do so, and, in such event, the holders of the remaining minority will not be able to elect any person or persons to the board of directors. An insurance company issuing a variable contract invested in shares issued by TCI Portfolios will request voting instructions from contract holders and will vote shares in proportion to the voting instructions received. In the event of the complete liquidation or dissolution of TCI Portfolios, shareholders of each series of shares shall be entitled to receive, pro rata, all of the assets less the liabilities of that series. TCI PORTFOLIOS RESERVES THE RIGHT TO CHANGE ANY OF ITS POLICIES, PRACTICES AND PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF ADDITIONAL INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE INSTANCES WHERE SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED.
Part of the Twentieth Century
(C) 1996 Twentieth Century Services, Inc.
TCI Portfolios, Inc. ("TCI Portfolios") is a mutual fund that offers its shares only to insurance companies to fund the benefits of variable annuity or variable life insurance contracts. The fund currently offers five portfolios or series. TCI Advantage is described in this prospectus. The other series are described in separate prospectuses. TCI Advantage is sometimes hereinafter referred to as the "fund." You should consult the prospectus of the separate account of the specific insurance product that accompanies this prospectus to see which series of TCI Portfolios are available for such insurance product.
The investment objective of TCI Advantage is current income and capital growth. The fund will seek to achieve its investment objective by investing in three types of securities. The fund's investment manager intends to invest approximately (i) 20% of the fund's assets in securities of the United States government and its agencies and instrumentalities and repurchase agreements collateralized by such securities with a weighted average maturity of six months or less, i.e., cash or cash equivalents, (ii) 40% of the fund's assets in fixed income securities of the United States government and its agencies and instrumentalities with a weighted average maturity of three to 10 years and (iii) 40% of the fund's assets in equity securities that are considered by management to have better-than-average prospects for appreciation. As described in greater detail in this prospectus, assets will be purchased or sold, as the case may be, as is necessary in response to changes in market value to maintain the asset mix of the fund's portfolio at approximately 60% cash, cash equivalents and fixed income securities and 40% equity securities. There can be no assurance that the fund will achieve its investment objective. Shares of the fund may be purchased only by insurance companies for the purpose of funding variable annuity or variable life insurance contracts. This prospectus should be read in conjunction with the prospectus of the separate account of the specific insurance product that accompanies this prospectus.
Additional information is included in the statement of additional information dated April 1, 1996, and filed with the Securities and Exchange Commission. It is incorporated in this prospectus by reference. To obtain a copy, or to make any other inquiries, call or write:
4500 Main Street * P.O. Box 419385 Kansas City, Mo. 64141-6385 * 1-800-345-3533 Local and international calls: 816-531-5575 Telecommunications device for the deaf: 1-800-345-1833 * In Missouri: 816-753-0070
This prospectus gives you information about TCI Portfolios that you should know before investing. Keep it for future reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Investment Policies of the Fund..........................................4 Fundamentals of Fixed Income Investing................................6
ADDITIONAL INFORMATION YOU SHOULD KNOW
Purchase and Redemption of Shares....................................11 When Share Price is Determined.......................................11 How Share Price is Determined........................................11
INVESTMENT POLICIES OF THE FUND
TCI Portfolios has adopted certain investment restrictions applicable to the fund that are set forth in the statement of additional information. Those restrictions, as well as the investment objective of the fund, as identified on the front cover page, and any other investment policies designated as "fundamental" in this prospectus or in the statement of additional information, cannot be changed without the approval of the shareholders entitled to cast a majority of the outstanding votes of the corporation, as defined by the Investment Company Act. The fund has implemented additional investment policies and practices to guide its activities in the pursuit of its investment objective. These policies and practices, which are described throughout this prospectus, are not designated as fundamental policies and may be changed without shareholder approval. The investment objective of TCI Advantage is current income and capital growth. The fund will seek to achieve its investment objective by investing in three types of securities. The investment manager intends to invest approximately 20% of the fund's assets (the "Core Cash" portion) in securities of the U.S. government, its agencies and instrumentalities ("government securities") with a weighted average maturity of six months or less, i.e., cash or cash equivalents. The investment manager intends to invest approximately 40% of the fund's assets (the "Fixed Income" portion) in fixed income government securities with a weighted average maturity of three to 10 years. If the investment manager believes, in its discretion, that market conditions warrant it, some or all of the Fixed Income portion of the fund's portfolio may be invested in cash or cash equivalents. The remaining approximately 40% of the fund's assets (the "Equity" portion) will be invested in equity securities. When changes in the market value of the fund's assets cause the Equity portion of the fund to be equal to or less than 35% of the fund's assets, or to be equal to or greater than 45% of the fund's assets, equity and fixed income securities will be purchased or sold, as the case may be, so that the Equity portion will again represent approximately 40% of the fund's assets. The securities to be purchased for the Core Cash portion and the Fixed Income portion of the fund will be chosen based on their level of income production and price stability and will consist only of obligations of the U.S. government, its agencies and instrumentalities, including mortgage-related and other asset-backed securities, and repurchase agreements fully collateralized by such securities. With regard to such obligations of the U.S. government, its agencies and instrumentalities, TCI Advantage may invest in (1) direct obligations of the United States, such as Treasury bills, Treasury notes and U.S. government bonds, which are supported by the full faith and credit of the United States, and (2) obligations, including mortgage-related securities, issued or guaranteed by agencies and instrumentalities of the U.S. government that are established under an Act of Congress. These agencies and instrumentalities may include, but are not limited to, the Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Student Loan Marketing Association, Federal Farm Credit Banks, Federal Home Loan Banks and Resolution Funding Corporation. The securities of some of these agencies and instrumentalities, such as the Government National Mortgage Association, are guaranteed as to principal and interest by the United States Treasury, and other securities are supported by the right of the issuer, such as the Federal Home Loan Banks, to borrow from the Treasury. Other obligations, including those issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, are supported only by the credit of the instrumentality. Mortgage-related securities in which TCI Advantage may invest include collateralized mortgage obligations ("CMOs") issued by a
U.S. agency or instrumentality. A CMO is a debt security that is collateralized by a portfolio or pool of mortgages or mortgage-backed securities. The issuer's obligation to make interest and principal payments is secured by the underlying pool or portfolio of mortgages or securities. The market value of mortgage-related securities, even those in which the underlying pool of mortgage loans is guaranteed as to the payment of principal and interest by the U.S. government, is not insured. When interest rates rise, the market value of those securities may decrease in the same manner as other fixed-rate debt, but when interest rates decline their market value may not increase as much as other fixed-rate debt instruments because of the prepayment feature inherent in the mortgages underlying such securities. If such securities are purchased at a premium, the fund will suffer a loss if the obligation is prepaid. Prepayments will be reinvested at prevailing rates, which may be less than the rate paid on such obligation. For the purpose of determining the average weighted portfolio maturity of the fund, management shall consider the maturity of a security issued by the Government National Mortgage Association, or other mortgage-related security, to be the remaining expected average life of the security. The average life of such securities is likely to be substantially less than the original maturity as a result of prepayments of principal of the mortgages underlying such securities, especially in a declining interest rate environment. While there are no maturity restrictions on the debt securities in which the fund may invest, the weighted average maturity of the Core Cash portion is expected to be six months or less. Under normal market conditions the weighted average maturity of the Fixed Income portion will be in the three-to ten-year range. The manager will actively manage such portion of the fund's assets, adjusting the weighted average portfolio maturity in response to expected interest rates. During periods of rising interest rates a shorter weighted average maturity may be adopted in order to reduce the effect of fixed income security price declines on the fund's net asset value. When interest rates are falling and fixed income security prices rising, a longer weighted average portfolio maturity may be adopted. If the investment manager believes that market conditions merit it, some or all of the assets in the Fixed Income portion may be invested in cash and cash equivalents. With regard to the Equity portion of its portfolio, TCI Advantage will invest in common stocks (including securities convertible into common stocks and other equity equivalents) and other securities that meet certain fundamental and technical standards of selection and have, in the opinion of the investment manager, better-than-average potential for appreciation. The Equity portion of the fund may be invested in cash and cash equivalents, including repurchase agreements, temporarily or when the fund is unable to find equity securities meeting its criteria of selection. The fund may purchase equity securities only of companies that have a record of at least three years' continuous operation.
TCI Portfolios will offer its shares only to insurance companies for the purpose of funding variable annuity or variable life insurance contracts. Although TCI Portfolios does not foresee any disadvantages to contract owners due to the fact that it offers its shares as an investment medium for both variable annuity and variable life products, the interests of various contract owners participating in the funds of TCI Portfolios might at some time be in conflict due to future differences in tax treatment of variable products or other considerations. Consequently, TCI Portfolios' board of directors will monitor events in order to identify any material irreconcilable conflicts that may possibly arise and to determine what action, if any, should be taken in response to such conflicts. If a conflict were to occur, an insurance company separate account might be required to
in the funds of TCI Portfolios, and those funds might be forced to sell securities at disadvantageous prices to fund such withdrawal.
For additional information regarding the fund and its investment policies, see "Investment Restrictions Applicable to all Series of Shares" in the statement of additional information.
Over time, the level of interest rates available in the marketplace changes. As prevailing rates fall, the prices of fixed income securities, i.e., securities that trade on a yield basis, rise. On the other hand, when prevailing interest rates rise, the prices of such securities fall. Generally, the longer the maturity of a debt security, the higher its yield and the greater its price volatility. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. These factors operating in the marketplace have a similar impact on fixed income security portfolios. A change in the level of interest rates causes the net asset value per share of any fixed income security fund, except money market funds, to change. If sustained over time, it would also have the impact of raising or lowering the yield of that fund. In addition to the risk arising from fluctuating interest rate levels, debt securities are subject to credit risk. When a security is purchased, its anticipated yield is dependent on the timely payment by the borrower of each interest and principal installment. Credit analysis and resultant bond ratings take into account the relative likelihood that such timely payment will occur. As a result, lower-rated bonds sell at higher yield levels than top-rated bonds of similar maturity. In addition, as economic, political and business developments unfold, lower-quality bonds, which possess lower levels of protection with regard to timely payment, usually exhibit more price fluctuation than do higher-quality bonds of maturity.
The fund may invest in repurchase agreements when such transactions present an attractive short-term return on cash that is not otherwise committed to the purchase of securities pursuant to the investment policy of the fund. A repurchase agreement occurs when, at the time the fund purchases an interest-bearing obligation, the seller (a bank or broker-dealer registered under the Securities Exchange Act of 1934) agrees to repurchase it on a specified date in the future at an agreed-upon price. The repurchase price reflects an agreed-upon interest rate during the time the fund's money is invested in the security. Since the security purchased constitutes security for the repurchase obligation, a repurchase agreement can be considered as a loan collateralized by the security purchased. The fund's risk is the ability of the seller to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. To the extent the value of the security decreases, the fund could experience a loss.
The fund will limit repurchase agreement transactions to transactions with those commercial banks and broker-dealers whose creditworthiness has been reviewed and found satisfactory by the fund's management pursuant to criteria adopted by the fund's board of directors.
In order to realize additional income, the fund may lend its portfolio securities to persons not affiliated with it and who are deemed to be creditworthy. Such loans must be secured continuously by cash collateral
basis in an amount at least equal to the market value of the securities loaned or by irrevocable letters of credit. During the existence of the loan, the fund must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral. The fund must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable the fund to vote the securities. Interest and dividends on loaned securities may not exceed 10% of the annual gross income of the fund (without offset for realized capital gains). The portfolio lending policy described in this paragraph is a fundamental policy that may be changed only by a vote of a majority of the shareholders of TCI Portfolios. TCI Portfolios is indemnified against loss on the loans by United States Trust Company of New York.
The fund may invest in equity securities of foreign issuers when these securities meet its standards of selection. The fund may make such investments either directly in foreign securities, or indirectly by purchasing depositary receipts or depositary shares or similar instruments for foreign securities ("DRs"). DRs are securities that are issued in and are listed on exchanges or quoted in over-the-counter markets in one country but represent shares of issuers domiciled in another country.
Investments in foreign securities may present certain risks, including those resulting from fluctuations in currency exchange rates, future political and economic developments, currency restrictions and devaluations, securities clearance and settlement procedures, exchange control regulations, reduced availability of public information concerning issuers, and the fact that foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic issuers.
Some of the securities held by the fund may be denominated in foreign currencies. Other securities, such as DRs, may be denominated in U.S. dollars or the currency of the country where issued (if not U.S. dollars) but have a value that is dependent upon the performance of a foreign security, as valued in the currency of its home country. As a result, the value of its portfolio will be affected by changes in the exchange rate between foreign currencies and the U.S. dollar, as well as by changes in the market value of the securities themselves. The performance of foreign currencies relative to the dollar may be an important factor in the overall performance of the fund. In order to protect against adverse movements in exchange rates between currencies, the fund may, for hedging purposes only, enter into forward cur- rency exchange contracts. A forward currency ex- change contract obligates the fund to purchase or sell a specific currency at a future date at a specific price. The fund may elect to enter into a forward currency exchange contract with respect to a specific purchase or sale of a security, or with respect to the fund's portfolio positions generally. By entering into a forward currency exchange contract with respect to the specific purchase or sale of a security denominated in a foreign currency, the fund can "lock in" an exchange rate between the trade and settlement dates for that purchase or sale. This practice is sometimes referred to as "transaction hedging." The fund may enter into transaction hedging contracts with respect to all or a substantial portion of its trades. When the manager believes that a particular currency may decline in value compared to the U.S. dollar, the fund may enter into a foreign currency exchange contract to sell an amount of foreign currency equal to the value of some or all of the fund's portfolio securities either denominated
in, or whose value is tied to, that currency. This practice is sometimes referred to as "portfolio hedging." The fund may not enter into a portfolio hedging transaction where the fund would be obligated to deliver an amount of foreign currency in excess of the aggregate value of the fund's portfolio securities or other assets denominated in, or whose value is tied to, that currency. The fund will make use of portfolio hedging to the extent deemed appropriate by the investment manager. However, it is anticipated that the fund will enter into portfolio hedges much less frequently than transaction hedges. If the fund enters into a forward contract, the fund, when required, will instruct its custodian bank to segregate cash or liquid high-grade securities in a separate account in an amount sufficient to cover its obligation under the contract. Those assets will be valued at market daily, and if the value of the segregated securities declines, additional cash or securities will be added so that the value of the account is not less than the amount of the fund's commitment. At any given time, no more than 10% of the fund's assets will be committed to a segregated account in connection with portfolio hedging transactions. Predicting the relative future values of currencies is very difficult, and there is no assurance that any attempt to protect the fund against adverse currency movements through the use of forward currency exchange contracts will be successful. In addition, the use of forward currency exchange contracts may limit the potential gains that might result from a positive change in the relationship between the foreign currency and the U.S. dollar.
To the extent permitted by its investment objectives and policies, each of the funds may invest in securities that are commonly referred to as "derivative" securities. Certain derivative securities are more accurately described as "index/structured securities." Index/structured securities are derivative securities whose value or performance is linked to other equity securities (such as DRs), currencies, interest rates, indexes or other financial indicators ("reference indexes"). No fund may invest in an index/structured security unless the reference index or the instrument to which it relates is an eligible investment for the fund. The return, interest rate or, unlike most fixed income securities, the principal amount payable at maturity of an index/structured security may increase or decrease, depending upon changes in the reference index. Index/ structured securities may be positively or negatively indexed. That means that an increase in the reference index may produce an increase or decrease in the return, interest rate or value at maturity of the security. No purchases will be made of index/structured securities having "leverage" characteristics. This means that no investments will be made in securities whose change in return, interest rate or value at maturity is a multiple of the change in the reference index. In no event will an index/structured security be purchased if its addition to the fund's fixed income portfolio would cause the expected interest rate characteristics of its fixed income portfolio to fall outside the expected interest rate characteristics of a fund having the same permissible weighted average portfolio maturity range that does not invest in index/structured securities. Because their performance is tied to a reference index, a fund investing in index/structured securities, in addition to being exposed to the credit risk of the issuer of the security, will also bear the market risk of changes in the reference index. The board of directors has approved management's policy regarding investments in derivative securities. That policy specifies factors that must be considered in connection with a purchase of derivative securities. The policy also establishes a committee that must review certain proposed purchases before the purchases can be made. Management will report on fund activity in derivative securities to the board of directors as
necessary. In addition, the board will review management's policy for investments in derivative securities annually.
The fund may engage in short sales if, at the time of the short sale, the fund owns or has the right to acquire an equal amount of the security being sold short at no additional cost. The fund may make a short sale when it wants to sell the security it owns at a current attractive price, but also wishes to defer recognition of gain or loss for federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code.
The fund may sometimes purchase new issues of securities on a when-issued basis without limit when, in the opinion of the investment manager, such purchases will further the investment objectives of the fund. The price of when-issued securities is established at the time the commitment to purchase is made. Delivery of and payment for these securities typically occur 15 to 45 days after the commitment to purchase. Market rates of interest on debt securities at the time of delivery may be higher or lower than those contracted for on the when-issued security. Accordingly, the value of such security may decline prior to delivery, which could result in a loss to the fund. A separate account consisting of cash or high-quality liquid debt securities in an amount at least equal to the when-issued commitments will be established and maintained with the custodian. No income will accrue to the fund prior to delivery.
The fund may invest up to 15% of its assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of fund shares), including restricted securities. Although securities which may be resold only to qualified institutional buyers in accordance with the provisions of Rule 144A under the Securities Act of 1933 are considered "restricted securities," the fund may purchase Rule 144A securities without regard to the percentage limitations described above when Rule 144A securities present an attractive investment opportunity, otherwise meet the fund's criteria of selection, and also meet the liquidity guidelines established for Rule 144A securities. With respect to securities eligible for resale under Rule 144A, the staff of the Securities and Exchange Commission has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of directors to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the board of directors is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the board of directors of TCI Portfolios has delegated the day-to-day function of determining the liquidity of 144A securities to the investment manager. The board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted. Since the secondary market for such securities will be limited to certain qualified institutional investors, their liquidity may be limited accordingly and the fund may from time to time hold a Rule 144A security which is illiquid. In such an event, TCI Portfolios will consider appropriate remedies to minimize the effect on the fund's liquidity.
From time to time, TCI Portfolios (or the insurance companies that use TCI Portfolios to fund the benefits of variable annuity or variable life insurance contracts) may advertise perfor-
mance data. Fund performance may be shown by presenting one or more performance measurements, including cumulative total return, average annual total return, yield and effective yield. Cumulative total return data is computed by considering all elements of return, including reinvestment of dividends and capital gains distributions, over a stated period of time. Average annual total return is determined by computing the annual compounded return over a stated period of time that would have produced the fund's cumulative total return over the same period if the fund's performance had remained constant throughout. A quotation of yield reflects the fund's income over a stated period expressed as a percentage of the fund's share price. Yield is calculated by adding over a 30-day (or one-month) period all interest and dividend income (net of fund expenses) calculated on each day's market values, dividing this sum by the average number of fund shares outstanding during the period, and expressing the result as a percentage of the fund's share price on the last day of the 30-day (or one-month) period. The percentage is then annualized. Capital gains and losses are not included in the calculation. Yields are calculated according to accounting methods that are standardized for all stock and bond funds. Because yield accounting methods differ from the methods used for other accounting purposes, TCI Advantage's yield may not equal income paid on your shares or the income reported in the fund's financial statements.
TCI Portfolios also may include in advertisements data comparing performance with the performance of non-related investment media, published editorial comments and performance rankings compiled by independent organizations (such as Lipper Analytical Services or Donoghue's Money Fund Report) and publications that monitor the performance of mutual funds. Performance information may be quoted numerically or may be represented in a table, graph or other illustration. In addition, fund performance may be compared to well-known indices of market performance, including the Standard & Poor's (S&P) 500 Index, The Dow Jones Industrial Average, Donoghue's Money Fund Average, the Shearson Lehman Intermediate Government Bond Index, the constant maturity five-year U.S. Treasury Note Index and the Bank Rate Monitor National Index of 21/2-year CD rates. Fund performance may also be compared to other funds in the Twentieth Century family. It may also be combined or blended with other funds in the Twentieth Century family, and that combined or blended performance may be compared to the same indices to which the individual funds may be compared.
All performance information advertised by TCI Portfolios is historical in nature and is not intended to represent or guarantee future results. The value of fund shares when redeemed may be more or less than their original cost. PERFORMANCE FIGURES ADVERTISED BY TCI PORTFOLIOS SHOULD NOT BE USED FOR COMPARATIVE PURPOSES BECAUSE THESE FIGURES WILL NOT INCLUDE CHARGES AND DEDUCTIONS IMPOSED BY THE INSURANCE COMPANY SEPARATE ACCOUNT UNDER THE VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS.
ADDITIONAL INFORMATION YOU SHOULD KNOW
For instructions on how to purchase and redeem shares, read the prospectus of your insurance company's separate account. Shares of TCI Portfolios are sold and redeemed by TCI Portfolios at their net asset value next determined after receipt by the insurance company separate account of the order from the variable annuity or variable life insurance contract owner to purchase or to redeem. There are no sales commissions or redemption charges. However, certain sales or deferred sales charges and other charges may apply to the variable annuity or life insurance contracts. Those charges are disclosed in the separate account prospectus.
WHEN SHARE PRICE IS DETERMINED
The price of TCI Portfolios' shares is their net asset value. Net asset value is determined at the close of business of the New York Stock Exchange, usually 3 p.m. Central time, on each day that the Exchange is open. Requests to redeem shares and investments received by the separate account before the close of business of the Exchange are effective, and will receive the price determined, on the day received. Redemption requests and investments received thereafter are effective on, and receive the price determined as of, the close of the Exchange the next day the Exchange is open.
HOW SHARE PRICE IS DETERMINED
The valuation of assets for determining net asset value may be summarized as follows: The portfolio securities of the fund, except as otherwise noted, listed or traded on a stock exchange are valued at the latest sale price on the exchange where they are primarily traded. If no sale is reported, the mean of the latest bid and asked prices is used. Securities traded over the counter are priced at the mean of the latest bid and asked prices, but will be valued at the last sale price if required by regulations of the Securities and Exchange Commission. When market quotations are not readily available, securities and other assets are valued at fair value as determined in good faith by the board of directors. Debt securities not traded on a principal securities exchange are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the board of directors. Pursuant to a determination by TCI Portfolios' board of directors that such value represents fair value, debt securities with maturities of 60 days or less are valued at amortized cost. When a security is valued at amortized cost, it is valued at its cost when purchased and thereafter by 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. The value of an exchange-traded foreign security is determined in its national currency as of the close of trading on the foreign exchange on which it is traded or as of the close of business of the New York Stock Exchange, if that is earlier. That value is then converted to U.S. dollars at the prevailing foreign exchange rate. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day that the New York Stock Exchange is open. If an event were to occur after the value of a security was established but before the net asset value per share was determined which was likely to materially change the net asset value, then that security would be valued at fair value as determined by the board of directors. Trading of securities in foreign markets may not take place on every New York Stock Exchange business day.
In addition, trading may take place in various foreign markets on Saturdays or on other days when the New York Stock Exchange is not open and on which the fund's net asset value is not calculated. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in such calculation and the value of the fund's portfolio may be affected on days when shares of the fund may not be purchased or redeemed.
Distributions from investment income generally are declared and paid quarterly in March, June, September and December, while distributions from realized securities gains, if any, generally are declared and paid once a year. The fund may make distributions on a more frequent basis to comply with the Internal Revenue Code, in all events in a manner consistent with the provisions of the Investment Company Act. All distributions from the fund will be reinvested in additional shares. The board of directors may elect not to distribute capital gains in whole or in part to take advantage of loss carryovers.
TCI Portfolios intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code. For a discussion of the tax status of your variable contract, refer to the prospectus of your insurance company's separate account.
Under the laws of the State of Maryland, the board of directors is responsible for managing the business and affairs of TCI Portfolios. Acting pursuant to an investment advisory agreement entered into with TCI Portfolios, Investors Research Corporation ("Investors Research") serves as the investment manager of TCI Portfolios. Its principal place of business is Twentieth Century Tower, 4500 Main Street, Kansas City, Missouri 64111. Investors Research has been providing investment advisory services to investment companies and institutional investors since 1958. Certain investments may be appropriate for TCI Portfolios and also for other clients advised by Investors Research. Investment decisions are made with the intention of achieving the respective investment objectives of Investors Research's clients after consideration of such factors as their current holdings, availability of cash for investment and the size of their investment generally. A particular security may be bought or sold for only one client or in different amounts and at different times for more than one but less than all clients. In addition, purchases or sales of the same security may be made for two or more clients on the same date. Such transactions will be allocated among clients in a manner believed by Investors Research to be equitable to each. In some cases, this procedure could have an adverse effect on the price or amount of the securities purchased or sold by TCI Portfolios. Investors Research supervises and manages the investment portfolio of the fund and directs the purchase and sale of its investment securities. Investors Research utilizes a team of portfolio managers, assistant portfolio managers and analysts acting together to manage the assets of the fund. The team meets regularly to review portfolio holdings and to discuss purchase and sale activity. The team adjusts holdings in the fund's portfolio as they deem appropriate in pursuit of the fund's investment objectives. Individual portfolio manager members of the team may also adjust portfolio holdings of the funds as necessary between team meetings. The portfolio manager members of the TCI Advantage team and their principal business experience for the last five years are as follows: ROBERT C. PUFF, JR., executive vice president and chief investment officer, has been a portfolio manager since joining Investors
Research in 1983. In his position as Chief Investment Officer, Mr. Puff oversees the investment activities of all of the teams that manage TCI Portfolios funds. CHARLES M. DUBOC, senior vice president and portfolio manager, joined Investors Research in August 1985 and served as fixed income portfolio manager from that time until April 1993. In April 1993, Mr. Duboc joined Investors Research equity investment efforts. He is a member of the team that manages the equity portion of TCI Advantage. NORMAN E. HOOPS, senior vice president and fixed income portfolio manager, joined Investors Research as vice president and portfolio manager in November 1989. In April 1993, he became senior vice president. He is a member of the team that manages the fixed income portion of TCI Advantage.
NANCY B. PRIAL, vice president and portfolio manager, joined Investors Research in February 1994 as a portfolio manager. She is a member of the team that manages the equity portion of TCI Advantage. For more than four years prior to joining Investors Research, Ms. Prial served as senior vice president and portfolio manager at Frontier Capital Management Company, Boston, Massachusetts.
The activities of Investors Research are subject only to directions of TCI Portfolios' board of directors. Investors Research pays all the expenses of TCI Portfolios except brokerage, taxes, interest, fees and expenses of the non-interested person directors (including counsel fees) and extraordinary expenses. For the foregoing services, Investors Research is paid a fee of 1% of the average net assets of the fund during the year. The fee is paid and computed on the first business day of each month by multiplying 1% of the average daily closing net asset values of the shares of the fund during the previous month by a fraction, the numerator of which is the number of days in the previous month and the denominator of which is 365 (366 in leap years). Many investment companies pay smaller investment management fees. However, most if not all of such companies also pay, in addition to an investment management fee, certain of their own expenses, while almost all of TCI Portfolios' expenses, as noted above, are paid by Investors Research.
TCI Portfolios' and Investors Research have adopted a Code of Ethics (the "Code"), which restricts personal investing practices by employees of Investors Research and its affiliates. Among other provisions, the Code requires that employees with access to information about the purchase or sale of securities in the fund's portfolios obtain preclearance before executing personal trades. With respect to portfolio managers and other investment personnel, the Code prohibits acquisition of securities in an initial public offering, as well as profits derived from the purchase and sale of the same security within 60 calendar days. These provisions are designed to ensure that the interests of fund shareholders come before the interests of the people who manage those funds. Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri 64111, acts as transfer agent and dividend-paying agent of TCI Portfolios. It provides facilities, equipment and personnel to TCI Portfolios and is paid for such services by Investors Research. Certain administrative and recordkeeping services that would otherwise be performed by Twentieth Century Services, Inc. may be performed by the insurance company that purchases TCI Portfolios' shares, and Investors Research may pay the insurance company for such services.
Investors Research and Twentieth Century Services, Inc. are both wholly owned by Twentieth Century Companies, Inc. James E. Stowers Jr., chairman and chief executive officer of TCI Portfolios, controls Twentieth Century Companies, Inc. by virtue of his ownership of a majority of its common stock.
TCI Portfolios was organized as a Maryland
corporation on June 4, 1987. It is a diversified, open-end management investment company. Its business and affairs are managed by its officers under the direction of its board of directors.
The principal office of TCI Portfolios is 4500 Main Street, P.O. Box 419385, Kansas City, Missouri 64141-6385. All inquiries may be made by mail to that address or by phone to 816-531-5575. TCI Portfolios issues five series of common stock with a par value of $.01 per share. The assets belonging to each series of shares are held separately by the custodian and, in effect, each series is a separate fund. Each share of each series, when issued, is fully paid and non-assessable.
Each share, irrespective of series, is entitled to one vote for each dollar of net asset value applicable to such share on all questions, except that certain matters must be voted on by the series of shares affected, and matters affecting only one series are voted upon only by that series. Shares have non-cumulative voting rights, which means that holders of more than 50% of the net asset value of the shares voting for election of directors can elect all of the directors if they choose to do so, and, in such event, the holders of the remaining minority will not be able to elect any person or persons to the board of directors. An insurance company issuing a variable contract invested in shares issued by TCI Portfolios will request voting instructions from contract holders and will vote shares in proportion to the voting instructions received. In the event of the complete liquidation or dissolution of TCI Portfolios, shareholders of each series of shares shall be entitled to receive, pro rata, all of the assets less the liabilities of that series. TCI PORTFOLIOS RESERVES THE RIGHT TO CHANGE ANY OF ITS POLICIES, PRACTICES AND PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF ADDITIONAL INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE INSTANCES WHERE SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED.
Part of the Twentieth Century
(C) 1996 Twentieth Century Services, Inc.
TCI Portfolios, Inc. ("TCI Portfolios") is a mutual fund that offers its shares only to insurance companies to fund the benefits of variable annuity or variable life insurance contracts. The fund currently offers five portfolios or series. TCI Balanced is described in this prospectus. The other series are described in separate prospectuses. TCI Balanced is sometimes hereinafter referred to as the "fund." You should consult the prospectus of the separate account of the specific insurance product that accompanies this prospectus to see which series of TCI Portfolios are available for such insurance product.
The investment objective of TCI Balanced is capital growth and current income. The fund will seek to achieve its investment objective by maintaining approximately 60% of the assets of TCI Balanced in common stocks that are considered by management to have better-than-average prospects for appreciation and the remaining assets in bonds and other fixed income securities. There can be no assurance that the fund will achieve its investment objective. Shares of the fund may be purchased only by insurance companies for the purpose of funding variable annuity or variable life insurance contracts. This prospectus should be read in conjunction with the prospectus of the separate account of the specific insurance product that accompanies this prospectus.
Additional information is included in the statement of additional information dated April 1, 1996, and filed with the Securities and Exchange Commission. It is incorporated in this prospectus by reference. To obtain a copy, or to make any other inquiries, call or write:
4500 Main Street * P.O. Box 419385 Kansas City, Mo. 64141-6385 * 1-800-345-3533 Local and international calls: 816-531-5575 Telecommunications device for the deaf: 1-800-345-1833 * In Missouri: 816-753-0070
This prospectus gives you information about TCI Portfolios that you should know before investing. Keep it for future reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Investment Policies of the Fund...........................................4 Fundamentals of Fixed Income Investing.................................6
ADDITIONAL INFORMATION YOU SHOULD KNOW
Purchase and Redemption of Shares.....................................11 When Share Price is Determined........................................11 How Share Price is Determined.........................................11
NO PERSON IS AUTHORIZED BY TCI PORTFOLIOS TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN OTHER PRINTED OR WRITTEN MATERIAL ISSUED BY THE COMPANY, AND YOU SHOULD NOT RELY ON ANY OTHER INFORMATION OR REPRESENTATION.
INVESTMENT POLICIES OF THE FUND
TCI Portfolios has adopted certain investment restrictions applicable to the fund that are set forth in the statement of additional information. Those restrictions, as well as the investment objective of the fund, as identified on the front cover page, and any other investment policies designated as "fundamental" in this prospectus or in the statement of additional information, cannot be changed without the approval of the shareholders entitled to cast a majority of the outstanding votes of the corporation, as defined by the Investment Company Act. The fund has implemented additional investment policies and practices to guide its activities in the pursuit of its investment objective. These policies and practices, which are described throughout this prospectus, are not designated as fundamental policies and may be changed without shareholder approval. The investment objective of TCI Balanced is capital growth and current income. The fund will seek to achieve its objective, with regard to the equity portion of its portfolio, by investing in common stocks (including securities convertible into common stocks and other equity equivalents) and other securities that meet certain fundamental and technical standards of selection and have, in the opinion of the fund's investment manager, better-than-average potential for appreciation. Management of the fund intends to maintain approximately 60% of the fund's assets in such securities, regardless of the movement of stock prices generally. The equity portion of the fund may be invested in cash and cash equivalents temporarily or when the fund is unable to find equity securities meeting its criteria of selection. It may only purchase securities of companies that have a record of at least three years' continuous operation. Since a portion of the fund's portfolio will be invested in fixed income securities, the opportunity for capital appreciation may be expected to be less than with a fund that invests primarily in common stocks. Management intends to maintain approximately 40% of the fund's assets in fixed income securities, with a minimum of 25% of that amount in fixed income senior securities. The fixed income securities in the fund will be chosen based on their level of income production and price stability. The fund may invest in a diversified portfolio of debt and other fixed-rate securities payable in U.S. currency. These may include obligations of the U.S. government, its agencies and instrumentalities, corporate securities (bonds, notes, preferred and convertible issues), and sovereign government, municipal, mortgage-related and other asset-backed securities. With regard to obligations of the U.S. government, its agencies and instrumentalities, TCI Balanced may invest in (1) direct obligations of the United States, such as Treasury bills, Treasury notes and U.S. government bonds, which are supported by the full faith and credit of the United States, and (2) obligations, including mortgage-related securities, issued or guaranteed by agencies and instrumentalities of the U.S. government that are established under an Act of Congress. These agencies and instrumentalities may include, but are not limited to, the Government National Mortgage Association, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Student Loan Marketing Association, Federal Farm Credit Banks, Federal Home Loan Banks and Resolution Funding Corporation. The securities of some of these agencies and instrumentalities, such as the Government National Mortgage Association, are guaranteed as to principal and interest by the United States Treasury, and other securities are supported by the right of the issuer, such as the Federal Home Loan Banks, to borrow from the Treasury. Other obligations, including those issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, are supported only by the credit of the instrumentality. Mortgage-related securities in which TCI Balanced may invest include
mortgage obligations ("CMOs") issued by a U.S. agency or instrumentality. A CMO is a debt security that is collateralized by a portfolio or pool of mortgages or mortgage-backed securities. The issuer's obligation to make interest and principal payments is secured by the underlying pool or portfolio of mortgages or securities. The market value of mortgage-related securities, even those in which the underlying pool of mortgage loans is guaranteed as to the payment of principal and interest by the U.S. government, is not insured. When interest rates rise, the market value of those securities may decrease in the same manner as other fixed-rate debt, but when interest rates decline, their market value may not increase as much as other fixed-rate debt instruments because of the prepayment feature inherent in the mortgages underlying such securities. If such securities are purchased at a premium, the fund will suffer a loss if the obligation is prepaid. Prepayments will be reinvested at prevailing rates, which may be less than the rate paid on such obligation. For the purpose of determining the weighted average portfolio maturity of the fund, management shall consider the maturity of a security issued by the Government National Mortgage Association, or other mortgage-related security, to be the remaining expected average life of the security. The average life of such securities is likely to be substantially less than the original maturity as a result of prepayments of principal of the mortgages underlying such securities, especially in a declining interest rate environment. It is management's objective to invest the fund's fixed income holdings in high-grade securities. At least 80% of fixed income assets will be invested in securities that at the time of purchase are rated within the three highest categories by a nationally recognized statistical rating organization (at least A by Moody's Investor Services, Inc. ("Moody's") or Standard & Poor's Corp. ("S&P")). The remaining portion of the fixed income assets may be invested in issues that are either rated in the fourth highest category (Baa by Moody's or BBB by S&P) or, if not rated, that are of equivalent investment quality as determined by the investment manager and that, in the opinion of the investment manager, can contribute meaningfully to the fund's results without compromising its objectives. Such issues might include a lower-rated issue where research suggests the likelihood of a rating increase or a convertible issue of a company deemed attractive by the equity management team. For a brief discussion of fixed income investing, see "Fundamentals of Fixed Income Investing" on page 6. There are no maturity restrictions on the securities in which the fund may invest. Under normal market conditions the weighted average portfolio maturity will be in the three- to 10-year range. The management will actively manage the portfolio, adjusting the weighted average portfolio maturity in response to expected interest rates. During periods of rising interest rates a shorter weighted average maturity may be adopted in order to reduce the effect of bond price declines on the fund's net asset value. When interest rates are falling and bond prices rising, a longer weighted average portfolio maturity may be adopted.
TCI Portfolios will offer its shares only to insurance companies for the purpose of funding variable annuity or variable life insurance contracts. Although TCI Portfolios does not foresee any disadvantages to contract owners due to the fact that it offers its shares as an investment medium for both variable annuity and variable life products, the interests of various contract owners participating in the funds of TCI Portfolios might at some time be in conflict due to future differences in tax treatment of variable products or other considerations. Consequently, TCI Portfolios' board of directors will monitor events in order to identify any material irreconcilable conflicts that may possibly arise and to determine what action, if any, should be taken in
response to such conflicts. If a conflict were to occur, an insurance company separate account might be required to withdraw its investments in the funds of TCI Portfolios and those funds might be forced to sell securities at disadvantageous prices to fund such withdrawal.
For additional information regarding the fund and its investment policies, see "Investment Restrictions Applicable to all Series of Shares" in the statement of additional information.
Over time, the level of interest rates available in the marketplace changes. As prevailing rates fall, the prices of fixed income securities, i.e., securities that trade on a yield basis, rise. On the other hand, when prevailing interest rates rise, the prices of such securities fall. Generally, the longer the maturity of a debt security, the higher its yield and the greater its price volatility. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. These factors operating in the marketplace have a similar impact on fixed income security portfolios. A change in the level of interest rates causes the net asset value per share of any fixed income security fund, except money market funds, to change. If sustained over time, it would also have the impact of raising or lowering the yield of that fund. In addition to the risk arising from fluctuating interest rate levels, debt securities are subject to credit risk. When a security is purchased, its anticipated yield is dependent on the timely payment by the borrower of each interest and principal installment. Credit analysis and resultant bond ratings take into account the relative likelihood that such timely payment will occur. As a result, lower-rated bonds sell at higher yield levels than top-rated bonds of similar maturity. In addition, as economic, political and business developments unfold, lower-quality bonds, which possess lower levels of protection with regard to timely payment, usually exhibit more price fluctuation than do higher-quality bonds of maturity.
The fund may invest in repurchase agreements when such transactions present an attractive short-term return on cash that is not otherwise committed to the purchase of securities pursuant to the investment policy of the fund. A repurchase agreement occurs when, at the time the fund purchases an interest-bearing obligation, the seller (a bank or broker-dealer registered under the Securities Exchange Act of 1934) agrees to repurchase it on a specified date in the future at an agreed-upon price. The repurchase price reflects an agreed-upon interest rate during the time the fund's money is invested in the security. Since the security purchased constitutes security for the repurchase obligation, a repurchase agreement can be considered as a loan collateralized by the security purchased. The fund's risk is the ability of the seller to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. To the extent the value of the security decreases, the fund could experience a loss.
The fund will limit repurchase agreement transactions to transactions with those commercial banks and broker-dealers whose creditworthiness has been reviewed and found satisfactory by the Fund's management pursuant to criteria adopted by the fund's board of directors.
In order to realize additional income, the
fund may lend its portfolio securities to persons not affiliated with it and who are deemed to be creditworthy. Such loans must be secured continuously by cash collateral maintained on a current basis in an amount at least equal to the market value of the securities loaned or by irrevocable letters of credit. During the existence of the loan, the fund must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral. The fund must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable the fund to vote the securities. Interest and dividends on loaned securities may not exceed 10% of the annual gross income of the fund (without offset for realized capital gains). The portfolio lending policy described in this paragraph is a fundamental policy that may be changed only by a vote of a majority of the shareholders of TCI Portfolios. TCI Portfolios is indemnified against loss on the loans by United States Trust Company of New York.
The fund may invest an unlimited amount of its assets in the securities of foreign issuers when these securities meet its standards of selection. The fund may make such investments either directly in foreign securities or indirectly by purchasing depositary receipts or depositary shares or similar instruments for foreign securities ("DRs"). DRs are securities that are issued in and are listed on exchanges or quoted in over-the-counter markets in one country but represent shares of issuers domiciled in another country.
Investments in foreign securities may present certain risks, including those resulting from fluctuations in currency exchange rates, future political and economic developments, currency restrictions and devaluations, securities clearance and settlement procedures, exchange control regulations, reduced availability of public information concerning issuers, and the fact that foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic issuers.
Some of the securities held by the fund may be denominated in foreign currencies. Other securities, such as DRs, may be denominated in U.S. dollars or the currency of the country where issued (if not U.S. dollars), but have a value that is dependent upon the performance of a foreign security, as valued in the currency of its home country. As a result, the value of its portfolio will be affected by changes in the exchange rate between foreign currencies and the U.S. dollar, as well as by changes in the market value of the securities themselves. The performance of foreign currencies relative to the dollar may be an important factor in the overall performance of the fund. In order to protect against adverse movements in exchange rates between currencies, the fund may, for hedging purposes only, enter into forward currency exchange contracts. A forward currency exchange contract obligates the fund to purchase or sell a specific currency at a future date at a specific price. The fund may elect to enter into a forward currency exchange contract with respect to a specific purchase or sale of a security, or with respect to the fund's portfolio positions generally. By entering into a forward currency exchange contract with respect to the specific purchase or sale of a security denominated in a foreign currency, the fund can "lock in" an exchange rate between the trade and settlement dates for that purchase or sale. This practice is sometimes referred to as "transaction hedging." The fund may enter into transaction hedging contracts with respect to all or a substantial portion of its trades. When the manager believes that a particular currency may decline in value compared to the U.S. dollar, the fund may enter into a foreign cur-
rency exchange contract to sell an amount of foreign currency equal to the value of some or all of the fund's portfolio securities either denominated in, or whose value is tied to, that currency. This practice is sometimes referred to as "portfolio hedging." The fund may not enter into a portfolio hedging transaction where the fund would be obligated to deliver an amount of foreign currency in excess of the aggregate value of the fund's portfolio securities or other assets denominated in, or whose value is tied to, that currency. The fund will make use of portfolio hedging to the extent deemed appropriate by the investment manager. However, it is anticipated that the fund will enter into portfolio hedges much less frequently than transaction hedges. If the fund enters into a forward contract, the fund, when required, will instruct its custodian bank to segregate cash or liquid high-grade securities in a separate account in an amount sufficient to cover its obligation under the contract. Those assets will be valued at market daily, and if the value of the segregated securities declines, additional cash or securities will be added so that the value of the account is not less than the amount of the fund's commitment. At any given time, no more than 10% of the fund's assets will be committed to a segregated account in connection with portfolio hedging transactions. Predicting the relative future values of currencies is very difficult, and there is no assurance that any attempt to protect the fund against adverse currency movements through the use of forward currency exchange contracts will be successful. In addition, the use of forward currency exchange contracts may limit the potential gains that might result from a positive change in the relationship between the foreign currency and the U.S. dollar.
To the extent permitted by its investment objectives and policies, each of the funds may invest in securities that are commonly referred to as "derivative" securities. Certain derivative securities are more accurately described as "index/structured securities." Index/structured securities are derivative securities whose value or performance is linked to other equity securities (such as DRs), currencies, interest rates, indexes or other financial indicators ("reference indexes"). No fund may invest in an index/structured security unless the reference index or the instrument to which it relates is an eligible investment for the fund. For example, a bond whose interest rate was indexed to the return on two-year treasury securities would be a permissible investment (assuming it met the other requirements for the fund), while a bond whose return was indexed to the price of oil would not be a permissible investment. The return, interest rate or, unlike most fixed income securities, the principal amount payable at maturity of an index/structured security may increase or decrease, depending upon changes in the reference index. Index/ structured securities may be positively or negatively indexed. That means that an increase in the reference index may produce an increase or decrease in the return, interest rate or value at maturity of the security. No purchases will be made of index/structured securities having "leverage" characteristics. This means that no investments will be made in securities whose change in return, interest rate or value at maturity is a multiple of the change in the reference index. Because their performance is tied to a reference index, a fund investing in index/structured securities, in addition to being exposed to the credit risk of the issuer of the security, will also bear the market risk of changes in the reference index. The board of directors has approved management's policy regarding investments in derivative securities. That policy specifies factors that must be considered in connection with a purchase of derivative securities. The policy also establishes a committee that must review certain proposed purchases before the purchases can be made. Management will report on fund activity in derivative securities to the board of directors as necessary. In addition, the board will review man-
agement's policy for investments in derivative securities annually.
The fund may engage in short sales if, at the time of the short sale, the fund owns or has the right to acquire an equal amount of the security being sold short at no additional cost. The fund may make a short sale when it wants to sell the security it owns at a current attractive price but also wishes to defer recognition of gain or loss for federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code.
The fund may sometimes purchase new issues of securities on a when-issued basis without limit when, in the opinion of the investment manager, such purchases will further the investment objectives of the fund. The price of when-issued securities is established at the time the commitment to purchase is made. Delivery of and payment for these securities typically occur 15 to 45 days after the commitment to purchase. Market rates of interest on debt securities at the time of delivery may be higher or lower than those contracted for on the when-issued security. Accordingly, the value of such security may decline prior to delivery, which could result in a loss to the fund. A separate account consisting of cash or high-quality liquid debt securities in an amount at least equal to the when-issued commitments will be established and maintained with the custodian. No income will accrue to the fund prior to delivery.
The fund may invest up to 15% of its assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of fund shares), including restricted securities. Although securities which may be resold only to qualified institutional buyers in accordance with the provisions of Rule 144A under the Securities Act of 1933 are considered "restricted securities," the fund may purchase Rule 144A securities without regard to the percentage limitations described above when Rule 144A securities present an attractive investment opportunity, otherwise meet the fund's criteria of selection, and also meet the liquidity guidelines established for Rule 144A securities. With respect to securities eligible for resale under Rule 144A, the staff of the Securities and Exchange Commission has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of directors to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the board of directors is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the board of directors of TCI Portfolios has delegated the day-to-day function of determining the liquidity of 144A securities to the investment manager. The board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted. Since the secondary market for such securities will be limited to certain qualified institutional investors, their liquidity may be limited accordingly and the fund may from time to time hold a Rule 144A security that is illiquid. In such an event, TCI Portfolios will consider appropriate remedies to minimize the effect on the fund's liquidity.
From time to time, TCI Portfolios (or the insurance companies that use TCI Portfolios to fund the benefits of variable annuity or variable life insurance contracts) may advertise performance data. Fund performance may be
presenting one or more performance measurements, including cumulative total return, average annual total return, yield and effective yield. Cumulative total return data is computed by considering all elements of return, including reinvestment of dividends and capital gains distributions, over a stated period of time. Average annual total return is determined by computing the annual compounded return over a stated period of time that would have produced the fund's cumulative total return over the same period if the fund's performance had remained constant throughout. A quotation of yield reflects the fund's income over a stated period expressed as a percentage of the fund's share price. Yield is calculated by adding over a 30-day (or one-month) period all interest and dividend income (net of fund expenses) calculated on each day's market values, dividing this sum by the average number of fund shares outstanding during the period, and expressing the result as a percentage of the fund's share price on the last day of the 30-day (or one-month) period. The percentage is then annualized. Capital gains and losses are not included in the calculation. Yields are calculated according to accounting methods that are standardized in accordance with Securities and Exchange Commission rules for all stock and bond funds. Because yield accounting methods differ from the methods used for other accounting purposes, TCI Balanced's yield may not equal income paid on your shares or the income reported in the fund's financial statements.
TCI Portfolios may also include in advertisements data comparing performance with the performance of non-related investment media, published editorial comments and performance rankings compiled by independent organizations (such as Lipper Analytical Services or Donoghue's Money Fund Report) and publications that monitor the performance of mutual funds. Performance information may be quoted numerically or may be represented in a table, graph or other illustration. In addition, fund performance may be compared to well-known indices of market performance, including the S&P 500 Index, The Dow Jones Industrial Average, Donoghue's Money Fund Average, the Shearson Lehman Intermediate Government Bond Index, the constant maturity five-year U.S.Treasury Note Index and the Bank Rate Monitor National Index of 21/2 -year CD rates. Fund performance may also be compared to other funds in the Twentieth Century family. It may also be combined or blended with other funds in the Twentieth Century family, and that combined or blended performance may be compared to the same indices to which the individual funds may be compared.
All performance information advertised by TCI Portfolios is historical in nature and is not intended to represent or guarantee future results. The value of fund shares when redeemed may be more or less than their original cost. PERFORMANCE FIGURES ADVERTISED BY TCI PORTFOLIOS SHOULD NOT BE USED FOR COMPARA-TIVE PURPOSES BECAUSE THESE FIGURES WILL NOT INCLUDE CHARGES AND DEDUCTIONS IMPOSED BY THE INSURANCE COMPANY SEPARATE ACCOUNT UNDER THE VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS.
ADDITIONAL INFORMATION YOU SHOULD KNOW
For instructions on how to purchase and redeem shares, read the prospectus of your insurance company's separate account. Shares of TCI Portfolios are sold and redeemed by TCI Portfolios at their net asset value next determined after receipt by the insurance company separate account of the order from the variable annuity or variable life insurance contract owner to purchase or to redeem. There are no sales commissions or redemption charges. However, certain sales or deferred sales charges and other charges may apply to the variable annuity or life insurance contracts. Those charges are disclosed in the separate account prospectus.
WHEN SHARE PRICE IS DETERMINED
The price of TCI Portfolios' shares is their net asset value. Net asset value is determined at the close of business of the New York Stock Exchange, usually 3 p.m. Central time, on each day that the Exchange is open. Requests to redeem shares and investments received by the separate account before the close of business of the Exchange are effective, and will receive the price determined, on the day received. Redemption requests and investments received thereafter are effective on, and receive the price determined as of, the close of the Exchange the next day the Exchange is open.
HOW SHARE PRICE IS DETERMINED
The valuation of assets for determining net asset value may be summarized as follows: The portfolio securities of the fund, except as otherwise noted, listed or traded on a stock exchange are valued at the latest sale price on the exchange where they are primarily traded. If no sale is reported, the mean of the latest bid and asked prices is used. Securities traded over the counter are required by regulations of the Securities and Exchange Commission. When market quotations are not readily available, securities and other assets are value as determined in good faith by the board of directors. Debt securities not traded on a principal securities exchange are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the board of directors. Pursuant to a determination by the TCI Portfolios' board of directors that such value represents fair value, debt securities with maturities of 60 days or less are valued at amortized cost. When a security is valued at amortized cost, it is valued at its cost when purchased, and thereafter by 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. The value of an exchange-traded foreign security is determined in its national currency as of the close of trading on the foreign exchange on which it is traded or as of the close of business of the New York Stock Exchange, if that is earlier. That value is then converted to U.S. dollars at the prevailing foreign exchange rate. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day that the New York Stock Exchange is open. If an event were to occur after the value of a security was established but before the net asset value per share was determined which was likely to materially change the net asset value, then that security would be valued at fair value as determined by the board of directors. Trading of securities in foreign markets may not take place on every New York Stock Exchange business day. In addition, trading may take place in various
foreign markets on Saturdays or on other days when the New York Stock Exchange is not open and on which the fund's net asset value is not calculated. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in such calculation and the value of the fund's portfolio may be affected on days when shares of the fund may not be purchased or redeemed.
Distributions from net investment income generally are declared and paid quarterly in March, June, September and December, while distributions from realized securities gains, if any, generally are declared and paid once a year. The fund may make distributions on a more frequent basis to comply with the distribution requirements of the Internal Revenue code, in all events in a manner consistent with the provisions of the Investment Company Act. All distributions from the fund will be reinvested in additional shares. The board of directors may elect not to distribute capital gains in whole or in part to take advantage of loss carryovers.
TCI Portfolios intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code. For a discussion of the tax status of your variable contract, refer to the prospectus of your insurance company's separate account.
Under the laws of the State of Maryland, the board of directors is responsible for managing the business and affairs of TCI Portfolios. Acting pursuant to an investment advisory agreement entered into with TCI Portfolios, Investors Research Corporation ("Investors Research") serves as the investment manager of TCI Portfolios. Its principal place of business is Twentieth Century Tower, 4500 Main Street, Kansas City, Missouri 64111. Investors Research has been providing investment advisory services to investment companies and institutional investors since 1958. Certain investments may be appropriate for TCI Portfolios and also for other clients advised by Investors Research. Investment decisions are made with the intention of achieving the respective investment objectives of Investors Research's clients after consideration of such factors as their current holdings, availability of cash for investment and the size of their investment generally. A particular security may be bought or sold for only one client or in different amounts and at different times for more than one but less than all clients. In addition, purchases or sales of the same security may be made for two or more clients on the same date. Such transactions will be allocated among clients in a manner believed by Investors Research to be equitable to each. In some cases, this procedure could have an adverse effect on the price or amount of the securities purchased or sold by TCI Portfolios. Investors Research supervises and manages the investment portfolio of the fund and directs the purchase and sale of its investment securities. Investors Research utilizes a team of portfolio managers, assistant portfolio managers and analysts acting together to manage the assets of the fund. The team meets regularly to review portfolio holdings and to discuss purchase and sale activity. The team adjusts holdings in the fund's portfolio as they deem appropriate in pursuit of the fund's investment objectives. Individual portfolio manager members of the team may also adjust portfolio holdings of the funds as necessary between team meetings. The portfolio manager members of the TCI Balanced team and their principal business experience for the last five years are as follows:
ROBERT C. PUFF, JR., executive vice president and chief investment officer, has been a portfolio manager since joining Investors Research in 1983. In his position as chief investment officer, Mr. Puff oversees the investment activities of all of the teams that manage TCI Portfolios funds. CHARLES M. DUBOC, senior vice president and portfolio manager, joined Investors Research in August 1985 and served as fixed income portfolio manager from that time until April 1993. In April 1993, Mr. Duboc joined Investor Research's equity investment efforts. He is a member of the team that manages the equity portion of TCI Balanced. NORMAN E. HOOPS, senior vice president and fixed income portfolio manager, joined Investors Research as vice president and portfolio manager in November 1989. In April 1993, he became senior vice president. He manages the fixed income portion of TCI Balanced. NANCY B. PRIAL, vice president and portfolio manager, joined Investors Research in February 1994 as a portfolio manager. She is a member of the team that manages the equity portion of TCI Balanced. For more than four years prior to joining Investors Research, Ms. Prial served as senior vice president and portfolio manager at Frontier Capital Management Company, Boston, Massachusetts. The activities of Investors Research are subject only to directions of TCI Portfolios' board of directors. Investors Research pays all the expenses of TCI Portfolios except brokerage, taxes, interest, fees and expenses of the non-interested person directors (including counsel fees) and extraordinary expenses. For the foregoing services, Investors Research is paid a fee of 1% of the average net assets of the fund during the year. The fee is paid and computed on the first business day of each month by multiplying 1% of the average daily closing net asset values of the shares of the fund during the previous month by a fraction, the numerator of which is the number of days in the previous month and the denominator of which is 365 (366 in leap years). Many investment companies pay smaller investment management fees. However, most if not all of such companies also pay, in addition to an investment management fee, certain of their own expenses, while almost all of TCI Portfolios' expenses, as noted above, are paid by Investors Research.
TCI Portfolios and Investors Research have adopted a Code of Ethics (the "Code"), which restricts personal investing practices by employees of Investors Research and its affiliates. Among other provisions, the Code requires that employees with access to information about the purchase or sale of securities in the fund's portfolios obtain preclearance before executing personal trades. With respect to portfolio managers and other investment personnel, the Code prohibits acquisition of securities in an initial public offering, as well as profits derived from the purchase and sale of the same security within 60 calendar days. These provisions are designed to ensure that the interests of fund shareholders come before the interests of the people who manage those funds. Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri 64111, acts as transfer agent and dividend-paying agent of TCI Portfolios. It provides facilities, equipment and personnel to TCI Portfolios and is paid for such services by Investors Research. Certain administrative and recordkeeping services that would otherwise be performed by Twentieth Century Services, Inc. may be performed by the insurance company that purchases TCI Portfolios' shares, and Investors Research may pay the insurance company for such services.
Investors Research and Twentieth Century Services, Inc. are both wholly owned by Twentieth Century Companies, Inc. James E. Stowers Jr., chairman and chief executive officer of TCI Portfolios, controls Twentieth Century Companies, Inc. by virtue of his ownership of a majority of its common stock.
TCI Portfolios was organized as a Maryland corporation on June 4, 1987. It is a diversified, open-end management investment company. Its business and affairs are managed by its officers under the direction of its board of directors.
The principal office of TCI Portfolios is 4500 Main Street, P.O. Box 419385, Kansas City, Missouri 64141-6385. All inquiries may be made by mail to that address or by phone to 816-531-5575. TCI Portfolios issues five series of common stock with a par value of $.01 per share. The assets belonging to each series of shares are held separately by the custodian and, in effect, each series is a separate fund. Each share of each series, when issued, is fully paid and non-assessable.
Each share, irrespective of series, is entitled to one vote for each dollar of net asset value applicable to such share on all questions, except that certain matters must be voted on by the series of shares affected, and matters affecting only one series are voted upon only by that series. Shares have non-cumulative voting rights, which means that holders of more than 50% of the net asset value of the shares voting for election of directors can elect all of the directors if they choose to do so and, in such event, the holders of the remaining minority will not be able to elect any person or persons to the board of directors. An insurance company issuing a variable contract invested in shares issued by TCI Portfolios will request voting instructions from contract holders and will vote shares in proportion to the voting instructions received. In the event of the complete liquidation or dissolution of TCI Portfolios, shareholders of each series of shares shall be entitled to receive, pro rata, all of the assets less the liabilities of that series. TCI PORTFOLIOS RESERVES THE RIGHT TO CHANGE ANY OF ITS POLICIES, PRACTICES AND PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF ADDITIONAL INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE INSTANCES WHERE SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED.
Part of the Twentieth Century
(C) 1996 Twentieth Century Services, Inc.
TCI Portfolios, Inc. ("TCI Portfolios") is a mutual fund that offers its shares only to insurance companies to fund the benefits of variable annuity or variable life insurance contracts. The fund currently offers five portfolios or series. TCI International is described in this prospectus. The other series are described in separate prospectuses. TCI International is sometimes hereinafter referred to as the "fund." You should consult the prospectus of the separate account of the specific insurance product that accompanies this prospectus to see which series of TCI Portfolios are available for purchase for such insurance product.
The investment objective of TCI International is capital growth. TCI International will seek to achieve its investment objective by investing primarily in an internationally diversified portfolio of common stocks that are considered by management to have prospects for appreciation. The fund will invest primarily in securities of issuers located in developed markets. Investment in securities of foreign issuers typically involves a greater degree of risk than investment in domestic securities. (See "Risk Factors," page 5.) There can be no assurance that the fund will achieve its investment objective. Shares of the fund may be purchased only by insurance companies for the purpose of funding variable annuity or variable life insurance contracts. This prospectus should be read in conjunction with the prospectus of the separate account of the specific insurance product that accompanies this prospectus.
Additional information is included in the statement of additional information dated April 1, 1996, and filed with the Securities and Exchange Commission. It is incorporated in this prospectus by reference. To obtain a copy, or to make any other inquiries, call or write:
4500 Main Street * P.O. Box 419385 Kansas City, Mo. 64141-6385 * 1-800-345-3533 Local and international calls: 816-531-5575 Telecommunications device for the deaf: 1-800-345-1833 * In Missouri: 816-753-0070
This prospectus gives you information about TCI Portfolios that you should know before investing. Keep it for future reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Investment Policies of the Fund..........................................4
ADDITIONAL INFORMATION YOU SHOULD KNOW
Purchase and Redemption of Shares....................................11 When Share Price is Determined.......................................11 How Share Price is Determined........................................11
NO PERSON IS AUTHORIZED BY TCI PORTFOLIOS TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN OTHER PRINTED OR WRITTEN MATERIAL ISSUED BY THE COMPANY, AND YOU SHOULD NOT RELY ON ANY OTHER INFORMATION OR REPRESENTATION.
INVESTMENT POLICIES OF THE FUND
TCI Portfolios has adopted certain investment restrictions applicable to the fund that are set forth in the statement of additional information. Those restrictions, as well as the investment objective of the fund, as identified on the front cover page, and any other investment policies designated as "fundamental" in this prospectus or in the statement of additional information, cannot be changed without the approval of the shareholders entitled to cast a majority of the outstanding votes of the corporation, as defined by the Investment Company Act. The fund has implemented additional investment policies and practices to guide its activities in the pursuit of its investment objective. These policies and practices, which are described throughout this prospectus, are not designated as fundamental policies and may be changed without shareholder approval. The investment objective of TCI International is capital growth. The fund will seek to achieve its investment objective by investing primarily in securities of foreign companies that meet certain fundamental and technical standards of selection and have, in the opinion of the investment manager, potential for appreciation. The fund will invest primarily in common stocks (defined to include depositary receipts for common stocks and other equity equivalents) of such companies. TCI Portfolios tries to stay fully invested in such securities, regardless of the movement of stock prices generally. Although the primary investment of the fund will be common stocks, the fund may also invest in other types of securities consistent with the accomplishment of the fund's objectives. When the manager believes that the total capital growth potential of other securities equals or exceeds the potential return of common stocks, the fund may invest up to 35% of its assets in such other securities. The other securities the fund may invest in are convertible securities, preferred stocks, bonds, notes and debt securities of companies, obligations of domestic or foreign governments and their agencies. The fund will limit its purchases of debt securities to investment-grade obligations. For long-term debt obligations this includes securities that are rated Baa or better by Moody's Investor Services, Inc. ("Moody's") or BBB or better by Standard & Poor's corporation ("S&P"), or that are not rated but considered by the manager to be of equivalent quality. According to Moody's, bonds rated Baa are medium grade and possess some speculative characteristics. A BBB rating by S&P indicates S&P's belief that a security exhibits a satisfactory degree of safety and capacity for repayment but is more vulnerable to adverse economic conditions or changing circumstances than higher-rated securities. The fund may make foreign investments either directly in foreign securities or indirectly by purchasing depositary receipts or depositary shares or similar instruments for foreign securities ("DRs"). DRs are securities that are listed on exchanges or quoted in the over-the-counter markets in one country but represent shares of issuers domiciled in another country. Notwithstanding the fund's investment objective of capital growth, under exceptional market or economic conditions, the fund may temporarily invest all or a substantial portion of its assets in cash or investment-grade short-term securities (denominated in U.S. dollars or foreign currencies). To the extent the fund assumes a defensive position, it will not be pursuing its investment objective of capital growth. Under normal conditions, the fund will invest at least 65% of its assets in common stocks or other equity equivalents of issuers from at least three countries outside of the United States. While securities of U.S. issuers may be included in the portfolio from time to time, it is the primary intent of the manager to diversify investments across a broad range of foreign issuers. Management defines "foreign issuer" as an issuer of securities that is
the United States and/or whose shares trade principally on an exchange or other market outside the United States. In order to achieve maximum investment flexibility, the fund has not established geographic limits on asset distribution on either a country-by-country or region-by-region basis. The investment manager expects to invest both in issuers whose principal place of business is located in countries with developed economies (such as Germany, the United Kingdom and Japan) and in issuers whose principal place of business is located in countries with less developed economies (such as Portugal, Malaysia and Mexico). The principal criterion for inclusion of a security in the fund's portfolio is its ability to meet the fundamental and technical standards of selection and, in the opinion of the fund's investment manager, to achieve better-than-average appreciation. If, in the opinion of the fund's investment manager, a particular security satisfies this principal criterion, the security may be included in the fund's portfolio, regardless of the location of the issuer or the percentage of the fund's investments in the issuer's country or region. At the same time, however, the investment manager recognizes that both the selection of the fund's individual securities and the allocation of the portfolio's assets across different countries and regions are important factors in managing an international equity portfolio. For this reason, the manager also will consider a number of other factors in making investment selections including: the prospects for relative economic growth among countries or regions, economic and political conditions, expected inflation rates, currency exchange fluctuations and tax considerations.
Investing in securities of foreign issuers generally involves greater risks than investing in the securities of domestic companies. Potential investors should carefully consider the following factors before investing: Currency Risk. The value of the fund's foreign investments may be significantly affected by changes in currency exchange rates. The dollar value of a foreign security generally decreases when the value of the dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the dollar falls against such currency. In addition, the value of the fund's assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities and by currency restrictions, exchange control regulation, currency devaluations, and political developments. Political and Economic Risk. The economies of many of the countries in which the fund invests are not as developed as the economy of the United States and may be subject to significantly different forces. Political or social instability, expropriation or confiscatory taxation, and limitations on the removal of funds or other assets, could also adversely affect the value of investments. Investments in lesser developed countries will involve exposure to economic structures that are generally less diverse and mature than in the United States or other developed countries and to political systems that can be expected to be less stable than those of more developed countries. A developing country can be considered to be a country that is in the initial stages of its industrialization cycle. Historically, markets of developing countries have been more volatile than the markets of developed countries. The fund has no limit with respect to investments in lesser developed countries. Regulatory Risk. Foreign companies are generally not subject to the regulatory controls imposed on U.S. issuers and, in general, there is less publicly available information about foreign securities than is available about domestic securities. Many foreign companies are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic companies. Income from foreign securities owned by
the fund may be reduced by a withholding tax at the source that would reduce dividends paid by the fund. Market and Trading Risk. Brokerage commission rates in foreign countries, which are generally fixed rather than subject to negotiation as in the United States, are likely to be higher. The securities markets in many of the countries in which the fund invests will have substantially less trading volume than the principal U.S. markets. As a result, the securities of some companies in these countries may be less liquid and more volatile than comparable U.S. securities. Furthermore, one securities broker may represent all or a significant part of the trading volume in a particular country, resulting in higher trading costs and decreased liquidity due to a lack of alternative trading partners. There is generally less government regulation and supervision of foreign stock exchanges, brokers and issuers, which may make it difficult to enforce contractual obligations. In addition, extended clearance and settlement periods in some foreign markets could result in losses to the fund or cause the fund to miss attractive investment possibilities.
TCI Portfolios will offer its shares only to insurance companies for the purpose of funding variable annuity or variable life insurance contracts. Although TCI Portfolios does not foresee any disadvantages to contract owners due to the fact that it offers its shares as an investment medium for both variable annuity and variable life products, the interests of various contract owners participating in the funds of TCI Portfolios might at some time be in conflict due to future differences in tax treatment of variable products or other considerations. Consequently, TCI Portfolios' board of directors will monitor events in order to identify any material irreconcilable conflicts that may possibly arise, and to determine what action, if any, should be taken in response to such conflicts. If a conflict were to occur, an insurance company separate account might be required to withdraw its investments in the fund and the fund might be forced to sell securities at disadvantageous prices to fund such withdrawal.
For additional information regarding the fund and its investment policies, see "Investment Restrictions Applicable to all Series of Shares" in the statement of additional information.
Some of the securities held by the fund will be denominated in foreign currencies. Other securities, such as DRs, may be denominated in U.S. dollars or the currency of the country where issued (if not U.S. dollars) but have a value that is dependent upon the performance of a foreign security, as valued in the currency of its home country. As a result, the value of its portfolio will be affected by changes in the exchange rate between foreign currencies and the U.S. dollar as well as by changes in the market value of the securities themselves. The performance of foreign currencies relative to the dollar may be an important factor in the overall performance of the fund. In order to protect against adverse movements in exchange rates between currencies, the fund may, for hedging purposes only, enter into forward currency exchange contracts. A forward currency exchange contract obligates the fund to purchase or sell a specific currency at a future date at a specific price. The fund may elect to enter into a forward currency exchange contract with respect to a specific purchase or sale of a security, or with respect to the fund's portfolio positions generally. By entering into a forward currency exchange contract with respect to the specific purchase or sale of a security denominated in a foreign currency, the fund can "lock in" an exchange rate between the trade and
purchase or sale. This practice is sometimes referred to as "transaction hedging." The fund may enter into transaction hedging contracts with respect to all or a substantial portion of its trades. When the manager believes that a particular currency may decline in value compared to the U.S. dollar, the fund may enter into a foreign currency exchange contract to sell an amount of foreign currency equal to the value of some or all of the fund's portfolio securities either denominated in, or whose value is tied to, that currency. This practice is sometimes referred to as "portfolio hedging." The fund may not enter into a portfolio hedging transaction where the fund would be obligated to deliver an amount of foreign currency in excess of the aggregate value of the fund's portfolio securities or other assets denominated in, or whose value is tied to, that currency. The fund will make use of portfolio hedging to the extent deemed appropriate by the investment manager. However, it is anticipated that the fund will enter into portfolio hedges much less frequently than transaction hedges. If the fund enters into a forward contract, the fund, when required, will instruct its custodian bank to segregate cash or liquid high-grade securities in a separate account in an amount sufficient to cover its obligation under the contract. Those assets will be valued at market daily, and if the value of the segregated securities declines, additional cash or securities will be added so that the value of the account is not less than the amount of the fund's commitment. At any given time, no more than 15% of the fund's assets will be committed to a segregated account in connection with portfolio hedging transactions. Predicting the relative future values of currencies is very difficult, and there is no assurance that any attempt to protect the fund against adverse currency movements through the use of forward currency exchange contracts will be successful. In addition, the use of forward currency exchange contracts may limit the potential gains that might result from a positive change in the relationship between the foreign currency and the U.S. dollar.
To the extent permitted by its investment objectives and policies, each of the funds may invest in securities that are commonly referred to as "derivative" securities. Certain derivative securities are more accurately described as "index/ structured securities." Index/structured securities are derivative securities whose value or performance is linked to other equity securities (such as DRs), currencies, interest rates, indexes or other financial indicators ("reference indexes"). No fund may invest in an index/structured security unless the reference index or the instrument to which it relates is an eligible investment for the fund. The return, interest rate, or, unlike most fixed income securities, the principal amount payable at maturity of an index/structured security may increase or decrease, depending upon changes in the reference index. Index/ structured securities may be positively or negatively indexed. That means that an increase in the reference index may produce an increase or decrease in the return, interest rate or value at maturity of the security. No purchases will be made of index/structured securities having "leverage" characteristics. This means that no investments will be made in securities whose change in return, interest rate or value at maturity is a multiple of the change in the reference index. Because their performance is tied to a reference index, a fund investing in index/structured securities, in addition to being exposed to the credit risk of the issuer of the security, will also bear the market risk of changes in the reference index. The board of directors has approved management's policy regarding investments in derivative securities. That policy specifies factors that must be considered in connection with a purchase of derivative securities. The policy also establishes a committee that must review certain proposed purchases before the purchases can be made. Management will report on fund
derivative securities to the board of directors as necessary. In addition, the board will review management's policy for investments in derivative securities annually.
Subject to certain restrictions contained in the Investment Company Act, the fund may invest in certain foreign countries indirectly through investment fund and registered investment companies authorized to invest in those countries. If the fund invests in investment companies, the fund will bear its proportionate shares of the costs incurred by such companies, including investment advisory fees, if any.
The fund may purchase sovereign debt instruments issued or guaranteed by foreign governments or their agencies. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations.
The fund may invest in repurchase agreements when such transactions present an attractive short-term return on cash that is not otherwise committed to the purchase of securities pursuant to the investment policy of the fund. A repurchase agreement occurs when, at the time the fund purchases an interest-bearing obligation, the seller (a bank or broker-dealer registered under the Securities Exchange Act of 1934) agrees to repurchase it on a specified date in the future at an agreed-upon price. The repurchase price reflects an agreed-upon interest rate during the time the fund's money is invested in the security. Since the security purchased constitutes security for the repurchase obligation, a repurchase agreement can be considered as a loan collateralized by the security purchased. The fund's risk is the ability of the seller to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. To the extent the value of the security decreases, the fund could experience a loss.
The fund will limit repurchase agreement transactions to transactions with those commercial banks and broker-dealers whose creditworthiness has been reviewed and found satisfactory by the fund's management pursuant to criteria adopted by the fund's board of directors.
The fund will not invest more than 15% of its assets in repurchase agreements maturing in more than seven days.
The fund may sometimes purchase new issues of securities on a when-issued basis without limit when, in the opinion of the investment manager, such purchases will further the investment objectives of the fund. The price of when-issued securities is established at the time the commitment to purchase is made. Delivery of and payment for these securities typically occur 15 to 45 days after the commitment to purchase. Market rates of interest on debt securities at the time of delivery may be higher or lower than those contracted for on the when-issued security. Accordingly, the value of such security may decline prior to delivery, which could result in a loss to the fund. A separate account consisting of cash or high-quality liquid debt securities in an amount at least equal to the when-issued commitments will be established and maintained with the custodian. No income will accrue to the fund prior to delivery.
The fund may engage in short sales if, at the time of the short sale, the fund owns or has the
right to acquire an equal amount of the security being sold short at no additional cost. These transactions allow a fund to hedge against price fluctuations by locking in a sale price for securities it does not wish to sell immediately. A fund may make a short sale when it wants to sell the security it owns at a current attractive price, but also wishes to defer recognition of gain or loss for federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code.
The fund may invest up to 15% of its assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of fund shares), including restricted securities. Although securities that may be resold only to qualified institutional buyers in accordance with the provisions of Rule 144A under the Securities Act of 1933 are considered "restricted securities," the fund may purchase Rule 144A securities without regard to the percentage limitations described above when Rule 144A securities present an attractive investment opportunity, otherwise meet the fund's criteria of selection, and also meet the liquidity guidelines established for Rule 144A securities. With respect to securities eligible for resale under Rule 144A, the staff of the Securities and Exchange Commission has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of directors to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the board of directors is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the board of directors of TCI Portfolios has delegated the day-to-day function of determining the liquidity of 144A securities to the investment manager. The board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted. Since the secondary market for such securities will be limited to certain qualified institutional investors, their liquidity may be limited accordingly and the fund may from time to time hold a Rule 144A security that is illiquid. In such an event, TCI Portfolios will consider appropriate remedies to minimize the effect on the fund's liquidity.
From time to time TCI Portfolios (or the insurance companies that use TCI Portfolios to fund the benefits of variable annuity or variable life insurance contracts) may advertise performance data. Fund performance may be shown by presenting one or more performance measurements, including cumulative total return and average annual total return. Cumulative total return data is computed by considering all elements of return, including reinvestment of dividends and capital gains distributions, over a stated period of time. Average annual total return is determined by computing the annual compounded return over a stated period of time that would have produced the fund's cumulative total return over the same period if the fund's performance had remained constant throughout.
TCI Portfolios may also include in advertisements data comparing performance with the performance of non-related investment media, published editorial comments and performance rankings compiled by independent organizations (such as Lipper Analytical Services or Donoghue's Money Fund Report) and publications that monitor the performance of mutual funds. Performance information may be quoted numerically or may be represented in a table, graph or other illustration. In addition, fund performance may be compared to well-known indices of market performance, including the S&P 500
Industrial Average, the Dow Jones World Index and the Morgan Stanley Capital International Europe, Australia, Far East (EAFE) Index. Fund performance may also be compared to other funds in the Twentieth Century family. It may also be combined or blended with other funds in the Twentieth Century family, and that combined or blended performance may be compared to the same indices to which the individual funds may be compared.
All performance information advertised by the TCI Portfolios is historical in nature and is not intended to represent or guarantee future results. The value of fund shares when redeemed may be more or less than their original cost. PERFORMANCE FIGURES ADVERTISED BY TCI PORTFOLIOS SHOULD NOT BE USED FOR COMPARATIVE PURPOSES BECAUSE THESE FIGURES WILL NOT INCLUDE CHARGES AND DEDUCTIONS IMPOSED BY THE INSURANCE COMPANY SEPARATE ACCOUNT UNDER THE VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS.
ADDITIONAL INFORMATION YOU SHOULD KNOW
For instructions on how to purchase and redeem shares, read the prospectus of your insurance company's separate account. Shares of TCI Portfolios are sold and redeemed by TCI Portfolios at their net asset value next determined after receipt by the insurance company separate account of the order from the variable annuity or variable life insurance contract owner to purchase or to redeem. There are no sales commissions or redemption charges. However, certain sales or deferred sales charges and other charges may apply to the variable annuity or life insurance contracts. Those charges are disclosed in the separate account prospectus.
WHEN SHARE PRICE IS DETERMINED
The price of TCI Portfolios' shares is their net asset value. Net asset value is determined at the close of business of the New York Stock Exchange, usually 3 p.m. Central time, on each day that the Exchange is open. Requests to redeem shares and investments received by the separate account before the close of business of the Exchange are effective on, and will receive the price determined, the day received. Redemption requests and investments received thereafter are effective on, and receive the price determined, as of the close of the Exchange the next day the Exchange is open.
HOW SHARE PRICE IS DETERMINED
The valuation of assets for determining net asset value may be summarized as follows: The portfolio securities of the fund, except as otherwise noted, listed or traded on a stock exchange are valued at the latest sale price on the exchange where they are primarily traded. Portfolio securities primarily traded on foreign securities exchanges are generally valued at the preceding closing value of such security on the exchange where primarily traded. If no sale is reported, or if local convention or regulation so provides, the mean of the latest bid and asked price is used. Depending on local convention or regulation, securities traded over the counter are priced at the mean of the latest bid and asked price, or at the last sale price. When market quotations are not readily available, securities and other assets are valued at fair value as determined in good faith by the board of directors. Debt securities not traded on a principal securities exchange are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the board of directors. Pursuant to a determination by TCI Portfolios' board of directors that such value represents fair value, debt securities with maturities of 60 days or less are valued at amortized cost. When a security is valued at amortized cost, it is valued at its cost when purchased, and thereafter by 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. The value of an exchange-traded foreign security is determined in its national currency as of the close of trading on the foreign exchange on which it is traded or as of the close of business on the New York Stock Exchange, if that is earlier. That value is then converted to U.S. dollars at the prevailing foreign exchange rate. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day that the New York Stock Exchange is open. If an event were to occur after the value of a security was established but before the net asset value per share was determined that was likely to materially change the net asset value, then that security
would be valued at fair value as determined by the board of directors. Trading of securities in foreign markets may not take place on every New York Stock Exchange business day. In addition, trading may take place in various foreign markets on Saturdays or on other days when the New York Stock Exchange is not open and on which a fund's net asset value is not calculated. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in such calculation and the value of the fund's portfolio may be significantly affected on days when shares of the fund may not be purchased or redeemed.
Distributions from net investment income and realized securities gains, if any, generally are declared and paid once a year, but the fund may make distributions on a more frequent basis to comply with the distributions requirements of the Internal Revenue Code, in all events in a manner consistent with the provisions of the Investment Company Act. All distributions from the fund will be reinvested in additional shares. The board of directors may elect not to distribute capital gains in whole or in part to take advantage of loss carryovers.
TCI Portfolios intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code. For a discussion of the tax status of your variable contract, refer to the prospectus of your insurance company's separate account.
Under the laws of the State of Maryland, the board of directors is responsible for managing the business and affairs of TCI Portfolios. Acting pursuant to an investment advisory agreement entered into with TCI Portfolios, Investors Research Corporation ("Investors Research") serves as the investment manager of TCI Portfolios. Its principal place of business is Twentieth Century Tower, 4500 Main Street, Kansas City, Missouri 64111. Investors Research has been providing investment advisory services to investment companies and institutional investors since 1958. Certain investments may be appropriate for TCI Portfolios and also for other clients advised by Investors Research. Investment decisions are made with the intention of achieving the respective investment objectives of Investors Research's clients after consideration of such factors as their current holdings, availability of cash for investment, and the size of their investment generally. A particular security may be bought or sold for only one client or in different amounts and at different times for more than one but less than all clients. In addition, purchases or sales of the same security may be made for two or more clients on the same date. Such transactions will be allocated among clients in a manner believed by Investors Research to be equitable to each. In some cases, this procedure could have an adverse effect on the price or amount of the securities purchased or sold by TCI Portfolios. Investors Research supervises and manages the investment portfolio of the fund and directs the purchase and sale of its investment securities. Investors Research utilizes a team of portfolio managers, assistant portfolio managers and analysts acting together to manage the assets of the fund. The team meets regularly to review portfolio holdings and to discuss purchase and sale activity. The team adjusts holdings in the fund's portfolio as they deem appropriate in pursuit of the fund's investment objectives. Individual portfolio manager members of the team may also adjust portfolio holdings of the fund as necessary between team meetings. The portfolio manager members of the TCI International team and their
experience during the past five years are as follows: ROBERT C. PUFF, JR., executive vice president and chief investment officer, has been a portfolio manager since joining Investors Research in 1983. In his position as chief investment officer, Mr. Puff oversees the investment activities of all of the teams that manage TCI Portfolios funds. THEODORE J. TYSON, vice president and portfolio manager, joined Investors Research in 1988 and has been a portfolio manager member of the TCI International team since its inception in 1994.
HENRIK STRABO, vice president and portfolio manager, joined Investors Research in 1993 as a financial analyst and has been a portfolio manager member of the TCI International team since its inception in 1994. Prior to joining Investors Research, Mr. Strabo was vice president, international equity sales with Barclays de Zoete Wedd (1991-1993) and obtained international equity sales experience with Cresvale International (1990-1991).
The activities of Investors Research are subject only to directions of TCI Portfolios' board of directors. Investors Research pays all the expenses of TCI Portfolios except brokerage, taxes, interest, fees and expenses of the non-interested person directors (including counsel fees) and extraordinary expenses. For the foregoing services, Investors Research is paid a fee of 1.5% of the average net assets of the fund during the year. The fee is paid and computed on the first business day of each month by multiplying 1.5% of the average daily closing net asset values of the shares of the fund during the previous month by a fraction, the numerator of which is the number of days in the previous month and the denominator of which is 365 (366 in leap years). The management fee paid by the fund to Investors Research is higher than the fees paid by the various other TCI Portfolios funds because of the higher costs and additional expenses associated with managing and operating a fund owning a portfolio consisting primarily of foreign securities. The fee may also be higher than the fee paid by many other international or foreign investment companies. Many investment companies pay smaller investment management fees. However, most if not all of such companies also pay, in addition to an investment management fee, certain of their own expenses, while almost all of TCI Portfolios' expenses, as noted above, are paid by Investors Research.
TCI Portfolios and Investors Research have adopted a Code of Ethics (the "Code"), which restricts personal investing practices by employees of Investors Research and its affiliates. Among other provisions, the Code requires that employees with access to information about the purchase or sale of securities in the fund's portfolios obtain preclearance before executing personal trades. With respect to portfolio managers and other investment personnel, the Code prohibits acquisition of securities in an initial public offering, as well as profits derived from the purchase and sale of the same security within 60 calendar days. These provisions are designed to ensure that the interests of fund shareholders come before the interests of the people who manage those funds. Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri 64111, acts as transfer agent and dividend paying agent of TCI Portfolios. It provides facilities, equipment and personnel to TCI Portfolios, and is paid for such services by Investors Research. Certain administrative and recordkeeping services that would otherwise be performed by Twentieth Century Services, Inc., may be performed by the insurance company that purchases TCI Portfolios' shares, and Investors Research may pay the insurance company for such services.
Investors Research and Twentieth Century Services, Inc. are both wholly owned by Twentieth Century Companies, Inc. James E. Stowers Jr., chairman and chief executive officer of TCI Portfolios, controls Twentieth Century Companies, Inc. by virtue of his ownership of a majority of its common stock.
TCI Portfolios was organized as a Maryland corporation on June 4, 1987. It is a diversified, open-end management investment company. Its business and affairs are managed by its officers under the direction of its board of directors.
The principal office of TCI Portfolios is 4500 Main Street, P.O. Box 419385, Kansas City, Missouri 64141-6385. All inquiries may be made by mail to that address, or by phone to 816-531-5575. TCI Portfolios issues five series of common stock with a par value of $.01 per share. The assets belonging to each series of shares are held separately by the custodian, and in effect each series is a separate fund. Each share of each series, when issued, is fully paid and non-assessable.
Each share, irrespective of series, is entitled to one vote for each dollar of net asset value applicable to such share on all questions, except that certain matters must be voted on by the series of shares affected, and matters affecting only one series are voted upon only by that series. Shares have non-cumulative voting rights, which means that holders of more than 50% of the net asset value of the shares voting for election of directors can elect all of the directors if they choose to do so, and, in such event, the holders of the remaining minority will not be able to elect any person or persons to the board of directors. An insurance company issuing a variable contract invested in shares issued by TCI Portfolios will request voting instructions from contract holders and will vote shares in proportion to the voting instructions received. In the event of the complete liquidation or dissolution of TCI Portfolios, shareholders of each series of shares shall be entitled to receive, pro rata, all of the assets less the liabilities of that series. TCI PORTFOLIOS RESERVES THE RIGHT TO CHANGE ANY OF ITS POLICIES, PRACTICES AND PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF ADDITIONAL INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE INSTANCES WHERE SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED.
Part of the Twentieth Century
(C) 1996 Twentieth Century Services, Inc.
[the following in red print along left margin of page] 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 16, 1996[in red print]
TCI Portfolios, Inc. ("TCI Portfolios") is a mutual fund that offers its shares only to insurance companies to fund the benefits of variable annuity or variable life insurance contracts. The fund currently offers five portfolios or series. TCI Value is described in this prospectus. The other series are described in separate prospectuses. TCI Value is sometimes hereinafter referred to as the "fund." You should consult the prospectus of the separate account of the specific insurance product that accompanies this prospectus to see which series of TCI Portfolios are available for purchase for such insurance product. The investment objective of TCI Value is long-term capital growth. Income is a secondary objective. The fund will seek to achieve its investment objective by investing in securities that management believes to be undervalued at the time of purchase. There can be no assurance that the fund will achieve its investment objective. Shares of the fund may be purchased only by insurance companies for the purpose of funding variable annuity or variable life insurance contracts. This prospectus should be read in conjunction with the prospectus of the separate account of the specific insurance product that accompanies this prospectus. Additional information is included in the statement of additional information dated April 1, 1996, and filed with the Securities and Exchange Commission. It is incorporated in this prospectus by reference. To obtain a copy, or to make any other inquiries, call or write:
4500 Main Street * P.O. Box 419385 Kansas City, Mo. 64141-6385 * 1-800-345-3533 Local and international calls: 816-531-5575 Telecommunications device for the deaf: 1-800-345-1833 * In Missouri: 816-753-0070
This prospectus gives you information about TCI Portfolios that you should know before investing. Keep it for future reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Investment Policies of the Fund..........................................4
ADDITIONAL INFORMATION YOU SHOULD KNOW
Purchase and Redemption of Shares....................................10 When Share Price is Determined.......................................11 How Share Price is Determined........................................11
NO PERSON IS AUTHORIZED BY TCI PORTFOLIOS TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN OTHER PRINTED OR WRITTEN MATERIAL ISSUED BY THE COMPANY, AND YOU SHOULD NOT RELY ON ANY OTHER
INVESTMENT POLICIES OF THE FUND
TCI Portfolios has adopted certain investment restrictions applicable to the fund that are set forth in the statement of additional information. Those restrictions, as well as the investment objective of the fund, as identified on the front cover page, and any other investment policies designated as "fundamental" in this prospectus or in the statement of additional information, cannot be changed without the approval of the shareholders entitled to cast a majority of the outstanding votes of the corporation, as defined by the Investment Company Act. The fund has implemented additional investment policies and practices to guide its activities in the pursuit of its investment objective. These policies and practices, which are described throughout this prospectus, are not designated as fundamental policies and may be changed without shareholder approval. The investment objective of TCI Value is long-term capital growth. Income is a secondary objective. The fund will seek to achieve its investment objective by investing primarily in equity securities of well-established companies with intermediate-to-large market capitalizations that are believed by management to be undervalued at the time of purchase. Securities may be undervalued because they are temporarily out of favor in the market due to market decline, poor economic conditions, or actual or anticipated unfavorable developments affecting the issuer of the security or its industry, or because the market has overlooked them. Under normal market conditions, the fund expects to invest at least 80% of the value of its total assets in equity securities. The fund's investments will typically be characterized by lower price-to-earnings, price-to-cash flow and/or price-to-book value ratios relative to the equity market in general. Its investments also may have above-average current dividend yields. It is management's intention that the fund will primarily consist of domestic equity securities. However, the fund also may invest in other types of domestic or foreign securities consistent with the accomplishment of the fund's objective. The other securities the fund may invest in are convertible securities (see "Other Investment Policies -- Equity Securities," page 5), preferred stocks, bonds, notes and debt securities of companies and debt obligations of governments and their agencies. Investments in these securities will be made when the manager believes that the total return potential on these securities equals or exceeds the potential return on common stocks. The fund's holdings will be spread among industry groups that meet its investment criteria to help reduce certain of the risks inherent in common stock investments. These investments will primarily be securities listed on major exchanges or traded in the over-the-counter markets. With the exception of convertible securities (see, "Other Investment Policies -- Equity Securities," page 5), the fund will limit purchases of debt securities to "investment grade" obligations, which means that, at the time of purchase, such obligations are rated within the four highest categories by a nationally recognized statistical rating organization [for example, at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("S&P")], or, if not rated, are of equivalent investment quality as determined by management. There is no limit on the amount of investments that can be made in securities rated in a particular investment grade ratings category. According to Moody's, bonds rated Baa are medium-grade and possess some speculative characteristics. A BBB rating by S&P indicates S&P's belief that a security exhibits a satisfactory degree of safety and capacity for repayment but is more vulnerable to adverse economic conditions or changing circumstances. In addition to other factors that will affect its value, the value of a fund's investments in fixed income securities will change as prevailing interest rates change. In general, the prices of such securities vary inversely with interest rates. As prevailing interest rates fall, the prices
securities that trade on a yield basis rise. When prevailing interest rates rise, bond prices fall. These changes in value may, depending upon the particular amount and type of fixed income securities holdings of a fund, impact the net asset value of the fund's shares. Notwithstanding the fact the fund will primarily invest in equity securities, under exceptional market or economic conditions, the fund may temporarily invest all or a substantial portion of its assets in cash or investment grade short-term securities (denominated in U.S. dollars or foreign currencies). To the extent that the fund assumes a defensive position, it will not be investing for capital growth.
TCI Portfolios will offer its shares only to insurance companies for the purpose of funding variable annuity or variable life insurance contracts. Although TCI Portfolios does not foresee any disadvantages to contract owners due to the fact that it offers its shares as an investment medium for both variable annuity and variable life products, the interests of various contract owners participating in the funds of TCI Portfolios might at some time be in conflict due to future differences in tax treatment of variable products or other considerations. Consequently, TCI Portfolios' board of directors will monitor events in order to identify any material irreconcilable conflicts that may possibly arise and to determine what action, if any, should be taken in response to such conflicts. If a conflict were to occur, an insurance company separate account might be required to withdraw its investments in the funds of TCI Portfolios and those funds might be forced to sell securities at disadvantageous prices to fund such withdrawal.
For additional information regarding the fund and its investment policies, see "Investment Restrictions Applicable to all Series of Shares" in the statement of additional information.
The fund may invest up to 25% of its assets in the securities of foreign issuers, including debt securities of foreign governments and their agen-cies, when these securities meet its standards of selection. The principal business activities of such issuers will be located in developed countries. The fund may make such investments either directly in foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments ("DRs") for foreign securities. DRs are securities that are listed on exchanges or quoted in the domestic over-the-counter markets in one country but represent shares of issuers domiciled in another country. Direct investments in foreign securities may be made either on foreign securities exchanges or in the over-the-counter markets. Subject to its investment objective and policies, the fund may invest in common stocks, convertible securities, preferred stocks, bonds, notes and other debt securities of foreign issuers and debt securities of foreign governments and their agencies. The credit quality standards applicable to domestic securities purchased by the fund are also applicable to its foreign securities investments. Investments in foreign securities may present certain risks, including those resulting from fluctuations in currency exchange rates, future political and economic developments, reduced availability of public information concerning issuers, securities clearance and settlement procedures, and the fact that foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic issuers.
In addition to investing in common stocks, the fund may invest in other equity securities and equity equivalents. Other equity securities and
equity equivalents include securities that permit the fund to receive an equity interest in an issuer, the opportunity to acquire an equity interest in an issuer, or the opportunity to receive a return on its investment that permits the fund to benefit from the growth over time in the equity of an issuer. Examples of equity securities and equity equivalents include preferred stock, convertible preferred stock and convertible debt securities. The fund will limit its purchase of convertible debt securities to those that, at the time of purchase, are rated at least B- by S&P or B3 by Moody's, or if not rated by S&P or Moody's are of equivalent investment quality as determined by management. Debt securities rated below the four highest categories are not considered "investment grade" obligations. These securities have speculative characteristics and present more credit risk than investment grade obligations. (For a description of the S&P and Moody's ratings categories, see "An Explanation of Fixed Income Securities Ratings," page 7 of the Statement of Additional Information.) Equity equivalents may also include securities whose value or return is derived from the value or return of a different security. An example of the type of derivative security in which the fund might invest includes depositary receipts.
Some of the securities held by the fund may be denominated in foreign currencies. Other securities, such as DRs, may be denominated in U.S. dollars but have a value that is dependent on the performance of a foreign security, as valued in the currency of its home country. As a result, the value of the fund's portfolio may be affected by changes in the exchange rate between foreign currencies and the U.S. dollar, as well as by changes in the market value of the securities themselves. The performance of foreign currencies relative to the dollar may be a factor in the fund's overall performance. To protect against adverse movements in exchange rates between currencies, the fund may, for hedging purposes only, enter into forward currency exchange contracts. A forward currency exchange contract obligates the fund to purchase or sell a specific currency at a future date at a specific price. The fund may elect to enter into a forward currency exchange contract with respect to a specific purchase or sale of a security, or with respect to the fund's portfolio positions generally. By entering into a forward currency exchange contract with respect to the specific purchase or sale of a security denominated in a foreign currency, the fund can "lock in" an exchange rate between the trade and settlement dates for that purchase or sale. This practice is sometimes referred to as "transaction hedging." The fund may enter into transaction hedging contracts with respect to all or a substantial portion of its foreign securities trades. When the manager believes that a particular currency may decline in value compared to the dollar, the fund may enter into forward currency exchange contracts to sell an amount of foreign currency equal to the value of some or all of the fund's portfolio securities either denominated in, or whose value is tied to, that currency. This practice is sometimes referred to as "portfolio hedging." A fund may not enter into a portfolio hedging transaction where the fund would be obligated to deliver an amount of foreign currency in excess of the aggregate value of the fund's portfolio securities or other assets denominated in, or whose value is tied to, that currency. The fund will make use of portfolio hedging to the extent deemed appropriate by the manager. However, it is anticipated that the fund will enter into portfolio hedges much less frequently than transaction hedges. If the fund enters into a forward currency exchange contract, the fund, when required, will instruct its custodian bank to segregate cash or liquid high-grade securities in a separate account in an amount sufficient to cover its obligation under the contract. Those assets will be valued at market daily, and if the value of the segregated securities declines, additional
will be added so that the value of the account is not less than the amount of the fund's commitment. At any given time, no more than 10% of a fund's assets will be committed to a segregated account in connection with portfolio hedging transactions. Predicting the relative future values of currencies is very difficult, and there is no assurance that any attempt to protect the fund against adverse currency movements through the use of forward currency exchange contracts will be successful. In addition, the use of forward currency exchange contracts tends to limit the potential gains that might result from a positive change in the relationship between the foreign currency and the U.S. dollar.
Investment decisions to purchase and sell securities are based on the anticipated contribution of the security in question to the fund's objectives. Management believes that the rate of portfolio turnover is irrelevant when it believes a change is in order to achieve those objectives and, accordingly, the annual portfolio turnover rate cannot be accurately predicted. The portfolio turnover of the fund may be higher than other investment companies with similar investment objectives. Higher turnover would generate correspondingly greater brokerage commissions, which is a cost that the fund pays directly. Portfolio turnover may also affect the character of capital gains, if any, realized and distributed by the fund since short-term capital gains are taxable as ordinary income.
The fund may invest up to 20% of its assets in repurchase agreements when such transactions present an attractive short-term return on cash that is not otherwise committed to the purchase of securities pursuant to the fund's investment policies. A repurchase agreement occurs when the fund purchases an interest-bearing obligation from a bank or broker-dealer registered under the Securities Exchange Act of 1934 and simultaneously agrees to sell it back on a specified date in the future (usually less than one week later) at a higher price. The repurchase price reflects an agreed-upon interest rate during the time the fund's money is invested in the security and is considered by the staff of the Securities and Exchange Commission to be a loan by the fund. The fund's risk in connection with repurchase agreements is the ability of the seller to pay the repurchase price on the repurchase date. If the seller defaults, the fund may incur costs, delays or losses. Management monitors the creditworthiness of sellers. The fund will not invest more than 15% of its assets in repurchase agreements maturing in more than seven days. The fund will enter into repurchase agreements only with those commercial banks and broker-dealers whose creditworthiness has been reviewed and found satisfactory by the fund's management pursuant to criteria adopted by the fund's board of directors.
The fund may enter into domestic stock index futures contracts. An index futures contract is an agreement to take or make delivery of an amount of cash based on the difference between the value of the index at the beginning and at the end of the contract period. Rather than actually purchasing the securities of an index, the manager may purchase a futures contract, which reflects the value of such underlying securities. For example, S&P 500 futures reflect the value of the underlying companies that comprise the S&P 500 Composite Stock Price Index. If the aggregate market value of the underlying index securities increases or decreases during the contract period, the value of the S&P 500 futures can be expected to reflect such increase or decrease. As a result, the manager is able to expose to the equity markets cash that is maintained by the
fund to meet anticipated redemptions or held for future investment opportunities. Because futures generally settle within a day from the date they are closed out (compared with three days for the types of equity securities primarily invested in by the funds) the manager believes that this use of futures allows the fund to effectively be fully invested in equity securities while maintaining the liquidity needed by the fund. When a fund enters into a futures contract, it must make deposit of cash or high-quality debt securities, known as "initial margin," as partial security for its performance under the contract. As the value of the index fluctuates, either party to the contract is required to make additional margin payments, known as "variation margin," to cover any additional obligation it may have under the contract. Assets set aside by the fund as initial or variable margin may not be disposed of so long as the fund maintains the contract. The fund may not purchase leveraged futures. The fund will deposit in a segregated account with its custodian bank cash or high-quality debt securities in an amount equal to the fluctuating market value of the index contracts it has purchased, less any margin deposited on its position. The fund will only invest in exchange-traded futures. In addition, the value of index futures contracts purchased by a fund may not exceed 5% of the fund's total assets.
To the extent permitted by its investment objectives and policies, the fund may invest in securities that are commonly referred to as "derivative" securities. Certain derivative securities are more accurately described as "index/ structured" securities. Index/structured securities are derivative securities whose value or performance is linked to other equity securities (such as DRs or S&P 500 futures), currencies, interest rates, indices or other financial indicators ("reference indices"). The fund may not invest in an index/structured security unless the reference index or the instrument to which it relates is an eligible investment for the fund. For example, a security whose underlying value is linked to the S&P 500 Index would be a permissible investment since the fund may invest in the securities of companies comprising the S&P 500 Index (assuming they otherwise meet the other requirements for the fund), while a security whose underlying value is linked to the price of oil would not be a permissible investment since the fund may not invest in oil and gas leases or futures. The return of an index/structured security may increase or decrease, depending upon changes in the reference index. No purchases will be made of index/structured securities having "leverage" characteristics. This means that no investments will be made in securities whose change in underlying value is a multiple of the change in the reference index. In no event will an index/structured security be purchased if its value (or referenced value) exceeds the available cash of the fund. Because their performance is tied to a reference index, investing in index/structured securities, in addition to being exposed to the credit risk of the issuer of the security, will also expose the fund to the market risk of changes in the reference index. The fund's board of directors has approved management's policy regarding investments in derivative securities. That policy specifies factors that must be considered in connection with a purchase of derivative securities. The policy also establishes a committee that must review certain proposed purchases before the purchases can be made. Management will report on fund activity in derivative securities to the board of directors as necessary. In addition, the board will review management's policy for investments in derivative securities annually.
In order to realize additional income, the fund may lend its portfolio securities to persons not affiliated with it and who are deemed to be
creditworthy. Such loans must be secured continuously by cash, collateral or by irrevocable letters of credit maintained on a current basis in an amount at least equal to the market value of the securities loaned. During the existence of the loan, the fund must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral. The fund must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable TCI Portfolios to vote the securities. Such loans may not exceed one-third of the fund's net assets valued at market. The portfolio lending policy described in this paragraph is fundamental policy that may be changed only by a vote of TCI Portfolios' shareholders.
The fund may purchase new issues of securities on a when-issued basis without limit when, in the opinion of management, such purchases will further the investment objectives of the fund. The price of when-issued securities is established at the time the commitment to purchase is made. Delivery of and payment for these securities typically occur 15 to 45 days after the commitment to purchase. Market rates of interest on debt securities at the time of delivery may be higher or lower than those contracted for on the when-issued security. Accordingly, the value of such security may decline prior to delivery, which could result in a loss to the fund. A separate account consisting of cash or high-quality liquid debt securities in an amount at least equal to the when-issued commitments will be established and maintained with the custodian. No income will accrue to the fund prior to delivery.
The fund may engage in short sales if, at the time of the short sale, the fund owns or has the right to acquire an equal amount of the security being sold short at no additional cost. These transactions allow the fund to hedge against price fluctuations by locking in a sale price for securities it does not wish to sell immediately. The fund may make a short sale when it wants to sell the security it owns at a current attractive price, but also wishes to defer recognition of gain or loss for federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code.
The fund will not invest more than 15% of its assets in illiquid securities (securities that may not be sold within seven days at approximately the price used in determining the net asset value of fund shares), including restricted securities. Although securities which may be resold only to qualified institutional buyers in accordance with the provisions of Rule 144A under the Securities Act of 1933 are considered "restricted securities," the fund may purchase Rule 144A securities without regard to the 15% limitation described above when Rule 144A securities present an attractive investment opportunity that otherwise meets TCI Portfolios' criteria of selection and also meets the liquidity guidelines established for Rule 144A securities. With respect to securities eligible for resale under Rule 144A, the staff of the Securities and Exchange Commission has taken the position that the liquidity of such securities in the portfolio of a fund offering redeemable securities is a question of fact for the board of directors to determine, such determination to be based upon a consideration of the readily available trading markets and the review of any contractual restrictions. Accordingly, the board of directors is responsible for developing and establishing the guidelines and procedures for determining the liquidity of Rule 144A securities. As allowed by Rule 144A, the board of directors of TCI Portfolios has delegated the day-to-day function of determining the liquidity of Rule 144A securities to the manager.
The board retains the responsibility to monitor the implementation of the guidelines and procedures it has adopted. Since the secondary market for such securities is limited to certain qualified institutional investors, the liquidity of such securities may be limited accordingly and a fund may, from time to time, hold a Rule 144A security that is illiquid. In such an event, TCI Portfolios will consider appropriate remedies to minimize the effect on such fund's liquidity.
From time to time TCI Portfolios (or the insurance companies that use TCI Portfolios to fund the benefits of variable annuity or variable life insurance contracts) may advertise performance data. Fund performance may be shown by presenting one or more performance measurements, including cumulative total return and average annual total return. Cumulative total return data is computed by considering all elements of return, including reinvestment of dividends and capital gains distributions, over a stated period of time. Average annual total return is determined by computing the annual compounded return over a stated period of time that would have produced the fund's cumulative total return over the same period if the fund's performance had remained constant throughout. TCI Portfolios may also include in advertisements data comparing performance with the performance of non-related investment media, published editorial comments and performance rankings compiled by independent organizations (such as Lipper Analytical Services) and publications that monitor the performance of mutual funds. Performance information may be quoted numerically or may be represented in a table, graph or other illustration. In addition, fund performance may be compared to well-known indices of market performance, including the Standard & Poor's (S&P) 500 Index, The Dow Jones Industrial Average and The S&P/Barra Value Index. Fund performance may also be compared to other funds in the Twentieth Century family. It may also be combined or blended with other funds in the Twentieth Century family, and that combined or blended performance may be compared to the same indices to which individual funds may be compared. All performance information advertised by TCI Portfolios is historical in nature and is not intended to represent or guarantee future results. The value of fund shares when redeemed may be more or less than their original cost. PERFORMANCE FIGURES ADVERTISED BY TCI PORTFOLIOS SHOULD NOT BE USED FOR COMPARATIVE PURPOSES BECAUSE THESE FIGURES WILL NOT INCLUDE CHARGES AND DEDUCTIONS IMPOSED BY THE INSURANCE COMPANY SEPARATE ACCOUNT UNDER THE VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS.
ADDITIONAL INFORMATION YOU SHOULD KNOW
For instructions on how to purchase and redeem shares, read the prospectus of your insurance company's separate account. Shares of TCI Portfolios are sold and redeemed by TCI Portfolios at their net asset value next determined after receipt by the insurance company separate account of the order from the variable annuity or variable life insurance contract owner to purchase or to redeem. There are no sales commissions or redemption charges. However, certain sales or deferred sales
and other charges may apply to the variable annuity or life insurance contracts. Those charges are disclosed in the separate account prospectus.
WHEN SHARE PRICE IS DETERMINED
The price of TCI Portfolios' shares is their net asset value. Net asset value is determined at the close of business of the New York Stock Exchange, usually 3 p.m. Central time, on each day that the Exchange is open. Requests to redeem shares and investments received by the separate account before the close of business of the Exchange are effective, and will receive the price determined, on the day received. Redemption requests and investments received thereafter are effective on, and receive the price determined as of, the close of the Exchange the next day the Exchange is open.
HOW SHARE PRICE IS DETERMINED
The valuation of assets for determining net asset value may be summarized as follows: The portfolio securities of the fund, except as otherwise noted, listed or traded on a stock exchange are valued at the latest sale price on the exchange where they are primarily traded. If no sale is reported, the mean of the latest bid and asked prices is used. Securities traded over the counter are priced at the mean of the latest bid and asked prices, but will be valued at the last sale price if required by regulations of the Securities and Exchange Commission. When market quotations are not readily available, securities and other assets are valued at fair value as determined in good faith by the board of directors. Debt securities not traded on a principal securities exchange are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the board of directors. Pursuant to a determination by TCI Portfolios' board of directors that such value represents fair value, debt securities with maturities of 60 days or less are valued at amortized cost. When a security is valued at amortized cost, it is valued at its cost when purchased, and thereafter by 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. The value of an exchange-traded foreign security is determined in its national currency as of the close of trading on the foreign exchange on which it is traded or as of the close of business of the New York Stock Exchange, if that is earlier. That value is then converted to U.S. dollars at the prevailing foreign exchange rate. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed at various times before the close of business on each day that the New York Stock Exchange is open. If an event were to occur after the value of a security was established but before the net asset value per share was determined which was likely to materially change the net asset value, then that security would be valued at fair value as determined by the board of directors. Trading of securities in foreign markets may not take place on every New York Stock Exchange business day. In addition, trading may take place in various foreign markets on Saturdays or on other days when the New York Stock Exchange is not open and on which the fund's net asset value is not calculated. Therefore, such calculation does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in such calculation and the value of the fund's portfolio may be affected on days when shares of the fund may not be purchased or redeemed.
Distributions from net investment income and realized securities gains, if any, generally are declared and paid once a year, but the fund may
make distributions on a more frequent basis to comply with the distribution requirements of the Internal Revenue Code, in all events in a manner consistent with the provisions of the Investment Company Act. All distributions from the fund will be reinvested in additional shares. The board of directors may elect not to distribute capital gains in whole or in part to take advantage of loss carryovers.
TCI Portfolios intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code. For a discussion of the tax status of your variable contract, refer to the prospectus of your insurance company's separate account.
Under the laws of the State of Maryland, the board of directors is responsible for managing the business and affairs of TCI Portfolios. Acting pursuant to an investment advisory agreement entered into with TCI Portfolios, Investors Research Corporation ("Investors Research") serves as the investment manager of TCI Portfolios. Its principal place of business is 4500 Main Street, Kansas City, Missouri 64111. Investors Research has been providing investment advisory services to investment companies and institutional investors since 1958. Certain investments may be appropriate for TCI Portfolios and also for other clients advised by Investors Research. Investment decisions are made with the intention of achieving the respective investment objectives of Investors Research's clients after consideration of such factors as their current holdings, availability of cash for investment, and the size of their investment generally. A particular security may be bought or sold for only one client or in different amounts and at different times for more than one but less than all clients. In addition, purchases or sales of the same security may be made for two or more clients on the same date. Such transactions will be allocated among clients in a manner believed by Investors Research to be equitable to each. In some cases, this procedure could have an adverse effect on the price or amount of the securities purchased or sold by TCI Portfolios. Investors Research supervises and manages the investment portfolio of the fund and directs the purchase and sale of its investment securities. Investors Research utilizes a team of portfolio managers, assistant portfolio managers and analysts acting together to manage the assets of the fund. The team meets regularly to review portfolio holdings and to discuss purchase and sale activity. The team adjusts holdings in the fund's portfolio as they deem appropriate in pursuit of the fund's investment objectives. Individual portfolio manager members of the team may also adjust portfolio holdings of the funds as necessary between team meetings. The portfolio manager members of the TCI Value team and their principal business experience for the last five years are as follows: ROBERT C. PUFF, JR., Executive Vice President and Chief Investment Officer, has been a Portfolio Manager for more than five years, having joined Investors Research in 1983. In his position as Chief Investment Officer, Mr. Puff oversees the investment activities of all of the teams that manage TCI Portfolios funds. PETER A. ZUGER, Vice President and Portfolio Manager, joined Investors Research in June 1993 as a Portfolio Manager. Prior to joining Investors Research, Mr. Zuger served as an investment manager in the Trust Department of NBD Bancorp in Detroit, Michigan. PHILLIP N. DAVIDSON, Vice President and Portfolio Manager, joined Investors Research in September 1993 as a Portfolio Manager. Prior to joining Investors Research, Mr. Davidson served as an investment manager for Boatmen's Trust Company in St. Louis, Missouri. The activities of Investors Research are subject only to directions of TCI Portfolios' board of directors. Investors Research pays all
the expenses of TCI Portfolios except brokerage, taxes, interest, fees, expenses of the non-interested person directors (including counsel fees) and extraordinary expenses. For the foregoing services, Investors Research is paid a fee of % of the average net assets of the fund during the year. The fee is paid and computed on the first business day of each month by multiplying % of the average daily closing net asset values of the shares of the fund during the previous month by a fraction, the numerator of which is the number of days in the previous month and the denominator of which is 365 (366 in leap years). Many investment companies pay smaller investment management fees. However, most if not all of such companies also pay, in addition to an investment management fee, certain of their own expenses, while almost all of TCI Portfolios' expenses, as noted above, are paid by Investors Research. TCI Portfolios and Investors Research have adopted a Code of Ethics (the "Code"), which restricts personal investing practices by employees of Investors Research and its affiliates. Among other provisions, the Code requires that employees with access to information about the purchase or sale of securities in the fund's portfolios obtain preclearance before executing personal trades. With respect to portfolio managers and other investment personnel, the Code prohibits acquisition of securities in an initial public offering, as well as profits derived from the purchase and sale of the same security within 60 calendar days. These provisions are designed to ensure that the interests of fund shareholders come before the interests of the people who manage those funds. Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri 64111, acts as transfer agent and dividend paying agent of TCI Portfolios. It provides facilities, equipment and personnel to TCI Portfolios and is paid for such services by Investors Research. Certain administrative and record keeping services that would otherwise be performed by Twentieth Century Services, Inc. may be performed by the insurance company that purchases TCI Portfolios' shares, and Investors Research may pay the insurance company for such services. Investors Research and Twentieth Century Services, Inc., are both wholly owned by Twentieth Century Companies, Inc. James E. Stowers Jr., chairman and chief executive officer of TCI Portfolios, controls Twentieth Century Companies, Inc. by virtue of his voting control of a majority of its common stock.
TCI Portfolios was organized as a Maryland corporation on June 4, 1987. It is a diversified, open-end management investment company. Its business and affairs are managed by its officers under the direction of its board of directors. The principal office of TCI Portfolios is 4500 Main Street, P.O. Box 419385, Kansas City, Missouri 64141-6385. All inquiries may be made by mail to that address or by phone to 816-531-5575. TCI Portfolios issues five series of common stock with a par value of $.01 per share. The assets belonging to each series of shares are held separately by the custodian, and in effect each series is a separate fund. Each share of each series, when issued, is fully paid and non-assessable. Each share, irrespective of series, is entitled to one vote for each dollar of net asset value applicable to such share on all questions, except that certain matters must be voted on by the series of shares affected, and matters affecting only one series are voted upon only by that series. Shares have non-cumulative voting rights, which means that holders of more than 50% of the net asset value of the shares voting for election of directors can elect all of the directors if they choose to do so, and, in such event, the holders of the remaining minority will not be able to elect any person or persons to the board of directors. An insurance company issuing a variable contract invested in shares
Portfolios will request voting instructions from contract holders and will vote shares in proportion to the voting instructions received. In the event of the complete liquidation or dissolution of TCI Portfolios, shareholders of each series of shares shall be entitled to receive, pro rata, all of the assets less the liabilities of that series. TCI PORTFOLIOS RESERVES THE RIGHT TO CHANGE ANY OF ITS POLICIES, PRACTICES AND PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF ADDITIONAL INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE INSTANCES WHERE SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED.
Part of the Twentieth Century
(C) 1996 Twentieth Century Services, Inc.
[the following in red print along left margin of page] 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 16, 1996 [red print]
This statement is not a prospectus but should be read in conjunction with the applicable current TCI Portfolios, Inc. prospectus of its five series of shares, TCI Growth, TCI Value, TCI Balanced, TCI Advantage or TCI International as the case may be. Each of such prospectuses is dated April 1, 1996. Please retain this document for future reference. To obtain copies of the various TCI Portfolios prospectuses, call TCI Portfolios at 1-800-345-3533 or 816-531-5575, or write to P.O. Box 419385, Kansas City, Missouri 64141-6385.
Currently, TCI Portfolios offers five funds: TCI Growth, TCI Value, TCI Balanced, TCI Advantage and TCI International. Such funds are sometimes individually referred to as a "fund," and collectively as the "funds."
In achieving their investment objectives, the funds of TCI Portfolios must conform to certain fundamental policies that may not be changed without shareholder approval.
The following paragraph is a statement of fundamental policy with respect to investment selection: In general, within the restrictions outlined in the prospectus or in other statements of the corporation's fundamental policies, TCI Growth, TCI Value, TCI International and, with regard to the equity portion of their portfolios, TCI Balanced and TCI Advantage, each has broad power with respect to investing funds or holding them uninvested. Investments are varied according to what is judged advantageous under changing economic conditions. It is the management's intention that TCI Growth, TCI Value, TCI International and the equity portion of TCI Balanced and TCI Advantage will generally consist of common stocks. However, the investment manager may invest the assets in varying amounts in other instruments and in senior securities, such as bonds, debentures and preferred stocks, when such a course is deemed appropriate under certain market and economic conditions. Senior securities that, in the opinion of management, are high-grade issues may also be purchased for defensive purposes.
Management intends to invest the assets of TCI Value primarily in equity securities of well-established companies with intermediate-to-large market capitalizations which management believes to be undervalued at the time of purchase. The selection of these investments is described above under "Selection of Investments--TCI Growth."
Management intends to invest the TCI Balanced portfolio approximately 60% in common stocks and the remainder in fixed income securities. Equity security investments are described above under "Selection of Investments--TCI Growth." At least 80% of the fixed income assets will be invested in securities that, at the time of purchase, are rated by a nationally recognized statistical rating organization within the three highest categories. The fund may invest in securities of the United States government and its agencies and instrumentalities, corporate, sovereign government, municipal, mortgage-related, and other asset-backed securities. It can be expected that management will invest from time to time in bonds and preferred stock convertible into common stock.
Management intends to invest approximately (i) 20% of TCI Advantage's assets in government securities with a weighted average maturity of six months or less, i.e., cash and cash equivalents, (ii) 40% of the fund's assets in fixed income government securities with a weighted average maturity of three to 10 years (although management has the discretion to invest some or all of this portion of the fund's assets in cash or cash equivalents if it believes that market conditions merit) and (iii) 40% of the fund's assets in equity securities. All of the debt securities purchased, regardless of weighted average maturity, will be securities of the U.S. government and its agencies and instrumentalities, including mortgage-related and other asset-backed securities issued by such entities. Equity security investments are described above under "Selection of Investments--TCI Growth."
Management intends to invest the assets of TCI International primarily in an internationally diversified portfolio of common stocks. The selection of these investments is described above under "Selection of Investments--TCI Growth."
INVESTMENT RESTRICTIONS APPLICABLE TO ALL SERIES
Additional fundamental policies applicable to TCI Portfolios that may be changed only with shareholder approval provide that: (1) No series of shares shall invest more than 15% of its assets in illiquid (2) No series of shares shall invest in the securities of companies that, including predecessors, have a record of less than three years' (3) No series of shares shall make loans to other persons, but may lend its portfolio securities to unaffiliated persons. Such loans must be secured continuously by cash collateral maintained on a current basis in an amount at least equal to the market value of the securities loaned; during the existence of the loan, the corporation must continue to receive the equivalent of the interest and dividends paid by the issuer on the securities loaned and interest on the investment of the collateral; the corporation must have the right to call the loan and obtain the securities loaned at any time on five days' notice, including the right to call the loan to enable the corporation to vote the securities. The interest and dividends on loaned securities of either series may not exceed 10% of the annual gross income of that series (without offset for realized capital gains); (4) No series of shares shall purchase the security of any one issuer if such purchase would cause more than 5% of the assets of such series at market to be invested in the securities of such issuer, except United States government securities, or if the purchase would cause more than 10% of the outstanding voting securities of any one issuer to be held in the portfolio of such series; (5) No series of shares shall invest for control or for management, or concentrate its investment in a particular company or a particular industry. No more than 25% of the assets of each series, exclusive of cash and government securities, will be invested in securities of any one industry. The corporation may make its own reasonable industry classifications based on information derived from published manuals, financial database services, and the corporation's analysis of the financial statements of affected companies; (6) No series of shares shall buy securities on margin or sell short (unless it owns, or by virtue of its ownership of other securities has the right to obtain securities equivalent in kind and amount to, the securities sold), or write put or call options; (7) No series of shares shall purchase shares of another investment company if immediately after the purchase (a) the corporation owns more than 3% of the total outstanding stock of the other investment company, or (b) the securities which the corporation owns of the other investment company exceed 5% of the total assets of the corporation, or (c) the securities which the corporation owns of all other investment companies exceed 10% of the value of the total assets of the corporation; (8) No series of shares shall issue any senior security; (9) No series of shares shall underwrite any security; (10) No series of shares shall purchase or sell real estate or real estate mortgage loans but may invest in securities of issuers that deal in real estate or real estate mortgage loans; (11) No series of shares shall purchase or sell commodities or commodity contracts, including futures contracts; and (12) No series of shares shall borrow any money with respect to any series of its stock, except in an amount not in excess of 5% of the total assets of the series, and then only for emergency and extraordinary purposes, including payment for shares redeemed. The Investment Company Act imposes certain additional restrictions upon acquisition by the corporation of securities issued by insurance companies, brokers, dealers, underwriters or investment advisers, and upon transactions
sons as therein defined. It also defines and forbids the creation of cross and circular ownership.
To comply with the requirements of state securities administrators, TCI Portfolios may, from time to time, agree to additional investment restrictions. These restrictions are not fundamental policies and may be adopted, revised or withdrawn, without shareholder approval, as required or permitted by the various state securities administrators.
Neither the Securities and Exchange Commission nor any other agency of the federal government participates in or supervises the corporation's management or its investment practices or policies.
As described in the prospectus, TCI Value may enter into domestic stock index futures contracts. Unlike when a fund purchases securities, no purchase price for the underlying securities is paid by the fund at the time it purchases a futures contract. When a futures contract is entered into, both the buyer and seller of the contract are required to deposit with a futures commission merchant ("FCM") cash or high-grade debt securities in an amount equal to a percentage of the contract's value, as set by the exchange on which the contract is traded. This amount is known as "initial margin" and is held by the fund's custodian for the benefit of the FCM in the event of any default by the fund in the payment of any future obligations. The value of the index futures is adjusted daily to reflect the fluctuation of the value of the underlying securities that comprise the index. This is a process known as marking the contract to market. If the value of a party's position declines, that party is required to make additional "variation margin" payments to the FCM to settle the change in value. The party that has a gain may be entitled to receive all or a portion of this amount. The FCM may have access to the fund's margin account only under specified conditions of default. The fund maintains from time to time a percentage of their assets in cash or high-grade liquid securities to provide for redemptions or to hold for future investment in securities consistent with the fund's investment objectives. The fund may enter into index futures contracts as an efficient means to expose the fund's cash position to the domestic equity market. The manager believes that the purchase of futures contracts is an efficient means to effectively be fully invested in equity securities. The fund intends to comply with guidelines of eligibility for exclusion from the definition of the term "commodity pool operator" adopted by the Commodity Futures Trading Commission ("CFTC") and the National Futures Association, which regulate trading in the futures markets. To do so, the aggregate initial margin required to establish such positions may not exceed 5% of the fair market value of the fund's net assets, after taking into account unrealized profits and unrealized losses on any contracts it has entered into. The principal risks generally associated with the use of futures include: o the possible absence of a liquid secondary market for any particular instrument may make it difficult or impossible to close out a position when o the risk that the counter party to the contract may fail to perform its obligations or the risk of bankruptcy of the FCM holding margin deposits o the risk that the index of securities to which the futures contract relates may go down in value (market risk); and o adverse price movements in the underlying index can result in losses substantially greater than the value of the fund's investment in that instrument because only a fraction of a contract's value is required to be deposited as initial margin (leverage risk); PROVIDED, HOWEVER, that the fund may not purchase leveraged futures, so there is no leverage risk involved in the fund's use of futures. A liquid secondary market is necessary to close out a contract. TCI Value will seek to manage liquidity risk by investing only in exchange-traded futures. Exchange-traded index futures pose less risk that there will not be
secondary market than privately negotiated instruments. Through their clearing corporations, the futures exchanges guarantee the performance of the contracts. Futures contracts are generally settled within a day from the date they are closed out, as compared to three days for most types of equity securities. As a result, futures contracts can provide more liquidity than an investment in the actual underlying securities. Nevertheless, there is no assurance that a liquid secondary market will exist for any particular futures contract at any particular time. Liquidity may also be influenced by an exchange-imposed daily price fluctuation limit, which halts trading if a contract's price moves up or down more than the established limit on any given day. On volatile trading days when the price fluctuation limit is reached, it may be impossible for a fund to enter into new positions or close out existing positions. If the secondary market for a futures contract is not liquid because of price fluctuation limits or otherwise, the fund may not be able to promptly liquidate unfavorable futures positions and potentially could be required to continue to hold a futures position until liquidity in the market is re-established. As a result, the fund's access to other assets held to cover its futures positions also could be impaired until liquidity in the market is re-established. TCI Value manages counter-party risk by investing in exchange-traded index futures. In the event of the bankruptcy of the FCM that holds margin on behalf of the fund, the fund may be entitled to the return of margin owed to the fund only in proportion to the amount received by the FCM's other customers. The manager will attempt to minimize the risk by monitoring the creditworthiness of the FCMs with which the fund does business. The prices of futures contracts depend primarily on the value of their underlying instruments. As a result, the movement in market price of index futures contracts will reflect the movement in the aggregate market price of the entire portfolio of securities comprising the index. Since TCI Value is not an index fund, its investment in futures contracts will not correlate precisely with the performance of the fund's other equity investments. However, the manager believes that an investment in index futures will more closely reflect the investment performance of the fund than an investment in U.S. government or other highly liquid, short-term debt securities, which is where the cash position of the fund would otherwise be invested. The policy of the manager is to remain fully invested in equity securities. There may be times when the manager deems it advantageous to the fund not to invest excess cash in index futures, but such decision will generally not be the result of an active effort to use futures to time or anticipate market movements in general.
As described in the prospectus, the funds may invest in fixed income securities. Fixed income securities ratings provide the investment manager with current assessment of the credit rating of an issuer with respect to a specific fixed income security. The following is a description of the rating categories utilized by the rating services referenced in the prospectus disclosure: The following summarizes the ratings used by Standard & Poor's Corporation ("S&P") for bonds: AAA--This is the highest rating assigned by S&P to a debt obligation and indicates an extremely strong capacity to pay interest and repay principal. AA--Debt rated AA is considered to have a very strong capacity to pay interest and repay principal and differs from AAA issues only to 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 con-
ditions 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--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. 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 or 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. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC--The rating CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. C--The rating C typically is applied to debt subordinated to senior debt that 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 also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. To provide more detailed indications of credit quality, the ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within these major rating categories. The following summarizes the ratings used by Moody's Investors Service, Inc. ("Moody's") for bonds: Aaa--Bonds that 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 edge." Interest payments are protected by a large or 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 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 that make the long-term risk appear somewhat larger than the Aaa securities. A--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 that suggest a susceptibility to impairment some time in the future. Baa--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. Ba--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 in the future. Uncertainty of position characterizes bonds in this class. B--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. Caa--Bonds that are 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 that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C--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 applies numerical modifiers 1, 2 and 3 in each generic rating category from Aa through B. 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 a ranking in the lower end of that generic rating category.
Each of the funds may engage in short sales if, at the time of the short sale, the fund owns or has the right to acquire an equal amount of the security being sold short at no additional cost. In a short sale, the seller does not immediately deliver the securities sold and is said to have a short position in those securities until delivery occurs. To make delivery to the purchaser, the executing broker borrows the securities being sold short on behalf of the seller. While the short position is maintained, the seller collateralizes its obligation to deliver the securities sold short in an amount equal to the proceeds of the short sale plus an additional margin amount established by the Board of Governors of the Federal Reserve. If a fund engages in a short sale the collateral account will be maintained by the fund's custodian. While the short sale is open, the fund will maintain in a segregated custodial account an amount of securities convertible into or exchangeable for such equivalent securities at no additional cost. These securities would constitute the fund's long position. A fund may make a short sale, as described above, when it wants to sell the security it owns at a current attractive price, but also wishes to defer recognition of gain or loss for federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code. In such a case, any future losses in the fund's long position should be reduced by a gain in the short position. The extent to which such gains or losses are reduced would depend upon the amount of the security sold short relative to the amount the fund owns. There will be certain additional transaction costs associated with short sales, but the fund will endeavor to offset these costs with income from the investment of the cash proceeds of short sales.
FUNDS INVESTING IN EQUITY SECURITIES With respect to each series of shares, the management will purchase and sell securities without regard to the length of time the security has been held and, accordingly, it can be expected that the rate of portfolio turnover may be substantial. The management intends to purchase a given
security whenever management believes it will contribute to the stated objective of the series, even if the same security has only recently been sold. The management will sell a given security, no matter for how long or for how short a period it has been held in the portfolio, and no matter whether the sale is at a gain or at a loss, if the management believes that it is not fulfilling its purpose, either because, among other things, it did not live up to management's expectations, or because it may be replaced with another security holding greater promise, or because it has reached its optimum potential, or because of a change in the circumstances of a particular company or industry or in general economic conditions, or because of some combination of such reasons. When a general decline in security prices is anticipated, the management may decrease or eliminate entirely its equity position and increase its cash position, and when a rise in price levels is anticipated, the management may increase its equity position and decrease its cash. Since investment decisions are based on the anticipated contribution of the security in question to the portfolio's objectives, the rate of portfolio turnover is irrelevant when management believes a change is in order to achieve those objectives, and the portfolio's annual portfolio turnover rate cannot be anticipated and may be comparatively high. This paragraph is a statement of fundamental policy and may be changed only by a vote of the shareholders. High portfolio turnover involves correspondingly greater transaction costs, which each fund must pay.
FUNDS INVESTING IN FIXED INCOME SECURITIES The decision to purchase or sell a security is based on the contribution of the security to the objective of the series and upon income tax considerations. The portfolio turnover rate is irrelevant to that decision. The annual portfolio turnover rate cannot be anticipated and may be comparatively high. The management has no intention of accomplishing any particular rate of portfolio turnover, whether high or low, and the portfolio turnover rates in the past should not be considered a representation of the rates which will be attained in the future. High portfolio turnover involves correspondingly greater transaction costs, which each fund must pay.
The following table sets forth the average annual total return of each of the funds for the periods indicated. Average annual total return is calculated by determining a fund's cumulative total return for the stated period and then computing the annual compound return that would produce the cumulative total return if the fund's performance had been constant over that period. Cumulative total return includes all elements of return, including reinvestment of dividends and capital gains distributions.
Year ended Five years ended through Fund Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 TCI GROWTH --% --% --%
TCI BALANCED --% -- --%
TCI ADVANTAGE --% -- --%
TCI INTERNATIONAL --% -- --% (1)Date of inception of Fund.
The funds may advertise average annual total return over periods of time other than those periods shown in the foregoing table. The funds may also advertise cumulative total return over various time periods.
The following table shows the cumulative total return and the average annual compound rate of return of the funds for the period indicated.
Total Return Rate of Return Fund through Dec. 31, 1995 through Dec. 31, 1995
PERFORMANCE FIGURES ADVERTISED BY TCI PORTFOLIOS SHOULD NOT BE USED FOR COMPARATIVE PURPOSES BECAUSE SUCH FIGURES WILL NOT INCLUDE CHARGES AND DEDUCTIONS IMPOSED BY THE INSURANCE COMPANY SEPARATE ACCOUNT UNDER THE VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS.
The principal officers and the directors of the corporation, their principal business experience during the past five years, and their affiliations with Investors Research Corporation and its affiliated companies are listed below. Unless otherwise noted, the business address of each director and officer is 4500 Main Street, Kansas City, Missouri 64111. Those directors who are "interested persons" as defined in the Investment Company Act of 1940 are indicated by an asterisk (*).
JAMES E. STOWERS, JR.,* chairman, chief executive officer and director; chairman, chief executive officer, director and controlling stockholder of Twentieth Century Companies, Inc., parent corporation of Twentieth Century Services, Inc., and Investors Research Corporation; chairman, chief executive officer and director, Investors Research Corporation, Twentieth Century Services, Inc., Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc., and Twentieth Century Strategic Portfolios, Inc.; father of James E. Stowers III. JAMES E. STOWERS III,* president and director; president and director, Twentieth Century Companies, Inc., Investors Research Corporation, Twentieth Century Services, Inc., Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc.; son of James E. Stowers, Jr. THOMAS A. BROWN, director; 2029 Wyandotte, Kansas City, Missouri; chief executive officer, Associated Bearings Company, a corporation engaged in the sale of bearings and power transmission products; director, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc. ROBERT W. DOERING, M.D., director; 6400 Prospect, Kansas City, Missouri; general surgeon; director, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc. LINSLEY L. LUNDGAARD, director; 18648 White Wing Drive, Rio Verde, Arizona; retired; formerly vice president and national sales manager, Flour Milling Division, Cargill, Inc.; director, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc. DONALD H. PRATT, director; P.O. Box 419917, Kansas City, Missouri; president, Butler Manufacturing Company; director, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc. LLOYD T. SILVER JR., director; 2300 West 70th Terrace, Mission Hills, Kansas; president, LSC, Inc., manufacturer's representative; director,
Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc. M. JEANNINE STRANDJORD, director; 908 West 121st Street, Kansas City, Missouri; senior vice president and treasurer, Sprint Corporation; director, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc. JOHN M. URIE, director; 5511 N.W. Flint Ridge Road, Kansas City, Missouri; consultant; director, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc. WILLIAM M. LYONS, executive vice president and general counsel; executive vice president and general counsel, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc.; executive vice president and general counsel, Twentieth Century Companies, Inc., Investors Research Corporation and Twentieth Century Services, Inc. ROBERT T. JACKSON, executive vice president- finance and principal financial officer; treasurer, Twentieth Century Companies, Inc. and Investors Research Corporation; executive vice president and treasurer, Twentieth Century Services, Inc.; executive vice president-finance, Twentieth Century Investors, Inc. and Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc. and Twentieth Century Strategic Portfolios, Inc.; formerly executive vice president, Kemper Corporation. MARYANNE ROEPKE, vice president and treasurer; vice president and treasurer, Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc.; vice president, Twentieth Century Services, Inc. PATRICK A. LOOBY, vice president and secretary; vice president and secretary, Twentieth Century Premium Reserves, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc.; vice president, Twentieth Century Investors, Inc., Twentieth Century World Investors, Inc. and Twentieth Century Services, Inc.
MERELE A. MAY, controller; controller, Twentieth Century Investors, Inc. and Twentieth Century Capital Portfolios, Inc. ROBERT J. LEACH, controller; controller, Twentieth Century World Investors, Inc. No director or principal officer owns shares of the corporation.
The directors of TCI Portfolios also serve as directors of Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth Century World Investors, Inc., Twentieth Century Capital Portfolios, Inc. and Twentieth Century Strategic Portfolios, Inc., each a registered investment company. Each director who is not an "interested person" as defined in the Investment Company Act receives for service as members of the board of all six of such companies an annual director's fee of $36,000 and an additional fee of $1,000 per regular board meeting attended and $500 per special board meeting and audit committee meeting attended. In addition, those directors that are not "interested persons" who serve as chairman of a committee of the board of directors receive an additional $2,000 for such services. These fees and expenses are divided among the five investment companies based upon their relative net assets.
Under the terms of the management agreement with Investors Research Corporation, TCI Portfolios is responsible for paying such fees and expenses. Set forth below is the aggregate compensation paid for the periods indicated by the corporation and by the Twentieth Century family of
mutual funds as a whole to each director of the corporation who is not an "interested person" as defined in the Investment Company Act.
Director from the corporation1 Family of Funds2 Thomas A. Brown $2,142 $44,000 Robert W. Doering, M.D. 2,142 44,000 Linsley L. Lundgaard 2,142 44,000 Donald H. Pratt 1,558 32,000 Lloyd T. Silver Jr. 2,142 44,000 M. Jeannine Strandjord 2,142 44,000 John M. Urie 2,240 46,000 1 Includes compensation paid by the corporation for the fiscal year ended December 31, 1995. 2 Includes compensation paid by the twelve investment company members of the Twentieth Century family of funds for the calendar year ended December 31, 1995.
Those directors who are "interested persons," as defined in the Investment Company Act, receive no fee as such for serving as a director. The salaries of such individuals, who are also officers of TCI Portfolios, are paid by Investors Research Corporation. Messrs. Stowers Jr., Stowers III and Urie constitute the executive committee of the board of directors. The committee performs the functions of the board of directors between meetings of the board, subject to the limitations on its powers set out in the Maryland Corporation Law and except for matters required by the Investment Company Act to be acted upon by the whole board. Those directors who are not "interested persons" constitute the audit committee. The functions of the audit committee include recommending the engagement of the corporation's independent accountants, reviewing the arrangements for the scope of the annual audit, reviewing comments made by the independent accountants with respect to internal controls and the considerations given or the corrective action taken by management, and reviewing nonaudit services provided by the independent accountants. The nominating committee has as its principal role the consideration and recommendation of individuals for nomination as directors. The names of potential director candidates are drawn from a number of sources, including recommendations from members of the board, management and shareholders. This committee also reviews and makes recommendations to the board with respect to the composition of board committees and other board-related matters, including its organization, size, composition, responsibilities, functions and compensation. The members of the nominating committee are Messrs. Urie (chairman), Lundgaard and Stowers III.
A description of the responsibilities and method of compensation of TCI Portfolios' investment manager, Investors Research Corporation, and its controlling persons, appears in the prospectus under the caption "Management." During the past three fiscal years, the management fees of Investors Research Corporation were as follows:
Management Fees $-- $8,825,656 $5,778,935 Average Net Assets $-- $882,565,600 $577,893,500
Management Fees $-- $910,453 $580,663 Average Net Assets $-- $91,045,300 $58,066,300
Management Fees $-- $224,257 $188,349 Average Net Assets $-- $22,425,700 $18,834,900
Management Fees $-- $101,344 -- Average Net Assets $-- $10,065,459 --
The management agreement shall continue as long as its continuance is specifically approved at least annually by (i) the board of directors of TCI Portfolios, or by the vote of a majority of the outstanding shares of TCI Portfolios, and (ii) by the vote of a majority of the directors of TCI Portfolios who are not parties to the agreement or interested persons of Investors Research Corporation, cast in
person at a meeting called for the purpose of voting on such approval. The management agreement provides that it may be terminated at any time without payment of any penalty by the board of directors of TCI Portfolios, or by a vote of a majority of TCI Portfolios' shareholders, on 60 days' written notice to Investors Research Corporation, and it shall be automatically terminated if it is assigned. The management agreement provides that Investors Research Corporation shall not be liable to TCI Portfolios or its shareholders for anything other than willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations or duties. The management agreement also provides that Investors Research Corporation and its officers, directors and employees may engage in other business, devote time and attention to any other business whether of a similar or dissimilar nature, and render services to others. Twentieth Century Services, Inc. provides physical facilities, including computer hardware and software and personnel, for the day-to-day administration of TCI Portfolios and of Investors Research Corporation. Investors Research Corporation pays Twentieth Century Services, Inc., for such services.
Chase Manhattan Bank, N.A., 770 Broadway, New York, New York 10036 and United Missouri Bank of Kansas City, N.A., 10th and Grand, Kansas City, Missouri 64105, each serve as custodians of the assets of the funds. The custodians take no part in determining the investment policies of the funds or in deciding which securities are purchased or sold by the funds. The funds, however, may invest in certain obligations of the custodians and may purchase or sell certain securities from or to the custodians.
TCI Portfolios' independent public accountants are Baird, Kurtz & Dobson, City Center Square, Suite 2700, 1100 Main Street, Kansas City, Missouri 64105. They will perform the annual audit of the corporation and review the corporation's tax return. They also attend the meetings of and perform services for the audit committee.
The five series of TCI Portfolios' capital stock are described in the prospectus under the caption "Further Information About TCI Portfolios, Inc."
TCI Portfolios may issue one or more additional series of shares. The assets belonging to each series of shares are held separately by the custodian and the shares of each series represent a beneficial interest in the principal, earnings and profit (or losses) of investments and other assets held for each series. The rights of a shareholder of a particular series are the same as the rights of a shareholder of all other series of securities unless otherwise stated. Within their respective series, all shares have equal redemption rights. Each share, when issued, is fully paid and non-assessable. Each share, irrespective of series, is entitled to one vote for each dollar of net asset value applicable to such share on all questions. In the event of complete liquidation or dissolution of TCI Portfolios, shareholders of each series of shares shall be entitled to receive, pro rata, all of the assets less the liabilities of that series.
As of December 31, 1995, in excess of 5% of the outstanding shares of TCI Growth were owned of record as follows: Aetna Life Insurance and Annuity Company, Hartford, Connecticut, owned 41.2%; Nationwide Life Insurance Company, Columbus, Ohio, owned 38.6%; Mutual of America, New York, New York, owned 8.2%; and Great-West Life and Annuity Company, Englewood, Colorado, owned 5.1%. As of December 31, 1995, 100% of the outstanding shares of TCI Advantage were owned of record by Nationwide Life Insurance Company, Columbus, Ohio. As of December 31, 1995, in excess of 5% of the outstanding shares of TCI Balanced were owned of record as follows: Nationwide Life
Insurance Company, Columbus, Ohio, owned 59.1%; Great- West Life and Annuity Insurance Company, Englewood, Colorado, owned 26.1%; and UNUM Life Insurance Company of America, Portland, Maine, owned 12.8%. As of December 31, 1995, 97.8% of the outstanding shares of TCI International were owned of record by Nationwide Life Insurance Company, Columbus, Ohio.
All of such shares of the funds are held for the benefit of the holders of variable life and variable annuity policies issued by such insurance companies. Such shares are held in one or more accounts by entities controlled by such insurance companies.
Under the terms of the Management Agreement between TCI Portfolios and Investors Research Corporation, Investors Research Corporation has the responsibility for determining what securities shall be purchased and sold and selecting the brokers or dealers to execute such transactions. TCI Portfolios' policy is to execute orders on its portfolio transactions at the most favorable prices available. So long as that policy is met, Investors Research Corporation may take into consideration the factors indicated below in selecting brokers or dealers. EQUITY INVESTMENTS: Transactions in securities other than those for which an exchange is the primary market may be done with dealers acting as principal or market maker or with brokers. Transactions will be done on a brokerage basis when Investors Research Corporation believes that the facilities, expert personnel and technological systems of a broker enable TCI Portfolios to secure as good a net price as it would have received from a market maker. TCI Portfolios places most of its over-the-counter transactions with market makers. FIXED INCOME INVESTMENTS: Purchases are made directly from issuers, underwriters, broker/ dealers or banks. In many transactions, the selection of the broker/dealer is determined by the availability of the desired security and its offering price. In other transactions, the selection is a function of the selection of market and the negotiation of price, as well as the broker/dealer's general execution, operational and financial capabilities in the type of transaction involved. Investors Research Corporation receives statistical and other information and services (brokerage and research services) without cost from broker/dealers. Investors Research Corporation evaluates such information and services, together with all other information that it may have, in supervising and managing the investment portfolios of TCI Portfolios. Because such information and services may vary in amount, quality and reliability, their influence in selecting brokers varies from none to very substantial. Investors Research Corporation proposes to continue to place some of the TCI Portfolios' brokerage business with one or more brokers who provide information and services. The brokerage and research services received by Investors Research Corporation may be used with respect to one or more of TCI Portfolios' funds and/or the other funds and accounts over which it has investment discretion, and not all of such services may be used by Investors Research Corporation in managing the portfolios of TCI Portfolios. Such information and services are in addition to and not in lieu of the services required to be performed for TCI Portfolios by Investors Research Corporation. Investors Research Corporation does not utilize brokers that provide such information and services for the purpose of reducing the expense of providing required services to the TCI Portfolios. The brokerage commissions paid by TCI Portfolios may exceed those that another broker might have charged for effecting the same transaction because of the value of the brokerage and/or research services provided. Factors considered in such determinations are skill in execution of orders and the quality of brokerage and research services received. Such services may include: (i) advice, either directly or through publications or writings, as to the value of securities, the advisability of purchasing or selling
availability of securities or purchasers or sellers of securities; (ii) analysis and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; or (iii) execution of securities transactions and performance of functions incidental thereto.
Evaluation of the overall reasonableness of brokerage commissions is made by the manager and reviewed by the board of directors of TCI Portfolios. In the years ended December 31, 1995, 1994 and 1993, TCI Portfolios paid brokerage commissions of $_________, $2,875,685 and $1,732,769, respectively.
Shares will normally be redeemed for cash, although the corporation retains the right to redeem its shares in kind under unusual circumstances, such as an unusually large redemption, in order to protect the investments of the remaining shareholders. The securities delivered will be selected at the sole discretion of TCI Portfolios, and will not necessarily be representative of the entire portfolio, and will be securities that TCI Portfolios regards as least desirable. The corporation has, however, elected to be governed by Rule 18f-1 under the Investment Company Act of 1940, pursuant to which the corporation is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the corporation during any 90-day period for any one shareholder. Should redemptions by any one contract owner exceed such limitation, the corporation will have the option of redeeming the excess in cash or in kind. If shares are redeemed in kind, the redeeming shareholder might incur brokerage costs in converting the assets to cash. The method of valuing securities used to make redemptions in kind will be the same as the method of valuing portfolio securities described in the prospectus under the caption "How Share Price is Determined," and such valuation will be made as of the same time the redemption price is determined.
TCI Portfolios does not determine the net asset value of its shares on days when the New York Stock Exchange is closed. Currently, the Exchange is closed on Saturdays, Sundays, and on holidays, namely New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The financial statements of each outstanding series of TCI Portfolios for the fiscal year ended December 31, 1995, are included in the annual report to shareholders of that series. All such financial statements are incorporated herein by reference. You may receive a copy of such financial statements without charge upon request to TCI Portfolios at the address and phone number shown on the cover of this statement of additional information.
With regard to TCI Growth, the TCI Growth prospectus and the TCI Growth Annual Report to shareholders contain a Financial Highlights table. The table found in the TCI Growth Annual Report indicates an inception date with regard to the information presented for TCI Growth of October 19, 1987, while the table included in the TCI Growth prospectus indicates an inception date of November 20, 1987. October 19, 1987, represents the date that the investment manager invested the original seed capital in TCI Growth. November 20, 1987, represents the date that the registration statement registering shares of TCI Growth became effective. The effective date of a registration statement is the date that is required by federal securities regulations to be shown in a prospectus financial highlights table as the date of inception of a series.
Part of the Twentieth Century
(C) 1996 TWENTIETH CENTURY SERVICES, INC.
ITEM 24. Financial Statements and Exhibits.
(i) Financial Statements filed in Part A of the Registration Statement:
1. Financial Highlights respecting shares of TCI Growth.
2. Financial Highlights respecting shares of TCI Balanced.
3. Financial Highlights respecting shares of TCI Advantage.
4. Financial Highlights respecting shares of TCI International.
(ii) Financial Statements filed in Part B of the Registration Statement respecting shares of TCI Growth (each of the following financial statements is contained in the Registrant's TCI Growth Annual Report dated December 31, 1994, which appears as Exhibit 12.1 to this Registration Statement, and which is incorporated by reference in Part B of this Registration Statement):
1. Statement of Assets and Liabilities at December 31, 1994.
2. Statement of Operations for the year ended December 31, 1994.
3. Statements of Changes in Net Assets for the years ended December 31, 1994 and 1993.
4. Notes to Financial Statements as of December 31, 1994 and 1993.
5. Schedule of Investments at December 31, 1994.
6. Independent Accountants' Report dated January 20, 1995.
(iii) Financial Statements filed in Part B of the Registration Statement respecting shares of TCI Balanced (each of the following financial statements is contained in the Registrant's TCI Balanced Annual Report dated December 31, 1994, which appears as Exhibit 12.2 to this Registration Statement, and which is incorporated by reference in Part B of this Registration Statement):
1. Statement of Assets and Liabilities at December 31, 1994.
2. Statement of Operations for the year ended December 31, 1994.
3. Statements of Changes in Net Assets for the years ended December 31, 1994 and 1993.
4. Notes to Financial Statements as of December 31, 1994 and 1993.
5. Schedule of Investments at December 31, 1994.
6. Independent Accountants' Report dated January 20, 1995.
(iv) Financial Statements filed in Part B of the Registration Statement respecting shares of TCI Advantage (each of the following financial statements is contained in the Registrant's TCI Advantage Annual Report dated December 31, 1994, which appears as Exhibit 12.3 to this Registration Statement, and which is incorporated by reference in Part B of this Registration Statement):
1. Statement of Assets and Liabilities at December 31, 1994.
2. Statement of Operations for the year ended December 31, 1994.
3. Statements of Changes in Net Assets for the years ended December 31, 1994 and 1993.
4. Notes to Financial Statements as of December 31, 1994 and 1993.
5. Schedule of Investments at December 31, 1994.
6. Independent Accountants' Report dated January 20, 1995.
(v) Financial Statements filed in Part B of the Registration Statement respecting shares of TCI International (each of the following financial statements is contained in the Registrant's TCI International Annual Report dated December 31, 1994, which appears as Exhibit 12.4 to this Registration Statement, and is incorporated by reference in Part B of this Registration Statement):
1. Statement of Assets and Liabilities at December 31, 1994.
2. Statement of Operations for the seven months ended December 31, 1994.
3. Statement of Changes in Net Assets for the seven months ended December 31, 1994 and 1993.
4. Notes to Financial Statements as of December 31, 1994 and 1993.
5. Schedule of Investments at December 31, 1994.
6. Independent Accountants' Report dated January 20, 1995.
1.1 Articles of Incorporation of TCI Portfolios, Inc. dated June 3, 1987 (EX-99.B1.1).
1.2 Articles of Amendment of TCI Portfolios, Inc. dated July 22, 1988 (EX-99.B1.2).
1.3 Articles of Amendment of TCI Portfolios, Inc. dated August 11, 1993 (EX-99.B1.3).
2. Amended and Restated By-Laws of TCI Portfolios, Inc. (EX-99.B2).
3. Voting Trust Agreements - None.
4. Specimen Securities - None.
5. Investment Management Agreement between TCI Portfolios, Inc. and Investors Research Corporation dated August 1, 1994 (EX-99.B5).
6. Underwriting Agreements - None.
7. Bonus and Profit Sharing Plan, Etc. - None.
8.1. Custodian Agreement with United States Trust Company of New York (filed as Exhibit 8 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A of the Registrant, Commission File No. 33-14567, filed October 15, 1987, and incorporated herein by reference).
8.2. Custodian Agreement with United Missouri Bank, N.A. (EX-99.B8.2).
9. Transfer Agency Agreement with Twentieth Century Services, Inc. (formerly J.E. Stowers & Company) (filed as Exhibit 9 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A of the Registrant Commission File No. 33-14567, filed October 15, 1987, and incorporated herein by reference).
10. Opinion and Consent of David H. Reinmiller, Esq. (EX-99.B10).
11. Consent of Baird, Kurtz & Dobson (EX-99.B11).
12.1 Annual Report of TCI Growth for the year ended December 31, 1994 (filed filed as Exhibit 12.1 to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A of the Registrant, Commission File No. 33- 14567, filed April 7, 1995, and incorporated herein by reference).
12.2 Annual Report of TCI Balanced for the year ended December 31, 1994 (filed as Exhibit 12.2 to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A of the Registrant, Commission File No. 33-14567, filed April 7, 1995, and incorporated herein by reference).
12.3 Annual Report of TCI Advantage for the year ended December 31, 1994 (filed as Exhibit 12.3 to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A of the Registrant, Commission File No. 33-14567, filed April 7, 1995, and incorporated herein by reference).
12.4 Annual Report of TCI International for the seven months ended December 31, 1994 (filed as Exhibit 12.4 to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A of the Registrant, Commission File No. 33-14567, filed April 7, 1995, and incorporated herein by reference).
13. Agreements for Initial Capital, Etc. - None.
14. Model Retirement Plans - None.
15. 12b-1 Plans - None.
16. Schedule of Computation for Performance Advertising Quotations (EX-99.B16).
17. Power of Attorney (EX-24).
ITEM 25. Persons Controlled by or Under Common Control with Registrant - None.
ITEM 26. Number of Holders of Securities.
Title of Series as of December 31, 1995
The Registrant is a Maryland corporation. Section 2- 418 of the Maryland General Corporation Law allows a Maryland corporation to indemnify its officers, directors, employees and agents to the extent provided in such statute.
Article XIII of the Registrant's Amended Articles of Incorporation, Exhibits 1(a) and 1(b), requires the indemnification of the Registrant's directors and officers to the extent permitted by Section 2-418 of the Maryland General Corporation Law, the Investment Company Act of 1940 and all other applicable laws.
The Registrant has purchased an insurance policy insuring its officers and directors against certain liabilities which such officers and directors may incur while acting in such capacities and providing reimbursement to the Registrant for sums which it may be permitted or required to pay to its officers and directors by way of indemnification against such liabilities, subject in either case to clauses respecting deductibility and participation. The current policy is for a one year term expiring March 23, 1995.
ITEM 28. Business and Other Connections of Investment Advisor.
Investors Research Corporation, the investment advisor, is engaged in the business of managing investments for registered investment companies, deferred compensation plans and other institutional investors.
ITEM 29. Principal Underwriters - None.
ITEM 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act, and the rules promulgated thereunder, are in the possession of Registrant, Twentieth Century Services, Inc. and Investors Research Corporation, all located at 4500 Main Street, Kansas City, Missouri 64111.
ITEM 31. Management Services - None.
(b) The Registrant hereby undertakes to file a post-effective amendment to this Registration Statement, using financial statements which need not be certified, within four to six months from the effective date of this Post-Effective Amendment No. 17. (c) The Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. (d) The Registrant hereby undertakes that it will, if requested to do so by the holders of at least 10% of the Registrant's outstanding votes, call a meeting of shareholders for the purpose of voting upon the question of the removal of a director and to assist in communication with other shareholders as required by Section 16(C).
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, TCI Portfolios, Inc., the Registrant, has duly caused this Post-Effective Amendment No. 17 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kansas City, State of Missouri on the 15th day of January, 1996.
By:/s/ James E. Stowers III James E. Stowers III, President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 17 has been signed below by the following persons in the capacities and on the dates indicated.
*James E. Stowers, Jr. Chairman, Director and January 15, 1996 James E. Stowers, Jr. Principal Executive Officer
/s/ James E. Stowers III President and Director January 15, 1996
/s/ Robert T. Jackson Executive Vice President January 15, 1996 Robert T. Jackson and Principal Financial Officer
*Maryanne Roepke Vice President, Treasurer and January 15, 1996 Maryanne Roepke Principal Accounting Officer
*Thomas A. Brown Director January 15, 1996
*Robert W. Doering, M.D. Director January 15, 1996 Robert W. Doering, M.D.
*Linsley L. Lundgaard Director January 15, 1996
*Donald H. Pratt Director January 15, 1996
*Lloyd T. Silver, Jr. Director January 15, 1996 Lloyd T. Silver, Jr.
*M. Jeannine Strandjord Director January 15, 1996
*John M. Urie Director January 15, 1996
*By/s/ James E. Stowers III | 485APOS | 485APOS | 1996-01-16T00:00:00 | 1996-01-16T10:41:39 |
0000095301-96-000002 | 0000095301-96-000002_0001.txt | Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. Sale and Purchase of Assets. . . . . . . . . . . . . . . . . . . . . 21
1.1 Sale of Assets to Buyer. . . . . . . . . . . . . . . . . . . . 21
1.2 Excluded Assets. . . . . . . . . . . . . . . . . . . . . . . . 27
2. Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.1 Amount and Payment of Purchase Price . . . . . . . . . . . . . 29
2.2 Assumption of Liabilities. . . . . . . . . . . . . . . . . . . 30
2.3 Adjustment of Base Purchase Price. . . . . . . . . . . . . . . 33
2.4 Purchase Price Allocation. . . . . . . . . . . . . . . . . . . 35
3. Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.1 Date of Closing. . . . . . . . . . . . . . . . . . . . . . . . 36
3.2 Outside Date for Closing . . . . . . . . . . . . . . . . . . . 36
4. Representations and Warranties by Sellers. . . . . . . . . . . . . . 37
4.1 Organization and Authority . . . . . . . . . . . . . . . . . . 37
4.2 Authorization of Agreement . . . . . . . . . . . . . . . . . . 37
4.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.4 Title to Assets. . . . . . . . . . . . . . . . . . . . . . . . 38
4.5 Condition of Personal Property . . . . . . . . . . . . . . . . 39
4.6 Certain Subsidiaries . . . . . . . . . . . . . . . . . . . . . 39
4.7 Real Property Interests. . . . . . . . . . . . . . . . . . . . 40
4.8 Financial Statements; Other Financial Information. . . . . . . 44
4.9 Absence of Certain Changes . . . . . . . . . . . . . . . . . . 45
4.10 Litigation; Compliance with Laws . . . . . . . . . . . . . . . 46
4.11 List of Agreements, Etc. . . . . . . . . . . . . . . . . . . . 47
4.12 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4.13 Status of Agreements . . . . . . . . . . . . . . . . . . . . . 48
4.14 Intangible Assets. . . . . . . . . . . . . . . . . . . . . . . 50
4.15 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.16 Labor Disagreements. . . . . . . . . . . . . . . . . . . . . . 51
4.17 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 52
4.18 Environmental Matters. . . . . . . . . . . . . . . . . . . . . 53
4.19 Permits and Licenses . . . . . . . . . . . . . . . . . . . . . 56
4.20 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4.21 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4.22 Sufficient Assets. . . . . . . . . . . . . . . . . . . . . . . 57
4.23 Transactions with Affiliates . . . . . . . . . . . . . . . . . 57
4.24 Products; Customers; Suppliers . . . . . . . . . . . . . . . . 57
4.25 Product Warranties . . . . . . . . . . . . . . . . . . . . . . 58
4.26 FCPA Compliance. . . . . . . . . . . . . . . . . . . . . . . . 58
4.27 Certain Affiliates.. . . . . . . . . . . . . . . . . . . . . . 58
4.28 KSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
4.29 No Misrepresentation . . . . . . . . . . . . . . . . . . . . . 59
5. Representations and Warranties by Buyer. . . . . . . . . . . . . . . 60
5.1 Buyer's Organization . . . . . . . . . . . . . . . . . . . . . 60
5.2 Authorization of Agreement . . . . . . . . . . . . . . . . . . 60
5.3 Consents of Third Parties. . . . . . . . . . . . . . . . . . . 60
5.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.5 Financial Statements.. . . . . . . . . . . . . . . . . . . . . 61
5.6 Adequate Funds.. . . . . . . . . . . . . . . . . . . . . . . . 61
6. Further Agreements of the Parties. . . . . . . . . . . . . . . . . . 61
6.1 Government Approvals . . . . . . . . . . . . . . . . . . . . . 61
6.2 Hart-Scott-Rodino Act. . . . . . . . . . . . . . . . . . . . . 62
6.3 Back-Ups . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
6.4 Operations of the Business . . . . . . . . . . . . . . . . . . 63
6.5 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
6.6 Disclaimer as to Physical Condition. . . . . . . . . . . . . . 65
6.7 Discharge of Liabilities . . . . . . . . . . . . . . . . . . . 66
6.8 Certain Consents and Approvals to Assignment . . . . . . . . . 67
6.9 Sales Taxes and Transfer Taxes and Allocated Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
6.10 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
6.11 Access to Information Prior to and After Closing . . . . . . . 68
6.12 Additional Information . . . . . . . . . . . . . . . . . . . . 70
6.13 Business Disclaimer. . . . . . . . . . . . . . . . . . . . . . 70
6.14 Covenant Against Competition, Solicitation and Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 72
6.15 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 73
6.16 Other Action.. . . . . . . . . . . . . . . . . . . . . . . . . 74
6.17 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . 74
6.18 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 76
6.19 Miscellaneous Real Estate Documents. . . . . . . . . . . . . . 76
6.20 Payment of Costs and Expenses. . . . . . . . . . . . . . . . . 77
6.21 Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . 77
6.22 Nashua Lease . . . . . . . . . . . . . . . . . . . . . . . . . 78
6.23 Warranty Costs and Recall Costs Reimbursement. . . . . . . . . 78
7. Conditions Precedent to Closing. . . . . . . . . . . . . . . . . . . 79
7.1 Conditions Precedent to the Obligations of Buyer . . . . . . . 79
7.2 Conditions Precedent to the Obligations of Sellers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
8. Transactions at the Closing. . . . . . . . . . . . . . . . . . . . . 83
8.1 Documents to be Delivered by Seller. . . . . . . . . . . . . . 83
8.2 Documents to be Delivered by Buyer . . . . . . . . . . . . . . 87
9. Survival of Representations and Warranties; Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . 88
9.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
9.2 Sellers' Indemnification Obligation. . . . . . . . . . . . . . 90
9.3 Buyer Indemnification Obligation . . . . . . . . . . . . . . . 91
9.4 Conditions of Indemnification for Third Party Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
9.5 Deductible and Cap.. . . . . . . . . . . . . . . . . . . . . . 93
9.6 Time Limits On Indemnification . . . . . . . . . . . . . . . . 94
9.7 Limits On Indemnification. . . . . . . . . . . . . . . . . . . 94
10. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
10.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . 95
10.2 Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 96
11. Risk of Loss; Damage to Facilities . . . . . . . . . . . . . . . . . 96
11.1 Major Taking.. . . . . . . . . . . . . . . . . . . . . . . . . 96
11.2 Minor Taking.. . . . . . . . . . . . . . . . . . . . . . . . . 96
11.3 Minor Damage.. . . . . . . . . . . . . . . . . . . . . . . . . 97
11.4 Major Damage.. . . . . . . . . . . . . . . . . . . . . . . . . 99
11.5 Notice of Casualty or Condemnation.. . . . . . . . . . . . . . 100
12. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
12.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
12.2 Finders. . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
12.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 102
12.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
12.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 102
12.6 Separability . . . . . . . . . . . . . . . . . . . . . . . . . 102
12.7 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . 102
12.8 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . 103
12.9 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . 103
12.10 Sellers; Joint and Several; Sequa Agency . . . . . . . . 103
12.11 Jurisdiction . . . . . . . . . . . . . . . . . . . . . . 104
LIST OF SCHEDULES AND EXHIBITS
1.1(g) Letters of Credit in favor of Sellers 1.1(h) Prepaid expenses and deposits 1.2(d) Letters of Credit issued on behalf of Sellers 1.2(e) Excluded Rights against Third Parties 2.3(b)-1 Eligible Military Stock Inventory 4.1 List of Foreign Qualifications 4.5 Condition of Personal Property 4.7(b) Defaults under Real Property Documents 4.7(i)-1 Real Estate Tax Proceedings 4.7(i)-2 Real Property Tax Bills 4.8 Financial Statements and Related Information 4.9 List of Certain Changes 4.9(e) Claim Receivables or Notes Receivables 4.10 Litigation and Violations of Law
4.24 Important Suppliers and Customers 4.25 List of Material Product and Service Warranties 4.27 List of Affiliates having Certain Names 5.5 Financial Statements of Buyer and Guarantor 6.9 Allocation of Real Estate Taxes 6.19 Miscellaneous Real Estate Documents
8.1(b) Opinion of counsel to Sellers 8.1(q) Certificate of Non-foreign Status 8.2(c) Opinion of counsel to Buyer
The parties to this Purchase Agreement are Sequa Corporation, a Delaware corporation ("Sequa"), Kollsman Manufacturing Company, Inc., a Delaware corporation ("KMC"), Sequa Export Corporation, a foreign sales corporation organized under the laws of the United States Virgin Islands ("Sequa Export", and together, jointly and severally, with Sequa and KMC, "Sellers"), and EL-OP U.S., Inc., a Delaware corporation ("Buyer") and El-Op Electro-Optics Industries, Ltd., an Israeli corporation which is the guarantor of Buyer's indemnification obligations and liabilities under Section 9.3 of this Agreement ("Guarantor").
Sequa's "Kollsman Division" consists of three units engaged in the following businesses (collectively, "the Business"): the military systems unit, a government contract supplier of electro-optical and electric systems for military weapons; the avionics products unit, a designer and manufacturer of aircraft instruments and related test equipment; and KMC and the business thereof, that produces medical diagnostic instruments. Sellers no longer desire to engage in the Business, and desire to divest themselves of all of the assets related to the Business (excluding certain assets relating thereto as provided in this Agreement). Sequa operates the Business directly and through KMC and Sequa Export. Sellers desire to sell to Buyer the Business, as a going concern, and all of the assets relating to the Business (excluding certain assets relating thereto as provided in this Agreement), and Buyer shall assume certain of the liabilities associated with the Business, and Buyer desires to purchase the Business, as a going concern, and those assets and to assume such liabilities, on the terms and conditions contained in this Agreement.
Accordingly, it is agreed as follows:
Definitions. When used in this Agreement, the following terms have the following respective meanings:
(a) "Acceptable Contractor" shall have the meaning given to that term in Section 11 of this Agreement.
(b) "Accountants" shall have the meaning given to that term in Section 2.3 of this Agreement.
(c) "Accounting Instructions" shall have the same meaning given to that term in Section 2.3 of this Agreement.
(d) "Actual Knowledge of Buyer" shall have the meaning given to that term in Section 9.7 of this Agreement.
(e) "Affiliate" shall mean any person or entity directly or indirectly controlled by, controlling, or under common control with, any other person or entity. For purposes of this definition, the term "control" (including "controlling", "controlled by", and "under common control with") shall mean the ability through ownership, direct or indirect, of voting stock or other equity interests, to direct or cause the direction of the management and policies of a person, partnership, corporation or other entity.
(f) "Agreement" shall mean this Purchase Agreement and all Exhibits and Schedules annexed hereto.
(g) "Assets" shall have the meaning given to that term in Section 1.1 of this Agreement.
(h) "Assigned Agreements" shall have the meaning given to that term in Section 1.1 of this Agreement.
(i) "Assumed Liabilities" shall have the meaning given to that term in Section 2.2(a) of this Agreement.
(j) "Balance Sheet" shall have the meaning given to that term in Section 4.8 of this Agreement.
(k) "Base Purchase Price" shall have the meaning given to that term in Section 2.1 of this Agreement.
(l) "Benefit Plans" shall have the same meaning given to that term in Section 4.17 of this Agreement.
(m) "Billed Receivables" shall mean all accounts receivable arising from the operation of the Business with respect to (x) finished products and spare parts that have been shipped to customers of the Business, and (y) services performed for customers of the Business, in each case, for which invoices have been issued or which any Seller invoices in the ordinary course of the Business after the products or services are shipped or performed. A list of Billed Receivables as of September 30, 1995 is, to the best of Sellers' knowledge, set forth on Schedule M.
(n) "Business" shall have the meaning given to that term in the recitals to this Agreement.
(o) "Business Day" shall mean (x) for all purposes other than the payment of money, any day on which federal and state commercial banks are open for business in the State of New York; and (y) for the purpose of the payment of money, any day on which (i) federal and state commercial banks are open for business in the State of New York, and (ii) commercial banks are open for business in Israel.
(p) "Business Records" shall have the meaning given to that term in Section 6.11 of this Agreement.
(q) "Buyer's Claims Liabilities" shall mean any and all liabilities or obligations arising out of or in connection with any claim, litigation or proceeding that arises out of or is in connection with Buyer's actions or omissions in the operation of the Business and/or the Assets after the close of business on the Closing Date, including actions or omissions by Buyer that are a continuation of an action or omission of Sellers, including continuing breaches or defaults of Sellers under any leases, contracts, commitments or agreements included in the Assets, in all such events occurring prior to the close of business on the Closing Date, but only to the extent that such continuation, act or omission occurs after the close of business on the Closing Date.
(r) "Buyer's Environmental Liabilities" shall mean:
(i) liabilities for Buyer's actions or omissions after the close of business on the Closing Date resulting in violations or continuation of violations of Environmental Laws (whether now or hereafter in existence), including actions or omissions by Buyer that are a continuation of an action or omission of Sellers occurring prior to the close of business on the Closing Date, but only to the extent that such continuation, act or omission occurs after the close of business on the Closing Date;
(ii) liabilities for conditions created by Buyer after the close of business on the Closing Date;
(iii) liabilities resulting from the disposition by Buyer of Materials of Environmental Concern after the close of business on the Closing Date.
(s) "Buyer Loss" shall have the meaning given to that term in Section 9.2 of this Agreement.
(t) "Buyer's Other Liabilities" shall mean any and all liabilities with respect to criminal and civil fines, penalties and punitive damages arising out of or in connection with Buyer's actions or omissions after the close of business on the Closing Date, including actions taken or failed to have been taken or facts or circumstances existing after the close of business on the Closing Date, including actions or omissions by Buyer that are a continuation of an action or omission of Sellers occurring prior to the close of business on the Closing Date, but only to the extent that such continuation, act or omission occurs after the close of business on the Closing Date;
(u) "Cash Equivalents" shall mean all bank accounts, certificates of deposit, commercial paper, treasury bills and treasury notes owned by any of Sellers arising from or in connection with the Business.
(v) "CERCLA" shall have the meaning given to that term in Section 4.18 of this Agreement.
(w) "Claims Receivable" shall mean all accounts receivable disputed by the customers of the Business and all other receivables accruing before the close of business on the Closing Date which is not a Billed Receivable or an Unbilled Receivable and which shall include, without limitation, the claims set forth on Schedule W.
(x) "Closing" and "Closing Date" shall have the meanings given to those terms in Section 3.1 of this Agreement.
(y) "COBRA" shall have the meaning given to that term in Section 4.17 of this Agreement.
(z) "Code" means the Internal Revenue Code of 1986, as the same may be amended from time to time.
(aa) "Common Control Entity" shall have the meaning given to that term in Section 4.17 of this Agreement.
(ab) "Contract Inventory" shall mean all items of inventory of the Business, including raw materials, work-in- process, spare parts, supplies and finished goods, that have been purchased and/or are being used in or held for use in the manufacture of products pursuant to specific purchase orders or agreements, a list of which as of September 30, 1995 is set forth on Schedule AB.
(ac) "Customer Agreements" shall have the meaning given to that term in Section 1.1 of this Agreement.
(ad) "Damage Deductible" shall have the meaning given to that term in Section 11.3 of this Agreement.
(ae) "Deeds" shall have the meaning given to that term in Section 8.1(h) of this Agreement.
(af) "Eligible Military Stock Inventory" shall have the meaning given to that term in Section 2.3 of this Agreement.
(ag) "Employees" shall have the meaning given to that term in Section 4.12 of this Agreement.
(ah) "Environmental Laws" shall have the meaning given to that term in Section 4.18(a) of this Agreement.
(ai) "Environmental Permits" shall have the meaning given to that term in Section 4.18(e) of this Agreement.
(aj) "Environmental Reports" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(ak) "Equipment" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(al) "ERISA" shall have the meaning given to that term in Section 4.17 of this Agreement.
(am) "Estimates at Completion" shall have the meaning given to that term in Section 7.1(k) of this Agreement.
(an) "Excluded Assets" shall have the meaning given to that term in Section 1.2 of this Agreement.
(ao) "Excluded Liabilities" shall mean all liabilities of any Seller arising from or in connection with the operation of the Business and/or the Assets on or prior to the Closing Date, whether accrued, absolute, contingent or otherwise and whether asserted before or after the date hereof or asserted on, before or after the Closing Date, except for such liabilities of Sellers as are specifically assumed by Buyer pursuant to this Agreement. Without limiting the foregoing, Excluded Liabilities shall include each and every one of the following liabilities:
(i) any liability for any Taxes accrued through or applicable to periods on or prior to the Closing Date other than those Taxes which are being prorated pursuant to the provisions of Section 6.9 of this Agreement and as otherwise provided in Section 6.9;
(ii) any liability for any brokerage or similar charge or commission payable or incurred by any Seller in connection with this Agreement or the transactions
(iii) any indebtedness, liability or obligation of, or guaranty of indebtedness made by, any Seller to or for any Seller or any Affiliate thereof;
(vi) any and all liabilities for bodily injury, death and property damage arising out of or in connection with services performed or products manufactured that are sold or shipped prior to the close of business on the Closing Date only if such bodily injury, death or property damage occurs on or prior to the Closing Date;
(vii) those Warranty Costs incurred during the twenty-four month period following the Closing Date for any Product or Service Warranty for, and any Recall Costs incurred within the twenty-four month period following the Closing Date with respect to, any product manufactured or service performed that is sold and shipped on or before the close of business on the Closing Date (whether or not the product was manufactured by the Business), but only to the extent that such Warranty Costs and Recall Costs exceed, in the aggregate (i) $1,000,000 for the first twelve months following the Closing Date or (ii) $800,000 for the next
(viii) any and all liabilities and obligations for expenses and fees incurred by any Seller arising out of or in connection with the negotiation or execution of this Agreement, or the consummation of the transactions contemplated hereby or thereby;
(ix) any and all intercompany accounts payable and other amounts due to any Seller or its Affiliates, including but not limited to liabilities of any Seller, arising out of or in connection with the Business
(xi) any and all liabilities for royalty expense and commissions due pursuant to the provisions of the Assigned Agreements with respect to shipments of products and/or rendering of services prior to the close of business on the Closing Date;
(xii) any and all liabilities for government recoupment fees due pursuant to the provisions of the Assigned Agreements with respect to shipments of products and/or rendering of services prior to the close of business on the Closing Date, including but not limited to any and all liabilities with respect to the Excluded Recoupment Fees (as such term is defined in the Accounting Instructions (Schedule 2.3(b)-2)), whether presently or
(xiii) any liabilities or obligations of any Seller arising out of or in connection with any Benefit
(xiv) any liabilities or obligations of any Seller for indebtedness for borrowed money.
(ap) "Final Statement" shall have the meaning given to that term in Section 2.3 of this Agreement.
(aq) "Guarantor" shall have the meaning given to that term in the recitals to this Agreement.
(ar) "Hazardous Condition" shall have the meaning given to that term in Section 11 of this Agreement.
(as) "HSR Act" shall have the meaning given to that term in Section 6.2 of this Agreement.
(at) "Improvements" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(au) "Indemnified Loss" shall have the meaning given to that term in Section 9.3 of this Agreement.
(av) "Indemnified Party" shall have the meaning given to that term in Section 9.4 of this Agreement.
(aw) "Indemnifying Party" shall have the meaning given to that term in Section 9.4 of this Agreement.
(ax) "Intellectual Property" shall have the meaning given to that term in Section 1.1(d) of this Agreement.
(ay) "Inventory" shall collectively mean Contract Inventory and Stock Inventory of the Business.
(az) "Investments" shall mean the minority ownership interest of Sequa in Kollsman Saudi Arabia Limited, a business entity organized under the laws of Saudi Arabia ("KSAL"), that is described on Schedule AZ.
(ba) "IRS" shall have the meaning given to that term in Section 2.4 of this Agreement.
(bb) "KI" shall have the meaning given to that term in Section 12.7 of this Agreement.
(bc) "KMCI" shall have the meaning given to that term in Section 12.7 of this Agreement.
(bd) "Knowledge of Sellers", "actual knowledge", "best knowledge" or words of similar import shall mean the actual knowledge of those officers, directors and/or employees of Sellers described on Schedule BD of this Agreement, and shall not be deemed to include any knowledge that any of the foregoing should have known or should be imputed to have known because of the services of such persons through the Closing.
(be) "Kollsman Division" shall have the meaning given to that term in the recitals to this Agreement.
(bf) "KSAL" shall have the meaning given to that term in paragraph (az) of this Agreement.
(bg) "Land" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(bh) "Land Appurtenances" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(bi) "Legal Requirements" shall have the meaning given to that term in Section 4.7 of this Agreement.
(bj) "Letters of Credit" shall mean all letters of credit, bonds or other surety or security posted by or for the benefit of any Seller in connection with the Business, a true and complete list of which as of September 30, 1995 is set forth on Schedule BJ.
(bk) "Licensing Agreements" shall have the meaning given to that term in Section 1.1 of this Agreement.
(bl) "Lien" shall have the meaning given to that term in Section 4.3 of this Agreement.
(bm) "Materials of Environmental Concern" shall have the meaning given to that term in Section 4.18 of this Agreement.
(bn) "Minor Taking" shall have the meaning given to that term in Section 11 of this Agreement.
(bo) "Nashua Lease" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(bp) "Nashua Sub-Lease" shall have the meaning given to that term in Section 6.22 of this Agreement.
(bq) "Net Insurance Proceeds" shall have the meaning given to that term in Section 11 of this Agreement.
(br) "Non-Competition Agreement" shall have the meaning given to that term in Section 6.14 of this Agreement.
(bs) "Notes Receivable" shall mean the notes receivable, if any, set forth on the date hereof on Schedule BS and as that Schedule is updated through the close of business on the Closing Date.
(bt) "Office Leases" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(bu) "Other Agreements" shall have the same meaning given to that term in Section 1.1 of this Agreement.
(bv) "Permits" shall have the meaning given to that term in Section 4.19 of this Agreement. (bw) "Permitted Exceptions" shall have the meaning given to that term in Section 4.7 of this Agreement.
(bx) "Personal Property Leases" shall have the same meaning given to that term in Section 1.1 of this Agreement.
(by) "Personalty" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(bz) "Plans" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(ca) "Post-Closing Employees" shall have the meaning given to that term in Section 6.17 of this Agreement.
(cb) "Product or Service Warranty" shall mean obligations (provided by contract or law or implied by law) to repair, replace or accept the return of any product manufactured or service performed in the operation of the Business.
(cc) "Purchase Contracts" shall have the meaning given to that term in Section 1.1 of this Agreement.
(cd) "Real Property" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(ce) "Real Property Interests" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(cf) "Real Property Documents" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(cg) "Real Property Permits" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(ch) "Recall Costs" shall mean and include with respect to any government mandated recall:
(i) direct labor and material costs incurred in accepting a return and/or making a refund, or performing a repair or replacement; and
(ii) an overhead charge equal to 149% of such direct labor costs and a material handling charge equal to 9.6% of such direct material costs.
(ci) "Representative Agreements" shall have the meaning given to that term in Section 1.1 of this Agreement.
(cj) "Required Consents" shall have the meaning given to that term in Section 6.8 of this Agreement.
(ck) "Returns" means all returns, reports, estimates, information returns and statements (including any related or supporting information) filed or to be filed with any
Tax Authority in connection with the determination, assessment, collection or administration of any Taxes.
(cl) "Sales Contracts" shall have the meaning given to that term in Section 1.1 of this Agreement.
(cm) "Sellers' Claims Liabilities" shall mean any and all liabilities or obligations arising out of or in connection with any claim, litigation or proceeding that arises out of or is in connection with (i) any government mandated recall of products manufactured or services performed that are sold or shipped by any Seller prior to the close of business on the Closing Date, to the extent that the Recall Costs in connection therewith are incurred after the twenty-four month period following the Closing, or (ii) Sellers' actions or omissions in connection with the operation of the Business and/or the Assets on or before the close of business on the Closing Date, provided that if such actions or omissions are continued by Buyer after the close of business on the Closing Date, Sellers shall only be liable to the extent that such actions or omissions occurred on or prior to the close of business on the Closing Date, provided, however, that Sellers' Claims Liability shall not in any event mean or include, Product or Service Warranty, provided, however, that the foregoing shall not relieve Sellers with respect to any liability or obligation Sellers may have under Section 9.2(a) of this Agreement to Buyer with respect to the representations and warranties made by Sellers in this Agreement, subject, however, to the limitations on indemnification and on survival of such representations and warranties as provided in this Agreement.
(cn) "Sellers' Environmental Liabilities" shall mean:
(i) liabilities for Sellers' actions or omissions on or before the close of business on the Closing Date resulting in violations of Environmental Laws (in existence on the Closing Date), provided that if such actions or omissions are continued by Buyer after the close of business on the Closing Date, Sellers shall only be liable to the extent that such actions or omissions occurred on or prior to the close of business on the Closing Date, provided, however, that the foregoing shall not relieve Sellers with respect to any liability or obligation Sellers may have under Section 9.2(a) of this Agreement to Buyer with respect to the representations and warranties made by Sellers in this Agreement, subject, however, to the limitations on indemnification and on survival of such representations and warranties as provided in this Agreement;
(ii) liabilities for conditions existing on the Real Property prior to the close of business on the Closing
Date, except that if such conditions existed prior to Sellers' or, with respect to the Wichita, Kansas Real Property, Intercontinental Dynamic Corporation's, use, ownership or occupancy of the Real Property, or were caused by any party other than Sellers, such liabilities shall not be "Excluded Liabilities" or "Assumed Liabilities", and the parties shall have, with respect to each other and third parties, such rights and obligations as may be otherwise provided by law; and/or
(iii) liabilities resulting from the disposition by Sellers of Materials of Environmental Concern on or prior to the close of business on the Closing Date.
(co) "Seller Loss" shall have the meaning given to that term in Section 9.3 of the Agreement.
(cp) "Sellers' Other Liabilities" shall mean any and all liabilities with respect to criminal and civil fines, penalties and punitive damages arising out of or in connection with Sellers' actions or omissions on or before the close of business on the Closing Date, provided that if such actions or omissions are continued by Buyer after the close of business on the Closing Date, Sellers shall only be liable to the extent that such actions or omissions occurred on or prior to the close of business on the Closing Date, provided, however, that the foregoing shall not relieve Sellers with respect to any liability or obligation Sellers may have under Section 9.2(a) of this Agreement to Buyer with respect to the representations and warranties made by Sellers in this Agreement, subject, however, to the limitations on indemnification and on survival of such representations and warranties as provided in this Agreement.
(cq) "Service Contracts" shall have the meaning given to that term in Section 1.1(l) of this Agreement.
(cr) "Stock Inventory" shall mean all items of inventory of the Business, including raw-materials, work-in- process, finished goods, spare parts and supplies that do not constitute Contract Inventory, a list of which as of September 30, 1995 is set forth on Schedule CR.
(cs) "Taxes" shall mean any and all taxes, charges, fees, levies, penalties or other assessments charged, accrued or based on net income, capital gain, gross income, gross receipts, payroll, license, withholding, employment, severance, occupation or windfall profits, franchise taxes, ad valorem, excise, property, premium, customs duties, stamp, sales and use imposed by any Tax Authority, and including, without limitation, any and all interest, penalties or additional attributable thereto.
(ct) "Tax Authority" means any federal, national, foreign, state, municipal or other local government, any subdivision, agency, commission or authority thereof, or any quasi-governmental body or other authority exercising any taxing or tax regulatory authority.
(cu) "Tax Liabilities" means (i) all liabilities for Taxes and (ii) all reasonable costs and expenses related thereto (including, without limitation, reasonable attorneys' and accountants' fees) without regard to whether Taxes are ultimately due.
(cv) "Teaming Agreements" shall have the meaning given to that term in Section 1.1 of this Agreement.
(cw) "Third Party Claim" or "Third Party Claims" shall have the meaning given to those terms in Section 9.4 of this Agreement.
(cx) "Title Exceptions" shall have the meaning given to that term in Section 4.7 of this Agreement.
(cy) "Unbilled Receivables" shall mean all assets of any Seller which are recorded on the books of any such Seller in connection with the revenues of the Business, booked on a percentage of completion method, and with respect to products that have not yet been shipped and/or services performed and not yet billable to customers of the Business pursuant to and in accordance with the terms and conditions of those of the Customer Agreements that are listed on Schedule CY-1. A list of Unbilled Receivables as of September 30, 1995 in respect of each such Customer Agreement is also set forth on Schedule CY-2.
(cz) "Waived Claims" shall have the meaning given to that term in Section 9.7 of this Agreement.
(da) "Warranty Costs" shall mean and include the following costs for Product and Service Warranty:
(i) direct labor and material costs incurred in accepting a return and/or making a refund, or performing a
(ii) an overhead charge equal to 149% of such direct labor costs and a material handling charge equal to 9.6% of such direct material costs.
1. Sale and Purchase of Assets.
1.1 Sale of Assets to Buyer. Subject to the terms and conditions of this Agreement, at the Closing referred to in Section 3.1 of this Agreement, Sellers shall sell and assign to
Buyer, and Buyer shall purchase and acquire from Sellers, all of the Business, as a going concern, and all of Sellers' assets relating to the Business and used or held for use in the operation of the Business (excluding only the assets referred to in Section 1.2 of this Agreement), as those assets exist as of the close of business on the Closing Date referred to in Section 3.1 of this Agreement, regardless of whether or not such assets are listed or are required to be listed on any Schedule hereto (collectively, the "Assets"). The Assets to be sold and assigned are substantially comprised of the following types of assets (except as otherwise provided in Section 1.2 of this Agreement):
(a) to the extent transferrable, all of Sellers' rights under all permits, franchises, licenses and authorizations that relate to the operation of the Business and/or the Assets, substantially all of which are those listed on Schedule 4.19;
(b) all equipment (including computers and office equipment), machinery, tools, supplies, vehicles, furniture, fixtures, leasehold improvements (subject to any limitations in the applicable lease for real property) and improvements on land, and all other tangible personal property and fixed assets, wherever located, that are owned by any Seller and used or held for use in the operation of the Business and/or the Assets, including but not limited to the items listed on
(c) all rights of Sellers under all leases for personal property (subject to any limitations contained in the applicable personal property lease), commitments and other agreements relating to the operation of the Business, or to which any of the Assets or the Business is subject, including, without limitation, those agreements listed on Schedule 4.11 (collectively, the "Assigned Agreements"), (i) to the extent that those rights relate to the period from and after the close of business on Closing Date, including, but not limited to (A) all commitments and other agreements for the purchase of any materials, supplies or equipment and all purchase orders (collectively, "Purchase Contracts"); (B) all leases or other rental agreements for personal property under which any Seller is either lessor or lessee (collectively, "Personal Property Leases"), (C) all customer agreements (collectively, "Customer Agreements"), (D) all sales orders (collectively, "Sales Contracts"), (E) all representative agreements (collectively, "Representative Agreements"), and (F) all teaming agreements (collectively, "Teaming Agreements"), (E) all licensing agreements (the "Licensing Agreements"), and (ii) any leases for personal property, commitments and other agreements relating to the Business and/or the Assets that are entered into in accordance with the provisions of Section 6.4 of this Agreement between the date of this Agreement and the close of business on the Closing Date (collectively, "Other Agreements");
(d) all patents, copyrights, know-how, inventions, trade secrets, technology, service marks, service names, trademarks (including but not limited to Sellers' right, title and interest in and to the name "Kollsman", but excluding the name "Sequa"), trade names, logos, brands and privacy, designs, intellectual, industrial and intangible property rights of every kind (whether or not copyrightable) and registrations and applications for registration of any of them and the right to apply therefor and other intangible personal property used in the operation of the Business (including, but not limited to, the intangible personal property listed on Schedule 4.14), together with the good will of the businesses associated therewith, and (ii) all books and quality and other control books and computer software (subject to any additional fees payable with respect to the transfer of "off-the-shelf" software, none of which are material and all of which shall be borne by Sellers and Buyer on a 50/50 basis), programs (whether source code, object code or other format), and computer documentation and all physical embodiments thereof, and all printouts, underlying tapes, discs and other media and computer databases, and all user's testings, service and operator's and programming manuals, specifications and diagnostic materials relating to the foregoing ("Intellectual
(e) except to the extent provided in Section 1.2 of this Agreement, all of Sellers' rights under manufacturers' and vendors' warranties relating to the Business and/or the Assets and items included in the Assets and all similar rights against third parties relating to the Business and items included in the Assets and all other claims, choses in action and causes of action of every kind and description that any Seller may have against any person or entity relating to the Business and the
(g) the Letters of Credit in favor of any Seller
(h) the prepaid expenses and deposits, a list of which, as of September 30, 1995, is set forth on Schedule 1.1(h);
(i) all books and records, including but not limited to all transaction records, financial records, personnel and payroll records and a copy of the files, logs and other records and data relating to the operation of the Business and the Assets, including, but not limited to, accounting and budgeting information, technical information and engineering data, customer lists and supplier lists, but excluding any of the foregoing relating solely to Excluded Assets and Excluded
(j) all items of Stock Inventory and Contract
(l) all real property interests and related assets relating to the Business, substantially all of which is comprised of the following real property interests and related assets (collectively, the "Real Property Interests"):
(i) fee title to the land described in Schedule 1.1(L)-1 and Schedule 1.1(L)-2 hereto (the "Land") and any easements, rights-of-way, licenses, interests, rights and appurtenances of any kind relating or pertaining thereto, including without limitation, all air, zoning and development rights appurtenant to the Land, and all right, title and interest of any Seller in and to any land lying in the bed of any highway, street, road, avenue, access way or easement, open or proposed, in front of, at a side or adjoining the Land and to the center line thereof (collectively, the "Land Appurtenances");
(ii) the buildings, structures and other improvements situated on the Land (the "Improvements"), descriptions of which are set forth on Schedules 1.1(L)-1 and
(iii) all fixtures and equipment used in connection with the operation of the Land and/or the Improvements
(iv) all right, title and interest as tenant under those certain leases (the "Offices Leases") for the use and occupancy of the land and/or property described in Schedule
(v) a subleasehold interest in and to the premises demised to Sellers pursuant to the Nashua lease described on Schedule 1.1(L)-4 (the "Nashua Lease"), in accordance with the provisions of Section 6.22 of this Agreement;
(vi) all construction contracts, service contracts, maintenance contracts, management agreements, utility agreements, warranties, guaranties, surety and other bonds issued for the benefit of any Seller, and other agreements relating to the Land, the Improvements and/or the premises demised under the Office Leases and the Nashua Lease (collectively, "Service
(vii) all architectural, engineering and other plans, drawings and studies relating to the Land, the Improvements and/or the premises demised under the Nashua Lease
(viii) all development, building, alteration, demolition and other municipal permits, licenses, approvals, authorizations and certificates relating to the Land, the Improvements and/or the premises demised under the Nashua Lease (collectively, "Real Property Permits"), to the extent
(ix) copies of any environmental reports, studies, soil reports, grading plans, topographical maps and similar data in the possession of Sellers or under the control of any one of them with respect to the Land, the Improvements and/or the premises demised under the Nashua Lease (collectively,
(x) all goods, chattels and personal property of any nature whatsoever, if any, used in the operation of the Land, the Improvements and/or the premises demised under the Nashua Lease or the Office Leases, in each case owned by Sellers and now or hereafter affixed or located upon the Land, the Improvements or the premises demised by the Nashua Lease or the Office Leases (collectively, the "Personalty"); and
(xi) all other rights and interests of Sellers relating to the foregoing.
For purposes of this Agreement, (i) "Real Property" means, collectively, (A) the Land, (B) the Improvements, (C) the premises demised under the Office Leases and Nashua Lease and (D) the Land Appurtenances, and (ii) "Real Property Documents" mean, collectively, the Nashua Lease, the Office Leases, the Service Contracts, the Plans, the Real Property Permits, the Environmental Reports and the Permitted Exceptions (as hereinafter defined); and
1.2 Excluded Assets. The following assets (collectively, the "Excluded Assets") used in the operation of the Business shall be retained by Sellers and shall not be sold or assigned to Buyer:
(a) all Billed Receivables as of the close of business on the Closing Date;
(b) all Claims Receivable and Notes Receivable as of the close of business on the Closing Date;
(c) all cash and Cash Equivalents as of the close of business on the Closing Date;
(d) the Letters of Credit issued by or on behalf of any Seller listed on Schedule 1.2(d) and those Letters of Credit issued by or on behalf of any Seller between the date hereof and the close of business on the Closing Date;
(e) Sellers' rights under manufacturers' and vendors' warranties, and all similar rights against third parties and all other claims, choses in action and causes of action of every kind and description that are related only to the Excluded Assets and the Excluded Liabilities, including such of the foregoing that are listed on Schedule 1.2(e);
(f) the corporate services provided to the Business that are listed on Schedule 1.2(f);
(g) the records relating to Sellers' Taxes and
ENU the rights and interests of Sellers under
(i) any right to use the name "Sequa" or "Sequa Corporation" or any derivation or adaptation thereof;
(j) all existing rights incident, directly or indirectly, to insurance policies, proceeds, loss funds (or claims or litigation relating thereto) and insurance accounts relating to Sellers' operation of the Business, except as otherwise provided in Section 11 of this Agreement only with respect to property and casualty proceeds and claims therefor;
(k) all business, assets and properties of Sellers of any kind or nature that are not to be conveyed pursuant to this Agreement and Schedules hereto;
(l) all refunds of Taxes of every kind and nature for all periods through and including the Closing Date;
(m) all net operating loss tax carryforwards attributable to KMC for all periods through and including the
(n) all assets, whether held in trust or otherwise, with respect to Benefit Plans;
(o) all claims, debts, liabilities and obligations owed by any Seller or its Affiliates to the Business and/or the Kollsman Division; and
(p) all warrants issued by BioTek Solutions, Inc. entitling Sequa to purchase common stock of BioTek Solutions, Inc.
2.1 Amount and Payment of Purchase Price. At the Closing, Buyer shall pay to Seller, by wire transfer of immediately available funds, the total purchase price of Forty Nine Million Six Hundred Twelve Thousand Dollars ($49,612,000) (the "Base Purchase Price"), subject to adjustment as provided in Section 2.3 of this Agreement.
2.2 Assumption of Liabilities. As additional consideration for the transactions contemplated by this Agreement and as a material inducement for Sellers to enter into this Agreement, Buyer further agrees as follows:
(a) On and as of the close of business on the Closing Date, Buyer shall (i) assume, agree to pay, perform and discharge all of the obligations and liabilities of Sellers under the Assigned Agreements that accrue after the close of business on the Closing Date, and (ii) pay, perform and discharge those additional obligations and liabilities of Buyer and/or Sellers set forth below and none other (the "Assumed Liabilities"):
(i) all liability for any Taxes applicable to periods after the Closing Date arising from the operation of the Business and as otherwise provided in Section 6.9 of
(ii) any liability for any brokerage or similar charge or commission payable or incurred by Buyer in connection with this Agreement or the transactions
(v) any and all liabilities for bodily injury, death and property damage occurring after the close of business on the Closing Date arising out of or in connection with services performed or products manufactured that are sold and shipped by the Business (including any and all items of Inventory) after the close of business on the
(vi) all Warranty Costs incurred for any Product or Service Warranty for any product manufactured or service performed that is sold and shipped (including any and all items of Inventory) after the close of business on the Closing Date (whether or not the product was
(vii) all Warranty Costs incurred after the close of business on Closing Date for Product or Service
Warranty and all Recall Costs for all products manufactured and services performed that are sold and shipped on or before the close of business on the Closing Date (whether or not the product was manufactured by the Business), provided that in no event shall such Warranty Costs and Recall Costs exceed in the aggregate (i) $1,000,000 for the first twelve months following the Closing Date, and (ii) $800,000 for the next succeeding twelve months, provided, further, that Buyer shall be responsible for all Warranty Costs incurred after such twenty-four month period without any limitation whatsoever or contribution from or recourse against any Seller for such Warranty Costs, provided, however, that the foregoing shall not relieve Sellers with respect to any liability or obligation Sellers may have under Section 9.2(a) of this Agreement to Buyer with respect to the representations and warranties made by Sellers in this Agreement, subject, however, to the limitations on indemnification and on survival of such representations and warranties as provided in this Agreement; and, provided further, that Buyer shall have no liability or obligation for Recall Costs after such twenty-four month period;
(viii) any and all liabilities for expenses and fees incurred by Buyer arising out of in connection with the negotiation or execution of this Agreement, or the
consummation of the transactions contemplated hereby or
(x) those employee obligations referred to in Section 6.17 of this Agreement;
(xi) any and all liabilities for royalty expense and commissions due pursuant to the provisions of the Assigned Agreements with respect to shipments of products and/or rendering of services from and after the
(xii) any and all liabilities for government recoupment fees due pursuant to the provisions of the Assigned Agreements with respect to shipments of products and/or rendering of services from and after the Closing Date.
(b) Except as specifically provided in Sections 2.2(a)(i) through 2.2(a)(xii), 6.3, 6.22 (to the extent provided in the Nashua Sublease), 6.23 and 9.3, 9.4 and 9.5 of this Agreement, Buyer shall not assume or be responsible for any lia- bilities or obligations of Sellers relating to the Business, the Assets or otherwise, and Sellers shall continue to be responsible for and shall pay, perform and discharge all such liabilities and obligations. Without limiting the generality of the preceding sentence, Buyer shall not assume or be responsible for, and Sellers shall continue to be responsible for and shall pay, perform and discharge all Excluded Liabilities.
(c) Sellers hereby agree to pay, perform and discharge all of the Excluded Liabilities in accordance with the respective terms and conditions thereof when the same become due and payable.
2.3 Adjustment of Base Purchase Price.
(a) Subject to Section 2.3(b) of this Agreement, if the aggregate amount of Unbilled Receivables and Inventory as of the close of Business on the Closing Date is greater than Forty Nine Million One Hundred Sixty Thousand Dollars ($49,160,000), then the Base Purchase Price shall be increased by an amount equal to that excess. Subject to Section 2.3(b) of this Agreement, if the aggregate amount of Unbilled Receivables and Inventory as of the close of business on the Closing Date is less than Forty Nine Million One Hundred Sixty Thousand Dollars ($49,160,000), then the Base Purchase Price shall be decreased by an amount equal to that shortfall.
(b) Set forth on Schedule 2.3(b)-1 is a list that Buyer and Sellers agree upon as identifying all items of military Stock Inventory owned by Sellers as of January 31, 1995, listing all material items separately (the "Eligible Military Stock Inventory"). The parties agree that the aggregate amount of the Eligible Military Stock Inventory was, at January 31, 1995, Twenty-Four Million Three Hundred Nineteen Thousand Dollars ($24,319,000). For purposes of computing the aggregate amount of Unbilled Receivables and Inventory in accordance with Section 2.3(a) of this Agreement: (i) only the aggregate amount (determined in accordance with the Accounting Instructions) of the balance of the Eligible Military Stock Inventory owned by Sellers as of the close of business on the Closing Date shall be taken into account with respect to any military Stock Inventory; and (ii) military Stock Inventory, if any, purchased or otherwise acquired after January 31, 1995, shall not be included in determining the adjustment to the Base Purchase Price. For purposes of Section 2.3(a) of this Agreement, Unbilled Receivables and Inventory shall be determined as of the close of business on the Closing Date in accordance with the accounting instructions set forth on Schedule 2.3(b)-2 (the "Accounting Instructions").
(c) Within sixty (60) days after the Closing Date, Buyer shall determine the Unbilled Receivables and Inventory as of the close of business on the Closing Date and shall deliver to Sellers a statement (the "Final Statement") setting forth in reasonable detail the amount of Unbilled Receivables and Inventory as so determined in accordance with the Accounting Instructions and the resulting adjustments to the Base Purchase Price pursuant to Sections 2.3(a) and 2.3(b) of this Agreement. Sellers shall have forty five (45) days after receipt of the Final Statement to evaluate the Final Statement. If Sellers accept the Final Statement or do not give Buyer notice within such forty five (45) day period that it disputes the Final Statement or any portion thereof, then within seven (7) days after the expiration of such forty five (45) day period, Buyer shall pay to Sellers, or Sellers shall pay to Buyer, as the case may be, the net amount due as a result of any adjustment (or, if there is any dispute, the undisputed amount). If, however, within that forty five (45) day period Sellers give notice to Buyer that they dispute Buyer's determinations as set forth in the Final Statement, the parties shall confer with regard to the matter and an appropriate adjustment and payment shall be made as agreed upon by the parties; if they are unable to resolve the matter within an additional thirty (30) days after the giving of such notice by Sellers, a firm of independent certified public accountants of recognized standing (the "Accountants"), whose decision on the matter shall be final and binding on the parties, shall be designated by agreement between Sellers and Buyer to resolve such dispute (if they fail to agree within such thirty (30) additional days, the Accountants shall be Price Waterhouse) and payment based on the Accountants' decision as to the Final Statement shall be made promptly after notification of the decision. The fees and expenses of the Accountants shall be borne 50% by Buyer and 50% by Sellers.
2.4 Purchase Price Allocation. The purchase price shall be allocated among the Assets in accordance with Schedule 2.4 as agreed upon by the parties. The parties shall conform to that allocation for all pertinent tax purposes, and each of the parties shall file with the Internal Revenue Service ("IRS") a Form 8594 on a basis consistent with that allocation.
3.1 Date of Closing. The closing (the "Closing") under this Agreement shall take place at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York (or at such other place as the parties may agree upon in writing) upon at least five Business Days prior notice given by Buyer to Sellers within five Business Days after the last of the conditions specified in Sections 7.1 and 7.2 of this Agreement has been fulfilled (or waived), but in no event whatsoever later than December 10, 1995. The date on which the Closing is held is referred to in this Agreement as the "Closing Date." At the Closing, the parties shall execute and deliver the documents referred to in Section 8 of this Agreement.
3.2 Outside Date for Closing. If the Closing has not occurred by December 10, 1995, Sellers or Buyer may terminate this Agreement by notice to the other. Upon termination pursuant to this Section 3.2 neither of the parties shall have any liability of any kind arising out of this Agreement other than for any liability resulting from its breach of this Agreement prior to termination. If the Closing is postponed pursuant to Section 11 of this Agreement, and this Agreement is not otherwise terminated in accordance with the provisions of Section 11, the outside date referred to in this Section shall be extended by the period of the postponement as provided in Section 11.
4. Representations and Warranties by Sellers. Each Seller represents and warrants to Buyer as follows:
4.1 Organization and Authority. Each Seller is a corporation duly organized, validly existing and in good standing under the law of the jurisdiction of its incorporation and has the full corporate power and authority to enter into and to perform this Agreement and to own lease and operate its properties as it now does and to carry on its business as it is presently being conducted. Each Seller is duly qualified and in good standing as a foreign corporation in all jurisdictions where the failure to so qualify or be in good standing would have a material adverse effect on the Business and/or the Assets. A list of such jurisdictions where any Seller is qualified as a foreign corporation is set forth on Schedule 4.1.
4.2 Authorization of Agreement. The execution, delivery and performance of this Agreement by each Seller have been duly authorized by all necessary corporate action of such Seller (including approval of its board of directors and/or its shareholders, if required), and this Agreement constitutes a valid and binding obligation enforceable against such Seller in accordance with its terms, except as may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Each Seller shall furnish to Buyer any documents reasonably requested by Buyer or Buyer's title insurance company and/or such other title insurer or title insurers (whether on a co-insurance or reinsurance basis) as may be satisfactory to Buyer which evidence the capacity and authorization of each of such Seller (and the signatories acting on behalf of it) to consummate the transactions contemplated hereby.
4.3 No Conflicts. Subject to receipt of the consents and approvals referred to on Schedule 4.3, the execution, delivery and performance of this Agreement by Sellers will not (i) conflict with their respective certificate of incorporation or by-laws and will not conflict with, or result in a breach or termination of, or constitute a default under, any lease, agree- ment, commitment or other instrument, or any order, judgment or decree, by which any Seller is bound, or to which any of the Assets is subject; (ii) constitute a violation by any Seller of any law or regulation applicable to it; (iii) result in the creation of any lien, claim, charge, security interest or encumbrance ("Lien") upon any of the Assets; or (iv) adversely affect the operation of the Business in any respect. Except as set forth on Schedule 4.3 and for the consents referred to in Sections 6.1 and 6.2 of this Agreement or otherwise provided by the terms of any of the Assigned Agreements but only insofar as such consents apply to the assignment of that particular Assigned Agreement, no consent, approval or authorization of, or desig- nation, declaration or filing with, any governmental authority or any person or entity is required on the part of any Seller in connection with the execution, delivery and performance of this Agreement.
4.4 Title to Assets. Except as set forth on Schedule 4.4 and except for the lien, if any, of current Taxes not yet due and payable, each Seller has, and at the Closing Buyer will receive, valid title, free and clear of any Liens, to all of the Assets to be conveyed by such Seller pursuant to this Agreement. Nothing in this Section 4.4 shall be deemed to constitute either an express or implied representation or warranty with respect to any restrictions which the terms and conditions of any of the Assigned Agreements impose solely on that Assigned Agreement and no other Assets.
4.5 Condition of Personal Property. Except as set forth on Schedule 4.5, since May 30, 1995, all material equipment and other material tangible assets used or held for use in the Business have, in all material respects, been maintained in the ordinary course without any deferral of maintenance. Except as set forth on Schedule 4.5, since May 30, 1995, no material amount of such equipment or other tangible personal property (other than Inventory) has been removed from any Seller's premises. To the best of Sellers' knowledge, Schedule 1.1(b) contains a true and complete list of all material equipment and such other tangible personal property (other than Inventory) used or held for use in the Business as of September 30, 1995.
4.6 Certain Subsidiaries. Sequa is the record and beneficial owner of all of the outstanding shares of capital stock of KMC and Sequa Export. The copies of the certificate of incorporation and by-laws of KMC and Sequa Export that have been delivered to Buyer are complete and correct and have not been amended. Sellers conduct the Business directly through Sequa's Kollsman Division, KMC and Sequa Export and through no other entity. There are no existing arrangements that require or permit any shares of KMC or Sequa Export to be voted by or at the discretion of anyone other than Sequa.
(a) Except for the Title Exceptions listed on Schedule 4.7(a)-1 (the "Permitted Exceptions"), Sequa has good and marketable fee title to the Land and Improvements and good and marketable leasehold title to the leasehold estates created by the Office Leases and the Nashua Lease, subject to the terms and conditions of those leases. No Seller has made any assignment, pledge or mortgage of, or granted any security interest in, any portion of the Real Property, or its leasehold interests in the Office Leases and the Nashua Lease. For purposes of this Agreement, the term "Title Exceptions" means any defects in, exceptions to, or conditions, liens, mortgages, encumbrances or other matters relating to title to any portion of the Real Property, whether evidenced by written instrument or otherwise evidenced; any encroachments upon any portion of the Real Property by improvements situated on other lands; any encroachments by the Improvements (including the improvements demised by the Office Leases and the Nashua Lease) onto any lands adjoining any portion of the Real Property; any boundary disputes regarding the boundaries of the Real Property; and the terms, provisions and conditions contained in any instruments evidencing or referring to any such defects, exceptions, conditions, liens, mortgages, encumbrances, encroachments, boundary disputes or other matters excepting any of the foregoing that do not individually or in the aggregate materially detract from or interfere with the use of the Land, Real Property or Improvements or the operation of the Business which, for purposes of this Agreement, shall be deemed to be Permitted Exceptions. The Land, the Improvements, the Office Leases and the Nashua Lease each comprise substantially all the real property interests of that type used in or held for use in connection with the operation of the Business.
(b) Except as otherwise disclosed in Schedule 4.7(b), no default on the part of any Seller exists, and, to the best of Sellers' knowledge, no non-monetary default exists, nor has any written notice thereof been received under the terms of any of the Real Property Documents which has not been remedied under the terms of such Real Property Document. To Sellers' knowledge, no circumstances or state of affairs presently exists which with notice, lapse of time, or both could reasonably be anticipated to result in the existence of a default on the part of any Seller under the terms of any of the Real Property Documents, or which could reasonably be anticipated to give any other party to any of the Real Property Documents the right to terminate such Real Property Document or pursue any other recourse or remedy against any Seller or the Real Property or the premises demised under the Office Leases or the Nashua Lease provided for at law or in equity or under the terms of such Real Property Document.
(c) Except as provided under the terms of the Office Leases or the Nashua Lease, no person, firm or entity has any possessory interest in, or any other rights with regard to the use of, any portion of the Real Property (whether pursuant to lease, sublease, rental, license, concession, management or other agreement, written or oral, now or hereafter in effect). No Seller has granted any rights to acquire or to lease any portion of the Real Property, including, without limitation, any renewals or extension options, or any part thereof or otherwise obtain any interest therein. No Seller has granted any rights of first refusal, rights of reverter or rights of first offer that are outstanding relating to the Real Property or any interest therein.
(d) True, complete and correct copies of all the Real Property Documents and of all written notices of default (if any) received with respect to the Real Property Documents and that remain pending have been delivered to Buyer and have been initialled by the appropriate Seller and Buyer.
(e) Sellers have no interest as a landlord in any lease or other agreement for the use and occupancy of all or any portion of the Land, Improvements or the premises demised under the Office Leases or the Nashua Lease.
(f) There is no indebtedness or monetary obligation secured by or in any manner constituting a lien, security interest or other monetary encumbrance on the Real Property.
(g) The Real Property, and the construction, use and operation thereof, are, to Sellers' knowledge, in material compliance with all applicable local, state or federal laws, municipal ordinances or regulations, orders, rules or requirements of any federal, state, municipal department or other governmental authority having jurisdiction against or affecting the Real Property or the construction, ownership, maintenance, operation, use or improvement thereof (including, without limitation, applicable zoning, building, health and environmental laws, ordinances, regulations, orders, rules or requirements, and laws, ordinances, regulations, orders, rules or requirements applicable to the establishment and maintenance of working conditions for labor) ("Legal Requirements"), and no Seller has received written notice (which remains uncured) of, nor has any Seller any knowledge of, (i) any uncured violation of any applicable Legal Requirements whether or not officially noted or issued, or (ii) any condition relating to the Real Property which could reasonably be expected to constitute a material violation of any applicable Legal Requirements. Sellers shall give Buyer notice of any violation of any Legal Requirement of which any Seller obtains written notice or acquires knowledge between the date of this Agreement and the Closing Date.
(h) There is no pending or, to the best of Sellers' knowledge, threatened annexation or condemnation proceeding involving all or a portion of the Real Property.
(i) Except as disclosed on Schedule 4.7(i)-1, there are no, and for the past three years have not been any, proceedings seeking a reduction in real estate taxes imposed upon any portion of the Real Property (other than the premises demised under the Office Leases). There is no pending or, to Sellers' knowledge, threatened imposition of any special or other assessments affecting any portion of the Real Property or any penalties or interest due with respect to the real estate taxes assessed against all or any portion of the Real Property that are payable by the owner or, in the case of Real Property leased to any Seller, the tenant thereof or that could result in a Lien thereon. True and complete copies of all tax bills with respect to each portion of the Real Property (other than with respect to the land and improvements demised under the Office Leases) payable for the last three years have been initialled by Sellers and Buyer and have been annexed to this Agreement as Schedule 4.7(i)-2.
4.8 Financial Statements; Other Financial Information.
(a) Schedule 4.8 contains (x) an unaudited balance sheet of the Business as of December 31, 1994, together with the related statements of operations for the twelve month period then ended, and (y) an unaudited balance sheet of the Business as of September 30, 1995 (the "Balance Sheet"), together with the related statement of operations for the nine month period then ended. Except as described in Schedule 4.8, all of the financial statements contained in Schedule 4.8 are in accordance with the books and records of Sellers, fairly present, in all material respects, the financial position and the results of operations of the Business as of the dates and for the periods indicated (subject to normal year end adjustments with respect to the Balance Sheet and the related statements for the nine months then ended none of which are material in any respect), which statements were provided to Sequa in accordance with its divisional reporting practices, which are subject to Sequa's further adjustments for the purposes of Sequa's financial reporting, which adjustments may be material.
(b) All of the accounts receivable of Sellers arising out of the Business and all of the Unbilled Receivables reflected in the Balance Sheet and/or Schedule M and Schedule CY- 2 arose from bona fide transactions in the ordinary course of business. To the best of Sellers' knowledge, Schedule CY-2 contains a true and correct list of all Unbilled Receivables as of September 30, 1995. Nothing contained in this Agreement shall constitute a representation or warranty of collectibility of any Unbilled Receivable.
4.9 Absence of Certain Changes. Since January 31, 1995, Sellers have operated the Business in the ordinary course and consistent with past practice, and, except as set forth on Schedule 4.9:
(a) there has been no material adverse change in the condition (financial or otherwise) or operations of the
(b) no Seller (as it relates to the Business) has (i) entered into any transaction that is material to the Business other than in the ordinary course, (ii) made any material change in its accounting methods or principles or (iii) incurred any indebtedness for borrowed money with respect to the Business or the Assets; or
(c) no Seller has granted or agreed to grant any general increase in any rate or rates of salaries, compensation or benefits to the employees of the Business or any specific increase in the salary, compensation or benefits to (x) any employee whose total salary and compensation after such increase would be at an annual rate in excess of $90,000, other than in the ordinary course of business, or (y) any other employee outside of the ordinary course of business;
(d) no Seller has established any new Benefit Plan, amended or modified any existing Benefit Plan or incurred any obligation or liability under any Benefit Plan materially different in nature or amount from obligations or liabilities incurred during similar periods in prior years;
(e) there presently are no Claims Receivable or Notes Receivable other than as indicated on Schedule 4.9(e) as may be updated through the close of business on the Closing Date;
(f) there have been no purchases or other additions of military Stock Inventory.
4.10 Litigation; Compliance with Laws. Except as set forth on Schedule 4.10, there is no claim, litigation, proceeding or governmental investigation pending or, to the best of the knowledge of Sellers, threatened, nor is there any order, injunction or decree outstanding, against any Seller relating to the Business and/or the Assets which could reasonably be determined to have a material adverse effect on the Business and/or the Assets. To the best of Sellers' knowledge, no Seller is in violation of any law, regulation or ordinance or any other requirement of any governmental body or court with respect to the operation of the Business and/or the Assets the consequence of which could be reasonably expected to have a material adverse effect on the Business and/or the Assets, and no written notice has been received by any Seller alleging any such violation which has not since been remedied. Except as set forth on Schedule 4.10, within the past twelve (12) months, no Seller has entered into any written agreement with (and no such written agreement exists), had any material dispute with respect to any law, regulation or ordinance, or, to Sellers' knowledge, been the subject of any investigation by, any governmental authority or community group that could reasonably be expected to adversely affect the operation of the Business and/or the Assets.
4.11 List of Agreements, Etc. Schedule 4.11 contains, with respect to the Business and the Assets, a complete list of: (a) all Purchase Contracts, other than those that were entered into in the ordinary course of business and that involve an expenditure by Sellers of less than $75,000 for any one commitment or two or more related commitments; (b) all Personal Property Leases; (c) all Teaming Agreements; (d) all Customer Agreements (indicating which Customer Agreements relate to KMC); (e) all Sales Contracts; (f) all Representative Agreements; (g) all Licensing Agreements; and (h) all other agreements, commitments and understandings (written or oral) that require payment by or to any Seller of more than $50,000 individually or that are otherwise material to the Business and/or the Assets. True and complete copies of all of the leases, commitments and other agreements referred to on Schedules 4.11 and 4.12-4 have been delivered to Buyer.
4.12 Employees. Attached hereto as Schedule 4.12-1 is a complete and correct list of the employees of Sequa and KMC employed solely in the Business ("Employees"), which list also includes each such employee's current salary, the date and amount of the last salary increase and the amount of any other compensation, including bonus, paid to such employee during the previous twelve month period or currently due, and such employee's position (specifying whether such position is with KMC or Sequa, place of employment, date of birth and date of employment). None of such compensation reflects settlements of any claims other than salary negotiations in the ordinary course of business consistent with past practice. Except as set forth on Schedule 4.12-2, none of the Employees has, since April 10, 1995, given written notice to Sequa or KMC of either a desire to terminate his or her employment or of any intention to terminate his or her employment upon a sale of the Business. Except as set forth on Schedule 4.12-3, since April 10, 1995, Sequa has not directed management of the Business to refrain from terminating any Employee other than in the ordinary course of business. No Employees are represented by any labor or trade union and, to the best of Sellers' knowledge, no movement to designate a collective bargaining unit to represent any of the Employees exists or, to Sellers' knowledge, is threatened. Except as set forth on Schedule 4.12-4, the transactions contemplated by this Agreement will not trigger any extraordinary payment of any kind to any Employees other than an obligation to make severance payments solely pursuant to the Benefit Plans or otherwise as provided by the Benefit Plans.
4.13 Status of Agreements. All leases, commitments and other agreements of Sellers to be assumed by Buyer were entered into in connection with and in the ordinary course of the Business. Each of the Assigned Agreements is presently in full force and effect in accordance with its terms and no written notice has been received by any Seller alleging any default under any of the Assigned Agreements. To the best of Sellers' knowledge, no Seller is in material default and, to the knowledge of Sellers, no other party is in default under any of the provisions of any of the Assigned Agreements, and, to Sellers' knowledge, no condition exists that, with notice or the lapse of time or both, could reasonably be expected to constitute a material default by any Seller or, to the knowledge of Sellers, any default by any other party to any of the Assigned Agreements. No party to any of the Assigned Agreements has, in writing, made or asserted, or to Seller's knowledge, has, any defense, set off or counterclaim under any of the Assigned Agreements or has exercised any option granted to it to cancel or terminate any such Assigned Agreement, to shorten the term thereof or to renew or extend the term thereof, and no Seller has received any written notice to that effect. No party to any of the Assigned Agreements has accelerated its time for performance thereunder, and without limiting the foregoing, no party to any of the Assigned Agreements has prepaid any of its obligations thereunder or made any prepayment with respect thereto, and, except as set forth on Schedule 4.13 and in respect of Product and Service Warranty, no Seller has received any payment or other consideration or deposit or collateral with respect to or on account of obligations to be performed, in whole or in part, by Buyer (as Sellers' assignee) thereunder after the Closing Date, and no Billed Receivable is, or shall be, for or on account of obligations to be performed, in whole or in part, by Buyer (as Sellers' assignee) thereunder after the Closing Date, other than with respect to Product and Service Warranty as provided in this Agreement. As of the date of this Agreement, to Sellers' knowledge, each Seller has fully and timely performed all of the material obligations to be performed by it under each of the Assigned Agreements on or prior to the date of this Agreement.
(a) Schedule 4.14 contains a complete list of all patents, copyrights, service marks, service names, trademarks, trade names, logos, brands and registrations and applications for registration of any of them, and all material computer software programs and material media and other computer databases used in the Business. Sellers own, free and clear of any Lien (other than the restrictions contained in any Assigned Agreement listed on Schedule 4.14 solely with respect to that Assigned Agreement and no other Asset), all the Intellectual Property listed on Schedule 4.14.
(b) To Sellers' knowledge, no Seller is infringing any intellectual property of any third party or otherwise violating the rights of any third party, and no claim is pending which has not been remedied or, to Sellers' knowledge, threatened against any Seller alleging any such violation. To Sellers' knowledge, there has been no violation by others of any right of any Seller in any Intellectual Property. Except as set forth in Schedule 4.14, no Seller is a party to or bound by any license or other agreement requiring the payment by it of any royalty or similar payment in connection with the operation of the Business. Except as set forth in Schedule 4.14, Sellers have the right to transfer copies of all computer software to Buyer as set forth in Section 1.1(d) of this Agreement without violating any agreement to which any Seller is a party or any rights of any third party in that software.
4.15 Insurance. Sellers maintain policies of fire and extended coverage and casualty, liability and other forms of insurance in connection with the Business and/or Assets in such amounts and against such risks and losses as are customary in the industry. Schedule 4.15 contains a complete list of all insurance policies held by Sellers in connection with the Business and/or the Assets and specifies the type of coverage, location and value of the property covered and expiration date of each of the policies maintained in connection with the Business and/or the Assets.
4.16 Labor Disagreements. Except as set forth on Schedule 4.16, with respect to the Business: (a) to the best of Sellers' knowledge, each Seller is in material compliance with all applicable laws and regulations regarding employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice; (b) there is no unfair labor practice charge or complaint against any Seller pending before the National Labor Relations Board, any state labor relations board or any court or tribunal and, to the knowledge of Sellers, none is or has, within the last eighteen (18) months, been threatened; (c) there is no labor strike, dispute, request for representation, slowdown or stoppage actually pending against or affecting any Sellers and, to the knowledge of Sellers, none is or has, within the last eighteen (18) months, been threatened; and (d) no grievance which might have a material adverse effect on the conduct of the operations of the Business and no arbitration proceeding arising out of or under any collective bargaining agreement is pending and, to the knowledge of Sellers, none is or has, within the last eighteen (18) months, been threatened.
(a) Schedule 4.17 sets forth a list of (i) each employee benefit plan, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and (ii) to the extent not covered under (i) above, each fringe benefit, stock option, bonus, incentive compensation, deferred compensation, excess, supplemental executive compensation, employee stock purchase, vacation, sickness or disability, severance or separation, restricted stock or other employee benefit plan, policy or arrangement, whether written or oral, maintained or contributed to within the last twelve months by any Seller or by a Common Control Entity (as defined below) for the benefit of Employees or former Employees (the "Benefit Plans"). Except as otherwise set forth on Schedule 4.17, no Benefit Plan provides health, dental, life insurance or other welfare benefits (whether on an insured or self-insured basis) to Employees or former Employees after their retirement or other termination of employment (other than continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") which may be purchased at the sole expense of the Employee or former Employee).
With respect to each Benefit Plan, each Seller has heretofore delivered to Buyer true and complete copies of the following documents, where applicable: (i) the text of the Benefit Plan and of any trust or insurance contract maintained in connection therewith, (ii) the most recent annual report (Form 5500 series) together with required schedules filed with the IRS and any financial statements or opinions required under ERISA, (iii) the most recent summary plan description and all modifications, (iv) the most recent determination letter issued by the IRS and the related submission and communications with the IRS, and (v) the most recent actuarial report.
(b) With respect to each employee benefit plan or arrangement (including the Benefit Plans) maintained or contributed to by Sellers or any corporation or other trade or business under common control with any Seller (as determined under Section 414(b) or (c) of the Code, a "Common Control Entity"), (i) there is no actual or contingent liability under Title IV of ERISA or the Code to any person or entity, including the Pension Benefit Guaranty Corporation, IRS, any such plan or the participants (or their beneficiaries) in any such plan, (ii) the Assets have not been subject to a lien under ERISA or the Code and (iii) there is no basis for such liability or the assertion of any such lien with respect to the Assets as the result of or after the consummation of the transactions contemplated by this Agreement.
(a) Except as disclosed in Schedule 4.18, Sellers and all of the property leased or owned by them and used in the Business is, to the best of Sellers' knowledge, in material compliance with all federal, state and local laws, regulations, rules, orders, decrees, ordinances, guidance documents promulgated by governmental regulatory entities and common law relating to human health, and the pollution or protection of human health or the environment, including, but not limited to, laws relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern ("Environmental Laws"). "Materials of Environmental Concern" means chemicals, pollutants, contaminants, wastes, toxic substances, petroleum, petroleum products, petroleum-derived substances, radiation, radioactive materials, polychlorinated biphenyls, lead based paint, urea formaldehyde, asbestos or any materials containing asbestos and any other substance listed in, regulated by or that could result in liability under any Environmental Laws.
(b) Except as disclosed in Schedule 4.18: (i) to the best of Sellers' knowledge, there are no past or present actions, activities, events or incidents, including, but not limited to, the release, emission, discharge or disposal of any Material of Environmental Concern, occurring prior to Seller's ownership or occupancy of the Real Property, and (ii) to the best of Sellers' knowledge, there are no past or present actions, activities, events or incidents, including, but not limited to, the release, emission, discharge or disposal of any Material of Environmental Concern, occurring during any Seller's ownership or occupancy of the Real Property, that, in either case, could reasonably be expected to form the basis of any claim against or violation by any Seller, or against any person or entity whose liability for any claim or violation arises under Environmental Laws that any Seller has (or may have) retained or assumed either contractually or by operation of law relating to the Business and/or the Assets.
(c) Except as set forth on Schedule 4.18, with respect to the Business (i) to the best of Sellers' knowledge, there are no on-site or off-site locations where any Seller has stored, disposed or arranged for the disposal of Materials of
Environmental Concern, (ii) there are no underground storage tanks located on property owned or leased by any Seller, (iii) there is no asbestos or asbestos-containing materials contained in or forming part of any building, building component, structure or office space owned or leased by any Seller, (iv) no polychlorinated biphenyls (PCBs) are used or stored at any property owned or leased by any Seller, and (v) none of the electrical equipment located at the real property owned or leased by any Seller contains any PCBs.
(d) Except as disclosed in Schedule 4.18, to the best of Sellers' knowledge, Materials of Environmental Concern have not been transported or disposed of from the property now or previously used by any Seller in the Business in a manner or to a location which could reasonably be expected to give rise to liability under Environmental Laws. Except as disclosed in Schedule 4.18, none of the real property comprising the Assets is listed or, to Sellers' knowledge, proposed for listing on the National Priorities List pursuant to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. . 9601 et seq., or any similar inventory of sites requiring investigation or remediation maintained by any state. No Seller has received any written notice which remains uncured from any governmental entity or third party of any actual or threatened liability arising under the Environmental Laws with respect to the real property comprising the Assets or the conduct of the Business.
(e) To the best of Sellers' knowledge, except as disclosed on Schedule 4.18, Sellers hold, and are in material compliance with, all permits, licenses, registrations or other authorizations required to be held by Sellers under Environmental Laws in connection with the Business ("Environmental Permits").
4.19 Permits and Licenses. Schedule 4.19 sets forth a complete list of all permits, licenses, franchises and other authorizations relating to the Business and/or the Assets held by any Seller, including without limitation, Real Property Permits and Environmental Permits (collectively, the "Permits"). To the best of Sellers' knowledge and except as disclosed on Schedule 4.19, Sellers have all material permits, licenses, franchises and other authorizations necessary for the conduct of the Business and the possession, ownership and use of the Assets by Sellers. All Permits are valid and in full force and effect.
4.20 Taxes. No Seller is a "foreign person" as that term is defined in Section 1445(f)(3) of the Code.
4.21 Inventory. All items of Inventory are being purchased on an "AS IS/WHERE IS" and "WITH ALL FAULTS" basis; except that since May 30, 1995, Sellers have continued to maintain the Inventory in the ordinary course of business consistent with past practice. Schedules AB and CR are, to the best of Sellers' knowledge, true and complete lists of the Contract Inventory and the Stock Inventory, respectively, as of September 30, 1995.
4.22 Sufficient Assets. The Assets include all of the assets reflected on the Balance Sheet (except Excluded Assets and assets sold or otherwise disposed of in the ordinary course of business since January 31, 1995), and constitute all of the assets used in or held for use for the conduct of the Business in the manner in which it has been conducted by Sellers.
4.23 Transactions with Affiliates. Except as set forth on Schedule 4.23: (a) since January 31, 1995 there has been no material transaction relating to the Business between any Seller and any Affiliate thereof, (b) there is no indebtedness, liability or obligation of, or guaranty of indebtedness made by, any Seller to any Affiliate thereof relating to the Business, and (c) there is no indebtedness, liability or obligation of, or guaranty of indebtedness made by, any Affiliate of a Seller to a Seller relating to the Business.
4.24 Products; Customers; Suppliers. Schedule 4.24 lists since January 1, 1995, (a) the ten largest suppliers of the Business measured by purchases and, to the best of Sellers' knowledge, all material sole source suppliers; and (b) the ten largest customers of the Business measured by sales. Except as set forth on Schedule 4.24, no Seller is engaged in any pending material dispute with any of those customers or suppliers and no such customer or supplier has since January 1, 1995 notified any Seller in writing that it is considering termination, non-renewal or any adverse modification of its agreement or arrangement with respect to the Business.
4.25 Product Warranties. Set forth as Schedule 4.25 is a description of all material written Product and Service Warranties made by Sellers with respect to each category of products and services sold and to be sold as of the date hereof or on or prior to the Closing Date and which remain outstanding as of the date hereof. Except by operation of law (to the extent not effectively excluded or disclaimed) and as set forth in Schedule 4.25, to the best of Sellers' knowledge, no Seller has given any other written warranty concerning the nature, merchantability, fitness for a particular purpose or expected performance in connection with the products and services shipped and/or sold or contracted to be shipped and/or sold by the Business on or prior to the Closing Date. Except as disclosed on Schedule 4.25 and since January 1, 1990, no products or services shipped and/or sold or contracted to be shipped and/or sold by the Business on or prior to the Closing Date have at any time been subject to any voluntary or mandated governmental recall
(whether federal, state, local or foreign), and, to the best of Sellers' knowledge, there is no presently existing circumstance that could reasonably be expected to constitute a valid basis for any such recall.
4.26 FCPA Compliance. The accounting procedures and control systems of Sellers relating to the Business are, to Sellers' knowledge, sufficient to comply in all material respects with the requirements of the Foreign Corrupt Practices Act, 15 U.S.C. .. 78m, 78dd-1, 78dd-2, 78ff (1986), as amended.
4.27 Certain Affiliates. All Affiliates of Sellers that have a name containing the word "Kollsman" or the abbreviations "KMC", "KIC" or "KSM" or that do business under any such name, are listed on Schedule 4.27. At the Closing, and from time to time thereafter, Sellers shall take such action, or cause any such Affiliate to take such action, as Buyer may reasonably request in order to change the name of any Seller or any such Affiliate to a name not containing the word "Kollsman" or the abbreviations "KMC", "KIC" or "KSM".
4.28 KSAL. KSAL is a duly organized and in good standing under the laws of its country of organization and is more particularly described in Schedule 4.28. Sequa owns an interest in KSAL, as more particularly described on Schedule 4.28 subject only to those Liens that are described on Schedule 4.28.
The sole asset of KSAL consists of cash. KSAL has not entered into any agreement of any nature whatsoever and has no liabilities or obligations of any nature whatsoever. The line item referred to as "Investments" on the Balance Sheet consists entirely of Sequa's minority ownership interest in KSAL.
nME No Misrepresentation. No representation or warranty by any Seller in this Agreement (including the Schedules and Exhibits to this Agreement) and no statement made or contained in any certificate or instrument delivered or to be delivered to Buyer pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained in this Agreement (including the Schedules and Exhibits to this Agreement) not misleading at the time given or on the Closing Date. Sellers make no representation or warranty with respect to Schedules 2.3(b)-1, 2.3(b)-2, 2.4, 5.5, 6.8, 6.9, 6.18 and 6.21.
5. Representations and Warranties by Buyer. Buyer represents and warrants to Sellers as follows:
5.1 Buyer's Organization. Buyer is a corporation duly organized and validly existing under the law of Delaware and has the full power and authority to enter into and perform this Agreement in accordance with its terms.
5.2 Authorization of Agreement. The execution, delivery and performance of this Agreement by Buyer have been duly authorized by all necessary action of Buyer (including approval by the board of directors or executive committee of EL- OP, U.S., Inc.) and this Agreement constitutes the valid and binding obligation of Buyer enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights in general and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
5.3 Consents of Third Parties. The execution, delivery and performance of this Agreement by Buyer will not (a) conflict with the certificate of incorporation or by laws of Buyer and will not conflict with or result in the breach or termination of, or constitute a default under, any lease, agreement, commitment or other instrument, or any order, judgment or decree to which Buyer is a party or by which Buyer is bound, or (b) constitute a violation by Buyer of any law or regulation applicable to Buyer.
5.4 Litigation. There is no claim, litigation, proceeding or governmental investigation pending or, to Buyer's knowledge, threatened, or any order, injunction or decree outstanding, against Buyer, that would prevent the consummation of the transactions contemplated by this Agreement.
5.5 Financial Statements. Schedule 5.5 contains an audited balance sheet of each of Buyer and Guarantor as of December 31, 1994. Such balance sheets are in accordance with the respective books and records of each of Buyer and Guarantor and fairly present, in all material respects, the financial position of each of Buyer and Guarantor as of such date and have been prepared in accordance with generally accepted accounting principles consistently applied.
5.6 Adequate Funds. Buyer has all funds or absolute binding commitments to obtain all funds required to consummate the transactions contemplated by this Agreement.
6. Further Agreements of the Parties.
6.1 Government Approvals. The parties shall, in an expeditious manner, fully cooperate in obtaining such U.S. and Israeli Governmental clearances and consents and in making such Governmental submissions and providing such notices as are required or which Buyer may require in connection with the transactions provided for in this Agreement, including, without limitation, submissions on or before November 10, 1995 to the Defense Investigative Service and the Committee on Foreign
Investments in the United States ("CFIUS"), and notice to the applicable security agency. Each party shall pay its own costs and expenses in connection with such activities, except that the fees and expenses of McKenna & Cuneo, counsel which the parties have retained to assist with such activities, shall be paid 50% by Buyer and 50% by Sellers. The receipt by Buyer of all such clearances and consents shall be a condition precedent to Buyer's and Sellers' obligations to consummate the transactions hereunder, all as set forth in Sections 7.1 and 7.2 of this Agreement.
6.2 Hart-Scott-Rodino Act. On or before November 10, 1995, each party shall, in cooperation with the other, file with each of the Department of Justice and the Federal Trade Commission any reports or notifications that may be required to be filed by it under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") in connection with the transactions contemplated by this Agreement, shall promptly comply with all requests for further documents and information made by the Department of Justice or the Federal Trade Commission, and shall furnish to the other all such information in its possession as may be necessary for the completion of the reports or notifications to be filed by the other. The fees due from either party under the HSR Act in connection with the filing of any of those reports or notifications shall be borne by Buyer.
6.3 Back-Ups. Sellers represent and warrant to Buyer that Schedule BJ sets forth a true and complete list of all Letters of Credit. At the Closing, Buyer shall deliver to Sellers: guarantees in form and substance satisfactory to Sellers in their sole discretion as well as a grant of a security interest in favor of Sellers in the Assets, subordinated only to Buyer's bank financing, an acceptable intercreditor agreement and provisions for tangible net worth of not less than the aggregate principal amount of the letters of credit set forth on Schedule 1.2(d) to the extent and for so long as they survive and the maintenance thereof; or substitute or back-up letters of credit, surety and performance bonds or other similar instruments (or evidence satisfactory to Sellers and its counsel of the establishment of the same), each in the aggregate principal amount and with terms described on Schedule 1.2(d), and from banks or other appropriate responsible financial institutions named on Schedule 1.2(d) to replace or collateralize the corresponding Letters of Credit set forth in Schedule 1.2(d).
6.4 Operations of the Business.
(a) From the date of this Agreement through the Closing Date, except with the prior written consent of Buyer:
(i) Sellers shall operate the Business in the ordinary course and consistent with past practice;
(ii) No Seller shall, except in the ordinary course of business and consistent with past practice, (i) enter into any transaction or incur any liability or obligation, (ii) sell or transfer any of the assets relating to the Business except that items may be sold provided such items are replaced with items of equal or greater value, (iii) grant or agree to grant any general increases in the rates of salaries or compensation payable to employees of the Business, except for annual increases at times and in amounts consistent with past practices, (iv) grant or agree to grant any specific bonus or increase to any employee of the Business, (v) hire or terminate the employment of any employee of the Business, or (vi) provide for any new pension, retirement or other employment benefits for employees of the Business or any increase in any
(iii) No Seller shall enter into any lease or agreement, modify any existing lease or agreement or create any Title Exception, with respect to the Real Property. No Seller shall commence any proceeding, or settle any pending proceeding, seeking a reduction of real property taxes with respect to the Real Property; and
(iv) Each Seller shall maintain all of its Assets consistent with past practice with no deferral of
maintenance, replace all items of equipment (excluding all items that are not currently being used) at time intervals consistent with past practice, and, subject to Section 11 of this Agreement, repair or replace any asset that may be damaged or destroyed, if consistent with past practice;
(b) Buyer shall incur no liability or obligation to Sellers for granting or withholding any consent under this Section 6.4.
6.5 Notices. Sellers shall (promptly after obtaining knowledge thereof) notify Buyer in writing of, and furnish any information which Sellers have or that Buyer may request with respect to any event or condition of which Sellers have knowledge that would cause any of Sellers' representations and warranties contained in this Agreement to be inaccurate in any material respect, including, without limitation, any material claim, litigation, proceeding or governmental investigation threatened or asserted by or against Sellers relating to the Business and/or the Assets, or any material development with respect to any such claim, litigation, proceeding or investigation. Any notice required to be given pursuant to this Section 6.5 shall specify that it is being given pursuant this Section 6.5.
6.6 Disclaimer as to Physical Condition. Prior to the Closing Date, Buyer and Buyer's agents shall have had performed any and all inspections, reviews, tests, examinations and investigations of all aspects of the Assets, as Buyer shall deem necessary or appropriate with respect to the physical condition of the Assets. Sellers and Buyer acknowledge that Buyer is acquiring the Assets solely on the basis of Sellers' representations or warranties in this Agreement or any of the documents executed by Sellers at the Closing, and Buyer's due diligence examinations of the Assets. EXCEPT AS SET FORTH IN THIS AGREEMENT AND SUCH OTHER DOCUMENTS: (I) THIS SALE IS WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, WARRANTY OF INCOME POTENTIAL, OPERATING EXPENSES, USES, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND EACH SELLER DOES HEREBY DISCLAIM AND RENOUNCE ANY SUCH REPRESENTATION OR WARRANTY EXCEPT FOR THOSE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT AND THE DOCUMENTS BEING EXECUTED BY SUCH SELLER AT THE CLOSING AND NO OTHER; AND (II) BUYER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS OR IMPLED, FROM SELLERS OR ANY AGENTS OR BROKERS AS TO ANY MATTER CONCERNING THE ASSETS, INCLUDING WITHOUT LIMITATION: (1) THE CONDITION OR SAFETY OF THE REAL PROPERTY AND THE IMPROVEMENTS THEREON, INCLUDING, BUT
NOT LIMITED TO, PLUMBING, SEWER, HEATING AND ELECTRICAL SYSTEMS, ROOFING, AIR CONDITIONING, FOUNDATIONS, SOILS AND GEOLOGY, LOT SIZE OR SUITABILITY OF THE REAL PROPERTY AND THE IMPROVEMENTS FOR A PARTICULAR PURPOSE; (2) WHETHER THE APPLIANCES, IF ANY, PLUMBING OR UTILITIES ARE IN WORKING ORDER; (3) THE HABITABILITY OR SUITABILITY FOR OCCUPANCY OF ANY STRUCTURE AND THE QUALITY OF ITS CONSTRUCTION; (4) THE FITNESS OF ANY PERSONAL PROPERTY OR FIXTURES; OR (5) WHETHER THE IMPROVEMENTS ARE STRUCTURALLY SOUND OR IN GOOD CONDITION.
6.7 Discharge of Liabilities. Sellers shall, on the Closing Date, pay all Excluded Liabilities (including but not limited to all accounts payable and other liabilities that arose out of the operations of the Business prior to the close of business on the Closing Date) only to the extent that they are then due and payable, and Sellers shall thereafter pay when due all such Excluded Liabilities, including such accounts payable and other liabilities that become due and payable thereafter. In addition, Sellers shall, on the Closing Date, cause to be removed and discharged any Title Exception affecting the Real Property which is not a Permitted Exception.
6.8 Certain Consents and Approvals to Assignment. Set forth on Schedule 6.8 hereto is a list of certain consents, covenants, approvals or similar acknowledgements that are required in connection with the consummation of the transactions contemplated by this agreement ("Required Consents"). With respect Required Consents:
(a) the parties will use their reasonable commercial efforts to obtain all Required Consents on or prior to
(b) if the parties are unable to obtain a Required Consent, then, (i) with respect to the contract, lease, license, permit, approval or other item with respect to which such Required Consent is not obtained, this Agreement shall not constitute or be deemed to be an assignment or an agreement to assign such item if an attempted assignment without such Required Consent would constitute a breach of or default under such item or create in any party thereto the right or power to cancel or terminate such item, and (ii) Buyer shall be entitled to terminate this Agreement in accordance with Section 10.1(b) of this Agreement if all Required Consents have not been obtained at least five (5) days prior to the Closing Date; and
(c) neither Sellers nor Buyers will be obligated to incur out-of-pocket expenses (except for reasonable travel expenses) or commence litigation in order to obtain any Required Consent pursuant to this Section 6.8.
6.9 Sales Taxes and Transfer Taxes and Allocated Expenses. Buyer shall be responsible for (i) any state or local sales and use taxes payable in connection the sale of the Assets and (ii) any stamp or transfer taxes, real property taxes or recording fees assessed in connection with the sale of the Assets, except for clause (ii) with respect to New Hampshire, which Buyer and Sellers shall share on a 50/50 basis. At the Closing, Sellers, on the one hand, and Buyer, on the other hand, shall allocate all real estate taxes in accordance with Schedule 6.9.
6.10 Expenses. Unless otherwise provided in this Agreement, each party shall bear its own expenses incurred in connection with the negotiation and preparation of this Agreement and in connection with all obligations required to be performed by it under this Agreement.
6.11 Access to Information Prior to and After Closing.
(a) Prior to the Closing, Buyer and its representatives may make such reasonable investigation of the assets and business of the Business as it may desire, and Sellers shall give to Buyer and to its counsel, accountants and other representatives reasonable access during normal business hours throughout the period prior to the Closing to all of the assets, books, commitments, agreements, records, employees, customers, suppliers and files of Sellers relating to the Business and/or the Assets, and Sellers shall furnish to Buyer during that period all documents and copies of documents and information concerning the business and affairs of the Business and/or the Assets as Buyer reasonably may request. All information furnished to Buyer by Sellers under this Section 6.11 shall be subject to that certain Confidentiality Agreement, dated November 30, 1994 between Sequa and Buyer.
(b) For a period of seven (7) years following the Closing, the parties will retain all business records reflecting the assets and liabilities of or relating to the Business in existence as of the Closing, including, without limitation, those related to the Excluded Assets and the Excluded Liabilities (the "Business Records"). During such period, the parties will afford authorized representatives of one another free and full access, subject to applicable law and governmental clearance, of all of the Business Records at reasonable times and during normal business hours at the principal business office of the Business or of the Sellers or any of them, as appropriate, or at such other location or locations at which the Business Records may be stored or maintained from time to time, and will permit such representatives to make abstracts from, or copies of, any of the Business Records, or to obtain temporary possession of any thereof as may be reasonably required by the requesting party at such party's sole cost and expense. If any party proposes to destroy any Business Records after the expiration of seven (7) years following the Closing, it shall provide written notice of such intent to the other parties. If within 30 days after receipt of such notice, the other party notifies the first party of its desire to retain the Business Records, the responding party shall be entitled to remove and retain (at its own cost and expense) the Business Records that the first party proposes to destroy, within 90 days after the sending of the response.
6.12 Additional Information. Sellers shall promptly deliver to Buyer copies of all financial statements and reports which are reasonably requested by Buyer and, in either case, without representation or warranty as to the truth or accuracy of the same relating to the Business that may be prepared by it during the period from the date of this Agreement to the Closing Date. Sellers shall furnish to Buyer any other information concerning the financial and operating condition of the Business and/or the Assets that Buyer from time to time may reasonably request.
(a) Except for representations and warranties expressly set forth in this Agreement, the Schedules and the documents and instruments delivered pursuant to this Agreement at Closing, Buyer UNDERSTANDS AND AGREES THAT NONE OF SELLERS OR
ANYONE ACTING ON THEIR BEHALF, MAKES ANY EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES (EXCEPT AS SET FORTH HEREIN) WITH RESPECT TO THE FINANCIAL CONDITION, ASSETS, PROPERTIES OR BUSINESS (CURRENT, FIXED, PERSONAL, REAL TANGIBLE AND INTANGIBLE) REFERRED TO HEREIN, INCLUDING BUT NOT LIMITED TO, CAPACITY, SUITABILITY, UTILITY, SALABILITY, AVAILABILITY, PROFITABILITY, COLLECTIBILITY AND OPERATION.
(b) Buyer will purchase the Assets and will enter into the transactions contemplated by this Agreement with the understanding, acknowledgement and agreement by Buyer that no representations or warranties, express or implied, are made with respect to future prospects (financial or otherwise) of the Business.
(c) Except as provided in this Agreement and the Schedules hereto, Sellers expressly disclaim (and Buyer accepts such disclaimer) any and all obligation or liability for representations and warranties, express or implied, contained in, or for omissions from, any written or oral communications, including, without limitation, due diligence materials heretofore transmitted to or in any matter obtained by, Buyer in the course of its investigation of the Business. Buyer represents and warrants that, in Buyer's determination to buy the Assets and to consummate the transactions contemplated by this Agreement, Buyer has not relied on any information previously delivered or otherwise acquired, learned or obtained, but rather is entering this transaction solely upon the basis of the express representations and warranties contained in this Agreement.
(d) Notwithstanding the foregoing, Sellers hereby represent and warrant to Buyer that those written materials that are described on Schedule 6.13, are true, correct and complete copies of the documents and materials that they purport to be, provided that, no representation or warranty is made with regard to the accuracy or completeness of the statements made therein.
6.14 Covenant Against Competition, Solicitation and Disclosure. To accord to Buyer the full value of its purchase, Sellers and Buyer shall enter into an agreement in the form of Exhibit 6.14 (the "Non-Competition Agreement"), which provides that none of Sellers or their respective Affiliates shall subject to certain limitations and exceptions contained in the Non- Competition Agreement (a) for a period of five (5) years after the Closing Date, directly or indirectly, engage or become interested in (as owner, stockholder, partner or otherwise) any business or entity that engages anywhere in the world in any business competitive with the Business, (b) at any time disclose to anyone, or use in competition with the Business, any information with respect to any confidential or secret aspect of the operations of the Business and that of the customers of the
Business, except as required by law or as relates to the Excluded Assets and/or Excluded Liabilities, or (c) for a period of five (5) years after the Closing Date, solicit for employment or hire any employee of the Business on the date of this Agreement or on the Closing Date. Each Seller acknowledges that the remedy at law for breach of the provisions of this Section 6.14, or the Non-Competition Agreement will be inadequate and that, in addition to any other remedy Buyer may have, it will be entitled, under the terms of this Agreement and the Non-Competition Agreement, to an injunction restraining any such breach or threatened breach, without any bond or other security being required (subject to money damages in the event Buyer wrongfully obtains injunctive relief without any such security). If any court construes the covenant in this Section 6.14 or the corresponding covenant in the Non-Competition Agreement, or any part thereof, to be unenforceable because of its duration or the area covered thereby, the court shall have the power to reduce the duration or area to the extent necessary so that the provision is enforceable, and such provision, as reduced, shall then be enforceable.
(a) If any Seller shall at any time after the Closing receive any payments with respect to any Assets, including Unbilled Receivables, it shall immediately forward such payments to Buyer. If Buyer shall at any time after the Closing receive any payments with respect to any Excluded Assets, including Billed Receivables, retained by Sellers pursuant to the provisions of Section 1.2 of this Agreement, it shall immediately forward such payments to Sequa. Buyer and Sellers will exchange reports of daily receipts to assure proper identification and allocation of receipts in respect of Billed Receivables and Unbilled Receivables.
(b) For the purpose of complying with paragraph (a) above, any payment received by Buyer or Sellers with respect to an account receivable after the Closing that is specifically identified by a payor as relating to a specified account receivable shall be applied to that receivable. If no account receivable is identified by the payor, the recipient shall inform the other party of its receipt of the payment promptly after its receipt thereof and, simultaneously therewith, request in writing of the payor that it specifically identify in writing the account receivable in respect of which the payment was made. If the payor does so specify an account receivable, the payment shall be applied to that receivable. If the payor fails to specify an account receivable within forty-five (45) days after the making of such a request, the payment received by Buyer or Sellers shall first be applied to the earliest account receivable due from that debtor.
6.16 Other Action. Each of the parties to this Agreement shall use its commercially reasonable efforts to cause the Closing to be held at the earliest practicable date and, in that connection, to cause the fulfillment at the earliest practicable date of all of the respective conditions to the obligations of the parties to consummate the sale and purchase under this Agreement.
(a) Except as otherwise provided below, Buyer shall, as of the close of business on the Closing Date, offer employment to all Employees who are actively at work in the Business or are on temporary disability, worker's compensation, leave of absence, vacation or sick leave on the Closing Date. The terms and conditions to be offered by Buyer to each of such Employees shall be substantially equivalent to the terms and conditions being paid to each such Employee by Sellers on the Closing Date. The employment by Buyer of any Employee who accepts the terms and conditions of employment offered by Buyer will commence as of the close of business on the Closing Date. For purposes of this Agreement, Employees who accept employment with Buyer as of the close of business on the Closing Date are hereinafter referred to as "Post-Closing Employees." With respect to any Post-Closing Employee who, during the period continuing for four (4) months following the Closing Date, Buyer either terminates (other than for cause) or does not continue to offer terms and conditions of employment that are substantially equivalent to the terms and conditions of employment being paid to such Post-Closing Employee by Sellers on the Closing Date, Buyer shall reimburse Sellers for any severance payments and related payments required to be made by Sellers in accordance with the severance plan described on Schedule 6.17 to such Post- Closing Employee. Sellers agree to cooperate with Buyer by permitting Buyer throughout the period prior to the Closing Date to meet with Employees at such reasonable times as shall be approved by a representative of Sellers and to distribute to such Employees such forms and other documents relating to employment by Buyer after the Closing Date as Buyer shall reasonably request. Although Buyer has no present intention of terminating the employment of any Post-Closing Employees or reducing the compensation of any such Post-Closing Employee, other than for "cause" or by reason of a change in circumstances affecting or relating to the Business, nothing in this Section 6.17 shall be deemed to require Buyer to retain any of the Post-Closing Employees for any fixed period of time or at any particular compensation rate or in any particular position or prevent Buyer from being able to continue, modify or establish such benefits and conditions of employment as it shall determine in its sole discretion. Nothing herein contained shall grant to any person any right of employment, nor shall anything herein contained constitute an agreement to employ any person.
(b) Buyer will not assume any of the Benefit Plans, or any rights, duties, obligations or liabilities thereunder, nor shall it become a successor employer or be responsible in any way for Sellers' or a Common Control Entity's participation in or obligations or responsibilities with respect to any Benefit Plan, nor shall it be obligated by this Agreement to make any provision with respect to employee benefits after the Closing Date. Employment of all Employees and coverage of all such Employees, their dependents and beneficiaries under any Benefit Plans, shall in all respects terminate as of the close of business on the Closing Date.
(c) Each Seller shall pay to each Employee, as applicable, (i) the value of any accrued but unused vacation entitlements and all other accrued benefits of such employee as of the Closing Date as soon as practicable after the Closing Date and in the case of the pension plan, and 401(k) plan, in accordance with the provisions of such plans, and (ii) a pro rata portion of the amount which would be payable to such Employee under any incentive or bonus plan described on Schedule 4.17 for the period from January 1, 1995 up to and including the Closing Date, promptly after the adjustments referred to in Section 2.3 of this Agreement have been finally determined and made.
6.18 Further Assurances. At any time and from time to time after the Closing, each of the parties shall, without further consideration, execute and deliver to the other party such additional instruments of transfer and assumption, and shall take such other action as the other may request to carry out the transactions contemplated by this Agreement and effect an orderly transition including, without limitation, those matters referred to in Schedule 6.18.
6.19 Miscellaneous Real Estate Documents. Schedule 6.19 contains: (i) to the extent available, a copy of any Seller's existing title insurance policy for each parcel of the Real Property, and (ii) true, correct and complete copies of all of the Real Property Documents.
6.20 Payment of Costs and Expenses. Each Seller shall pay all fees and expenses of its legal counsel and other advisors. Buyer shall pay for the cost of the surveys of the Land and of its due diligence investigation of the Real Property, the cost of any title insurance which it may elect to obtain and all fees and expenses of its legal counsel and other advisors.
6.21 Insurance Coverage. With respect to liability for bodily injury, death and property damage occurring after the close of business on the Closing Date arising out of or in connection with products manufactured or services performed and sold or shipped prior to close of business on the Closing Date, Buyer shall obtain and maintain for not less than 10 years after the Closing Date, to the extent available, the insurance coverages listed on Schedule 6.21 which insurance will include a waiver of subrogation. The cost of such coverages shall be borne as between Sellers and Buyers on a 50/50 basis. Buyer shall (i) furnish Sellers, from time to time upon request, with copies of the insurance policies required to be maintained pursuant to this Section 6.21, together with all amendments thereto, (ii) require the carriers to furnish to Sellers, copies of any notice of expiration or termination or modification or similar notice with respect to any such insurance policy. Notwithstanding anything to the contrary in this Agreement, Buyer shall have no obligation with respect to liability for bodily injury, death and property damage occurring after the close of business on the Closing Date arising out of or in connection with products manufactured or services performed and sold or shipped on or prior to the close of business on the Closing Date, other than to comply with the provisions of this Section 6.21.
6.22 Nashua Lease. At the Closing, the appropriate Seller shall sub-lease the premises demised under the Nashua Lease on the terms and conditions set forth in a sub-lease in substantially the form annexed hereto as Exhibit 6.22 (the
6.23 Warranty Costs and Recall Costs Reimbursement.
(a) Buyer shall maintain a detailed record and account, including unit serial numbers, of Warranty Costs and Recall Costs incurred during each of the first two 12 month periods following the Closing Date with respect to any product manufactured or service performed that is sold and shipped on or before the close of business on the Closing Date and prepare a quarterly report of such Warranty Costs and Recall Costs and send a copy thereof to Sellers. Sellers or their representatives shall have reasonable access during normal business hours to inspect Buyer's records to verify the information contained in such reports.
(b) If the Warranty Costs and Recall Costs at any time during either of the 12 month periods immediately following the Closing Date shall exceed (i) $1,000,000 in the aggregate for the first twelve months following the Closing Date, and/or (ii) $800,000 in the aggregate for the next succeeding twelve months, Buyer shall give notice thereof to Sellers and within thirty (30) days after receipt of any such notice Sellers shall pay to Buyer the amount of any such excess in each of such 12 month periods. Buyer shall bill Sellers monthly for such excess costs. If Sellers shall dispute any such bill, or whether such matter in fact involves Product or Service Warranty or a government mandated recall, the parties shall confer with regard to the matter and an appropriate adjustment and payment shall be made if and to the extent agreed upon by the parties. If they are unable to resolve any such disputed bill within thirty (30) days after Sellers' receipt thereof the matter shall be resolved in accordance with the procedures set forth in Section 2.3(c) with respect to disputes relating to the Final Statement.
7. Conditions Precedent to Closing.
7.1 Conditions Precedent to the Obligations of Buyer. Buyer's obligation to consummate the purchase under this Agreement is subject to the fulfillment, at or prior to the Closing, of each of the following conditions (any of which may be waived in writing by Buyer):
(a) each representation and warranty of Sellers under this Agreement shall be true in all material respects at and as of the time of the Closing with the same effect as though each representation and warranty had been made again at and as of
(b) Sellers shall have performed and complied in all material respects with each obligation, covenant and condition required by this Agreement to be performed or complied with by any of them prior to or at the Closing;
(c) Buyer shall have received all government approvals required or which Buyer may require in connection with the transactions contemplated under this Agreement, including but not limited to approvals from CFIUS;
(d) Buyer shall have received, without any condition adverse to it, all Required Consents, each in form and substance reasonably satisfactory to Buyer;
(e) there shall not be in effect an injunction or restraining order issued by a court of competent jurisdiction in an action or proceeding against the consummation of the trans- actions contemplated by this Agreement;
change in the condition (financial or otherwise) or operations of the Business and/or the Assets, since January 31, 1995;
(g) there shall not be pending or, to the knowledge of Sellers, threatened any litigation, proceeding or governmental investigation relating to the transactions contem-
(h) all applicable waiting periods under the HSR Act with respect to the transactions contemplated by this
(i) Buyer shall have been furnished with a certificate of an executive officer of each Seller, dated the Closing Date, in form and substance satisfactory to Buyer, certifying to the fulfillment of the conditions set forth in Sections 7.1(a) through 7.1(h) of this Agreement;
(j) Sellers shall have obtained such estoppel certificates for the benefit of Buyer and Sellers with respect to the Real Property as Buyer may reasonably request; and
(k) Sellers and Buyer shall, in their sole and absolute discretion, have agreed to the Estimates at Completion and to the methodology of determining a reserve, if any, for the purposes of the valuation of the Avionics stock inventory and Avionics excess stock inventory (as such terms are defined in the Accounting Instructions (Schedule 2.3(b)-2)).
7.2 Conditions Precedent to the Obligations of Sellers. Each Seller's obligation to consummate the sale under this Agreement is subject to the fulfillment, at or prior to the Closing, of each of the following conditions (any of which may be waived in writing by such Seller):
(a) each representation and warranty of Buyer under this Agreement shall be true in all material respects at and as of the time of the Closing with the same effect as though each representation and warranty had been made at and as of that
(b) Buyer shall have performed and complied in all material respects with all obligations, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing;
(c) there shall not be in effect an injunction or restraining order issued by a court of competent jurisdiction in an action or proceeding against the consummation of the trans- actions contemplated by this Agreement;
(d) all applicable waiting periods under the HSR Act with respect to the transactions contemplated by this
(e) Sellers shall have been furnished with a certificate of an executive officer of Buyer, dated the Closing Date, in form and substance satisfactory to Sellers, certifying to the fulfillment of the conditions set forth in Sections 7.2(a) through 7.2(d) of this Agreement;
(f) Sellers and Buyer shall, in their sole and absolute discretion, have agreed to the Estimates at Completion and to the methodology of determining a reserve, if any, for the purposes of the valuation of the Avionics stock inventory and Avionics excess stock inventory (as such terms are defined in the Accounting Instructions (Schedule 2.3(b)-2)); and
(g) Sellers shall have approved, in their sole and absolute discretion, the form and substance of the guarantees, security agreement, intercreditor agreement and net worth covenants as provided in Section 6.3 of this Agreement.
8. Transactions at the Closing.
8.1 Documents to be Delivered by Seller. At the Closing, Sellers shall deliver to Buyer the following:
(a) one or more bills of sale in the form of Exhibit 8.1(a) and such other bills of sale, assignments, deeds or other instruments of transfer and assignment, termination letters and UCC-3 termination statements, all in form and substance reasonably satisfactory to Buyer and its counsel and consistent with the provisions of this Agreement, as shall be effective to vest in Buyer valid and marketable title, free and clear of any Liens (except for the lien, if any, of current taxes not yet due and payable, and as provided by the terms of any Assigned Agreement but only with respect to consents for the assignment of that particular Assigned Agreement), to the Assets, and the estoppel certificates referred to in Section 7.1(j) that have been obtained by Sellers;
(b) an opinion of John J. Dowling III, counsel to Sellers, dated the Closing Date, in substantially the form of
(c) a copy of resolutions of the board of directors and, if legally required, shareholders of each Seller authorizing the execution, delivery and performance of this Agreement by it, and a certificate of the secretary or an assistant secretary of each Seller, dated the Closing Date, that such resolutions were duly adopted and are in full force and
(d) the originals (or, to the extent that the originals are not in the possession or under the control of Sellers, copies) of all contracts, leases, agreements, commitments and trademark registrations to be assigned to Buyer
(e) the certificate referred to in Section
(f) the originals (or, to the extent that the originals are not in the possession or under the control of Sellers, copies) of all Required Consents;
(g) documents required to transfer ownership of
(h) bargain and sale deeds with covenants against grantor's acts (the "Deeds"), duly executed and acknowledged by the appropriate Sellers, conveying fee simple title to the Land and Improvements (including fixtures constituting Equipment), subject only to the Permitted Exceptions. The Deeds shall include the express contractual subrogation of Buyer to the rights of the appropriate Seller, if any, as grantee, to enforce any warranties included in the deed or deeds conveying the Land and Improvements to such Seller;
(i) an assignment of Sellers' leasehold interest
(j) the Nashua Sub-lease duly executed by Sequa;
(k) an estoppel certificate and consent, if necessary, from the lessors under the Nashua Lease and the Office Leases, in form acceptable to Buyer, stating (i) that the Nashua Lease or appropriate Office Lease, in the form provided by
Sellers to Buyer, is unmodified and in full force and effect, (ii) that no default on the part of any Sellers exists under the Nashua Lease or the appropriate Office Lease, (iii) the date through which rent and other charges have been paid under the Nashua Lease or the appropriate Office Lease, and (iv) that the landlord consents to the Nashua Sub-lease;
(l) an original counterpart of each of the Real Property Documents, including, without limitation, all amendments, modifications or renewals of any thereof (and any other leases and service contracts approved by Buyer); provided, however, if Sellers do not have in its possession an original counterpart of any of said documents, Sellers shall deliver to Buyer a photostatic copy of said document together with a certification by Sellers to Buyer that said copy is a true and complete copy of the document and that no Seller has further modified or amended said document;
(m) an assignment, duly executed by Sellers, assigning to Buyer all assignable guaranties and warranties, issued in connection with the construction, improvement, alteration and repair of the buildings and other improvements constituting the Improvements and the Personalty owned by Sellers, together with the original of each such guaranty and
(n) the original, or copy, of each bill for current real estate taxes and assessments, personal property taxes, sewer charges, water charges, and other utilities or other impositions related to the Real Property;
(o) an assignment, duly executed by Sellers, assigning to Buyer all of Sellers' right, title and interest to, and possession of, all architectural plans and drawings, engineering plans, drawings and specifications, site plans, surveys, soil tests, floor plan, landscape plans and all other plans and drawings for the Improvements; the original or certified copies of all the permits required to be delivered by Sellers pursuant to this Agreement, certificates or reservations, if any, allocating utility capacity to the property, operating permits and all other permits or certificates issued by any governmental authority or subdivision thereof relating to the use, occupancy or operation of the Real Property;
(p) possession of the Real Property;
(q) a certificate, in the form annexed hereto as Exhibit 8.1(q), dated the Closing Date and duly executed by Sellers as required under Treasury Regulation 1.1445-
(r) such documentation as is necessary, in the judgment of Buyer and its counsel, in order to transfer and assign to Buyer the Permits; and
(s) any document required to be delivered pursuant to Section 4.27 of this Agreement.
8.2 Documents to be Delivered by Buyer. At the Closing, Buyer shall deliver to Sellers the following:
(a) wire transferred funds in the amount provided in Section 2.1 of this Agreement;
(b) instruments, in form and substance reasonably satisfactory to Sellers and their counsel, pursuant to which Buyer shall assume the obligations and liabilities of Sellers to be assumed by Buyer pursuant to Section 2.2(a) of this
(c) an opinion of Proskauer Rose Goetz & Mendelsohn LLP, counsel to Buyer, dated the Closing Date, in sub- stantially the form of Exhibit 8.2(c);
(d) a copy of resolutions of the board of directors, and shareholders, if legally required, of Buyer authorizing the execution, delivery and performance of this
Agreement by Buyer, and a certificate of the secretary or assistant secretary of Buyer, dated the Closing Date, that such resolutions were duly adopted and are in full force and effect;
(e) the certificate referred to in Section
(f) the Nashua Sub-Lease, duly executed by
(g) the guarantees, security agreement (and related UCC financing statements), intercreditor agreement and net worth covenants referred to in Section 6.3 of this Agreement.
9. Survival of Representations and Warranties; Indemnification.
9.1 Survival. All representations, warranties and agreements by Sellers as set forth in this Agreement and the Schedules hereto shall survive the Closing Date, notwithstanding any investigation at any time by or on behalf of Buyer (subject, however, to the limitations set forth in Section 9.7 of this Agreement); provided, however, that the representations and warranties contained in (a) Sections 4.5, 4.7(b), 4.7(d), 4.7(e), 4.7(g), 4.7(h), 4.7(i), 4.8, 4.9, 4.10, 4.11, 4.12, 4.13, 4.14(b), 4.15, 4.16, 4.17, 4.18, 4.19, 4.21, 4.24, 4.26, 4.28,
4.29 (solely as it relates to the representations and warranties contained in the other Sections set forth in this Section 9.1(a)), and 6.13(d) of this Agreement shall expire eighteen (18) months after the Closing Date and thereafter no claim shall be asserted by Buyer for misrepresentation or breach of warranty with respect to those Sections and the correspondingly numbered Schedules, and (b) Section 4.25 shall expire with respect to each respective Product and Service Warranty described in Schedule 4.25 at such time as each such respective Product and Service Warranty described therein shall expire by its terms and conditions. All statements contained in any certificate or other instrument delivered by or on behalf of Buyer pursuant to this Agreement or in connection with the transactions contemplated by this Agreement shall be considered representations and warranties by Buyer to Sellers with the same force and effect as if contained in this Agreement. All representations, warranties and agreements by Buyer shall survive the Closing notwithstanding any investigation at any time by or on behalf of Sellers, and shall not be considered waived by Sellers' consummation of the sale contemplated by this Agreement with knowledge of any breach or misrepresentation by Buyer; provided, however, that the representations and warranties contained in Sections 5.4 through and including 5.6 of this Agreement shall expire eighteen (18) months after the Closing Date and thereafter no claim shall be asserted by Sellers for misrepresentation or breach of warranty with respect to those Sections.
9.2 Sellers' Indemnification Obligation. Each Seller shall indemnify and hold harmless Buyer and its Affiliates against all claims of, and all actual loss, liability, actual damage or out-of-pocket expense, including reasonable fees and expenses of counsel, whether involving a third party or between the parties to this Agreement (a "Buyer Loss"), Buyer may suffer, sustain or become subject to as a result of (a) any breach of any warranties, covenants or other agreements contained in this Agreement, or any misrepresentation by any Seller, or any warranty or representation not being true as of the Closing or a claim by a third party which, without regard to the merits of the claim, would constitute such a breach or misrepresentation if such third party's allegations were true; (b) any Seller's failure to fully pay, perform and discharge when the same become due and payable the Excluded Liabilities; (c) any of Sellers' other obligations, liabilities, agreements or commitments that do not arise out of or are not in connection with the operation of the Business and/or the Assets; (d) any failure to comply with any "bulk sales" laws applicable to the transactions contemplated hereby; and (e) any obligation or liability relating to any Benefit Plan or arrangement (including the Benefit Plans) sponsored, maintained or contributed to by Sellers or a Common Control Entity on or prior to the Closing Date to any person or entity, including the Employees, any such plan or the participants (or their beneficiaries) in any such plan, whether such liability is incurred on, prior to or after the Closing Date (including, without limitation, any liability relating to benefits provided under any post-retirement welfare benefit plan), and any obligation or liability to any Employee or other present or former employee of any Seller, or to any dependent, survivor or beneficiary thereof, arising out of or relating to any such person's employment with any Seller on or prior to the Closing Date.
9.3 Buyer Indemnification Obligation. Buyer and Guarantor shall jointly and severally indemnify and hold harmless Sellers against all claims of, and all actual loss, liability, actual damage or out-of-pocket expense, including reasonable fees and expenses of counsel (a "Seller Loss" and, together with a Buyer Loss, an "Indemnified Loss"), Sellers may suffer, sustain or become subject to as a result of (a) any breach of any warranties, covenants or other agreements contained in this Agreement or any misrepresentation by Buyer, or a claim by a third party which, without regard to the merits of the claim, would constitute such a breach or misrepresentation if such third party's allegations were true; (b) the operations of the Business and/or the Assets after the close of business on the Closing Date; (c) Buyer's failure to fully pay, perform and discharge when the same become due and payable the Assumed Liabilities; (d) any of Buyer's other obligations, liabilities, agreements or commitments arising out of or in connection with the operation of the Business after the close of business on the Closing Date, in each case except to the extent Sellers are obligated to indemnify Buyer for a breach of representation or warranty pursuant to Section 9.2(a) of this Agreement, subject, however, to the limitations on indemnification and on survival of such representations and warranties as provided in this Agreement.
9.4 Conditions of Indemnification for Third Party Claims. The obligations and liabilities of the parties under this Agreement with respect to, relating to, caused (in whole or in part) by or arising out of claims of third parties (individ- ually, a "Third Party Claim" and collectively "Third Party Claims") including, without limitation, any Tax Authority, shall be subject to the following terms and conditions:
(a) The party entitled to be indemnified hereunder (the "Indemnified Party") shall give the party obligated to provide the indemnity (the "Indemnifying Party") prompt notice of any Third Party Claim, and, provided that the Indemnifying Party acknowledges in writing its obligation to indemnify in accordance with the terms of this Agreement, the Indemnifying Party may undertake the defense of that claim by representatives chosen by it. Any such notice of a Third Party Claim shall identify with reasonable specificity the basis for the Third Party Claim, the facts giving rise to the Third Party Claim, and the amount of the Third Party Claim (or, if such amount is not yet known, a reasonable estimate of the amount of the Third Party Claim). The Indemnified Party shall make available to the Indemnifying Party copies of all relevant documents and records in its possession. Failure to give prompt notice shall not relieve the Indemnifying Party of its obligation to indemnify except to the extent that the Indemnifying Party is actually prejudiced by the delay in giving notice.
(b) If the Indemnifying Party, within 15 days after notice of any such Third Party Claim (or such lesser time as is reasonable), fails to assume the defense in accordance with Section 9.4(a) of this Agreement, the Indemnified Party shall (upon further notice to the Indemnifying Party) have the right to undertake the defense, compromise or settlement of the Third Party Claim, subject to the right of the Indemnifying Party to assume the defense of such Third Party Claim at any time prior to settlement, compromise or final determination thereof, provided, however, that at the time of the assumption of defense the Indemnifying Party shall acknowledge in writing its obligation to indemnify as provided in Section 9.4(a) of this Agreement and reimburse the Indemnified Party for its out-of-pocket expenses incurred prior to the assumption of defense by the Indemnifying Party.
(c) Anything in this Section 9.4 to the contrary notwithstanding, (i) the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compro- mise any Third Party Claim or consent to the entry of judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of an unconditional release from all liability in respect of the Third Party Claim; and (ii) if there is a reasonable probability that a claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments for which the Indemnified Party is indemnified hereunder, the Indemnified Party shall have the right, at its own cost and expense, to participate in the defense of the Third Party Claim (control of the defense to remain with the Indemnifying Party).
(a) Deductible. Except for claims under Section 9.2(a) with respect to representations and warranties, no claim for indemnification under Section 9.2 may be made by Buyer unless such claim along with all prior claims, Waived Claims and Damage Deductibles is, with respect to an Indemnified Loss equal to or exceeding $200,000 in the aggregate. Except for claims under Section 9.3(a) with respect to representations and warranties, no claim for indemnification under Section 9.3 may be made by Sellers unless such claim along with all prior claims is, with respect to an Indemnified Loss equal to or exceeding $200,000 in the aggregate. In addition, the amount which an Indemnified Party shall be entitled to receive from an Indemnifying Party under this Section 9.5 with respect to an Indemnified Loss shall be net of any recovery actually received from third parties (including insurance proceeds, counterclaims, subrogation actions and the like) or actually reimbursed after all costs of collection on account of such Indemnified Loss.
(b) Cap. In no event whatsoever shall the liability of Sellers or Buyer with respect to Indemnified Losses exceed the purchase price hereunder; provided, however, that this Section 9.5(b) shall not apply with respect to an Indemnified Loss with respect to an Excluded Liability or an Assumed Liability.
9.6 Time Limits On Indemnification. No claim on account of misrepresentation or breach of warranty shall be made beyond the survival periods referred to in Section 9.1 of this Agreement. No claim for indemnification may be made by any Seller against Guarantor after five (5) years from the Closing Date.
9.7 Limits On Indemnification. If at the Closing, Buyer has Actual Knowledge that any of Sellers' representations or warranties contained in this Agreement are untrue, then Buyer shall be limited to the following options:
(a) to elect to terminate this Agreement; or
(b) to elect to close the transactions contemplated by this Agreement, notwithstanding such misrepresentation or breach of warranty, in which event such transactions shall be consummated in accordance with the provisions of this Agreement and Sellers shall have no liability hereunder by reason of such misrepresentation or breach of warranty ("Waived Claims"). For purposes hereof: Buyer shall be deemed to have had "Actual Knowledge" of a matter if any of the persons listed on Schedule 9.7 had actual knowledge of such matter, and shall not be deemed to include any knowledge that any of the foregoing (i) should have had or should be imputed to have had because of the services of such persons through the Closing to the Buyer or (ii) had, or should have had or should be imputed to have had solely by virtue of the fact that such matter was contained in any of the due diligence materials provided by Sellers to Buyer.
10.1 Termination. This Agreement may be terminated:
(a) by written agreement of Buyer and Sellers;
(b) by Buyer, if a Required Consent is not obtained prior to or at the Closing; or
(c) by Buyer, pursuant to Section 9.7 of this
(d) by Buyer or Sellers as provided in Section 11 of this Agreement; or
(e) by Buyer or Sellers as provided in Section 3.2 of this Agreement.
10.2 Liability. The termination of this Agreement hereunder shall not relieve any party of any liability for breach of this Agreement prior to the termination.
11. Risk of Loss; Damage to Facilities.
11.1 Major Taking. In the event of a condemnation or taking by eminent domain of all or any portion of the Real Property, Buyer may elect to terminate this Agreement upon written notice to Sellers, unless it is a "Minor Taking" (as hereinafter defined) in which case the provisions of Section 11.2 shall apply.
11.2 Minor Taking. In the event of a Minor Taking prior to Closing, Buyer shall nevertheless take title to the Real Property on the Closing Date, subject to such condemnation or taking by eminent domain, without any abatement in the Base Purchase Price provided that the entire condemnation award applicable to such Real Property shall, on the Closing Date, be assigned to Buyer or, if received by any Seller prior to the Closing Date, be paid by such Seller to Buyer at the Closing (net of the reasonable costs of collection actually paid or incurred by Sellers), in either such case, free and clear of Liens. For the purposes of this Agreement, a "Minor Taking" shall mean a condemnation or taking by eminent domain whereby less than 5% of any parcel of the Real Property is taken and no interference in any material respect with the current operation, occupancy or maintenance of taken Real Property or portion of the Business conducted thereon or the other Assets could reasonably be expected to result therefrom. Buyer shall have the right, at its sole cost and expense, to participate in any proceedings prior to the Closing with respect to a condemnation or taking, and shall have the right to approve the settlement of any such proceeding relating to a Minor Taking, which approval shall not be unreasonably withheld or delayed.
(a) In the event of damage or destruction to any material portion of the Assets first occurring after the date of this Agreement and prior to the Closing, of which Sellers obtain actual knowledge and which Sellers reasonably believe would involve more than $25,000 to repair or replace, Sellers shall promptly give Buyer notice thereof and retain a contractor or other professional reasonably acceptable to Buyer (the "Acceptable Contractor") to estimate the cost of restoration and/or replacement thereof, and shall instruct such Acceptable Contractor to deliver its written estimate of such restoration and/or replacement cost to Sellers and Buyer as soon as reasonably practicable. If the cost of restoring and/or replacing such Assets, in the reasonable judgment of such Acceptable Contractor, is $100,000 or less in the aggregate, Buyer shall have the option, to be exercised by written notice to Sellers within thirty (30) days after the restoration and/or replacement cost has been determined by the Acceptable Contractor, as provided above, either:
(i) to proceed with the acquisition of all the Assets at the Closing, in which case at the Closing, Sellers shall disburse to Buyer the amount of any insurance proceeds (less deductibles ("Damage Deductibles")) to the extent at that time actually collected by Sellers in connection with such damage or destruction and Sellers shall assign all Sellers'
rights to receive any such proceeds (less Damage Deductibles) in the future free and clear of any Liens thereon and claims thereto, less the reasonable costs of collection actually paid or incurred by Sellers in connection therewith (the "Net Insurance Proceeds"); or
(ii) if the damage or destruction (1) can reasonably be expected to interfere in any material respect with the operation of the Business as presently operated and/or the Assets, or (2) shall create in the Assets an environmentally hazardous condition which pursuant to applicable law requires remediation ("Hazardous Condition"), to elect to terminate this Agreement.
(b) Notwithstanding the foregoing, in the event that a Hazardous Condition is created by any such damage or destruction which could reasonably be expected to expose Sellers to liabilities resulting therefrom in excess of $500,000 and/or such damage or destruction could reasonably be expected to expose Sellers under the Assigned Agreements to liabilities in excess of $500,000 by reason of delays or Sellers inability to perform its obligations under the Assigned Agreements prior to the Closing Date, then Sellers may elect to terminate this Agreement.
(a) In the event of damage or destruction to the Assets first occurring after the date hereof and prior to the Closing and the cost of restoring and/or replacing the Assets, in the reasonable judgment of the Acceptable Contractor retained by Sellers, is greater than $100,000 in the aggregate, Buyer shall have the option, to be exercised by written notice to Sellers within thirty (30) days after the restoration and/or replacement cost has been determined by the Acceptable Contractor, as provided above, either:
(i) to proceed with the acquisition of all the Assets at the Closing, in which case at the Closing Sellers shall disburse to Buyer the amount of Net Insurance Proceeds (less Damage Deductibles) to the extent at that time collected by Sellers and Sellers shall assign all Sellers' rights to receive any Net Insurance Proceeds (less Damage Deductibles) in the future free and clear of any Liens thereon and claims thereto; or
(ii) to elect to terminate this Agreement.
(b) Notwithstanding the foregoing, in the event that a Hazardous Condition is created by any such damage or destruction which could reasonably be expected to expose Sellers to liabilities resulting therefrom in excess of $500,000 and/or such damage or destruction could reasonably be expected to expose Sellers under the Assigned Agreements to liabilities in excess of $500,000 by reason of delays or Sellers inability to perform its obligations under the Assigned Agreements prior to the Closing Date, then Sellers may elect to terminate this Agreement.
11.5 Notice of Casualty or Condemnation. In the event any casualty or condemnation shall affect the Assets after the date hereof and prior to the Closing, Sellers shall promptly notify Buyer thereof promptly after Sellers obtain actual knowledge of any such casualty or notice of condemnation and provide Buyer with reasonably detailed information with respect thereto.
12.1 Notices. Any notice or other communication under this Agreement shall be in writing and shall be considered given when (a) sent by telecopier, with receipt confirmed, (b) delivered personally, (c) one Business Day after being sent by recognized overnight courier or (d) four Business Days after being mailed by registered mail, return receipt requested, to the parties at the addresses set forth below (or at such other address as a party may specify by notice to the other):
Firon Karni Sarov & Firon Attention: Zvi Firon, Adv.
Proskauer Rose Goetz & Mendelsohn LLP New York, New York 10036 Attention: Michael E. Feldman, Esq.
If to Sellers, to them at:
New York, New York 10166
120 South Central Avenue, Suite 1507 Attention: John J. Dowling III
Notwithstanding the foregoing, if, by operation of this section, any notice or other communication would be deemed to have been given on a day that is not a Business Day, it shall be deemed to have been given on the next succeeding day that is a Business Day.
12.2 Finders. Buyer and Sellers represent and warrant to the each other that they have not retained or dealt with any broker or finder in connection with the transactions contemplated by this Agreement.
12.3 Entire Agreement. This Agreement, including the Schedules and Exhibits, contains a complete statement of all the arrangements between the parties with respect to its subject matter, supersedes any previous agreements among them relating to that subject matter, and cannot be changed or terminated orally.
12.4 Headings. The Section headings of this Agreement are for reference purposes only and are to be given no effect in the construction or interpretation of this Agreement.
12.5 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of New York applicable to agreements made and to be performed in New York.
12.6 Separability. If any provision of this Agreement is invalid or unenforceable, the balance of this Agreement shall remain in effect.
12.7 Assignment. No party may assign any of its rights or delegate any of its duties under this Agreement without the consent of the other, except that Buyer intends to, and Sellers hereby agree that it may, assign its rights and delegate its duties under this Agreement at or prior to the Closing to Optronic Devices Inc, a wholly owned subsidiary of Buyer, and/or: (i) with respect to the business of KMC and the portion of the Assets relating thereto, to KMC, Inc. ("KMCI"), a wholly owned subsidiary of Kollsman, Inc., a wholly owned subsidiary of EL-OP
U.S., Inc. ("KI"); (ii) with respect to the portion of the Assets owned by Sequa Export, to Kollsman Export, Inc., a wholly owned subsidiary of KI; and (iii) with respect to all of the other Assets, to KI; provided, however, that in the event of such an assignment, Buyer and Guarantor shall remain jointly and severally liable, as a primary obligor, to Sellers for the performance by its assignees of the Buyer's obligations hereunder.
12.8 Publicity. No party shall issue any press release or other public statement regarding the transactions contemplated by this Agreement without the prior written consent the other, except that each party may make such disclosures to the public or to governmental agencies as are required by applicable federal or state laws.
12.9 No Third Party Beneficiaries. This Agreement shall enure to the benefit of the parties hereto and their respective successors and assigns. Nothing in this Agreement is intended to, nor does it, confer any right or benefit upon any person or entity other than the parties hereto and their respective successors and assigns.
12.10 Sellers; Joint and Several; Sequa Agency. All obligations and liabilities of Sellers under this Agreement and the documents to be executed and delivered by them at the Closing pursuant to this Agreement are, and shall be, at all times, joint and several obligations and liabilities of Sellers. KMC and Sequa Export do hereby appoint Sequa as their agent, to act in all respects in their stead and on their behalf, with respect to any and all matters relating to, arising out of or in connection with this Agreement. In addition, KMC and Sequa Export hereby acknowledge that (x) such agency is coupled with an interest and, therefore, irrevocable, and (y) Buyer and its successors and assigns shall rely upon this agency in its dealings with Sellers. Accordingly, all notices or other communications to be given, and all sums to be paid, to Sellers shall be delivered to or paid, as the case may be, to Sequa or to such other person or entity it may designate in writing.
12.11 Jurisdiction. The courts of the State of New York in New York County and the United States District Court for the Southern District of New York shall have exclusive jurisdiction over the parties to this Agreement with respect to any dispute or controversy among them arising under or in connection with this Agreement and, by execution and delivery of this Agreement, each of the parties to this Agreement hereby submits to the jurisdiction of those courts, including, but not limited to, the in personam and subject matter jurisdiction of those courts, waives any objection to such jurisdiction on the grounds of venue or forum non conveniens, the absence of in personam or subject matter jurisdiction and any similar grounds, consents to service of process in the manner permitted by law, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement; provided, however, that any service of process to the Guarantor shall be made upon EL-OP US, Inc., which is hereby appointed as the agent of the Guarantor for that limited purpose.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed on their behalf as of the date first above written.
This ASSIGNMENT AND ASSUMPTION is dated as of ________________ _____, and is between EL-OP U.S., INC., a Delaware corporation ("Assignor"), and OPTRONIC DEVICES, INC., a Delaware corporation ("Assignee").
WHEREAS, Assignor owns all the capital stock of
WHEREAS, Assignor has entered into that certain Purchase Agreement, dated November 9, 1995 (as amended, the "Purchase Agreement"), by and among Assignor (as buyer) and El-Op Electro-Optics Industries, Ltd. (as guarantor), on the one hand, and Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the other hand, pursuant to which, among other things, Assignor has agreed to purchase from Sellers substantially all the assets of the Kollsman Division of Sequa, subject to certain liabilities;
WHEREAS, Assignor desires to assign to Assignee, and Assignee desires to assume, all of Assignor's rights, title and interest in and to, and all Assignor's duties, obligations and liabilities under, the Purchase Agreement;
NOW, THEREFORE, in recognition of the foregoing and the mutual promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor does hereby assign, transfer and convey to Assignee, and Assignee does hereby accept the assignment of and otherwise assume, all of Assignor's rights, title and interest in and to, and its duties, obligations and liabilities under, the Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption to be executed as of the date first above written.
This ASSIGNMENT AND ASSUMPTION is dated as of _________________ ____, and is between OPTRONIC DEVICES, INC., a Delaware corporation ("Assignor"), and KOLLSMAN, INC., a Delaware corporation ("Assignee").
WHEREAS, Assignor owns all the capital stock of
WHEREAS, Assignor's parent corporation, EL-OP U.S., Inc. ("ELOP U.S."), has entered into that certain Purchase Agreement, dated November 9, 1995 (as amended, the "Purchase Agreement"), by and among ELOP US (as buyer) and El-Op Electro- Optics Industries, Ltd. (as guarantor), on the one hand, and Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the other hand, pursuant to which, among other things, ELOP US has agreed to purchase from Sellers substantially all the assets of the Kollsman Division of Sequa,
WHEREAS, ELOP US has assigned to Assignor, and Assignor has assumed, all ELOP US's rights, title and interest in and to, all of ELOP US's duties, obligations and liabilities under, the
WHEREAS, Assignor desires to assign to Assignee, and Assignee desires to assume, all of Assignor's rights, title and interest in and to, and all Assignor's duties, obligations and liabilities under, the Purchase Agreement;
NOW, THEREFORE, in recognition of the foregoing and the mutual promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor does hereby assign, transfer and convey to Assignee, and Assignee does hereby accept the assignment of and otherwise assume, all of Assignor's rights, title and interest in and to, and its duties, obligations and liabilities under, the Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption to be executed as of the date first above written.
This ASSIGNMENT AND ASSUMPTION is dated as of _________________ ____, and is between KOLLSMAN, INC., a Delaware corporation ("Assignor"), and KMC SYSTEMS, INC., a Delaware corporation ("Assignee").
WHEREAS, Assignor owns all the capital stock of
WHEREAS, Assignor's parent corporation, EL-OP U.S., Inc. ("ELOP U.S."), has entered into that certain Purchase Agreement, dated November 9, 1995 (as amended, the "Purchase Agreement"), by and among ELOP US (as buyer) and El-Op Electro- Optics Industries, Ltd. (as guarantor), on the one hand, and Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the other hand, pursuant to which, among other things, ELOP US has agreed to purchase from Sellers substantially all the assets of the Kollsman Division of Sequa,
WHEREAS, all of ELOP US's rights, title, and interest in and to, and all of ELOP US's duties, obligations and liabilities under, the Purchase Agreement have been assigned to
WHEREAS, Assignor desires to assign to Assignee, and Assignee desires to assume, all of Assignor's rights, title and interest in and to, and all of Assignor's duties, obligations and liabilities under, the Purchase Agreement to the extent that they relate solely to the business, assets or liabilities of KMC;
NOW, THEREFORE, in recognition of the foregoing and the mutual promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor does hereby assign, transfer and convey to Assignee, and Assignee does hereby accept the assignment of and otherwise assume, all of Assignor's rights, title and interest in and to, and its duties, obligations and liabilities under, the Purchase Agreement to the extent that they relate solely to the business, assets or liabilities of KMC.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption to be executed as of the date first above written.
This ASSIGNMENT AND ASSUMPTION is dated as of __________________ ___, and is between KOLLSMAN, INC., a Delaware corporation ("Assignor"), and KOLLSMAN EXPORT CORPORATION, a foreign sales corporation organized under the law of the U.S. Virgin Islands ("Assignee").
WHEREAS, Assignor owns all the capital stock of
WHEREAS, Assignor's parent corporation, EL-OP U.S., Inc. ("ELOP U.S."), has entered into that certain Purchase Agreement, dated November 9, 1995 (as amended, the "Purchase Agreement"), by and among ELOP US (as buyer) and El-Op Electro- Optics Industries, Ltd. (as guarantor), on the one hand, and Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the other hand, pursuant to which, among other things, ELOP US has agreed to purchase from Sellers substantially all the assets of the Kollsman Division of Sequa,
WHEREAS, all of ELOP US's rights, title, and interest in and to, and all of ELOP US's duties, obligations and liabilities under, the Purchase Agreement have been assigned to
WHEREAS, Assignor desires to assign to Assignee, and Assignee desires to assume, all of Assignor's rights, title and interest in and to, and all of Assignor's duties, obligations and liabilities under, the Purchase Agreement to the extent that they relate solely to the business, assets or liabilities of Export.
NOW, THEREFORE, in recognition of the foregoing and the mutual promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor does hereby assign, transfer and convey to Assignee, and Assignee does hereby accept the assignment of and otherwise assume, all of Assignor's rights, title and interest in and to, and its duties, obligations and liabilities under, those sections of the Purchase Agreement to the extent that they relate solely to the business, assets or liabilities of Export.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption to be executed as of the date first above written.
FIRST AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "First Amendment") to the Purchase Agreement is dated the 29th day of November, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL- OP U.S., Inc. ("Buyer") and El-Op Electro-optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers, substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor, simultaneously with their execution of the Agreement, entered into that certain Letter Agreement, dated as of November 9, 1995 (the "Letter Agreement"), relating, among other things, to the preparation, negotiation and finalization of the Schedules and Exhibits referred to in the Agreement, as well as certain expenses incurred by the parties in connection with certain governmental filings.
C. Sellers and Buyer have agreed upon some of the Schedules referred to in the Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this First Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings: Interpretations. For purposes of this First Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this First Amendment as a whole. The headings of the Articles and Sections of this First Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this First Amendment.
1.3 Relationship with the Agreement. This First Amendment is intended to amend the Agreement as and to the extent set forth herein. The Agreement, and each and every provision thereof, will otherwise remain in full force and effect and each of the parties reserves all of their respective rights contained therein.
2.1 Termination of Letter Agreement. The Letter Agreement is hereby terminated effective immediately and, accordingly shall be of no further force and effect and the parties shall have no further liability thereunder.
2.2 Governmental Filings. Sellers, on the one hand, and Buyer, on the other, have filed with each of the Department of Justice and the Federal Trade Commission the report and notification required to be filed by them under the Hart-Scott- Rodino Anti-Trust Improvements Act of 1976 in connection with the transactions contemplated by the Agreement. The $45,000 filing fee has been shared equally by Sellers, on the one hand, and Buyer, on the other. If the transactions contemplated by the Agreement close in accordance with the Agreement (as amended herein), Buyer shall reimburse Sellers at the Closing for the $22,500 paid by Sellers for such filing.
3.1 Agreed Upon Schedules. The parties agree and acknowledge that they have agreed upon the form and substance of the Schedules to the Agreement that are listed on Schedule A attached hereto (the "November 29, 1995 Agreed Upon Schedules"). Simultaneously with the execution of this First Amendment, Reuben Ben-Arie, on behalf of Buyer and Guarantor, and Joseph C. Allwarden, on behalf of Sellers, have initialled for identification the November 29, 1995 Agreed Upon Schedules. Accordingly, the Agreement is hereby amended in order to reflect the November 29, 1995 Agreed Upon Schedules, with the same effect as if they had been agreed upon and attached to the Agreement simultaneously with its execution.
3.2 Other Schedules and Exhibits. All Schedules or Exhibits that are referred to in the Agreement other than
Instructions) and the November 29, 1995 Agreed Upon Schedules (the "Open Schedules and/or Exhibits") have not been finalized or agreed upon as between the parties. Accordingly, on or before December 8, 1995, Sellers, on the one hand, and Buyer, on the other, shall finalize the Open Schedules and/or Exhibits. If agreed upon in each such party's sole and absolute discretion, Sellers and Buyer, shall initial the agreed upon Open Schedules and/or Exhibits and the same shall be the subject of a further amendment to the Agreement in substantially the form of this First Amendment. If, on or before December 8, 1995, Sellers or Buyer object in writing to any Open Schedules and/or Exhibits received by them or otherwise fail to agree upon the form and substance of the Open Schedules and/or Exhibits, then the objecting parties may, at their sole and absolute election, terminate the Agreement (as amended herein) and no party shall have any further rights or obligations thereunder. For purposes of delivering Open Schedules and/or Exhibits, delivery shall be deemed to have been made upon delivery of the same (i) in the case of Buyer, to Buyer's counsel, Proskauer Rose Goetz & Mendelsohn LLP, Attention: Michael E. Feldman, Esq., (ii) in the case of Sellers, to Sellers' counsel, John J. Dowling III, Sequa Corporation, 120 South Central Avenue, St. Louis, Mo. 63105.
3.3 New Outside Dates. Section 3 of the Agreement is hereby amended and restated so as to read in its entirety as follows: "3 Closing.
3.1 Date of Closing. The closing (the "Closing") under this Agreement shall take place at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York (or at such other place as the parties may agree upon in writing) upon at least five Business Days prior notice given by Buyer to Sellers within five Business Days after the last of the conditions specified in Sections 7.1 and 7.2 of this Agreement has been fulfilled (or waived), but in no event whatsoever later than December 21, 1995. The date on which the Closing is held is referred to in this Agreement as the "Closing Date." At the Closing, the parties shall execute and deliver the documents referred to in Section 8 of this Agreement.
3.2 Outside Date for Closing. If any of the following events shall not have occurred on or prior to the following time, Sellers or Buyer may terminate this Agreement by notice to the other:
a. the Closing shall not have occurred on or prior to 12:01 a.m. on December 22, 1995;
b. the condition referred to in Section 7.1(c) shall have been fulfilled or waived prior to 12:01 a.m. on December 21, 1995;
c. the conditions referred to in Sections 7.1(h) and 7.2(d) shall have been fulfilled or waived prior to 12:01 a.m. on December 16, 1995;
d. the condition referred to in Sections 7.1(d) shall have been fulfilled or waived prior to 12:01 a.m. on December 11, 1995;
e. the conditions referred to in Sections 7.1(k) and 7.2(f) shall have been fulfilled or waived prior to 12:01 a.m. on December 9, 1995; or
f. the parties shall have, in their sole and absolute discretion, agreed to the form and substance of, and intialled for identification (it being that for purposes of this Section 3.2 facsimile initials shall be sufficient), Schedule 6.8 to the Agreement (Required Consents) prior to 12:01 a.m. on December 2, 1995.
Upon termination pursuant to this Section 3.2 neither of the parties shall have any liability of any kind arising out of this Agreement other than for any liability resulting from its breach of this Agreement prior to termination. If the Closing is postponed pursuant to Section 11 of this Agreement, and this Agreement is not otherwise terminated in accordance with the provisions of Section 11, the outside date referred to in this Section shall be extended by the period of the postponement as provided in Section 11."
4.1 Severability. If any provision of this First Amendment shall finally be determined to be unenforceable, then such provision shall be deemed to be severed from this First Amendment and every other provision of this First Amendment shall remain in full force and effect.
4.2 Counterparts. More than one counterpart of this First Amendment may be executed by the parties hereto, and each fully-executed counterpart shall be deemed an original without production of the others.
4.3 Complete Agreement. The Agreement (as amended herein) and this First Amendment sets forth the entire understanding of the parties with respect to the subject matter thereof and supersedes all prior letters of intent, agreements (including, without limitation, the Letter Agreement), covenants, arrangements, communications, representations, or warranties, whether oral or written, by any officer, employee, or representative of either party relating thereto.
4.4 Acknowledgement. Sellers and Buyer acknowledge that each of them has been informed by the other that if either: (x) they are unable for any reason whatsoever, in their respective sole and absolute discretion, to timely agree upon the form and substance of the Open Schedules and/or Exhibits in accordance with Section 3.2 above, or (y) any of the deadlines set forth in Section 3 of the Agreement (as amended herein) shall not have been timely met for any reason whatsoever, then, in either such event, neither party shall be obligated to grant any further extensions to this First Amendment or the Agreement (as amended herein), that they shall not grant such an extension and that they shall, instead, terminate the Agreement (as amended herein) and this First Amendment. Sellers have additionally advised Buyer that they are unwiliing and unable to consummate any transaction after December 21, 1995.
IN WITNESS WHEREOF, the parties hereto have each caused this First Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
to First Amendment to Purchase Agreement
List of November 29, 1995 Agreed Upon Schedules
1.1(g) Letters of Credit in favor of Sellers 1.1(h) Prepaid expenses and deposits 1.2(e) Excluded Rights against Third Parties 4.5 Condition of Personal Property 4.7(b) Defaults under Real Property Documents 4.7(i)-1 Real Estate Tax Proceedings 4.8 Financial Statements and Related Information 4.9 List of Certain Changes 4.9(e) Claim Receivables or Notes Receivables 4.24 Important Suppliers and Customers 5.5 Financial Statements of Buyer and Guarantor 6.9 Allocation of Real Estate Taxes
SECOND AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "Second Amendment") to the Purchase Agreement is dated the 1st day of December, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL-OP U.S., Inc. ("Buyer") and El-Op Electro-optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers, substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor have entered into that certain First Amendment to Purchase Agreement, dated November 30, 1995 (the "First Amendment"), pursuant to which, among other things, the Agreement was amended and the parties agreed to the reimbursement of certain fees incurred by Sellers in connection with certain governmental filings and to certain deadlines with respect the finalization of certain Schedules and Exhibits referred to in the Agreement.
C. Sellers and Buyer have agreed upon one additional Schedule that is currently referred to in the Agreement and a new Schedule that is referred to in the Agreement as amended herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this Second Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings: Interpretations. For purposes of this Second Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this Second Amendment as a whole. For purposes of this Second Amendment, the term "November 29, 1995 Agreed Upon Schedules" shall have the meaning set forth in the First Amendment. The headings of the Articles and Sections of this Second Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Second Amendment.
1.3 Relationship with the Agreement and prior amendment. This Second Amendment is intended to amend the Agreement as and to the extent set forth herein. The Agreement and the First Amendment, and each and every provision thereof, will otherwise remain in full force and effect to the extent not superseded by this Second Amendment and each of the parties reserves all of their respective rights contained therein.
2.1 Agreed Upon Schedules. The parties agree and acknowledge that they have agreed upon the form and substance of the Schedules to the Agreement that are listed on Schedule A attached hereto (the "December 1, 1995 Agreed Upon Schedules"). Simultaneously with the execution of this Second Amendment, Reuben Ben-Arie, on behalf of Buyer and Guarantor, and Joseph C. Allwarden, on behalf of Sellers, have initialled for identification the December 1, 1995 Agreed Upon Schedules. Accordingly, the Agreement is hereby amended in order to reflect the December 1, 1995 Agreed Upon Schedules, with the same effect as if they had been agreed upon and attached to the Agreement simultaneously with its execution.
2.2 Other Schedules and Exhibits. All Schedules or Exhibits that are referred to in the Agreement other than Schedule 2.3(b)-2 (Accounting Instructions), the November 29, 1995 Agreed Upon Schedules and the December 1, 1995 Agreed Upon Schedules (the "Open Schedules and/or Exhibits") have not been finalized or agreed upon as between the parties. Accordingly, on or before December 8, 1995, Sellers, on the one hand, and Buyer, on the other, shall finalize the Open Schedules and/or Exhibits. If agreed upon in each such party's sole and absolute discretion, Sellers and Buyer, shall initial the agreed upon Open Schedules and/or Exhibits and the same shall be the subject of a further amendment to the Agreement in substantially the form of this Second Amendment. If, on or before December 8, 1995, Sellers or Buyer object in writing to any Open Schedules and/or Exhibits received by them or otherwise fail to agree upon the form and substance of the Open Schedules and/or Exhibits, then the objecting parties may, at their sole and absolute election, terminate the Agreement (as amended) and no party shall have any further rights or obligations thereunder. For purposes of delivering Open Schedules and/or Exhibits, delivery shall be deemed to have been made upon delivery of the same (i) in the case of Buyer, to Buyer's counsel, Proskauer Rose Goetz & Mendelsohn LLP, Attention: Michael E. Feldman, Esq., and (ii) in the case of Sellers, to Sellers' counsel, John J. Dowling III, Sequa Corporation, 120 South Central Avenue, St. Louis, Mo. 63105.
2.3 Certain Notifications. A new Section 6.8A shall be added to the Agreement which shall read in its entirety as follows:
"6.8A Certain Notices. Sellers shall, on or prior to December 4, 1995, send to all parties to any Customer Agreement or Teaming Agreement (x) listed on Schedule 6.8 a request for its consent to, or (y) listed on Schedule 6.8A a notice of, the proposed assignment of that agreement to Buyer. For purposes of this Agreement, a "Required Consent" shall be deemed not to have been obtained if: (x) any customer or teaming partner listed on Schedule 6.8A of this Agreement notifies any Seller or Buyer that it is considering termination, non-renewal or any adverse modification of the applicable Customer Agreement or Teaming Agreement or shall indicate that its unwillingness to continue its business relationship with Sellers and/or Buyer, or (y) one or more customers shall have notified Sellers or Buyer that they are considering termination, non-renewal or any adverse modification of one or more agreements having an aggregate value of $1,000,000 or more or shall indicate that their unwillingness to continue their business relationship with Sellers and/or Buyer."
3.1 Severability. If any provision of this Second Amendment shall finally be determined to be unenforceable, then such provision shall be deemed to be severed from this Second Amendment and every other provision of this Second Amendment shall remain in full force and effect.
3.2 Counterparts. More than one counterpart of this Second Amendment may be executed by the parties hereto, and each fully-executed counterpart shall be deemed an original without production of the others. The parties acknowledge that they are delivering to each other facsimile counterparts of this Second Amendment and the December 1, 1995 Agreed Upon Schedules, signed and initialled on their behalf, and agree that such signature and initialization shall be binding upon each of them as if the counterparts being delivered to the other parties had been originally signed and initialized.
3.3 Complete Agreement. The Agreement (as amended), the First Amendment and this Second Amendment set forth the entire understanding of the parties with respect to the subject matter thereof and, together, supersede all prior letters of intent, agreements (including, without limitation, the Letter representations, or warranties, whether oral or written, by any officer, employee, or representative of either party relating thereto.
3.4 Acknowledgement. Sellers and Buyer acknowledge that each of them has been informed by the other that if either: (x) they are unable for any reason whatsoever, in their respective sole and absolute discretion, to timely agree upon the form and substance of the Open Schedules and/or Exhibits in accordance with Section 2.2 above, or (y) any of the deadlines set forth in Section 3 of the Agreement (as amended) shall not have been timely met for any reason whatsoever, then, in either such event, neither party shall be obligated to grant any further extensions to this Second Amendment or the Agreement (as amended), that they shall not grant such an extension and that they shall, instead, terminate the Agreement (as amended) and this Second Amendment. Sellers have additionally advised Buyer that they are unwilling and unable to consummate any transaction after December 21, 1995.
IN WITNESS WHEREOF, the parties hereto have each caused this Second Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
GUARANTOR: EL-OP ELECTRO-OPTICS INDUSTRIES LTD.
to Second Amendment to Purchase Agreement
List of December 1, 1995 Agreed Upon Schedules
6.8A Other Customer Agreement and Teaming Agreements
THIRD AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "Third Amendment") to the Purchase Agreement is dated the 8th day of December, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL- OP U.S., Inc. ("Buyer") and El-Op Electro-optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers, substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor have entered into that certain First Amendment to Purchase Agreement, dated November 29, 1995 (the "First Amendment") and that certain Second Amendment to Purchase Agreement, dated December 1, 1995 (the "Second Amendment"), pursuant to which, among other things, the Agreement was amended and the parties agreed to the reimbursement of certain fees incurred by Sellers in connection with certain governmental filings and to certain deadlines with respect the finalization of certain Schedules and Exhibits referred to in the Agreement.
C. Sellers and Buyer have agreed upon additional Schedules that are currently referred to in the Agreement, and to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this Third Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings: Interpretations. For purposes of this Third Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this Third Amendment as a whole. For purposes of this Third Amendment, the term "November 29, 1995 Agreed Upon Schedules" shall have the meaning set forth in the First Amendment, and the term "December 1, 1995 Agreed Upon Schedules" shall have the meaning set forth in the Second Amendment. The headings of the Articles and Sections of this Third Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Third Amendment.
1.3 Relationship with the Agreement and prior amendments. This Third Amendment is intended to amend the Agreement as and to the extent set forth herein. The Agreement, the First Amendment and the Second Amendment, and each and every provision thereof, will otherwise remain in full force and effect to the extent not superseded by this Third Amendment and each of the parties reserves all of their respective rights contained therein.
2.1 Agreed Upon Schedules. The parties agree and acknowledge that they have agreed upon the form and substance of the Schedules to the Agreement that are listed on Schedule A attached hereto (the "December 8, 1995 Agreed Upon Schedules"). Simultaneously with the execution of this Third Amendment, either Reuben Ben-Arie or Michael E. Feldman (as attorney-in-fact) on behalf of Buyer and Guarantor, and John J. Dowling III, on behalf of Sellers, have initialled for identification the December 8, 1995 Agreed Upon Schedules. Accordingly, the Agreement is hereby amended in order to reflect the December 8, 1995 Agreed Upon Schedules, with the same effect as if they had been agreed upon and attached to the Agreement simultaneously with its execution.
2.2 Other Schedules and Exhibits. All Schedules or Exhibits that are referred to in the Agreement other than Schedule 2.3(b)-2 (Accounting Instructions), the November 29, 1995 Agreed Upon Schedules, the December 1, 1995 Agreed Upon Schedules and the December 8, 1995 Agreed Upon Schedules (the "Open Schedules and/or Exhibits") have not been finalized or agreed upon as between the parties. Accordingly, on or before December 13, 1995, Sellers, on the one hand, and Buyer, on the other, shall finalize the Open Schedules and/or Exhibits. If agreed upon in each such party's sole and absolute discretion, Sellers and Buyer, shall initial the agreed upon Open Schedules and/or Exhibits and the same shall be the subject of a further amendment to the Agreement in substantially the form of this Third Amendment. If, on or before December 13, 1995, Sellers or Buyer object in writing to any Open Schedules and/or Exhibits received by them or otherwise fail to agree upon the form and substance of the Open Schedules and/or Exhibits, then the objecting parties may, at their sole and absolute election, terminate the Agreement (as amended) and no party shall have any further rights or obligations thereunder. For purposes of delivering Open Schedules and/or Exhibits, delivery shall be deemed to have been made upon delivery of the same (i) in the case of Buyer, to Buyer's counsel, Proskauer Rose Goetz & Mendelsohn LLP, Attention: Michael E. Feldman, Esq., and (ii) in the case of Sellers, to Sellers' counsel, John J. Dowling III, Sequa Corporation, 120 South Central Avenue, St. Louis, Mo. 63105.
2.3 New Outside Dates. Section 3 of the Agreement is hereby amended and restated so as to read in its entirety as follows:
3.1 Date of Closing. The closing (the "Closing") under this Agreement shall take place at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York (or at such other place as the parties may agree upon in writing) upon at least twenty-four hours' notice given by Buyer to Sellers after the last of the conditions specified in Sections 7.1 and 7.2 of this Agreement has been fulfilled (or waived), but in no event whatsoever later than December 21, 1995. The date on which the Closing is held is referred to in this Agreement as the "Closing Date." At the Closing, the parties shall execute and deliver the documents referred to in Section 8 of this Agreement.
3.2 Outside Date for Closing. If any of the following events shall not have occurred on or prior to the following time, Sellers or Buyer may terminate this Agreement by notice to the other:
a. the Closing shall not have occurred on or prior to 12:01 a.m. on December 22, 1995;
b. the condition referred to in Section 7.1(c) shall have been fulfilled or waived prior to 12:01 a.m. on December 21, 1995;
c. the conditions referred to in Sections 7.1(h) and 7.2(d) shall have been fulfilled or waived prior to 12:01 a.m. on December 16, 1995;
d. the condition referred to in Sections 7.1(d) shall have been fulfilled or waived prior to 12:01 a.m. on December 16, 1995; or
e. the conditions referred to in Sections 7.1(k) and 7.2(f) shall have been fulfilled or waived prior to 12:01 a.m. on December 16, 1995.
Upon termination pursuant to this Section 3.2 neither of the parties shall have any liability of any kind arising out of this Agreement other than for any liability resulting from its breach of this Agreement prior to termination. If the Closing is postponed pursuant to Section 11 of this Agreement, and this Agreement is not otherwise terminated in accordance with the provisions of Section 11, the outside date referred to in this Section shall be extended by the period of the postponement as provided in Section 11."
3.1 Severability. If any provision of this Third Amendment shall finally be determined to be unenforceable, then such provision shall be deemed to be severed from this Third Amendment and every other provision of this Third Amendment shall remain in full force and effect.
3.2 Counterparts. More than one counterpart of this Third Amendment may be executed by the parties hereto, and each fully-executed counterpart shall be deemed an original without production of the others. The parties acknowledge that they are delivering to each other facsimile counterparts of this Third Amendment and the December 8, 1995 Agreed Upon Schedules, signed and initialled on their behalf, and agree that such signature and initialization shall be binding upon each of them as if the counterparts being delivered to the other parties had been originally signed and initialized.
3.3 Complete Agreement. The Agreement (as amended), the First Amendment, the Second Amendment and this Third Amendment set forth the entire understanding of the parties with respect to the subject matter thereof and, together, supersede all prior letters of intent, agreements (including, without limitation, the Letter Agreement), covenants, arrangements, communications, representations, or warranties, whether oral or written, by any officer, employee, or representative of either party relating thereto.
3.4 Acknowledgement. Sellers and Buyer acknowledge that each of them has been informed by the other that if either: (x) they are unable for any reason whatsoever, in their respective sole and absolute discretion, to timely agree upon the form and substance of the Open Schedules and/or Exhibits in accordance with Section 2.2 above, or (y) any of the deadlines set forth in Section 3 of the Agreement (as amended) shall not have been timely met for any reason whatsoever, then, in either such event, neither party shall be obligated to grant any further extensions to this Third Amendment or the Agreement (as amended), that they shall not grant such an extension and that they shall, instead, terminate the Agreement (as amended) and this Third Amendment. Sellers have additionally advised Buyer that they are unwilling and unable to consummate any transaction after December 21, 1995.
IN WITNESS WHEREOF, the parties hereto have each caused this Third Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
to Third Amendment to Purchase Agreement
List of December 8, 1995 Agreed Upon Schedules
1.2(d) Letters of Credit issued on behalf of Sellers 2.3(b)-1 Eligible Military Stock Inventory 4.1 List of Foreign Qualifications 4.7(i)-2 Real Property Tax Bills 4.27 List of Affiliates having Certain Names
FOURTH AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "Fourth Amendment") to the Purchase Agreement is dated the 13th day of December, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL-OP U.S., Inc. ("Buyer") and El-Op Electro-optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers, substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor have entered into that certain First Amendment to Purchase Agreement, dated November 29, 1995 (the "First Amendment"), that certain Second Amendment to Purchase Agreement, dated December 1, 1995 (the "Second Amendment"), and that certain Third Amendment to Purchase Agreement, dated December 13, 1995 (the "Third Amendment"), pursuant to which, among other things, the Agreement was amended and the parties agreed to the reimbursement of certain fees incurred by Sellers in connection with certain governmental filings and to certain deadlines with respect the finalization of certain Schedules and Exhibits referred to in the Agreement.
C. Sellers and Buyer have agreed upon additional Schedules and Exhibits that are currently referred to in the Agreement, and to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this Fourth Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings: Interpretations. For purposes of this Fourth Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this Fourth Amendment as a whole. For purposes of this Fourth Amendment, the term "November 29, 1995 Agreed Upon Schedules" shall have the meaning set forth in the First Amendment, the term "December 1, 1995 Agreed Upon Schedules" shall have the meaning set forth in the Second Amendment, and the term "December 8, 1995 Agreed Upon Schedules" shall have the meaning set forth in the Third Amendment. The headings of the Articles and Sections of this Fourth Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Fourth Amendment.
1.3 Relationship with the Agreement and prior amendments. This Fourth Amendment is intended to amend the Agreement as and to the extent set forth herein. The Agreement, the First Amendment, the Second Amendment and the Third Amendment, and each and every provision thereof, will otherwise remain in full force and effect to the extent not superseded by this Fourth Amendment and each of the parties reserves all of their respective rights contained therein.
2.1 Agreed Upon Schedules. The parties agree and acknowledge that they have agreed upon the form and substance of the Schedules and Exhibits to the Agreement that are listed on Schedule A attached hereto (the "December 13, 1995 Agreed Upon Schedules and Exhibits"). Simultaneously with the execution of this Fourth Amendment, either Reuben Ben-Arie or Michael E. Feldman (as attorney-in-fact) on behalf of Buyer and Guarantor, and John J. Dowling III, on behalf of Sellers, have initialled for identification the December 13, 1995 Agreed Upon Schedules and Exhibits. Accordingly, the Agreement is hereby amended in order to reflect the December 13, 1995 Agreed Upon Schedules and Exhibits, with the same effect as if they had been agreed upon and attached to the Agreement simultaneously with its execution.
2.2 Other Schedules and Exhibits. All Schedules or Exhibits that are referred to in the Agreement other than Schedule 2.3(b)-2 (Accounting Instructions), the November 29, 1995 Agreed Upon Schedules, the December 1, 1995 Agreed Upon Schedules, the December 8, 1995 Agreed Upon Schedules and the December 13, 1995 Schedules and Exhibits (the "Open Schedules and/or Exhibits") have not been finalized or agreed upon as between the parties. Accordingly, on or before December 18, 1995, Sellers, on the one hand, and Buyer, on the other, shall finalize the Open Schedules and/or Exhibits. If agreed upon in each such party's sole and absolute discretion, Sellers and Buyer, shall initial the agreed upon Open Schedules and/or Exhibits and the same shall be the subject of a further amendment to the Agreement in substantially the form of this Fourth Amendment. If, on or before December 18, 1995, Sellers or Buyer object in writing to any Open Schedules and/or Exhibits received by them or otherwise fail to agree upon the form and substance of the Open Schedules and/or Exhibits, then the objecting parties may, at their sole and absolute election, terminate the Agreement (as amended) and no party shall have any further rights or obligations thereunder. For purposes of delivering Open Schedules and/or Exhibits, delivery shall be deemed to have been made upon delivery of the same (i) in the case of Buyer, to Buyer's counsel, Proskauer Rose Goetz & Mendelsohn LLP, Attention: Michael E. Feldman, Esq. (Fax: 212/969-2900), and (ii) in the case of Sellers, to Sellers' counsel, John J. Dowling III, Sequa Corporation, 120 South Central Avenue, St. Louis, Mo. 63105 (Fax: 314/862-6144).
3.1 Severability. If any provision of this Fourth Amendment shall finally be determined to be unenforceable, then such provision shall be deemed to be severed from this Fourth
Amendment and every other provision of this Fourth Amendment shall remain in full force and effect.
3.2 Counterparts. More than one counterpart of this Fourth Amendment may be executed by the parties hereto, and each fully-executed counterpart shall be deemed an original without production of the others. The parties acknowledge that they are delivering to each other facsimile counterparts of this Fourth Amendment and the December 13, 1995 Agreed Upon Schedules and Exhibits, signed and initialled on their behalf, and agree that such signature and initialization shall be binding upon each of them as if the counterparts being delivered to the other parties had been originally signed and initialized.
3.3 Complete Agreement. The Agreement (as amended), the First Amendment, the Second Amendment, the Third Amendment and this Fourth Amendment set forth the entire understanding of the parties with respect to the subject matter thereof and, together, supersede all prior letters of intent, agreements (including, without limitation, the Letter Agreement), covenants, arrangements, communications, representations, or warranties, whether oral or written, by any officer, employee, or representative of either party relating thereto.
3.4 Acknowledgement. Sellers and Buyer acknowledge that each of them has been informed by the other that if either:
(x) they are unable for any reason whatsoever, in their respective sole and absolute discretion, to timely agree upon the form and substance of the Open Schedules and/or Exhibits in accordance with Section 2.2 above, or (y) any of the deadlines set forth in Section 3 of the Agreement (as amended) shall not have been timely met for any reason whatsoever, then, in either such event, neither party shall be obligated to grant any further extensions to this Fourth Amendment or the Agreement (as amended), that they shall not grant such an extension and that they shall, instead, terminate the Agreement (as amended) and this Fourth Amendment. Sellers have additionally advised Buyer that they are unwilling and unable to consummate any transaction after December 21, 1995.
IN WITNESS WHEREOF, the parties hereto have each caused this Fourth Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
GUARANTOR: EL-OP ELECTRO-OPTICS INDUSTRIES LTD.
to Fourth Amendment to Purchase Agreement
List of December 13, 1995 Agreed Upon Schedules and Exhibits
4.25 List of Material Product and Service Warranties
8.1(q) Certificate of Non-foreign Status
FIFTH AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "Fifth Amendment") to the Purchase Agreement is dated the 15th day of December, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL- OP U.S., Inc. ("Buyer") and El-Op Electro-optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers, substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor have entered into that certain First Amendment to Purchase Agreement, dated November 29, 1995 (the "First Amendment"), that certain Second Amendment to Purchase Agreement, dated December 1, 1995 (the "Second Amendment"), that certain Third Amendment to Purchase Agreement, dated December 8, 1995 (the "Third Amendment"), and that certain Fourth Amendment to Purchase Agreement, dated December 13, 1995 (the "Fourth Amendment"), pursuant to which, among other things, the Agreement was amended and the parties agreed to the reimbursement of certain fees incurred by Sellers in connection with certain governmental filings and to certain deadlines with respect the finalization of certain Schedules and Exhibits referred to in the Agreement.
C. Sellers and Buyer have agreed to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this Fifth Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings: Interpretations. For purposes of this Fifth Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this Fifth Amendment as a whole. For purposes of this Fifth Amendment, the term "November 29, 1995 Agreed Upon Schedules" shall have the meaning set forth in the First Amendment, the term "December 1, 1995 Agreed Upon Schedules" shall have the meaning set forth in the Second Amendment, the term "December 8, 1995 Agreed Upon Schedules" shall have the meaning set forth in the Third Amendment, and the term "December 13, 1995 Agreed Upon Schedules and Exhibits" shall have the meaning set forth in the Fourth Amendment. The headings of the Articles and Sections of this Fifth Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Fifth Amendment.
1.3 Relationship with the Agreement and prior amendments. This Fifth Amendment is intended to amend the Agreement as and to the extent set forth herein. The Agreement, the First Amendment, the Second Amendment, the Third Amendment and the Fourth Amendment, and each and every provision thereof, will otherwise remain in full force and effect to the extent not superseded by this Fifth Amendment and each of the parties reserves all of their respective rights contained therein.
2.1 New Outside Dates. Section 3 of the Agreement is hereby amended and restated so as to read in its entirety as follows:
3.1 Date of Closing. The closing (the "Closing") under this Agreement shall take place at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York (or at such other place as the parties may agree upon in writing) upon at least twenty-four hours' notice given by Buyer to Sellers after the last of the conditions specified in Sections 7.1 and 7.2 of this Agreement has been fulfilled (or waived), but in no event whatsoever later than December 21, 1995. The date on which the Closing is held is referred to in this Agreement as the "Closing Date." At the Closing, the parties shall execute and deliver the documents referred to in Section 8 of this Agreement.
3.2 Outside Date for Closing. If any of the following events shall not have occurred on or prior to the following time, Sellers or Buyer may terminate this Agreement by notice to the other:
a. the Closing shall not have occurred on or prior to 12:01 a.m. on December 22, 1995;
b. the condition referred to in Section 7.1(c) shall have been fulfilled or waived prior to 12:01 a.m. on December 21, 1995;
c. the conditions referred to in Sections 7.1(h) and 7.2(d) shall have been fulfilled or waived prior to 12:01 a.m. on December 16, 1995;
d. the condition referred to in Section 7.1(d) shall have been fulfilled or waived prior to 12:01 a.m. on December 21, 1995; or
e. the conditions referred to in Sections 7.1(k) and 7.2(f) shall have been fulfilled or waived prior to 12:01 a.m. on December 19, 1995.
Upon termination pursuant to this Section 3.2 neither of the parties shall have any liability of any kind arising out of this Agreement other than for any liability resulting from its breach of this Agreement prior to termination. If the Closing is postponed pursuant to Section 11 of this Agreement, and this Agreement is not otherwise terminated in accordance with the provisions of Section 11, the outside date referred to in this Section shall be extended by the period of the postponement as provided in Section 11."
3.1 Severability. If any provision of this Fifth Amendment shall finally be determined to be unenforceable, then such provision shall be deemed to be severed from this Fifth Amendment and every other provision of this Fifth Amendment shall remain in full force and effect.
3.2 Counterparts. More than one counterpart of this Fifth Amendment may be executed by the parties hereto, and each fully-executed counterpart shall be deemed an original without production of the others. The parties acknowledge that they are delivering to each other facsimile counterparts of this Fifth Amendment, signed and initialled on their behalf, and agree that such signature and initialization shall be binding upon each of them as if the counterparts being delivered to the other parties had been originally signed and initialized. Notwithstanding anything herein contained to the contrary, this Fifth Amendment shall not be binding on any of the parties unless and until signed counterparts are received by facsimile by each party prior to 12:01 a.m. on December 16, 1995.
3.3 Complete Agreement. The Agreement (as amended), the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment and this Fifth Amendment set forth the entire understanding of the parties with respect to the subject matter thereof and, together, supersede all prior letters of intent, agreements (including, without limitation, the Letter Agreement referred to in the First Amendment), covenants, arrangements, communications, representations, or warranties, whether oral or written, by any officer, employee, or representative of either party relating thereto.
3.4 Acknowledgement. Sellers and Buyer acknowledge that each of them has been informed by the other that if either: (x) they are unable for any reason whatsoever, in their respective sole and absolute discretion, to timely agree upon the form and substance of the Open Schedules and/or Exhibits in accordance with Section 2.2 of the Fourth Amendment, or (y) any of the deadlines set forth in Section 3 of the Agreement (as amended) shall not have been timely met for any reason whatsoever, then, in either such event, neither party shall be obligated to grant any further extensions to this Fourth Amendment or the Agreement (as amended), that they shall not grant such an extension and that they shall, instead, terminate the Agreement (as amended) and this Fifth Amendment. Sellers have additionally advised Buyer that they are unwilling and unable to consummate any transaction after December 21, 1995.
IN WITNESS WHEREOF, the parties hereto have each caused this Fifth Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
SIXTH AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "Sixth Amendment") to the Purchase Agreement is dated the 18th day of December, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL- OP U.S., Inc. ("Buyer") and El-Op Electro-optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor have entered into that certain First Amendment to Purchase Agreement, dated November 29, 1995 (the "First Amendment"), that certain Second Amendment to Purchase Agreement, dated December 1, 1995 (the "Second Amendment"), that certain Third Amendment to Purchase Agreement, dated December 8, 1995 (the "Third Amendment"), and that certain Fourth Amendment, dated December 13, 1995 (the "Fourth Amendment"), and that certain Fifth Amendment, dated December 15, 1995 (the "Fifth Amendment", and collectively, the "Amendments"), pursuant to which, among other things, the Agreement was amended and the parties agreed to the reimbursement of certain fees incurred by Sellers in connection with certain governmental filings and to certain deadlines with respect the finalization of certain Schedules and Exhibits referred to in the Agreement.
C. Sellers and Buyer have agreed upon additional Schedules and Exhibits that are currently referred to in the Agreement, and to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this Sixth Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings: Interpretations. For purposes of this Sixth Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this Sixth Amendment as a whole. For purposes of this Sixth Amendment, the term "November 29, 1995 Agreed Upon Schedules" shall have the meaning set forth in the First Amendment, the term "December 1, 1995 Agreed Upon Schedules" shall have the meaning set forth in the Second Amendment, the term "December 8, 1995 Agreed Upon Schedules" shall have the meaning set forth in the Third Amendment, the term "December 13 Agreed Upon Schedules and Exhibits" shall have the meaning set forth in the Fourth Amendment. The headings of the Articles and Sections of this Sixth Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Sixth Amendment.
1.3 Relationship with the Agreement and prior amendments. This Sixth Amendment is intended to amend the Agreement as and to the extent set forth herein. The Agreement and the Amendments, and each and every provision thereof, will otherwise remain in full force and effect to the extent not superseded by this Sixth Amendment and each of the parties reserves all of their respective rights contained therein.
2.1 Agreed Upon Schedules. The parties agree and acknowledge that they have agreed upon the form and substance of the Schedules and Exhibits to the Agreement that are listed on Schedule A attached hereto (the "December 18, 1995 Agreed Upon Schedules"). Simultaneously with the execution of this Sixth Amendment, Reuben Ben-Arie on behalf of Buyer and Guarantor, and John J. Dowling III, on behalf of Sellers, have initialled for identification the December 18, 1995 Agreed Upon Schedules. Accordingly, the Agreement is hereby amended in order to reflect the December 18, 1995 Agreed Upon Schedules, with the same effect as if they had been agreed upon and attached to the Agreement simultaneously with its execution.
2.2 Other Schedules and Exhibits. All Schedules or Exhibits that are referred to in the Agreement other than Schedule 2.3(b)-2 (Accounting Instructions), the November 29, 1995 Agreed Upon Schedules, the December 1, 1995 Agreed Upon Schedules, the December 8, 1995 Agreed Upon Schedules, the December 13, 1995 Schedules and Exhibits, and the December 18, 1995 Agreed Upon Schedules (the "Open Schedules and/or Exhibits") have not been finalized or agreed upon as between the parties. Accordingly, on or before December 20, 1995, Sellers, on the one hand, and Buyer, on the other, shall finalize the
Open Schedules and/or Exhibits. If agreed upon in each such party's sole and absolute discretion, Sellers and Buyer, shall initial the agreed upon Open Schedules and/or Exhibits and the same shall be the subject of a further amendment to the Agreement in substantially the form of this Sixth Amendment. If, on or before December 20, 1995, Sellers or Buyer either object in writing to any Open Schedules and/or Exhibits received by them or otherwise fail to agree upon the form and substance of the Open Schedules and/or Exhibits and initial the same, then the objecting parties may, at their sole and absolute election, terminate the Agreement (as amended) and no party shall have any further rights or obligations thereunder. For purposes of delivering Open Schedules and/or Exhibits, delivery shall be deemed to have been made upon delivery of the same (i) in the case of Buyer, to Buyer's counsel, Proskauer Rose Goetz & Mendelsohn LLP, Attention: Michael E. Feldman, Esq. either by personal delivery of by fax at 212/969-2900, and (ii) in the case of Sellers, to Sellers' counsel, John J. Dowling III, Sequa Corporation, 120 South Central Avenue, St. Louis, Mo. 63105 either by personal delivery or by fax at 314/862-6144.
2.3 New Outside Dates. Section 3 of the Agreement is hereby amended and restated so as to read in its entirety as follows: "3 Closing.
3.1 Date of Closing. The closing (the "Closing") under this Agreement shall take place at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York (or at such other place as the parties may agree upon in writing) upon at least twenty-four hours' notice given by Buyer to Sellers after the last of the conditions specified in Sections 7.1 and 7.2 of this Agreement has been fulfilled (or waived), but in no event whatsoever later than 5:00 p.m. on December 21, 1995. The date on which the Closing is held is referred to in this Agreement as the "Closing Date." At the Closing, the parties shall execute and deliver the documents referred to in Section 8 of this Agreement.
3.2 Outside Date for Closing. If any of the following events shall not have occurred on or prior to the following time, Sellers or Buyer may terminate this Agreement by means of a delivery notice to the other in the manner provided in Section 2.2(i) and (ii) above:
a. the Closing shall not have occurred on or prior to 5:00 p.m. on December 21, 1995;
b. the condition referred to in Section 7.1(c) shall have been fulfilled or waived prior to 12:01 a.m. on December 21, 1995;
c. the condition referred to in Section 7.1(d) shall have been fulfilled or waived prior to 12:01 a.m. on December 21, 1995; or
d. the conditions referred to in Sections 7.1(k) and 7.2(f) shall have been fulfilled or waived prior to 12:01 a.m. on December 21, 1995.
Upon termination pursuant to this Section 3.2 neither of the parties shall have any liability of any kind arising out of this Agreement other than for any liability resulting from its breach of this Agreement prior to termination. If the Closing is postponed pursuant to Section 11 of this Agreement, and this Agreement is not otherwise terminated in accordance with the provisions of Section 11, the outside date referred to in this Section shall be extended by the period of the postponement as provided in Section 11."
3.1 Severability. If any provision of this Sixth Amendment shall finally be determined to be unenforceable, then such provision shall be deemed to be severed from this Sixth Amendment and every other provision of this Sixth Amendment shall remain in full force and effect.
3.2 Counterparts. More than one counterpart of this Sixth Amendment may be executed by the parties hereto, and each fully-executed counterpart shall be deemed an original without production of the others.
3.3 Complete Agreement. The Agreement (as amended), the Amendments and this Sixth Amendment set forth the entire understanding of the parties with respect to the subject matter thereof and, together, supersede all prior letters of intent, agreements (including, without limitation, the Letter Agreement referred to in the First Amendment), covenants, arrangements, communications, representations, or warranties, whether oral or written, by any officer, employee, or representative of either party relating thereto.
3.4 Acknowledgement. Sellers and Buyer acknowledge that each of them has been informed by the other that if either: (x) they are unable for any reason whatsoever, in their respective sole and absolute discretion, to timely agree upon the form and substance of the Open Schedules and/or Exhibits in accordance with Section 2.2 above, or (y) any of the deadlines set forth in Section 3 of the Agreement (as amended) shall not have been timely met for any reason whatsoever, then, in either such event, neither party shall be obligated to grant any further extensions to this Sixth Amendment or the Agreement (as amended), that they shall not grant such an extension and that they shall, instead, terminate the Agreement (as amended) and this Sixth Amendment. Sellers have additionally advised Buyer that they are unwilling and unable to consummate any transaction after 5:00 p.m. December 21, 1995.
IN WITNESS WHEREOF, the parties hereto have each caused this Sixth Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
to Sixth Amendment to Purchase Agreement
List of December 18, 1995 Agreed Upon Schedules
SEVENTH AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "Seventh Amendment") to the Purchase Agreement is dated the 19th day of December, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL-OP U.S., Inc. ("Buyer") and El-Op Electro-optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor have entered into that certain First Amendment to Purchase Agreement, dated November 29, 1995 (the "First Amendment"), that certain Second Amendment to Purchase Agreement, dated December 1, 1995 (the "Second Amendment"), that certain Third Amendment to Purchase Agreement, dated December 8, 1995 (the "Third Amendment"), and that certain Fourth Amendment, dated December 13, 1995 (the "Fourth Amendment"), and that certain Fifth Amendment, dated December 15, 1995 (the "Fifth Amendment"), and that certain Sixth Amendment, dated December 18, 1995 (the "Sixth Amendment", and collectively, the "Amendments"), pursuant to which, among other things, the Agreement was amended and the parties agreed to the reimbursement of certain fees incurred by Sellers in connection with certain governmental filings and to certain deadlines with respect the finalization of certain Schedules and Exhibits referred to in the Agreement.
C. Sellers and Buyer have agreed upon additional Schedules and Exhibits that are currently referred to in the Agreement, and to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this Seventh Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings: Interpretations. For purposes of this Seventh Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this Seventh Amendment as a whole. The headings of the Articles and Sections of this Seventh Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Seventh Amendment.
1.3 Relationship with the Agreement and prior amendments. This Seventh Amendment is intended to amend the Agreement as and to the extent set forth herein. The Agreement and the Amendments, and each and every provision thereof, will otherwise remain in full force and effect to the extent not superseded by this Seventh Amendment and each of the parties reserves all of their respective rights contained therein.
2.1 Agreed Upon Schedules. The parties agree and acknowledge that they have agreed upon the form and substance of the Schedules and Exhibits to the Agreement that are listed on Schedule A attached hereto (the "December 19, 1995 Agreed Upon Schedules and Exhibits"). Simultaneously with the execution of this Seventh Amendment, Reuben Ben-Arie on behalf of Buyer and Guarantor, and John J. Dowling III, on behalf of Sellers, have initialled for identification the December 19, 1995 Agreed Upon Schedules and Exhibits. Accordingly, the Agreement is hereby amended in order to reflect the December 19, 1995 Agreed Upon Schedules, with the same effect as if they had been agreed upon and attached to the Agreement simultaneously with its execution.
IN WITNESS WHEREOF, the parties hereto have each caused this Seventh Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
GUARANTOR: EL-OP ELECTRO-OPTICS INDUSTRIES LTD.
to Seventh Amendment to Purchase Agreement
List of December 19, 1995 Agreed Upon Schedules
6.19 Miscellaneous Real Estate Documents
EIGHTH AMENDMENT TO PURCHASE AGREEMENT
This amendment (this "Eighth Amendment") to the Purchase Agreement executed this 28th day of December, 1995 is dated as of the 22nd day of December, 1995 and is by and between Sequa Corporation ("Sequa"), Kollsman Manufacturing Company, Inc. ("KMC") and Sequa Export Corporation ("Export", and together with Sequa and KMC, "Sellers"), on the one hand, and EL-OP U.S., Inc. ("Buyer") and EL-OP Electro-Optics Industries, Ltd. ("Guarantor"), on the other.
A. Sellers, Buyer and Guarantor have entered into that certain Purchase Agreement, dated as of November 9, 1995 (the "Agreement"), pursuant to which, among other things, Sellers have agreed to sell to Buyer, and Buyer has agreed to purchase from Sellers substantially all of the assets of, and Buyer has agreed to assume certain specified liabilities of, the Kollsman Division of Sequa on the terms and subject to the conditions set forth therein.
B. Sellers, Buyer and Guarantor have entered into that certain First Amendment to Purchase Agreement, dated November 29, 1995 (the "First Amendment"), that certain Second Amendment to Purchase Agreement, dated December 1, 1995 (the "Second Amendment"), that certain Third Amendment to Purchase Agreement, dated December 8, 1995 (the "Third Amendment"), that certain Fourth Amendment, dated December 13, 1995 (the "Fourth Amendment"), that certain Fifth Amendment, dated December 15, 1995 (the "Fifth Amendment"), that certain Sixth Amendment, dated December 18, 1995 (the "Sixth Amendment"), and that certain Seventh Amendment, dated December 19, 1995 (the "Seventh Amendment", and collectively, the "Amendments"), pursuant to which, among other things, the Agreement was amended and the parties agreed to the reimbursement of certain fees incurred by Sellers in connection with certain governmental filings and to certain deadlines with respect the finalization of certain Schedules and Exhibits referred to in the Agreement.
C. Sellers and Buyer have agreed upon the balance of the Schedules and Exhibits that are currently referred to in the Agreement to be agreed upon by them in accordance with the Amendments, and to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, and intending to be legally bound hereby, Sellers, Buyer and Guarantor hereby agree as follows:
1.1 Definitions. All capitalized terms used, but not otherwise defined in this Eighth Amendment, shall have the respective meanings ascribed thereto in the Agreement.
1.2 Other Definitions and Meanings; Interpretations. For purposes of this Eighth Amendment the term "parties" (except where the context otherwise requires) means Sellers, Buyer and Guarantor; the term "person" includes any natural person, firm, association, partnership, corporation, or entity other than the parties, and the words "hereof", "hereby" and other words of similar import refer to this Eighth Amendment as a whole. The headings of the Articles and Sections of this Eighth Amendment have been included herein for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Eighth Amendment.
1.3 Relationship with the Agreement and prior amendments. This Eighth Amendment is intended to amend the Agreement and the Amendments as and to the extent set forth herein. The Agreement and the Amendments, and each and every provision thereof, will otherwise remain in full force and effect to the extent not superseded by this Eighth Amendment and each of the parties reserves all of their respective rights contained therein.
2.1 Agreed Upon Schedules and Exhibits. The parties agree and acknowledge that they have agreed upon the form and substance of the Schedules and Exhibits to the Agreement that are listed on Schedule A attached hereto (the "December 21, 1995 Agreed Upon Schedules") as well as the First Supplement to Disclosure Schedules and, accordingly, have agreed upon the form and substance of all Schedules and Exhibits that are referred to in the Agreement (as amended). Simultaneously with the execution of this Eighth Amendment, Reuben Ben-Arie, Michael E. Feldman and/or and Eric Rubenfeld (as attorneys-in-fact) on behalf of Buyer and Guarantor, and Joseph Allwarden and/or John J. Dowling III, on behalf of Sellers, have initialed for identification the December 21, 1995 Agreed Upon Schedules and First Supplement to Disclosure Schedules. Accordingly, the Agreement is hereby amended in order to reflect the December 21, 1995 Agreed Upon Schedules and First Supplement to Disclosure Schedules, with the same effect as if they had been agreed upon and attached to the Agreement simultaneously with its execution.
2.2 New Outside Dates. Section 3 of the Agreement is hereby amended and restated so as to read in its entirety as follows: "3 Closing. 3.1 Date of Closing. The closing (the "Closing") under this Agreement shall take place at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York after the last conditions specified in Sections 7.1(a), (b), (e), (f) and (i) and 7.2(a), (b), (c) and (e) of this Agreement has been fulfilled (or waived), but in no event whatsoever later than 5:00 p.m. on December 29, 1995. The date on which the Closing is held is referred to in this Agreement as the "Closing Date," and the effective time of closing shall be the close of business (5:00 p.m. EST) on the Closing Date. At the Closing, the parties shall execute and deliver the documents referred to in Section 8 of this Agreement. 3.2 Outside Date for Closing. If any of the following events shall not have occurred on or prior to the following times, this Agreement shall automatically terminate and neither Sellers nor Buyer will be required to give notice of such termination to the other: a. the Closing shall not, for any reason whatsoever, have occurred on or prior to 5:00 p.m. on b. Buyer shall have wire transferred to
Corporation, The Bank of New York, New York, NY ABA #021000018 Account #8090605950 on or before 12:00 p.m. EST on December 28, 1995, immediately available funds, in the amount of $22,500 representing reimbursement to Sequa of one-half (1/2) of the Hart-Scott-Rodino fee previously paid and advanced by Sequa Corporation on c. Sequa shall have agreed in writing prior to 8:00 p.m. EST December 28 1995, in its sole and absolute discretion (which may be subjective), to the terms, conditions and provisions of a proposed intercreditor and subordination agreement with Buyer's lender, which is referred to in Section 6.3 of the Agreement, which agreements will provide, among other things, for the right of Sequa to foreclose on the security interests and mortgages granted to Sequa, with no more than fifteen (15) days prior written notice to Buyer and Buyer's lenders, unless such lenders pay Sequa the full amount of such letters of credit which have been drawn. In the event that Sequa is unable for any reason to agree in writing with Buyer upon the loan documentation, covenants and guaranties referred to in Section 6.3 of the Agreement to be executed by Buyer in favor of Sequa on or before 8:00 p.m. EST on December 28, 1995, then the substitute or back-up letters of credit as required by Section 6.3 of the Agreement must be delivered at and as a condition to Closing. Upon termination pursuant to this Section 3.2 none of the parties hereto shall have any liability of any kind arising out of this Agreement other than for any liability resulting from its breach of this Agreement prior to termination. If the Closing is postponed pursuant to Section 11 of this Agreement, and this Agreement is not otherwise terminated in accordance with the provisions of Section 11, the outside date referred to in this shall be extended by the period of the postponement as provided in Section 11, but in no event whatsoever beyond December 31, 1995." 2.3 Certain Conditions. 2.3.1 EACs and Certain Reserves. The and agree that they have agreed to the Estimates at Completion and to the methodology of determining a reserve, if any, for the purposes of the valuation of the Avionics stock inventory and Avionics excess stock inventory. Such Estimates at Completion have been initialed by the parties, are attached to this Eighth Amendment as Schedule B (the "EACs") and a description of such methodology has been initialed for identification by the parties and is attached to this Eighth Amendment as
Schedule C (the "Methodology"). Accordingly: (a) Sections 7.1(k) and 7.2(f) of the Agreement are each hereby agreed to have been satisfied as Instructions) is hereby amended to annex thereto the EACs and the Methodology as Annex 1 and Annex 2 thereto, respectively, with the same effect as if they had been agreed upon and annexed to such Schedule at the time of its initialing by the parties. 2.3.2 Other Conditions. Section 7.1(c), Section 7.1(h), Section 7.1(j) and Section 7.2(d) are each hereby agreed to have been satisfied as conditions to Closing. Estoppel certificates, if any, and Required Consents will only be delivered to the extent received by Sellers on or prior to the Closing Date. 2.3.3 Certain Litigation Matters. A new Section 7.1(l) is hereby added to the Agreement which reads in its entirety as follows: "(l) All matters shall be satisfactory in all respects in Buyer's sole and absolute discretion (which may be subjective) with respect to the "governmental settlement" referred to in Item 1 of Schedule 4.10 to the Agreement and described in the March 3, 1995, November 22, 1995 and December 13, 1995 letters from McKenna & Cuneo that are attached thereto, and if Buyer has not advised Sellers that Buyer is not satisfied with all such matters in writing personally delivered to either Joseph C. Allwarden or John J. Dowling III and receipted in writing by either Joseph C. Allwarden or John J. Dowling III at the offices of Proskauer Rose Goetz & Mendelsohn LLP, 1585 Broadway, New York, New York 10036 by 8:00 p.m. EST, December 27, 1995 to the contrary, then such shall be deemed satisfied." 2.4 Certain Covenants.
A new Section 6.17(d) shall be added to the Agreement and shall read in its entirety as follows: "(d) From and after the Closing, Buyer shall not use that portion of Sellers' computer program for processing payroll checks using Sellers' bank bar codes." 2.4.2 Legal Opinions. (a) Section 8.1(b) is hereby amended by words "substantially the form of Exhibit 8.1(b)" by the words "a form reasonably satisfactory to Buyer and its counsel".
(b) Section 8.1(b) is hereby amended by words "substantially the form of Exhibit 8.2(c) by the words "a form reasonably satisfactory to Sellers and their counsel". 2.4.3 Suspension and Debarment. A new hereby added to the Agreement and shall read as follows: "6.24 Suspension and Debarment. (a) Except as set forth in Section 6.24 (b), (c) and Agreement, Buyer hereby assumes and accepts all risk of any suspension and/or debarment proceedings asserted against Buyer, including risk of loss, termination or cessation of business and the like with the Government to the extent arising out of or in connection with any of Sellers' actions or omissions, whether known or unknown, on or before the close of business on the Closing Date, including but not limited to matters disclosed in Schedules 4.9, 4.10 and 4.24 to this Agreement, and except as provided in (b) and (c) below whether or not involving a misrepresentation or breach of warranty by Sellers. (b) Sellers hereby retain all liabilities and result of (i) any suspension and/or debarment proceedings pending or threatened in writing against Sellers relating to the Business on or before the close of business on the Closing Date other than with respect to the matters disclosed in Schedules 4.9, 4.10 and 4.24 to this Agreement, the risk of which shall be with Buyer; and (ii) any suspension and/or debarment proceedings: (A) solely to the extent arising out of or in connection with those matters involving a misrepresentation or breach of warranty by Sellers of this Agreement but then if and only if such misrepresentation or breach of warranty is actually known on or before the close of business on the Closing Date by any of Joseph C. Allwarden, John J. Quicke, John J. Dowling III, Stuart Z. Krinsly, Ira A. Schreger and Jesse Battino; or (B) arising out of or in connection with those matters involving a misrepresentation or breach of warranty of the representation and warranty provided in (c) below. (c) Sellers represent and warrant that, except for the disclosed as Item 2 of Schedule 4.10, there are no pending suspension and/or debarment proceedings nor are there any such suspensions and/or debarment proceedings presently threatened in writing.
(d) Notwithstanding anything contained in this Section all liabilities and obligations with respect to criminal monetary fines, civil monetary fines, administrative monetary fines, monetary penalties and punitive damages of a monetary nature, solely to the extent arising out of or in connection with Sellers' actions or omissions on or before the close of business on the Closing Date shall be deemed to be included within the meaning of the term "Sellers' Other Liabilities", including but not limited to such monetary amounts assessed with respect to the matters disclosed in Schedule 4.10 and all such monetary amounts assessed with respect to actions or omissions of Sellers resulting in a suspension or debarment proceeding described in either Section 6.24 (a) or (b); and (ii) each Seller shall indemnify Buyer for all out-of-pocket expenses, including reasonable fees and expenses of counsel, incurred by Buyer in connection with any suspension or debarment proceeding described in Section 6.24 (a) or (b) subject, however, to the limitations on indemnification and on survival of representations and warranties as provided in this Agreement and further provided that the Two Hundred Thousand Dollar ($200,000) deductible may be applied to all such fees and expenses of counsel."
3.1 Severability. If any provision of this Eighth Amendment shall finally be determined to be unenforceable, then such provision shall be deemed to be severed from this Eighth Amendment and every other provision of this Eighth Amendment shall remain in full force and effect. 3.2 Counterparts. More than one counterpart of this Eighth Amendment may be executed by the parties hereto, and each fully-executed counterpart shall be deemed an original without production of the others. 3.3. Complete Agreement The Agreement (as amended), the Amendments and this Eighth Amendment set forth the entire understanding of the parties with respect to the subject matter thereof and, together, supersede all prior letters of intent, agreements (including, without limitation, the Letter Agreement referred to in the First Amendment), covenants, arrangements, communications, representations, or warranties, whether oral or written, by an officer, employee, or representative of either party relating thereto. 3.4 Acknowledgment. Sellers and Buyer acknowledge and agree that each of them has been informed by the other that if any of the deadlines set forth in Section 3 of the Agreement (as amended) shall not have been timely met for any reason whatsoever, then, in such vent, neither party shall be obligated to grant any further extensions to this Eighth Amendment or the Agreement (as amended) and such decision shall be in such party's sole and absolute discretion (which may be subjective) and the Agreement (as amended) shall automatically terminate without necessity of notice or discussion. Sellers have additionally advised Buyer that they are unwilling and unable and do not have power or authority, including Board of Director approval, to consummate any transaction after December 29, 1995 and that from and after December 30, 1995, Sellers may in their sole and absolute discretion (which may be subjective) solicit and/or accept offers for the Business from third parties.
3.5 Wire Transfer. Sellers acknowledge that Buyer informed Sellers that the wire transfer referred to in Section 3.2 b was made at approximately 4:15 p.m. EST. Sellers will confirm whether such amounts were received on or before 12:00 p.m. on December 28, 1995 and so advise Buyer.
IN WITNESS WHEREOF, the parties hereto have each caused this Eighth Amendment to be executed by its duly authorized officers or signatory as of the date first above written.
to Eighth Amendment to Purchase Agreement
dated as of December 22, 1995
List of December 21, 1995 Agreed Upon Schedules and Exhibits
4.13 List of Prepayments (Superseded and replaced in its entirety by Schedule 4.13 dated December 28, 1995 and included in the | 8-K | EX-10.1 | 1996-01-16T00:00:00 | 1996-01-16T15:34:19 |
0000912057-96-000518 | 0000912057-96-000518_0007.txt | Re: Robertson Stephens Value + Growth Fund
Reference is made to the Investment Advisory Agreement (the "Agreement") dated as of April 17, 1992, between Robertson Stephens Investment Trust (the "Trust") in respect of the Robertson Stephens Value +Growth Fund, a series of shares of the Trust (the "Fund"), on the one hand, and Robertson, Stephens & Company Investment Management, L.P. ("RSIM"), on the other, and to the Distribution Plan of the Fund to be implemented on this date, contemplating the payment of fees by the Fund to Robertson, Stephens & Company LLC ("RS&Co."), the Fund's distributor.
RSIM hereby agrees that the fee payable by the Fund to RSIM pursuant to Section 8 of the Agreement shall be reduced in respect of any period when the Distribution Plan is in effect by an amount equal to the fees payable by the Fund to RS&Co. under the Distribution Plan for such period.
A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of the Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trust by an officer of the Trust as an officer and not individually and the obligations of the Trust arising out of this Agreement are not binding upon any of the trustees, officers, or shareholders of the Trust individually but are binding only upon the assets and property of the Trust.
If this letter reflects your understanding of our agreement, please sign in the space indicated below, whereupon this letter shall become a binding agreement between under seal. | 485BPOS | EX-99.5-I | 1996-01-16T00:00:00 | 1996-01-16T15:18:38 |
0000912057-96-000529 | 0000912057-96-000529_0002.txt | THIS GUARANTY ("Guaranty") is entered into as of the _____ day of July, 1995, by The Kushner-Locke Company ("Guarantor") in favor of Banque Paribas, Los Angeles Agency ("Bank"), with reference to the following:
A. Dayton Way Pictures III, Inc. ("Borrower") and Bank have entered into a Loan and Security Agreement, dated as of July __, 1995 (said Loan and Security Agreement, as it may hereafter be modified, amended, extended and restated from time to time, being referred to herein as the "Loan Agreement"), pursuant to which Bank has agreed to advance certain funds to Borrower in the aggregate principal amount of One Million Nine Hundred Eighty-Three Thousand Three Hundred Thirty-Three Dollars (US$1,983,333.00) (the "Loan") to be used in payment of certain costs of production of the motion picture entitled "Freeway".
B. Pursuant to an agreement between Borrower and Guarantor, Guarantor assigned the rights to the Picture and agreed to finance certain costs of production of the Picture.
C. It is a condition precedent to the making of the Loan by Bank under the Loan Agreement that Guarantor execute and deliver this Guaranty to Bank.
D. Capitalized terms used herein without definition shall have the meanings ascribed them in the Loan Agreement.
NOW, THEREFORE, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Guarantor unconditionally agrees to guarantee the Guarantied Obligations (as hereinafter defined) in accordance with the following terms and conditions:
Until all of the Obligations in favor of Bank arising under or with respect to the Loan Agreement are repaid in full and the Commitment Period has terminated, Guarantor hereby unconditionally and irrevocably guaranties the due and punctual payment of all obligations in favor of Bank arising under or with respect to the Loan Agreement up to an amount equal to fifty percent (50%) of the Indebtedness of Borrower to Bank under the Loan Agreement (the "Guarantied Obligations"), upon [the date which is six (6) months after delivery of the Picture to Kushner-Locke International, Inc.], and agrees to pay, in addition to the Guarantied Obligations, any and all costs and expenses (including fees and disbursements of outside counsel) incurred by Bank in enforcing any rights under this Guaranty. In furtherance of the foregoing and not in limitation of any other right which Bank may have at law or in equity against Guarantor by virtue hereof, upon the failure of Borrower to pay any of the Guarantied Obligations when and as the same become due, as aforesaid, Guarantor will, within ten (10) days after written demand therefor, pay, or cause to be paid, in cash, to Bank, an amount equal to all Guarantied Obligations then owed to Bank, subject to any defenses thereto which Borrower may have (if any) under the Loan Agreement.
Guarantor further agrees that this Guaranty constitutes a guaranty of payment when due and not of collection and waives any right to require that any resort be had by Bank to any of the security held for payment of any of the Guarantied Obligations or to any balance of any deposit account or credit on the books of Bank in favor of Borrower or any other Person.
Guarantor agrees that the Guarantied Obligations may be rescinded, waived, extended, renewed or altered, in whole or in part, without notice or further assent from it, and that Guarantor will remain bound by this Guaranty notwithstanding any such rescission, waiver, extension, renewal or alteration of any Guarantied Obligation.
Guarantor waives presentment, demand and protest of any Guarantied Obligation and also waives notice of protest for nonpayment. Without limiting the generality of the foregoing and to the fullest extent permitted by law, Guarantor hereby waives and relinquishes any and all rights, defenses and benefits arising under California Commercial Code Section 3605, California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2850, 2899 and 3433, and all other rights, defenses and benefits limiting the liability of or exonerating guarantors or sureties offered by law as well as the benefits of Sections 580a- 580d and 726 of the California Code of Civil Procedure. The obligations of Guarantor under this Guaranty shall not be affected by:
(a) the failure of Bank to assert any claim or demand or to enforce any right or remedy against Borrower under the provisions of the Loan Agreement, any other Loan Document or any instrument executed pursuant thereto or any other agreement or otherwise; or
(b) any extension or renewal of any provision of any thereof; or
(c) any rescission, waiver, amendment or modification of any of the terms or provisions of the Loan Agreement, any other Loan Document, or any instrument or agreement executed pursuant thereto; or
(d) Bank taking and holding security or collateral for the payment of this Guaranty, any other guaranties of the Guarantied Obligations or any other liabilities of Borrower or the Guarantied Obligations, and Bank exchanging, enforcing, waiving and releasing any such security or collateral; or
(e) the failure to perfect any security interest in, or the release of, any of the security held by Bank for any of the Guarantied Obligations; or
(f) the failure of Bank to exercise any right or remedy against any other guarantor of any of the Guarantied Obligations; or
(g) Bank applying such security or collateral and directing the order or manner of sale thereof as in its discretion it may determine; or
(h) Bank settling, releasing, compromising, collecting or otherwise liquidating the Guarantied Obligations and any security or collateral therefor in any manner, as Bank may determine.
The obligations of Guarantor under this Guaranty shall not be subject to any reduction, limitation, defense (other than such defenses (if any) as Borrower may have under the Loan Agreement), setoff, recoupment, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise of any of the Guarantied Obligations, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of any of the Guarantied Obligations or any discharge of Borrower from any of the Guarantied Obligations in a bankruptcy or similar proceeding or otherwise. Without limiting the generality of the foregoing, the obligations of Guarantor under this Guaranty shall not be discharged or impaired or otherwise affected by any default, failure or delay, or by any other act or thing or omission or delay to do any other act or thing that may or might in any manner or to any extent vary the risk of Guarantor or which would otherwise operate as a discharge of Guarantor as a matter of law or equity.
Guarantor assumes the risk of keeping informed concerning the financial condition of Borrower and all other circumstances bearing upon the risk of nonpayment of the Guarantied Obligations and further agrees that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Guarantied Obligation is rescinded or must otherwise be restored by Bank upon the bankruptcy or reorganization of Borrower, or any other Person or otherwise.
Guarantor hereby irrevocably waives with respect to Borrower, its successors and assigns and any other person, including other guarantors, who may have similar rights against Borrower, any and all rights of subrogation, reimbursement, exoneration, contribution or setoff, any and all rights to participate in any claim or remedy of Bank against Borrower or any collateral, and any and all other rights that could accrue to a surety against a principal, to a guarantor against a maker or obligor, to an accommodation party against the party accommodated or to a holder or transferee against a maker, and which Guarantor may have or hereafter acquire against Borrower or any such other person by contract, at law or in equity in connection with or as a result of
Guarantor's execution, delivery and/or performance of this Guaranty or any other Loan Document. Guarantor shall not at any time hereafter have or assert any such claims or rights against Borrower, its successors and assigns or any such other persons either directly or as an attempted setoff to any action commenced against Guarantor by Borrower, Bank or any other person. Guarantor hereby acknowledges and agrees that this waiver is intended to be for the benefit of Borrower, as a third party beneficiary, as well as for the benefit of Bank. Therefore, the waiver set forth herein shall remain at all times hereafter in full force and effect, and may be enforced by Borrower in its own name and right, notwithstanding that all indebtedness and obligations of Borrower to Bank arising under the Loan Documents have been repaid in full.
Guarantor acknowledges that all of the waivers and consents set forth herein are freely granted, after consultation with competent counsel, since it is Guarantor's purpose and intent that all of Guarantor's obligations hereunder be absolute, independent and unconditional under any and all circumstances.
Guarantor represents and warrants that:
(i) Guarantor is a corporation duly organized and existing in good standing under the laws of the State of California, respectively, and in each other jurisdiction in which each transacts business, has all requisite corporate power to own and operate its property and to carry on its business as now conducted and as proposed to be conducted. Guarantor has all necessary corporate or legal power and authority to enter into this Guaranty and to perform its obligations and undertakings hereunder.
(ii) There is no action, suit, investigation or proceeding pending or, to the best knowledge of Guarantor after due inquiry, threatened against or affecting Guarantor, any of its subsidiaries, or any properties or rights of any of such corporations or entity, before any court, arbitrator or administrative or governmental body, which might reasonably be expected to result, individually or in the aggregate, in any material adverse change in the business, condition or operations of Guarantor or any of its subsidiaries taken as a whole, or seeks to restrain, enjoin, prevent the consummation of or otherwise questions the validity or legality of this Guaranty or any action taken or to be taken pursuant hereto and, to the best knowledge or Guarantor, there is no valid basis for any such action, proceeding or investigation.
(iii) Neither the execution nor delivery of this Guaranty, nor the fulfillment and compliance with the terms and conditions hereof, will (A) conflict with, or result in a breach or violation of, or constitute a default under, any of the terms, conditions or provisions of (x) the articles of incorporation, bylaws (if any) or any other organizational documents of Guarantor or any of its subsidiaries, or (y) any term of any material agreement, instrument, order, writ, judgment or decree to which Guarantor or any of its subsidiaries is a party or by which its
properties or assets are bound, or (z) any present statute, rule or regulation binding on Guarantor or any of its subsidiaries, or (B) result in the creation of any lien upon any of the properties or assets of Guarantor or any of its subsidiaries under any agreement referred to in clause (y) above.
No delay or omission by Bank to exercise any right under this Guaranty shall impair any such right, nor shall it be construed to be a waiver thereof. No amendment, modification, termination or waiver of any provision of this Guaranty, or consent to any departure by Guarantor therefrom, shall in any event be effective without the written concurrence of Bank. No waiver of any single breach or default under this Guaranty shall be deemed a waiver of any other breach or default.
In addition to all rights of setoff given to Bank by law against any property of Borrower or of Guarantor, Bank and each subsequent holder of the promissory note delivered to Bank pursuant to the Loan Agreement shall have a right of setoff against all property of Guarantor now or hereafter in the physical possession of or on deposit with Bank or such subsequent holder, whether held in a general or special account, on deposit for safekeeping, evidenced by a certificate of deposit or otherwise (but not trust accounts). Each such right of setoff may be enforced or exercised without demand upon or notice to Guarantor, shall continue in full force unless specifically waived by Bank or such subsequent holder in writing and shall not be deemed waived by any conduct of Bank or such subsequent holder, by any failure of Bank or such subsequent holder to exercise any such right of setoff or by any neglect or delay in so doing. Pending any such setoff or application Bank or such subsequent holder may hold all such property and deposits as collateral and return as unpaid any and all checks drawn against such deposits which are presented for payment.
To the extent that any underlying Guarantied Obligation is not bearing interest, payments not made when due hereunder by Guarantor to Bank on account of such Guarantied Obligation shall bear interest from the due date hereunder until paid to Bank at the Default Rate specified in the Loan Agreement. Guarantor shall also, upon demand, indemnify Bank against and pay to Bank (1) any and all outside attorneys' fees, costs and other expenses that Bank actually expends or incurs in collecting or compromising the Guarantied Obligations or in enforcing this Guaranty against Guarantor, whether or not suit is filed, including, without limitation, all costs, attorneys' fees and expenses actually expended or incurred by Bank in connection with, or in defense of, any insolvency, bankruptcy, reorganization, arrangement or other similar proceeding involving Guarantor, Borrower or any other person that in any way affects the exercise by Bank of its rights and remedies hereunder and (2) any and all amounts which Bank at any time returns to Borrower or to Borrower's trustee in bankruptcy, whether voluntarily or involuntarily and whether or not suit is filed, in response to any claim that Bank had theretofore received preferential payments or transfers in fraud of creditors within the meaning of any bankruptcy, insolvency or other similar law, now or hereafter existing. As used herein attorneys' fees "actually expended or incurred" means the full and actual cost of any legal services actually performed in connection with the matter for which such fees are sought, calculated on the basis of the usual fees charged by the attorneys performing such services, and shall not be limited to "reasonable attorneys' fees" as that term may be defined in statutory or decisional authority.
Subject to any duty of Bank imposed by contract or by law and subject to he direction of a court of competent jurisdiction, upon payment in full of the Guarantied Obligations Guarantor shall be entitled to the release of all security interests in any and all collateral given to Bank by Guarantor to secure this Guaranty and to the return of any and all such collateral which is in the possession of Bank; PROVIDED, however, that Bank shall not be obligated to return such collateral to Guarantor, to deliver the same to the holder of any subordinate lien or to release any of Bank's security interests therein until it is satisfied, in its sole and absolute discretion, that all amounts which it has received in respect of the Guarantied Obligations are no longer subject to being recaptured under any applicable bankruptcy, insolvency or similar laws. The return of collateral, however effected, shall be without recourse to Bank, and Bank shall be entitled to receive appropriate documentation to such effect. The return of such collateral shall be effected without representation or warranty and shall not entitle Guarantor to any right to any endorsement.
This Guaranty shall be binding upon Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of Bank and, in the event of any transfer or assignment of rights by Bank, the rights and privileges herein conferred upon Bank shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof.
This Guaranty, and any instrument or agreement required hereunder, shall be governed by, and construed and enforced in accordance with, the laws of the State of California. Guarantor hereby agrees that any legal action or proceeding arising under or with respect to this Guaranty or any other agreement, document or other instrument executed in connection herewith or pursuant hereto, or any action or proceeding to execute or otherwise enforce any judgment obtained against Guarantor or any of its properties may be brought in the courts of the State of California or in the Federal Courts of the United States for the Central District of California, provided always that suit also may be brought in the courts of any country or place where Guarantor or any of its assets may be found, and, by execution and delivery of this Guaranty, Guarantor hereby irrevocably waives any objection which Guarantor may now or hereafter have to the venue of any such suit, action or proceeding brought in the courts of the State of California or in the Federal Courts of the United States for the Central District of California, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Service of all writs, processes and summonses in any action, suit or proceeding instituted by Bank in any of the courts of the State of California or of the United States of America may be made upon Guarantor by any means permitted by law, and to the extent permitted by law, by the mailing of copies of the same to Guarantor, enclosed in registered or certified mail cover, at the address designated for Guarantor below its signature hereto.
Guarantor consents to service of process in accordance with California law and hereby appoints Bruce Lilliston, Esq. as agent for service of process.
This Guaranty may be executed in any number of counterparts, each of which shall be deemed to be an original for all purposes; but such counterparts shall be deemed to constitute but one and the same instrument.
IN WITNESS WHEREOF, the undersigned Guarantor has caused this Guaranty to be duly executed as of the day and year first written above.
By: [Signature of Donald Kushner] Its:
11061 Wilshire Blvd, 21st Floor | 10-K | EX-10.36 | 1996-01-16T00:00:00 | 1996-01-16T16:18:17 |
0000912057-96-000542 | 0000912057-96-000542_0014.txt | <DESCRIPTION>EXHIBIT 13 ANNUAL REPORT TO SHAREHOLDERS
Nuclear Metals, Inc. develops and manufactures a variety of advanced metal products serving a diverse customer base which includes the aerospace, environmental, defense, medical and energy industries.
Management's Discussion and Analysis of Operations 14 Consolidated Statements of Operations 17 Consolidated Statements of Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements 20 Report of Independent Public Accountants 32
Net Sales $ 18,784,000 $ 19,004,000 Net Income (loss) $ 510,000 $(10,196,000) Earnings (loss) per Share $ .22 $ (4.43) Weighted Average Number of Shares of Common Stock Outstanding 2,352,756 2,300,131 Number of Employees at Year-end 200 189 Total Assets $ 40,886,000 $ 40,542,000 Working Capital $ 15,866,000 $ 17,477,000 Stockholders' Equity $ 27,245,000 $ 26,252,000
NMI will continue to strengthen our product and customer base into the 21st century. The entire organization is committed to providing superior metallurgical technology, products, and services to our customers by continuously striving for excellence in all we do. The foundation of NMI's success in the marketplace is technological excellence and innovation. These qualities are evidenced by the introduction of our patented Beralcast-TM-, a beryllium aluminum alloy, in several new and expanding aerospace systems during 1995. Making an accelerated transition from development to production of a new engineering material can only occur when a team of individuals, which includes our customers, solves technical, cost, and scheduling issues in a cooperative manner. Our involvement in the Comanche Helicopter Team has solidified the notion that Customer Partnerships, with a focus on cost as a design requirement, are key to continued success and expansion in today's aerospace market. NMI is increasing its capability to accommodate the tremendous growth that is occurring in the Beralcast-TM- product area.
Several new domestic and international customers incorporated Beralcast-TM- into their systems during 1995 to take advantage of its light weight, high stiffness and strength, and thermal characteristics. In the upcoming years, NMI expects to introduce low cost manufacturing techniques for expanded use of Beralcast-TM- in the commercial marketplace.
Through the fifty years that NMI has created new products and solved customer's metallurgical problems, we have steadily built a profitable base of niche metal products and services that is the foundation for continued creativity and product innovation. The production of high purity Cobalt Chrome alloy powders for the medical prosthetic device industry is but one mature product where NMI's unmatched technical and quality standards are required by customers in the medical industry.
The stringent quality and reliability needs of the satellite and spacecraft industry mean continued reliance on NMI for seamless Beryllium tubing and Bi-metallic transition joints. Commercial applications for our Depleted Uranium(DU) sheilding products have been strengthened by the expanding international marketplace which is being utilized by our existing customers. DU is still the most effective gamma radiation shield available at competitive prices.
Offering extrusion services to customers in the Superconducting wire area, for precision navigational systems, and educational fields for a variety of other alloy systems, ensures that NMI is abreast of new materials as they are developed.
We are working diligently to improve the quality and lower the manufacturing costs associated with all of our niche products to offer increasing value to our customers.
Carolina Metals, Inc. (CMI) has the buildings, permits, and talented workforce to accept the challenge of converting radioactive scrap metal into useful products. This capability was successfully demonstrated during 1995 under Westinghouse Savannah River Company's Beneficial Reuse Program for recycling slightly contaminated Stainless Steel into useful products. NMI's competitive proposal for a full scale recycling facility to manage all of the DoE's steel scrap was selected by Westinghouse and recommended for implementation. This facility will utilize State-of-the-Art technology to be competitive with the commercial marketplace while ensuring that contaminated materials are recycled rather than buried as a waste. The same facility would use its excess capacity in an environmentally sound manner to recycle contaminated steel from the commercial nuclear industry.
As a Strategic Team member, ARMCO Inc., the nations premiere specialty steel producer, will participate with NMI in the construction and production operations associated with the large scale recycling facility. There are several DoE initiatives underway to advance the likelihood of a major recycling program in the near future. CMI will continue to offer melting and recycling services to the DoE, DoD, and commercial industry with existing equipment while production opportunities solidify.
The United States Enrichment Corporation (USEC) has committed to the commercialization of the Atomic Vapor Laser Isotope Separation Process (AVLIS) which will replace Gaseous Diffusion as the means for separating fissionable U-235 from natural uranium. This transition will occur over the next ten years. The annual AVLIS feed requirements, which CMI is ideally suited to produce with available floor space, permits, and trained personnel, will be 10,000 metric tons per year. NMI has supplied the AVLIS feed stock for the development work performed at the Lawrence Livermore National Laboratory.
USEC is scheduled to privatize from the Department of Energy (DoE) during 1996. Once this occurs, USEC will be required by the Nuclear Regulatory Commission to convert the byproduct stream of Uranium Hexafluoride gas (UF(6)), created during the gaseous diffusion process, into a stable product such as Uranium Tetrafluoride (UF(4)). With the only installed domestic capacity, and ability to ramp up to significantly higher rates, CMI offers USEC a Strategic Partnership opportunity that is unmatched in the uranium industry. As the DoE's UF(6) stockpile of over 1 billion pounds is addressed, opportunities to increase conversion revenues will materialize.
Fiscal 1995 was a successful transition year for NMI. While sales revenues were flat, we achieved net income of $522,000 compared to a loss of $10.2 million in fiscal 1994. Our year ending backlog more than doubled to $30.7 million which was the highest in eight years and the second highest in Company history. NMI has transitioned from being a Depleted Uranium (DU) penetrator company to a diversified company with four new markets each having potential annual sales revenue which could exceed our existing revenue. In effect we view ourselves as a high growth start-up company in these new markets.
Fiscal 1995 sales of $18.8 million and net income of $522,000 or $0.22/share compared favorably to fiscal 1994 sales of $19 million and a loss of $10.2 million or $4.43/share. Year-end backlog more than doubled to $30.7 million from $14.5 million the prior year. Capital expenditures for the year were $0.8 million.
Our balance sheet remains stable even after replacing, at a discount, long term debt with short term borrowing. Year-end cash and marketable securities were $1.25 million. Inventories of $17.5 million were $3.1 million higher than the prior year. This inventory increase relates to DU penetrator blanks made for a foreign customer under a purchase order option that has not yet been funded. Funding delays on this option have caused serious liquidity concerns since September 1995. We expect funding and full payment in the second quarter of Fiscal 1996 which will relieve the ongoing liquidity concerns. We are most grateful to State Street Bank & Trust Company which has increased and extended our line of credit to cover this delayed payment.
Fiscal 1995 sales of our Beralcast-TM- products jumped 800% over the prior year along with a corresponding increase in year-end backlog. Lockheed Martin has become our largest customer replacing Olin Corporation (a DU penetrator customer). Our patented alloys have been chosen by Lockheed Martin for 52 different components in the Electro-Optic system of the Army's new Comanche helicopter. Prototype hardware for the Comanche will be delivered in fiscal 1996 and 1997 with production beginning in 2002. NMI's lightweight, high-strength alloys were also selected by Rockwell International for use on the Army's new Patriot missile, and for upgraded missile guidance systems. Major Aerospace companies including Boeing, Loral, Honeywell, Hughes Aircraft Co., United Technologies, and others have recently purchased Beralcast-TM- prototype hardware for future use in production of systems. Aircraft engine manufacturers have expressed interest in evaluating Beralcast-TM- for several components. Once production begins, NMI anticipates dramatic sales revenue increases.
UNITED STATES ENRICHMENT CORPORATION (USEC)
The United States Government is in the process of privatizing uranium enrichment services in 1996. The new company called USEC has committed to commercializing a new uranium enrichment process developed by Lawrence Livermore National Laboratory (LLNL). This new process is called Advanced Vapor Laser Isotope Separation (AVLIS). NMI has supplied virtually all the DU feed stock to LLNL since 1980. The Company has proposed a partnership with USEC to transfer the feed stock process technology from LLNL to Carolina Metals, Inc. (CMI) our wholly owned subsidiary in Barnwell SC. A pilot plant would be constructed over the next three years with a full size commercial facility scheduled for production commencing in 2002. CMI is ideally suited for this major new initiative, with a trained workforce, ample remote property, licenses and strong community acceptance. Once in production we anticipate substantial sales revenue for AVLIS feed stock.
Once USEC is privatized it will be required by the Nuclear Regulatory Commission to dispose of the depleted UF(6) tails from the existing gaseous diffusion plants. NMI has submitted a partnership proposal to USEC to perform this work at CMI which is the only operational and licensed depleted UF(6) conversion plant in North America. Acceptance of this proposal would result in a major expansion at CMI to handle the large volumes of depleted UF(6) generated each day by USEC. The Department of Energy (DoE) has its own inventory of over one billion pounds of depleted UF(6) that one day will need to be converted to a more stable and useful form. This marketplace should provide a substantial contribution to our future sales and earnings.
During fiscal 1995 the Company installed new metal melting equipment and received the appropriate license modifications at CMI to demonstrate the recycling of contaminated stainless steel into useful products for the Department of Energy. The Company has undertaken an expansion project to double existing metal melting capabilities at CMI to better service DoE and commercial nuclear power customers. The Company entered into a teaming agreement with Alaron Corporation of Columbia, SC to provide metal recycling services to the commercial nuclear power industry.
The Company's offer to commercialize advanced steelmaking technology in partnership with ARMCO Inc. was recommended for approval to DoE by Westinghouse, Savannah River Co. The DoE is evaluating our proposal to install a steel micromill at CMI.
During fiscal 1995 the Company hired highly skilled technical people to support increasing Beralcast-TM- business at NMI and expanded by 50% the workforce at CMI supporting the new metal recycling business. Our commitment to Research and Development was enhanced by the addition of a Ph.D. powder metallurgist to develop new applications for our Specialty Powders, and a Ph.D. chemist to develop recycling processes primarily for USEC. The Company now has five Ph.D.'s developing technology to expand our product mix.
It is with deep sadness and regret we report that NMI Director Richard S. Vokey pased away in July 1995. Mr. Vokey served on the Board of Directors for 13 years. His sage advice, intelligence, and friendship will be greatly missed.
During fiscal 1995 the Company initiated a company-wide effort to receive ISO 9002 certificate of registration during calendar 1996. We have joined the US Army's Contractor Performance Certification Program(CP)(2) that recognizes companies who demonstrate a total commitment to producing quality products. To become certified we must satisfy rigorous certification requirements, that include aggressive utilization of Statistical Process Control (SPC), demonstrate continuous product and process improvements, and a demonstrated commitment to customer satisfaction. This program will result in a stronger, more profitable Company committed to customer satisfaction.
We believe NMI's sales and earnings will increase substantially in fiscal 1996. Never before has the Company seen four new market areas ideally suited to its technology, licenses, and site locations; each able to sustain record sales and earnings for the foreseeable future. We have a tremendous group of talented and dedicated employees, new partnerships with customers and suppliers all of which translates into an exciting opportunity for growth in our business. We are committed to achieving financial results that will enhance shareholder value.
Thank you for your continued support and confidence.
/s/ ROBERT E. QUINN /s/ GEORGE J. MATTHEWS Robert E. Quinn George J. Matthews [LOGO] President Chairman of the Board
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF EMPLOYEES)
THIS SUMMARY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES WHICH APPEAR LATER IN THIS REPORT.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS)
FISCAL 1995 COMPARED WITH FISCAL 1994
Net sales decreased by $220,000 or 1% in fiscal 1995. Sales in the Uranium Services and Recycle industry segment increased by $217,000 or 5%. Sales in the Specialty Metal Products industry segment increased by $4,818,000 or 66%. Sales in the Depleted Uranium Penetrator industry segment decreased by $5,255,000 or 75%.
The increase in the Uranium Services and Recycle industry segment was mainly due to increases in remelt services. The increase in the Specialty Metal Products industry segment was a result of increased sales of beryllium products and commercial depleted uranium. The decrease in the Depleted Uranium Penetrator industry segment was primarily due to lower large caliber penetrator production sales.
Gross income (net sales and contract revenues less cost of sales) increased by $5,918,000 to $3,332,000 or 18% of sales as compared to $(2,586,000) or (14)% of sales for fiscal 1994. This increase in gross income is primarily due to increased reserves taken in fiscal 1994 and the absence in fiscal 1995 of losses on certain contracts which occurred during fiscal 1994.
Selling, general and administrative expenses increased by $608,000 to $4,817,000. This increase was attributable to higher legal and audit costs which were primarily associated with debt restructuring and a property sale. As a percentage of sales, these expenses increased to 26% as compared to 22% for the prior year.
Company-sponsored research and development expenses decreased by $136,000 to $439,000 for fiscal 1995. As a percentage of sales, these expenses were 2% as compared to 3% in fiscal 1994.
Interest and other income, net, increased to $232,000 for the fiscal year as compared to $120,000 for the prior year. This increase was mainly due to a gain recognized during the second quarter of fiscal 1995 on the sale of an office building.
Interest expense decreased by $200,000 to $350,000 as compared to fiscal 1994. This decrease was primarily the result of reductions in debt during 1995.
The Company realized a $585,000 extraordinary gain, net of taxes of $10,000, on the early extinguishment of debt.
Income taxes benefited during 1995 and 1994 were at an effective rate of 96% and 10%, respectively. During fiscal 1995 the Company received $978,000 in tax refunds from carryback losses and reduced tax reserves by $989,000 as a result of successful completion of a federal tax audit.
Inflation has not had a material impact on the Company's cost of doing business. Management attempts to protect the Company by adjusting prices where market conditions permit and by reviewing and improving production processes where possible. Price escalation clauses also are negotiated into long-term contracts when possible.
During fiscal 1995, working capital decreased to $14,366,000 from $17,477,000 in fiscal 1994. This decrease is primarily due to debt reduction and restructuring costs.
The Company was profitable in fiscal 1995 for the first time since fiscal 1992, inclusive of a tax benefit of $1,967,000 and a $585,000 gain on early extinguishment of debt. As a result of cumulative losses in prior years, due primarily to a downturn in the Company's defense contracting business and related downsizing, as well as to the costs of investing in new lines of business, the Company has experienced cash flow difficulties and has funded its operating and cash flow deficits primarily from borrowings.
The Company's cash flow projections for fiscal 1996 indicate that there is sufficient cash to sustain operations. The report of the Company's independent auditors included with the Company's financial statements for the fiscal year ended September 30, 1995, expresses concern about the Company's ability to continue as a going concern in light of the current status of its indebtedness and potential delays in receiving a critical sales order and payment from a foreign customer for penetrator blanks. During fiscal 1995, the Company manufactured penetrator blanks in accordance with a contract option with a foreign customer without funding in order to preserve critical skills within the Company, while the U.S. Army's multi-year 120mm requirements were finalized. (This strategy was successful in obtaining a multi-year U.S. Army 120mm contract.) The Company expected a payment of $3,030,000 in September, 1995 for work performed on the penetrator blanks for the foreign customer. As of January 10, 1996, the Company had not received such sales order and payment and the exact timing of payment to the Company is uncertain. The customer has documented its intention to fund the option in the near future by providing the Company with a letter of intention. Therefore, the Company expects it will receive the payment, and that upon receipt of such payment, the Company will be able to continue as a going concern, addressing the matter raised in the auditor's report. While management is confident that this payment will be received, the Company simultaneously is pursuing several potential alternate sources of cash to attempt to insure that the Company has adequate cash to sustain operations.
Since restrictive covenants in the Company's agreements with lenders limit borrowing by the Company other than under the existing credit facilities, the Company may seek to raise cash through the sale of its common stock (or securities convertible into common stock). The issuance of additional equity securities could have a dilutive effect on the Company's outstanding common stock. There can be no assurance that the Company would be able to raise additional funds through a sale of its equity securities on favorable terms, if at all.
On January 11, 1996, the Company and its commercial bank extended the maturity dates of the credit facilities (See Notes 1 and 6 of the Notes to Consolidated Financial Statements) pursuant to the terms contained in a certain Forbearance and Amendment Agreement dated as of January 11, 1996 between the Company, its wholly-owned subsidiary, Carolina Metals, Inc. and State Street Bank and Trust Company (the "Forbearance Agreement"). As required by the bank prior to the execution of the Forbearance Agreement, on January 11, 1996 the Company sold an aggregate of $510,500 in 10% convertible subordinated debentures to certain investors. (See Note 1 of the Notes to
The Company also has outstanding approximately $800,000 in principal amount on industrial revenue bond indebtedness.
The Company did not declare any dividends during its last two fiscal years. Given the Company's current cash flow situation, the Company does not expect to pay dividends in the next year. Future cash dividends if any, would be paid on an annual basis, the amount of which is subject to the determination and approval of the Company's Board of Directors. The Company's loan agreement with a bank prohibits the declaration or payments of dividends without the bank's consent.
The Company has been working with various regulatory bodies to formulate a plan for the removal of materials contained in a holding basin at its site in Concord, Massachusetts. To date, a final plan for remediation has not been established. The Company believes the cost of remediation will not have a material impact on its results of operations or financial position. (See Note 11 of the Notes to Consolidated Financial Statements for further
FISCAL 1994 COMPARED WITH FISCAL 1993
Net sales increased by $1,985,000 or 12% in fiscal 1994. Sales in Uranium Services and Recycle industry increased by $4,752,000. Sales in Specialty Metal Products industry segment decreased by $2,974,000 or 29%. Sales in the Depleted Uranium Penetrator industry segment increased by $207,000 or 3%.
The increase in Uranium Services and Recycle industry is the result of the production contract of commercial DU that began at Carolina Metals, Inc. The decrease in the Specialty Metal Products industry segment was due primarily to decreased volumes of commercial DU and Medical Powders. The increase in the Depleted Uranium Penetrator industry segment was primarily due to higher large caliber penetrator production sales.
The timing, volumes and possible downselect decisions regarding future large caliber penetrator business, in general, are uncertain in the current environment of reduced U.S. defense spending. The Company will continue to pursue both domestic and foreign military depleted uranium penetrator production requirements.
Gross loss (net sales and contract revenues less cost of sales) decreased by $256,000 to $(2,586,000) or (14)% of sales as compared to $(2,842,000) or (17)% of sales for fiscal 1993. This reduction in gross loss is primarily due to higher sales volume and reduced cost structure.
Selling, general and administrative expenses decreased by $2,414,000 to $4,209,000. This decrease was attributable to workforce reductions and decreased discretionary spending partially offset by increases in reserves. As a percentage of sales, these expenses decreased to 22% as compared to 39% for the prior year.
Company-sponsored research and development expenses decreased by $456,000 to $575,000 for fiscal 1994. As a percentage of sales, these expenses were 3% as compared to 6% in fiscal 1993.
Interest and other income, net, decreased to $120,000 for the fiscal year as compared to $396,000 for the prior year. This decrease was mainly due to lower levels of cash throughout most of 1994.
Interest expense decreased by $403,000 to $550,000 as compared to fiscal 1993. This decrease was primarily the result of reductions in debt during 1994.
The Company realized a $3,584,000 loss from a write-off of Depleted Uranium Penetrators industry segment fixed assets. The reduction in fixed assets was part of a realignment of the Company's asset base due to declining defense industry spending.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 1995, Nuclear Metals and subsidiaries (the Company) was not in compliance with certain financial covenants of its debt agreements. These events of non-compliance permitted the lender to declare all amounts due and payable upon notice to the Company.
The Company's Demand Line of Credit Note ($925,000 outstanding at September 30, 1995, and $1,680,000 at January 11, 1996) was due by January 15, 1996. This note, which was negotiated in September 1995, was intended to provide the Company working capital until the receipt of a specific order and the related proceeds from the sale of penetrator blanks to a certain customer, which management expected to occur prior to the due date of the note. In addition, under the Company's Revolving Line of Credit $1,000,000 was due in February 1996. The proceeds from the sale of penetrator blanks discussed above were to be used to pay this amount. As of January 11, 1996, the Company's customer has not been able to obtain funding to complete the purchase.
On January 11, 1996, the Company reached an agreement with its lender to amend certain terms of its debt, including the waiver of past violations of debt covenants, extension of certain debt maturity dates and the revision of certain financial covenants. The agreement requires the Company to make a payment of $500,000 of the Demand Line of Credit Note on January 12, 1996, the proceeds of which were received from certain shareholders in exchange for a note payable of $500,000 due June 1997. The note payable to the shareholders is payable interest only semi-annually until its maturity date at a rate of 10%, convertible into shares of the Company's common stock at $11.89 per share and subordinate to the debt of the Company. The agreement also revised the repayment terms for the remaining balance of the Demand Line of Credit Note (balance of $1,680,000 as of January 11, 1996) as follows: $500,000 on January 12, 1996, and monthly installments of $100,000, $200,000, $300,000 and $580,000 beginning January 31, 1996, and ending April 15, 1996, and revised the due date for the Line of Credit ($1,000,000 outstanding at September 30, 1995, and January 11, 1996) to December 31, 1996. In addition, the agreement requires the Company to use any proceeds received from the sale of penetrator blanks to the customer, discussed above, to prepay the amounts outstanding under the Demand Line of Credit Note and purchase certificates of deposit in aggregate of $1,000,000 from the lender and pledge those as security for the Company's remaining obligations to lender.
Management believes that the order and the related proceeds from the customer will be received by the Company to enable it to meet its debt service requirements. The customer has documented its expectations that it will receive its funding (from the primary contractor and government source) by March 1996, and remit payment to the Company by April 1996. In the event that the customer is not able to complete this purchase, the Company will not have the available funds to meet the debt service requirements, in which case the Company will pursue alternative financing sources to meet these requirements. This matter raises substantial doubt about the Company's ability to continue as a going concern. These financial statements do not incluse any adjustments that might result from the outcome of this uncertainty.
The Company is a manufacturer of specialized metal products which are fabricated by a variety of metalworking processes. Export sales to foreign unaffiliated customers are 33% of total net sales and contract revenues in fiscal 1995, 37% in fiscal 1994, and less than 10% in fiscal 1993. A significant portion of the Company's sales revenue has been derived from major customers as follows:
COGEMA MARTIN IDAHO FALLS CORP ORDNANCE 1995 19% 18% 9% 8% --% 1994 20 -- 6 21 12 1993 -- -- 11 35 3
The accompanying consolidated financial statements include the accounts of Nuclear Metals, Inc. and its wholly owned subsidiaries: NMI Foreign Sales Corporation, NMI Holdings, Inc., a Massachusetts securities corporation, and Carolina Metals, Inc. All material intercompany transactions and balances have been eliminated in consolidation.
References in these financial statements to 1995, 1994, and 1993 are for the fiscal years ended September 30, 1995, September 30, 1994, and September 30, 1993, respectively.
Revenues are recorded when products are shipped, except for revenues on long-term contracts which are recorded on the percentage-of-completion method. The percentage-of-completion method is used for research and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
development contracts and for production contracts which require significant amounts of initial engineering and development costs. The percentage-of-completion is determined by relating the actual number of contract units completed to date to the total units to be completed under the respective contract. When the estimated total cost on a contract indicates a loss, the Company's policy is to record the entire loss currently. Performance incentives incorporated in certain government contracts are recognized when incentives are earned or awarded or when penalties are incurred or assessed. Contract revenues include fees resulting from facilitization contracts with the U. S. Army (contracts to establish production capacity through the purchase and installation of equipment to be owned by the U.S. Army). Costs associated with these contracts, exclusive of the costs to purchase the equipment ($0 in 1995, $380,000 in 1994 and $1,285,000 in 1993) are included in cost of sales. The consolidated balance sheets do not include the cost of this U.S. Army-owned equipment.
Cash and cash equivalents are recorded at cost which approximates market value. Cash equivalents include certificates of deposit with a maturity of three months or less.
Marketable securities are recorded at cost which approximates market value. Marketable securities include certificates of deposit purchased with a maturity greater than three months.
Inventories are stated at the lower of cost (first-in, first-out) or market and include materials, labor, and manufacturing and engineering overhead.
Property, plant, and equipment are recorded at the lower of cost or net realizable value. For financial reporting purposes, the Company provides depreciation on the straight-line method over the estimated useful lives of the assets, which are as follows:
Buildings 20 - 30 years Machinery, equipment, and fixtures 3 - 10 years
Maintenance and repairs are charged to operations as incurred; renewals and betterment's are capitalized. When property, plant, and equipment are sold, retired or entirely written down, the asset cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss is included in operations.
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement requires a reveiw for impairment for long-lived assets and certain identifiable intangibles to be held and used by an entity whether events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized if the sum of the expected future cash flows to result from the use and eventual disposition of the asset is less than the carrying amount of the asset. The amount by which the carrying amount of the asset exceeds the fair value less costs to sell, is an impairment loss to be recognized. This statement would apply to fiscal years beginning after December 15, 1995. The effects on the Company's financial condition and results of operations are not expected to be material.
During the fourth quarter of 1994, the Company recorded a loss on fixed asset writedown in the Depleted Uranium Segment of $3,584,000 consisting principally of a provision to adjust the carrying values of idle and underperforming fixed assets to estimated net realizable values. The provision was based on a periodic review of fixed assets and a determination that there has been a permanent decline in the value of assets due to declines in defense spending and the pricing necessary to compete effectively for such contracts.
The Company provides for income taxes in each year's consolidated statements of operations regardless of the year in which the transactions are reported for tax purposes to recognize the tax effects of all events.
The deferred federal and state income taxes result primarily from using accelerated depreciation on property, plant, and equipment for income tax reporting purposes and from establishing reserves which are not currently deductible for income tax purposes, respectively.
The Company adopted Statement of Financial Accounting Standards No. 109 in the first quarter of fiscal 1993 via a cumulative catch-up adjustment. The catch-up adjustment resulted in a one time gain of $1,100,000.
Research and development costs are related only to Company-sponsored research and development and include direct costs and an allocation of overhead.
Certain amounts previously reported in the consolidated financial statements have been reclassified to conform with the 1995 presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is an analysis of accounts receivable (net of allowances for doubtful accounts): Unbilled Receivables and Retainages due upon completion of contracts 281,000 1,779,000
Inventories (net of reserves) at September 30, 1995, and September 30, 1994, were as follows:
As of September 30, 1995, approximately $11.8 million of the Company's inventory consists of Depleted Uranium (DU) in various stages of production. This amount consists of both value-added costs to government owned material, ($6.6 million), which is used for U.S. Military contracts and for material which the Company has acquired from other sources, ($5.2 million). During fiscal 1995 the U.S. Army notified the Company that the Army would provide the DU for production for the most recent penetrator contract. Management strongly believes that the Army is responsible to compensate the Company for the value-added costs of this material and that at a minimum the Army would allow the Company to use this material for non U.S. military contracts at no additional cost to the Company. Management is pursuing several Department of Energy programs that would require more DU over the next several years than the Company currently has on hand. Management believes that the carrying cost of the inventory on hand will be fully realizable through these possible programs or from its ongoing usage for U.S. and foreign military procurements, however it is uncertain how much of the inventory balance will be utilized in fiscal 1996.
6. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations and notes payable of the Company at September 30, 1995, and September 30, 1994, areas follows:
Based on the amended debt agreement date January 11, 1996 as discussed below maturities of long-term obligations subsequent to September 30, 1995, are: 1996 - $2,405,000; 1997 - $1,895,000; 1998 - $80,000; 1999 - $80,000; $20,000 thereafter.
During fiscal 1995, the Company restructured its long-term debt, the principal balance of $3,532,000 outstanding on the 10.05% note was settled at a discount. Accordingly, the Company recorded an extraordinary gain on extinguishment of debt of $585,000 net of taxes of $10,000 in the accompanying statement of operations as a result of this transaction.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Simultaneously, the Company entered into a credit facility of $5,650,000 with a bank. As of September 30, 1995, this facility consisted of a revolving line of credit of $3,250,000 and a term credit of $2,400,000. The revolving line of credit has $2,250,000 in letters of credit outstanding and $1,000,000 in credit line advance. This credit facility is secured by accounts receivable and inventory of the Company.
The Company's Line of Credit Demand Note (the note) (Balance of $925,000 as of September 30, 1995, and $1,680,000 at January 11, 1996) was due by January 15, 1996. This Note, which was negotiated in September 1995, was intended to provide the Company working capital until the receipt of proceeds from the sale of specific penetrators blanks to a certain customer. This Note is secured by a number of patents currently held by the Company. In consideration for providing this facility, the Company issued the lender a warrant to purchase 25,000 shares of the Company's common stock at $11.89 per share which was the approximate market value of the Company's common stock at the time the warrants were issued. These warrants expire in 2005. The holder of the warrant has the option to exercise a portion of the warrant in a cashless transaction by surrendering the remaining portion of the warrant as defined.
On January 11, 1996, the Company reached an agreement with its lender to amend certain terms of its debt, including the waiver of past violations of debt covenants, extension of certain debt maturity dates and the revision of certain financial covenants. The agreement required the Company to make a payment of $500,000 of the Demand Line of Credit Note on January 12, 1996, the proceeds of which were received from certain shareholders in exchange for a note payable of $500,000 due June 1997. The note payable to the shareholders is payable interest only (in cash or common stock) semi-annually until its maturity date at a rate of 10%, convertible into shares of the Company's common stock at $11.89 per share and subordinate to the debt of the Company. The agreement also revised the repayment terms for the remaining balance of the Demand Line of Credit Note (balance of $1,680,000 as of January 11, 1996) as follows: $500,000 on January 12, 1996, and monthly installments of $100,000, $200,000, $300,000 and $580,000 beginning January 31, 1996, and ending April 15, 1996, and revised the due date for the Line of Credit ($1,000,000 outstanding at September 30, 1995, and January 11, 1996) to December 31, 1996. This agreement also adjusts the value of the eligible loan collateral determined under the borrowing base formula. In addition, the agreement requires the Company to use any proceeds received from the sale of penetrator blanks to the customer, discussed above, to prepay the amounts outstanding under the Demand Line of Credit Note and purchase certificates of deposit in aggregate of $1,000,000 from the lender and pledge those as security for the Company's remaining obligations to lender. The revisions to the financial covenants includes general working capital requirements, and net income before interest and taxes not less than the amounts for the quarter ending dates as follows: March 31, 1996 - $250,000, June 30, 1996 - $25,000, September 30, 1996 - $175,000, December 31, 1996 - $175,000, and $175,000 thereafter. On or before July 1, 1996, the Company will be required to provide the bank documentation that the Company will have sufficient funds to fulfill all obligations to the bank. In consideration for providing this amendment, the Company will pay the Bank a fee in the amount of $150,000 upon the earlier of the receipt of funds from sale of penetrator blanks or at December 31, 1996.
The Industrial Development Revenue Notes consist of four note issues. The interest rates on these notes range from 66.5% to 70% of the lender bank's prime interest rate. The notes are secured by all property, plant, and equipment.
Effective the beginning of fiscal 1993 the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the Company must compute the impact upon its future income tax payments, using current tax rates, of temporary differences resulting from the different periods in which events are recognized in the financial statements and in the tax returns. SFAS 109 requires deferred tax assets and liabilities to be adjusted when the tax rates or other provisions of the income tax law change.
The Company elected to adopt this new standard by recording a cumulative catch-up adjustment. Net income increased by $1,100,000 as a result of adopting the new standard. Adopting SFAS 109 has not caused a significant change in the Company's provision (benefit) for income taxes, reconciliation of the effective tax rate with the statutory rate or significant components of the income tax benefit.
The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal income tax rate due to the following:
Statutory rate (34.0)% (34.0)% (34.0)% Increase (reduction) in taxes resulting from: State taxes, net of federal effect (6.0) (6.3) (6.3) Valuation allowance (2.0) 29.6 6.4 Tax reserves no longer required (48.0) -- --
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As of September 1995, the Company has a federal net operating loss carryforward of approximately $5.4 million of which $3.1 million expires in 2009 and $2.3 million expires in 2010 and State net operating loss carryforwards of approximately $14.4 million which expire between 1998 through 2008. These net operating loss carryforwards are fully reserved by valuation allowances.
The components of the provision (benefit) for income taxes are as follows:
Federal $ (766,000) $(1,757,000) $(2,336,000) Valuation allowance 901,000 2,300,000 435,000 Total current benefit $ -- $ -- $(2,336,000) Valuation allowance -- 1,087,000 261,000 Total deferred benefit (1,967,000) (1,188,000) (1,410,000) Total benefit $(1,967,000) $(1,188,000) $(3,746,000)
During 1995 the Company received $978,000 of Federal income tax refunds. As of September 30, 1994, the Company had established a full valuation allowance for this amount. Accordingly, the Company reduced it's valuation allowance by $978,000 upon receipt of this amount.
The Company has provided a full valuation allowance on the net deferred tax assets as of September 30, 1995, and 1994. The Company's alternative minimum tax credit has an unlimited life. The tax effects of significant items making up the deferred tax liabilities and deferred tax assets, as of the end of the 1995 and 1994 fiscal years are as follows:
8. STOCK OPTIONS AND EMPLOYMENT AGREEMENTS
A total of 247,900 shares of common stock have been reserved for issuance upon exercise of options issued or issuable pursuant to the Company's stock option plans for employees and directors. The exercise price of options issued or issuable under such plans may not be less than 100% of the fair market value of the shares purchasable on the date of grant of the options. Information concerning options which have been granted under the plans and the exercise prices thereof is set forth below. Those options with an indicated exercise price of $6.63 expire in 2003, those with an exercise price of $13.50, $14.00, or $16.00 expire in 2004, in each case on the anniversary of the date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Common shares under option are presented:
In consideration of entering into a credit agreement with its lender the Company issued the lender a warrant to purchase 25,000 shares of the Company's common stock for $11.89 per share, which was the approximate market value of the Company's common stock at the date of the transaction. These warrants expire in 2005. The holder of the warrant has the option to exercise a portion of the warrant in a cashless transaction by surrendering the remaining portion of the warrant as defined.
The Company has a defined benefit pension plan designed to provide retirement benefits to all employees. This plan provides pension benefits that are based on the employee's salary and years of service. The Company's policy is to fund the plan at a level within the range required by applicable regulations.
The Company's net pension cost for 1995, 1994, and 1993 was $165,000, $269,000 and $90,000, respectively. During 1995, the Company used the weighted average discount rate of 8.0%. Net pension cost for the Company's defined benefit plan included the following components:
Assumptions used in determining the plan's funded status:
Discount rate 8.0% 8.0% 7.0% Expected rate of increase in compensation levels 5.5% 5.5% 5.5% Expected long-term rate of return on assets 8.5% 8.5% 8.5%
The following table sets forth the plan's funded status as of September 30, 1995, September 30, 1994, and September 30, 1993.
Plan assets are invested under the provision of a trust agreement with a bank in common trust funds.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Effective the beginning of fiscal 1994 the Company adopted Statement of Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions". The statement requires companies to accrue the cost of postretirement health care and life insurance benefits within the employees' active service periods. The Company had been recognizing these costs on the cash basis prior to adoption of SFAS 106. In fiscal 1993, the Company expensed $23,400 of these benefits.
The Company provides employees who retired from the Company prior to January 1, 1993, with at least ten years of service and are under the age of 65, with Group Health Insurance on a cost-sharing basis. Coverage for an employee's spouse or dependents will also continue under this plan until the employee has reached age 65 at which time, the coverage ceases. In addition, the Company provides the same employees who are at least 62 years of age with life insurance equal to their ending annual salary up to a maximum of $50,000.
For employees who retire after January 1, 1993, the postretirement benefits do not include health insurance. In addition, the life insurance benefit, up to a maximum of $50,000, is provided for one year after retirement.
The accumulated benefit obligation of these benefits as of October 1, 1995, is approximately $751,000 ($36,000 for medical insurance and $715,000 for life insurance). Plan assets of $344,000 in cash reserves are on hand with an insurance company to partially cover the cost of the life insurance benefits. The Company adopted the new standard prospectively as of October 1, 1993, and is amortizing the transition obligation of $456,000, over three years for the medical insurance benefits and fifteen years for the life insurance benefits.
Postretirement benefit expense for fiscal 1995 is $96,000. The components of the expense are as follows:
Service cost of benefits earned $1,000 Interest cost on liability 57,000 Return on plan assets (10,000) Amortization of transition obligation 48,000 Net postretirement benefit cost $96,000
The following table sets forth the Benefit Plan's funded status as of October 1, 1995: Accumulated Post Retirement Benefit obligation $(751,000) Plan Asset at Fair Value 344,000 Accrued Post-Retirement Benefit Cost $(63,000) The following actuarial assumptions were used:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company is expanding its facilities by adding new equipment. The Company anticipates that this will require capital expenditures totaling approximately $1,000,000 during fiscal 1996.
In the process of manufacturing depleted uranium products, the Company generates low-level radioactive waste (LLRW) that must be disposed of at sites licensed by federal, state, and local governments. At present, there is one licensed commercial repository in the United States available for use by the Company. For LLRW originating in Concord, no site currently exists and provisions have been made to accommodate interim storage. State government has the responsibility to implement the provisions of the federal Low-Level Waste Policy Amendments Act and provide a state solution for Massachusetts companies that generate this type of waste. Management is of the opinion that an extended period of storage can be accommodated within existing buildings and in an environmentally safe manner acceptable to all regulatory agencies until such time as an acceptable site is identified.
For a number of years, ending in 1985, the Company disposed of manufacturing-related depleted uranium waste and the associated spent acid and other residual materials by neutralizing with lime and discharging the neutralized mixture to a holding basin on its premises in Concord, Massachusetts. In 1986 the holding basin was covered with hypalon, an impervious material used to prevent rain and surface run-off water from leaching through the holding basin. The Company now uses a proprietary "closed loop" process that it developed to discontinue such discharges. The Company believes that both practices were and are in compliance with all applicable regulations.
The Commonwealth of Massachusetts, Department of Environmental Protection ("DEP"), has designated the Concord site, including the holding basin, as a "priority" remediation site. The DEP, in conjunction with the Company and its consultants, are developing a comprehensive evaluation and risk assessment. The risk assessment originally scheduled for completion during calendar year 1995 has been delayed. Additional information needed for the risk assessment has been collected and is currently being evaluated with the current expectation that completetion of the risk evauation will occur in 1996. The Company continues to believe that the results of these studies will establish that the holding basin does not present an environmental risk consistent with its designation as a "priority" site.
The vast majority (approximately 96%) of the material in the holding basin is the byproduct of manufacturing processes conducted by the Company under Government contracts using Government furnished material. Management believes, based on advice from legal counsel and discussions with the Army, that this material continues to be Government owned and that the Government has a responsibility for any required remediation of the site. The Company has no written commitment from the Government to fund any remediation costs, however, existing contracts provide the basis for Government responsibility to pay the costs of removal of the material from the holding basin. In September 1995, the Company submitted a request for funding for the full remediation under Public Law 85-804. The Army is currently reviewing the submittal and is expected to provide their recommendations to the Company early in 1996. The Army has not denied the Government's responsibility to pay the costs of removal of the material from the holding basin. Management of the Company considers it unlikely that the Army will not pay the appropriate costs for remediation. Also, the Government has demonstrated a general practice of paying its portion of site remediation costs by the funding of other remediation projects.
Included in the accompanying balance sheet as of September 30, 1995, is a $2.8 million reserve against any potential administrative, legal, research or other costs of remediating the holding basin that are not paid by the Government. The Company believes this reserve to be adequate for any residual costs that may be incurred beyond the Government's portion of the holding basin.
The planned decommissioning of the holding basin has involved discussions with several agencies including the NRC, DEP and the Army. The Company has developed a range of cost estimates for remediation of the holding basin based on assumptions as to the amount of gravel to be removed and that all material will be buried at licensed sites. Significant costs include excavation, transportation and burial of the holding basin material as well as back fill and grading at the Concord site. Under these assumptions, the estimated costs of burial range from $4 million to $9 million. In developing these estimates, the future burial rates that will be charged at the licensed sites are uncertain and are the predominant reason for the wide range of potential costs. These burial costs are affected by, among other things, the various regulatory agencies, the regulations imposed by these agencies and the volume of waste processed at individual licensed sites. In developing these estimates for burial, the Company has not assumed any offset based
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
on Government funding or insurance claims. Further, the Company assumes that the recommendations of the Company's outside experts as to how much gravel should be removed will be accepted by the regulatory authorities and that none of the material in the holding basin will be recycled. The Company believes that its cost of remediation will not have a material impact on its results of operations or financial position.
The Company is in the process of renewing certain licenses by the NRC which the Company is required to hold in order to possess and process depleted uranium materials. Under applicable licensing regulations, the Company was required to submit and did submit a Decommissioning Funding Plan ("DFP") to provide for the possible future decommissioning of its Concord facility. The Company is also required to provide financial assurance for such decommissioning.
Approximately 96% of the depleted uranium materials which generated the DFP requirements were processed for the United States Government. Accordingly, the Company believes that its financial assurance, is only for the balance of the cost. The total estimated cost of decommissioning the NMI facility is $13.7 million. The Company's share, approximately 4%, would be $550,000 for which a reserve is included in the accompanying balance sheet as of September 30, 1995. The Company has provided financial assurance in the form of a letter of credit in the amount of $750,000.
The outcome of a December 1994, NRC enforcement conference with respect to what the NRC described as the Company's apparent lack of compliance with the decommissioning financial assurance regulations has resulted in the Company submitting a request to the NRC for exemption to certain aspects of the Decommissioning and Disposal(D&D) regulations. The exemption request includes alternate financial funding mechanisms not specifically called out in the regulations. Management believes that these funding mechanisms when coupled with Government contractual obligations will collectively satisfy the decommissioning funding obligations of the Company. In filing the exemption, the Company reiterated its long standing position that the United States Government is obligated, by policy and by contract, to bear the balance of decommissioning costs at the Concord site. The Company expects NRC's response to the exemption request, early in 1996.
Management believes that based on progress made to date on the holding basin remediation, along with the submission of a request for partial exemption to the D&D rules, escalated enforcement action by NRC regarding decommissioning funding compliance, although possible, will not occur. Escalated enforcement action could take form of civil penalty, license suspension or license revocation. A license action, such as a suspension or revocation would have a material and adverse impact on results of operations and financial position.
The Company is involved with various legal actions. Management believes that the final disposition of these actions will not have a material effect on the Company's results of operations or financial position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. TRANSACTIONS WITH RELATED PARTIES
Under the terms of a management agreement, Matthews Associates Limited is entitled to an annual management fee. George J. Matthews, Chairman of the Board of Directors, is sole owner of Matthews Associates Limited. These fees, as well as certain expenses of Matthews Associates Limited that were reimbursed by the Company, have been included in selling, general, and administrative expenses. Management fees were $350,000 in 1995, 1994, and 1993. Mr. Matthews does not receive any other salary or fee for services as Chairman of the Board of Directors.
Maintenance and repair expenditures, which are charged to cost and expense as incurred, amounted to $854,000 in 1995, $1,029,000 in 1994 and $1,002,000 in 1993.
The Company is engaged in the manufacture and sale of various specialty metal products. The Company operates in three industry segments: Uranium Services and Recycle, Specialty Metal Products, and Depleted Uranium Penetrators. The Company has changed its segments for financial purposes. All prior year amounts have been restated. Information relating to the Company's operations for the industry segments described above for each of the three years in the period ended September 30 is as follows:
Net Sales and Contract Revenues: Uranium Services & Recycle $ 4,969,000 $ 4,752,000 $ - Specialty Metal Products 12,102,000 7,284,000 10,258,000 Depleted Uranium Penetrators 1,713,000 6,968,000 6,761,000 Total $18,784,000 $ 19,004,000 $ 17,019,000
Uranium Services & Recycle $ (996,000) $ (5,409,000) $ - Specialty Metal Products (341,000) (162,000) (2,816,000) Depleted Uranium Penetrators (237,000) (5,033,000) (7,330,000)
General Corporate Expenses 350,000 350,000 350,000 Net Operating Loss (1,924,000) (10,954,000) (10,496,000)
Other Expense, Net 118,000 430,000 557,000 Loss Before Taxes $(2,042,000) $(11,384,000) $(11,053,000)
Uranium Services & Recycle $16,609,000 $ 16,772,000 $ 18,090,000 Specialty Metal Products 5,140,000 5,646,000 7,297,000 Depleted Uranium Penetrators 12,158,000 9,863,000 11,697,000 Total $40,886,000 $ 40,542,000 $ 57,223,000
Uranium Services & Recycle $ 404,000 $ 843,000 $ 864,000 Specialty Metal Products 251,000 421,000 450,000 Depleted Uranium Penetrators 443,000 1,252,000 1,351,000 Total $ 1,339,000 $ 2,874,000 $ 3,056,000
Uranium Services & Recycle $ 325,000 $ 68,000 $ 184,000 Specialty Metal Products 85,000 315,000 827,000 Depleted Uranium Penetrators 6,000 65,000 96,000 Total $ 777,000 $ 709,000 $ 1,265,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Uranium Services and Recycle segment includes the manufacture of depleted uranium products (non-penetrator) and the recycle of low level radioactive metal. The Specialty Metal Products segment includes a large assortment of metal products fabricated using foundry, extrusion, and machining capabilities and involves the production and sale of various metal powders manufactured by the Company's patented Rotating Electrode Process. Operations in the Depleted Uranium Penetrator industry segment include the production of various penetrators (a component of armor-piercing ammunition used in certain U.S. military gun systems) which are sold to a department of the U.S. Department of Defense (DOD), to prime contractors manufacturing such ammunition for the DOD or to foreign military operations. Revenues derived from contract research and development activities have been included in the above segments based on the nature of the product.
Net sales and contract revenues by industry segment include sales to unaffiliated customers (intersegment sales are not significant). A significant portion of the Company's revenues has been derived from three major customers (see Note 2) sales to Cogema are included in the Uranium Services & Recycle industry segment. Sales to Lockheed Martin and Lockheed Idaho Falls are included in the Specialty Metal Products industry segment.
Due to the utilization among segments of common production facilities and equipment and the involvement of a single management organization in all phases of the Company's operations, necessary allocations have been made based on estimates which management believes to be reasonable.
Operating loss includes net sales and contract revenues less operating expenses allocated to the individual segments. General corporate expenses represent expenses which are not of an operating nature and, therefore, are not allocable to industry segments.
Identifiable assets shown include accounts receivable, inventory, and plant and equipment that have been allocated to each of the Company's industry segments. Corporate assets consist primarily of cash, certificates of deposit, and other assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Financial results by quarter for 1995, 1994, and 1993 are summarized below:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Nuclear Metals, Inc.:
We have audited the accompanying consolidated balance sheets of NUCLEAR METALS, INC. (a Massachusetts corporation) and subsidiaries as of September 30, 1995, and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1995. 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 Nuclear Metals, Inc. and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for the three years in the period ended September 30, 1995, 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 Notes 1 and 6 to the financial statements, on January 11, 1996, the Company reached an agreement with its lender to amend certain terms of its debt, including the extension of certain debt maturity dates; the lender's waiver of past violations of debt covenants and the revision of certain financial covenants. The Company's ability to meet its revised debt service requirements in 1996 is dependent upon the receipt of a specific order and the related proceeds from a certain customer. As of January 11, 1996, the Company's customer has not been able to obtain funding to complete the purchase. This matter raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
November 22, 1995 (except for Notes 1 and 6 for which the date is January 11, 1996)
Edwin R. Gilliland Professor of Chemical Engineering
Boston Private Bank & Trust Company
EXECUTIVE OFFICERS AND CORPORATE STAFF
Chairman of the Board of Directors
Vice Chairman of the Board of Directors
Vice President, Finance and Administration
The Company's common stock is traded on the NASDAQ Market under the symbol NUCM. As reported by a principal market maker for the stock, the high and low bid prices for the three years ended September 30 are reflected in the following table. This information reflects inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
1st Quarter 18 13 1/4 2nd Quarter 16 3/4 11 1/2 3rd Quarter 14 1/2 11 1/2 4th Quarter 14 1/4 11
1st Quarter 10 3/4 6 1/8 2nd Quarter 13 10 1/8 3rd Quarter 20 11 3/4
1st Quarter 7 5 1/2 2nd Quarter 10 6 1/4 3rd Quarter 11 1/4 7 1/2 4th Quarter 9 5 3/4
As of September 30, 1995, there were approximately 298 holders of record of the Company's Common Stock. The Company believes the actual number of beneficial owners of the Company's Common Stock is greater because a large number of shares are held in custodial or nominee accounts.
The Company did not declare any dividends during its last two fiscal years. Given the Company's current cash flow situation, the Company does not expect to pay dividends in the next year. Future cash dividends, if any, would be paid on an annual basis, the amount of which is subject to the determination and approval of the Company's Board of Directors. The Company's loan agreement with a bank prohibits the declaration or payment of dividends without the bank's consent.
2229 Main Street, Concord, Massachusetts 01742
Highway 80, Barnwell, South Carolina 29812
State Street Bank & Trust Co. 225 Franklin Street, Boston, Massachusetts 02101
One International Place, Boston, Massachusetts 02110
The annual meeting of stockholders will be held on May 1, 1996 at 10:00 A.M. at the offices of State Street Bank & Trust Company, 225 Franklin Street, Boston, Massachusetts 02101.
The Form 10-K Annual Report to the Securities and Exchange Commission will be provided without charge to shareholders on written request. Requests should be directed to the Vice President, Finance, Nuclear Metals, Inc. 2229 Main Street, Concord, Massachusetts 01742.
2229 MAIN ST, CONCORD, MASSACHUSETTS 01742 PHONE (508) 369-5410 - FAX (508) 369-4045 | 10-K | EX-13 | 1996-01-16T00:00:00 | 1996-01-16T17:13:10 |
0000899140-96-000021 | 0000899140-96-000021_0000.txt | <DESCRIPTION>POST EFFECTIVE AMENDMENT NO. 6
As filed with the Securities and Exchange Commission
Securities Act File No. 33-36066 Investment Company Act File No. 811-06143
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 6 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
(Check appropriate box or boxes)
Warburg, Pincus Global Fixed Income Fund, Inc. (formerly Counsellors Global Fixed Income Fund, Inc.) . . . . . . . . . . . . . . . . . . . . . . (Exact Name of Registrant as Specified in Charter)
New York, New York 10017-3147 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 878-0600
Warburg, Pincus Global Fixed Income Fund, Inc. New York, New York 10017-3147 . . . . . . . . . . . . . . . . . . . . . (Name and Address of Agent for Service)
New York, New York 10022-4667
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to paragraph (b) [X] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
Registrant has registered an indefinite number or amount of securities under the Securities Act of 1933, as amended (the "1933 Act"), pursuant to Section (a)(1) of Rule 24f-2 under the Investment Company Act of 1940, as amended (the "1940 Act"), and to the number or amount presently registered is added an indefinite number or amount of such securities. The Rule 24f-2 Notice for Registrant's fiscal year ended October 31, 1995 was filed on December 19, 1995.
WARBURG, PINCUS GLOBAL FIXED INCOME FUND
Calculation of Registration Fee under the Securities Act of 1933
Securities Amount Maximum Maximum Amount of Being Being Offering Price Aggregate Registration Registered Registered Per Share (1) Offering Price (1,2) Fee (2) ---------- ---------- -------------- -------------------- ------------
$.001 2,909,714 $10.97 $289,992 $100
This Post-Effective Amendment No. 6 seeks to register 2,909,714 additional shares under the 1933 Act.
(1) Computed under Rule 457(d) on the basis of the net asset value per share of the Registrant's shares at the close of business on January 5, 1996. The above calculation shall not be deemed a representation of the actual offering price.
(2) Calculated pursuant to Rule 24e-2 under the 1940 Act.
(a) Total number of shares
(b) Total number of shares used under Rule 24e-2 this
(c) Total number of shares
(d) Total number of shares included in (a) being used
WARBURG, PINCUS GLOBAL FIXED INCOME FUND
1. Cover Page . . . . Cover Page
2. Synopsis . . . . . The Funds' Expenses
Information . . . Financial Highlights
of Registrant . . Cover Page; Investment
5. Management of the Management of the Funds Fund . . . . . .
Other Securities . General Information
Securities How to Open an Account; How to Being Offered Purchase Shares; Net
8. Redemption or How to Redeem and Exchange Repurchase . . . Shares
Proceedings . . . Not applicable
* Relates to Registrant's Common Share prospectus, which is substantially similar to Registrant's Advisor Share prospectus.
Part B Heading in Statement of
10. Cover Page . . . . Cover Page
11. Table of Contents . Contents
and History . . . Management of the Fund; Notes Information"
Policies . . . . Investment Policies
Registrant . . . Management of the Fund; See Funds"
of Securities . . . Management of the Fund; Information"
and Other Services . . Management of the Fund; See Servicing"
17. Brokerage Investment Policies; See Turnover Rate"
Other Securities . . Management of the Fund-- Information"
Part B Heading in Statement of
Securities Being Additional Purchase and Offered . . . . . . Redemption Open an Account," Asset Value"
20. Tax Status . . . . Additional Information and Taxes"
21. Underwriters . . . Investment Policies; Portfolio Servicing"
Performance Data Determination of Performance
23. Financial Report of Independent Statements . . Auditors; Financial
Information required to be included in Part C is set forth after the appropriate item, so numbered, in Part C to this Registration Statement.
The Fund's Common Share and Advisor Prospectuses are incorporated by reference to the Prospectuses that form a part of Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A of Warburg, Pincus Fixed Income Fund filed on January 16, 1996 (Securities Act File No. 33-12343; Investment Co. Act File No. 811-5039).
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 STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS.
Subject to Completion, dated January 16, 1996
WARBURG PINCUS GLOBAL FIXED INCOME FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030 For information, call (800) 888-6878
Investment Objective . . . . . . . . . . . . . . . . . 2 Investment Policies . . . . . . . . . . . . . . . . . . 2 Management of the Fund . . . . . . . . . . . . . . . . 27 Additional Purchase and Redemption Information . . . . 34 Exchange Privilege . . . . . . . . . . . . . . . . . . 35 Additional Information Concerning Taxes . . . . . . . . 35 Determination of Performance . . . . . . . . . . . . . 38 Auditors and Counsel . . . . . . . . . . . . . . . . . 39 Miscellaneous . . . . . . . . . . . . . . . . . . . . . 40 Financial Statements . . . . . . . . . . . . . . . . . 40 Appendix - Description of Ratings . . . . . . . . . . . A-1 Report of Coopers & Lybrand L.L.P., Independent Accountants . . . . . . . . . . . . . . . A-5
This Statement of Additional Information is meant to be read in conjunction with the combined Prospectus for the Common Shares of Warburg Pincus Global Fixed Income Fund (the "Fund"), Warburg Pincus Intermediate Maturity Government Fund and Warburg Pincus New York Intermediate Municipal Fund, dated , 1996, as amended or supplemented from time to time, and is incorporated by reference in its entirety into those Prospectuses. Because this Statement of Additional Information is not itself a prospectus, no investment in shares of the Fund should be made solely upon the information contained herein. Copies of the Fund's Prospectuses and information regarding the Fund's current performance may be obtained by calling the Fund at (800) 927-2874. Information regarding the status of shareholder accounts may be obtained by calling the Fund at (800) 888-6878 or by writing to the Fund, P.O. Box 9030, Boston, Massachusetts 02205-9030.
The investment objective of the Fund is to maximize total investment return consistent with prudent investment management, consisting of a combination of interest income, currency gains and capital appreciation.
The following policies supplement the descriptions of the Fund's investment objective and policies in the Prospectuses.
Options, Futures and Currency Exchange Transactions
Securities Options. The Fund may write covered put and call options on stock and debt securities and may purchase such options that are traded on foreign and U.S. exchanges, as well as over-the-counter ("OTC").
The Fund realizes fees (referred to as "premiums") for granting the rights evidenced by the options it has written. A put option embodies the right of its purchaser to compel the writer of the option to purchase from the option holder an underlying security at a specified price for a specified time period or at a specified time. In contrast, a call option embodies the right of its purchaser to compel the writer of the option to sell to the option holder an underlying security at a specified price for a specified time period or at a specified time.
The principal reason for writing covered options on a security is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. In return for a premium, the Fund as the writer of a covered call option forfeits the right to any appreciation in the value of the underlying security above the strike price for the life of the option (or until a closing purchase transaction can be effected). Nevertheless, the Fund as a put or call writer retains the risk of a decline in the price of the underlying security. The size of the premiums that the Fund may receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect to profit, although its gain would be limited to the amount of the premium it received. If security prices remain the same over time, it is likely that the writer will also profit, because it should be able to close out the option at a lower price. If security prices fall, the put writer would expect to suffer a loss. This loss should be less than the loss from purchasing the underlying instrument directly, however, because the premium received for writing the option should mitigate the effects of the decline.
In the case of options written by the Fund that are deemed covered by virtue of the Fund's holding convertible or exchangeable preferred stock or debt securities, the time required to convert or exchange and obtain physical delivery of the underlying securities with respect to which the Fund has written options may exceed the time within which the Fund must make delivery in accordance with an exercise notice. In these instances, the Fund may purchase or temporarily borrow the underlying securities for purposes of physical delivery. By so doing, the Fund will not bear any market risk, since the Fund will have the absolute right to receive from the issuer of the underlying security an equal number of shares to replace the borrowed securities, but the Fund may incur additional transaction costs or interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for which the Fund may write covered call options. For example, if the Fund writes covered call options on mortgage-backed securities, the mortgage-backed securities that it holds as cover may, because of scheduled amortization or unscheduled prepayments, cease to be sufficient cover. If this occurs, the Fund will compensate for the decline in the value of the cover by purchasing an appropriate additional amount of mortgage-backed securities.
Options written by the Fund will normally have expiration dates between one and nine months from the date written. The exercise price of the options may be below, equal to or above the market values of the underlying securities at the times the options are written. In the case of call options, these exercise prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money," respectively. The Fund may write (i) in-the-money call options when Warburg, Pincus Counsellors, Inc., the Fund's investment adviser ("Warburg"), expects that the price of the underlying security will remain flat or decline moderately during the option period, (ii) at-the-money call options when Warburg expects that the price of the underlying security will remain flat or advance moderately during the option period and (iii) out-of-the-money call options when Warburg expects that the premiums received from writing the call option plus the appreciation in market price of the underlying security up to the exercise price will be greater than the appreciation in the price of the underlying security alone. In any of the preceding situations, if the market price of the underlying security declines and the security is sold at this lower price, the amount of any realized loss will be offset wholly or in part by the premium received. Out-of-the-money, at-the-money and in-the-money put options (the reverse of call options as to the relation of exercise price to market price) may be used in the same market environments that such call options are used in equivalent transactions. To secure its obligation to deliver the underlying security when it writes a call option, the Fund will be required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (the "Clearing Corporation") and of the securities exchange on which the option is written.
Prior to their expirations, put and call options may be sold in closing sale or purchase transactions (sales or purchases by the Fund prior to the exercise of options that it has purchased or written, respectively, of options of the same series) in which the Fund may realize a profit or loss from the sale. An option position may be closed out only where there exists a secondary market for an option of the same series on a recognized securities exchange or in the over-the-counter market. When the Fund has purchased an option and engages in a closing sale transaction, whether the Fund realizes a profit or loss will depend upon whether the amount received in the closing sale transaction is more or less than the premium the Fund initially paid for the original option plus the related transaction costs. Similarly, in cases where the Fund has written an option, it will realize a profit if the cost of the closing purchase transaction is less than the premium received upon writing the original option and will incur a loss if the cost of the closing purchase transaction exceeds the premium received upon writing the original option. The Fund may engage in a closing purchase transaction to realize a profit, to prevent an underlying security with respect to which it has written an option from being called or put or, in the case of a call option, to unfreeze an underlying security (thereby permitting its sale or the writing of a new option on the security prior to the outstanding option's expiration). The obligation of the Fund under an option it has written would be terminated by a closing purchase transaction, but the Fund would not be deemed to own an option as a result of the transaction. So long as the obligation of the Fund as the writer of an option continues, the Fund may be assigned an exercise notice by the broker-dealer through which the option was sold, requiring the Fund to deliver the underlying security against payment of the exercise price. This obligation terminates when the option expires or the Fund effects a closing purchase transaction. The Fund can no longer effect a closing purchase transaction with respect to an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will exist to create a liquid secondary market on a securities exchange 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 events have at times rendered certain of the facilities of the 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. Moreover, the Fund's ability to terminate options positions established in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that securities dealers participating in over-the-counter transactions would fail to meet their obligations to the Fund. The Fund, however, intends to purchase over-the-counter options only from dealers whose debt securities, as determined by Warburg, are considered to be investment grade. If, as a covered call option writer, the Fund is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. In either case, the Fund would continue to be at market risk on the security and could face higher transaction costs, including brokerage commissions.
Securities exchanges generally have established limitations governing the maximum number of calls and puts of each class which may be held or written, or exercised within certain time periods by an investor or group of investors acting in concert (regardless of whether the options are written on the same or different securities exchanges or are held, written or exercised in one or more accounts or through one or more brokers). It is possible that the Fund and other clients of Warburg and certain of its 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. These limits may restrict the number of options the Fund will be able to purchase on a particular security.
Securities Index Options. The Fund may purchase and write exchange-listed and OTC put and call options on securities indexes. A securities index measures the movement of a certain group of securities by assigning relative values to the securities included in the index, fluctuating with changes in the market values of the securities included in the index. Securities index options may be based on a broad or narrow market index or on a particular industry or market segment.
Options on securities indexes are similar to options on securities except that (i) the expiration cycles of securities index options are monthly, while those of securities options are currently quarterly, and (ii) the delivery requirements are different. Instead of giving the right to take or make delivery of securities at a specified price, an option on a securities 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 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 index and the exercise price of the option times a specified multiple. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Index options may be offset by entering into closing transactions as described above for securities options.
OTC Options. The Fund may purchase OTC or dealer options or sell covered OTC options. Unlike exchange-listed options where an intermediary or clearing corporation, such as the Clearing Corporation, assures that all transactions in such options are properly executed, the responsibility for performing all transactions with respect to OTC options rests solely with the writer and the holder of those options. A listed call option writer, for example, is obligated to deliver the underlying securities to the clearing organization if the option is exercised, and the clearing organization is then obligated to pay the writer the exercise price of the option. If the Fund were to purchase a dealer option, however, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. If the dealer fails to honor the exercise of the option by the Fund, the Fund would lose the premium it paid for the option and the expected benefit of the transaction.
Listed options generally have a continuous liquid market while dealer options have none. Consequently, the Fund will generally be able to realize the value of a dealer option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when the Fund writes a dealer option, it generally will be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Fund originally wrote the option. Although the Fund will seek to enter into dealer options only with dealers who will agree to and that are expected to be capable of entering into closing transactions with the Fund, there can be no assurance that the Fund will be able to liquidate a dealer option at a favorable price at any time prior to expiration. The inability to enter into a closing transaction may result in material losses to the Fund. Until the Fund, as a covered OTC call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used to cover the written option until the option expires or is exercised. This requirement may impair the Fund's ability to sell portfolio securities or, with respect to currency options, currencies at a time when such sale might be advantageous. In the event of insolvency of the other party, the Fund may be unable to liquidate a dealer option.
Futures Activities. The Fund may enter into foreign currency, interest rate and securities index futures contracts and purchase and write (sell) related options traded on exchanges designated by the Commodity Futures Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign exchanges. These transactions may be entered into for "bona fide hedging" purposes as defined in CFTC regulations and other permissible purposes including hedging against changes in the value of portfolio securities due to anticipated changes in currency values, interest rates and/or market conditions and increasing return.
The Fund will not enter into futures contracts and related options for which the aggregate initial margin and premiums (discussed below) required to establish positions other than those considered to be "bona fide hedging" by the CFTC exceed 5% of the Fund's net asset value after taking into account unrealized profits and unrealized losses on any such contracts it has entered into. The Fund reserves the right to engage in transactions involving futures contracts and options on futures contracts to the extent allowed by CFTC regulations in effect from time to time and in accordance with the Fund's policies. Although the Fund is limited in the amount of assets it may invest in futures transactions (as described above and in the Prospectus), there is no overall limit on the percentage of Fund assets that may be at risk with respect to futures activities. The ability of the Fund to trade in futures contracts and options on futures contracts may be limited by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), applicable to a regulated investment company.
Futures Contracts. A foreign currency futures contract provides for the future sale by one party and the purchase by the other party of a certain amount of a specified non-U.S. currency at a specified price, date, time and place. An interest rate futures contract provides for the future sale by one party and the purchase by the other party of a certain amount of a specific interest rate sensitive financial instrument (debt security) at a specified price, date, time and place. Securities indexes are capitalization weighted indexes which reflect the market value of the securities listed on the indexes. A securities index futures contract is an agreement to be settled by delivery of an amount of cash equal to a specified multiplier times the difference between the value of the index at the close of the last trading day on the contract and the price at which the agreement is made.
No consideration is paid or received by the Fund upon entering into a futures contract. Instead, the Fund is required to deposit in a segregated account with its custodian an amount of cash or cash equivalents, such as U.S. government securities or other liquid high-grade debt obligations, equal to approximately 1% to 10% of the contract amount (this amount is subject to change by the exchange on which the contract is traded, and brokers may charge a higher amount). This amount is known as "initial margin" and is in the nature of a performance bond or good faith deposit on the contract which is returned to the Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. The broker will have access to amounts in the margin account if the Fund fails to meet its contractual obligations. Subsequent payments, known as "variation margin," to and from the broker, will be made daily as the currency, financial instrument or index underlying the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "marking-to-market." The Fund will also incur brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a 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 (described below) may be closed out only on the exchange on which they were entered into (or through a linked exchange). No secondary market for such contracts exists. Although the Fund intends to enter into futures contracts only if there is an active market for such contracts, there is no assurance that an active market will exist 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 or trading may be suspended for specified periods during the day. It is possible that futures contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions at an advantageous price 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 variation margin. In such situations, if the fund had insufficient cash, it might have to sell securities to meet daily variation margin requirements at a time when it would be disadvantageous to do so. In addition, if the transaction is entered into for hedging purposes, in such circumstances the Fund may realize a loss on a futures contract or option that is not offset by an increase in the value of the hedged position. Losses incurred in futures transactions and the costs of these transactions will affect the Fund's performance.
Options on Futures Contracts. The Fund may purchase and write put and call options on foreign currency, interest rate and securities index futures contracts and may enter into closing transactions with respect to such options to terminate existing positions. There is no guarantee that such closing transactions can be effected; the ability to establish and close out positions on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index futures contract, as contrasted with the direct investment in such a contract, gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time prior to the expiration date of the option. The writer of the option is required upon exercise to assume an offsetting futures position (a short position if the option is a call and a long position if the option is a put). Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The potential loss related to the purchase of an option on futures contracts is limited to the premium paid for the option (plus transaction costs). Because the value of the option 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.
Currency Exchange Transactions. The value in U.S. dollars of the assets of the Fund that are invested in foreign securities may be affected favorably or unfavorably by changes in exchange control regulations, and the Fund may incur costs in connection with conversion between various currencies. Currency exchange transactions may be from any non-U.S. currency into U.S. dollars or into other appropriate currencies. The Fund will conduct its currency exchange transactions (i) on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, (ii) through entering into futures contracts or options on such contracts (as described above), (iii) through entering into forward contracts to purchase or sell currency or (iv) by purchasing and writing exchange-traded currency options.
Forward Currency Contracts. A forward currency contract 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 as agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into in the interbank market conducted directly between currency traders (usually large commercial banks and brokers) and their customers. Forward currency contracts are similar to currency futures contracts, except that futures contracts are traded on commodities exchanges and are standardized as to contract size and delivery date.
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 partially offset its contractual obligation to deliver the currency by negotiating with its trading partner to purchase a second, offsetting contract. 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.
Currency Options. The Fund may purchase and write exchange-traded put and call options on foreign currencies. Put options convey the right to sell the underlying currency at a price which is anticipated to be higher than the spot price of the currency at the time the option is exercised. Call options convey the right to buy the underlying currency at a price which is expected to be lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. The Fund's currency hedging 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 accruing in connection with the purchase or sale of its portfolio securities. Position hedging is the sale of forward currency with respect to portfolio security positions. The Fund may not position hedge to an extent greater than the aggregate market value (at the time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in which the Fund's securities are denominated will reduce the U.S. dollar value of the securities, even if their value in the foreign currency remains constant. The use of currency hedges 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. For example, in order to protect against diminutions in the U.S. dollar value of securities it holds, the Fund may purchase currency put options. If the value of the currency does decline, the Fund will have the right to sell the currency for a fixed amount in dollars and will thereby offset, in whole or in part, the adverse effect on the U.S. dollar value of its securities that otherwise would have resulted. Conversely, if a rise in the U.S. dollar value of a currency in which securities to be acquired are denominated is projected, thereby potentially increasing the cost of the securities, the Fund may purchase call options on the particular currency. The purchase of these options could offset, at least partially, the effects of the adverse movements in exchange rates. The benefit to the Fund derived from purchases of currency options, like the benefit derived from other types of options, will be reduced by premiums and other transaction costs. Because transactions in currency exchange are generally conducted on a principal basis, no fees or commissions are generally involved. Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Although currency hedges limit the risk of loss due to a decline in the value of a hedged currency, at the same time, they also limit any potential gain that might result should the value of the currency increase. If a devaluation is generally anticipated, the Fund may not be able to contract to sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward currency contracts and currency options may be expected to correlate with exchange rates, they will not reflect other factors that may affect the value of the Fund's investments and a currency hedge may not be entirely successful in mitigating changes in the value of the Fund's investments denominated in that currency. A currency hedge, for example, should protect a Yen- denominated bond against a decline in the Yen, but will not protect the Fund against a price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and currency exchange transactions for other purposes, including generating current income to offset expenses or increase return, the Fund may enter into these transactions as hedges to reduce investment risk, generally by making an investment expected to move in the opposite direction of its portfolio position. A hedge is designed to offset a loss in a portfolio position with a gain in the hedged position; at the same time, however, a properly correlated hedge will result in a gain in the portfolio position being offset by a loss in the hedged position. As a result, the use of options, futures, contracts and currency exchange transactions for hedging purposes could limit any potential gain from an increase in the value of the position hedged. In addition, the movement in the portfolio position hedged may not be of the same magnitude as movement in the hedge. With respect to futures contracts, since the value of portfolio securities will far exceed the value of the futures contracts sold by the Fund, an increase in the value of the futures contracts could only mitigate, but not totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, 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 securities prices in the market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular security. The risk of imperfect correlation increases as the composition of the Fund's portfolio varies from the composition of the index. In an effort to compensate for imperfect correlation of relative movements in the hedged position and the hedge, the Fund's hedge positions may be in a greater or lesser dollar amount than the dollar amount of the hedged position. Such "over hedging" or "under hedging" may adversely affect the Fund's net investment results if market movements are not as anticipated when the hedge is established. Securities index futures transactions may be subject to additional correlation risks. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which would distort the normal relationship between the index and futures markets. Secondly, from the point of view of speculators, the 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 also may cause temporary price distortions. Because of the possibility of price distortions in the futures market and the imperfect correlation between movements in an index and movements in the price of index futures, a correct forecast of general market trends by Warburg still may not result in a successful hedging transaction.
The Fund will engage in hedging transactions only when deemed advisable by Warburg, and successful use by the Fund of hedging transactions will be subject to Warburg's ability to predict trends in currency, interest rate or securities markets, as the case may be, and to correctly predict movements in the directions of the hedge and the hedged position and the correlation between them, which predictions could prove to be inaccurate. This requires different skills and techniques than predicting changes in the price of individual securities, and there can be no assurance that the use of these strategies will be successful. Even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior or trends. Losses incurred in hedging transactions and the costs of these transactions will affect the Fund's performance.
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures. As described in the Prospectuses, the Fund will comply with guidelines established by the U.S. Securities and Exchange Commission (the "SEC") with respect to coverage of forward currency contracts; options written by the Fund on securities, indexes and currencies; and currency, interest rate and index futures contracts and options on these futures contracts. These guidelines may, in certain instances, require segregation by the Fund of cash or liquid high-grade debt securities or other securities that are acceptable as collateral to the appropriate regulatory authority.
For example, a call option written by the Fund on securities may require the Fund to hold the securities subject to the call (or securities convertible into the securities without additional consideration) or to segregate assets (as described above) sufficient to purchase and deliver the securities if the call is exercised. A call option written by the Fund on an index may require the Fund to own portfolio securities that correlate with the index or to segregate assets (as described above) equal to the excess of the index value over the exercise price on a current basis. A put option written by the Fund may require the Fund to segregate assets (as described above) equal to the exercise price. The Fund could purchase a put option if the strike price of that option is the same or higher than the strike price of a put option sold by the Fund. If the Fund holds a futures or forward contract, the Fund could purchase a put option on the same futures or forward contract with a strike price as high or higher than the price of the contract held. The Fund may enter into fully or partially offsetting transactions so that its net position, coupled with any segregated assets (equal to any remaining obligation), equals its net obligation. Asset coverage may be achieved by other means when consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
Foreign Investments. Investors should recognize that investing in foreign companies involves certain risks, including those discussed below, which are not typically associated with investing in U.S. issuers.
Foreign Currency Exchange. Since the Fund will be investing substantially in securities denominated in currencies of non-U.S. countries, and since the Fund may temporarily hold funds in bank deposits or other money market investments denominated in foreign currencies, the Fund may be affected favorably or unfavorably by exchange control regulations or changes in the exchange rate between such currencies and the dollar. A change in the value of a foreign currency relative to the U.S. dollar will result in a corresponding change in the dollar value of the Fund assets denominated in that foreign currency. Changes in foreign currency exchange rates may also affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by the Fund. The rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign exchange markets. Changes in the exchange rate may result over time from the interaction of many factors directly or indirectly affecting economic and political conditions in the United States and a particular foreign country, including economic and political developments in other countries. Of particular importance are rates of inflation, interest rate levels, the balance of payments and the extent of government surpluses or deficits in the United States and the particular foreign country, all of which are in turn sensitive to the monetary, fiscal and trade policies pursued by the governments of the United States and foreign countries important to international trade and finance. Governmental intervention may also play a significant role. National governments rarely voluntarily allow their currencies to float freely in response to economic forces. Sovereign governments use a variety of techniques, such as intervention by a country's central bank or imposition of regulatory controls or taxes, to affect the exchange rates of their currencies. The Fund may use hedging techniques with the objective of protecting against loss through the fluctuation of the value of foreign currencies against the U.S. dollar, particularly the forward market in foreign exchange, currency options and currency futures. See "Currency Exchange Transactions" and "Futures Activities" above.
Information. Many of the foreign securities held by the Fund will not be registered with, nor the issuers thereof be subject to reporting requirements of, the SEC. Accordingly, there may be less publicly available information about the securities and about the foreign company or government issuing them than is available about a domestic company or government entity. Foreign companies are generally not subject to uniform financial reporting standards, practices and requirements comparable to those applicable to U.S. companies.
Political Instability. With respect to some foreign countries, there is the possibility of expropriation or confiscatory taxation, limitations on the removal of funds or other assets of the Fund, political or social instability, or domestic developments which could affect U.S. investments in those and neighboring countries.
Delays. Securities of some foreign companies are less liquid and their prices are more volatile than securities of comparable U.S. companies. Certain foreign countries are known to experience long delays between the trade and settlement dates of securities purchased or sold. Due to the increased exposure of the Fund to market and foreign exchange fluctuations brought about by such delays, and due to the corresponding negative impact on Fund liquidity, the Fund will avoid investing in countries which are known to experience settlement delays which may expose the Fund to unreasonable risk of loss.
Increased Expenses. The operating expenses of the Fund, to the extent it invests in foreign securities, can be expected to be higher than that of an investment company investing exclusively in U.S. securities, since the expenses of the Fund associated with foreign investing, such as custodial costs, valuation costs and communication costs, as well as the rate of the investment advisory fees, though similar to such expenses of some other international funds, are higher than those costs incurred by other investment companies.
General. Individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments positions. The Fund may invest in securities of foreign governments (or agencies or instrumentalities thereof), and many, if not all, of the foregoing considerations apply to such investments as well.
Foreign Debt Securities. The returns on foreign debt securities reflect interest rates and other market conditions prevailing in those countries and the effect of gains and losses in the denominated currencies against the U.S. dollar, which have had a substantial impact on investment in foreign fixed income securities. The relative performance of various countries' fixed income markets historically has reflected wide variations relating to the unique characteristics of each country's economy. Year-to- year fluctuations in certain markets have been significant, and negative returns have been experienced in various markets from time to time.
The foreign government securities in which the Fund may invest generally consist of obligations issued or backed by national, state or provincial governments or similar political subdivisions or central banks in foreign countries. Foreign government securities also include debt obligations of supranational entities, which include international organizations designated, or backed by governmental entities to promote economic reconstruction or development, international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Coal and Steel Community, the Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of "quasi-governmental agencies" and debt securities denominated in multinational currency units of an issuer (including supranational issuers). Debt securities of quasi-governmental agencies are issued by entities owned by either a national, state or equivalent government or are obligations of a political unit that is not backed by the national government's full faith and credit and general taxing powers. An example of a multinational currency unit
European Currency Unit ("ECU"). An ECU represents specified amounts of the currencies of certain member states of the European Economic 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.
Loan Participations and Assignments. The Fund may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between a foreign government (a "Borrower") and one or more financial institutions ("Lenders"). The majority of the Fund's investments in Loans are expected to be in the form of participations in Loans ("Participations") and assignments of portions of Loans from third parties ("Assignments"). Participations typically will result in the Fund having a contractual relationship only with the Lender, not with the Borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the Borrower. In connection with purchasing Participations, the Fund generally will have no right to enforce compliance by the Borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the Borrower, and the Fund may not directly benefit from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund will assume the credit risk of both the Borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling a Participation, the Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the Borrower. The Fund will acquire Participations only if the Lender interpositioned between the Fund and the Borrower is determined by Warburg to be creditworthy.
When the Fund purchases Assignments from Lenders, the Fund will acquire direct rights against the Borrower on the Loan. However, since Assignments are generally arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and Assignments. The Fund may have difficulty disposing of them because there is no liquid market for such securities. The lack of a liquid secondary market will have an adverse impact on the value of such securities and on the Fund's ability to dispose of particular Participations or Assignments when necessary to meet the Fund's liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the Borrower. The lack of a liquid market for Participations and Assignments also may make it more difficult for the Fund to assign a value to these securities for purposes of valuing the Fund's portfolio and calculating its net asset value.
Zero Coupon Securities. The Fund may invest in "zero coupon" U.S. Treasury, foreign government and U.S. and foreign corporate convertible and nonconvertible debt securities, which are bills, notes and bonds that have been stripped of their unmatured interest coupons and custodial receipts or certificates of participation representing interests in such stripped debt obligations and coupons. A zero coupon security pays no interest to its holder prior to maturity. Accordingly, such securities usually trade at a deep discount from their face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities that make current distributions of interest. The Fund anticipates that it will not normally hold zero coupon securities to maturity. Federal tax law requires that a holder of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year, even though the holder receives no interest payment on the security during the year. Such accrued discount will be includible in determining the amount of dividends the Fund must pay each year and, in order to generate cash necessary to pay such dividends, the Fund may liquidate portfolio securities at a time when it would not otherwise have done so.
Below Investment Grade Securities. The Fund may hold up to 35% of its net assets in fixed income securities rated below investment grade or in comparable unrated securities considered to be of equivalent quality. While the market values of medium- and lower-rated securities and unrated securities of comparable quality tend to react less to fluctuations in interest rate levels than do those of higher-rated securities, the market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-quality securities. In addition, medium- and lower-rated securities and comparable unrated securities generally present a higher degree of credit risk. Issuers of medium- and lower-rated securities and unrated securities are often highly leveraged and may not have more traditional methods of financing available to them so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by such issuers is significantly greater because medium- and lower-rated securities and unrated securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness.
The market for medium- and lower-rated and unrated securities is relatively new and has not weathered a major economic recession. Any such recession could disrupt severely the market for such securities and may adversely affect the value of such securities and the ability of the issuers of such securities to repay principal and pay interest thereon.
The Fund may have difficulty disposing of certain of these securities because there may be a thin trading market. Because there is no established retail secondary market for many of these securities, the Fund anticipates that these securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market for these securities does exist, it generally is not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market, as well as adverse publicity and investor perception with respect to these securities, may have an adverse impact on market price and the Fund's ability to dispose of particular issues when necessary to meet the Fund's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. The lack of a liquid securities also may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing the Fund and calculating its net asset value.
The market value of securities in lower-rated categories is more volatile than that of higher quality securities. Factors adversely impacting the market value of these securities will adversely impact the Fund's net asset value. The Fund will rely on the judgment, analysis and experience of Warburg in evaluating the creditworthiness of an issuer. In this evaluation, Warburg will take into consideration, among other things, the issuer's financial resources, its sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management and regulatory matters. Normally, medium- and lower-rated and comparable unrated securities are not intended for short-term investment. The Fund may incur additional expenses to the extent it is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings of such securities. Recent adverse publicity regarding lower-rated bonds may have depressed the prices for such securities to some extent. Whether investor perceptions will continue to have a negative effect on the price of such securities is uncertain.
Short Sales "Against the Box." In a short sale, the Fund sells a borrowed security and has a corresponding obligation to the lender to return the identical security. The seller does not immediately deliver the securities sold and is said to have a short position in those securities until delivery occurs. If the Fund engages in a short sale, the collateral for the short position will be maintained by the Fund's custodian or qualified sub-custodian. While the short sale is open, the Fund will maintain in a segregated account an amount of securities equal in kind and amount to the securities sold short or securities convertible into or exchangeable for such equivalent securities. These securities constitute the Fund's long position.
The Fund does not intend to engage in short sales against the box for investment purposes. The Fund may, however, make a short sale as a hedge, when it believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund (or a security convertible or exchangeable for such security), or when the Fund wants to sell the security at an attractive current price, but also wishes to defer recognition of gain or loss for U.S. federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Code. In such case, any future losses in the Fund's long position should be offset by a gain in the short position and, conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which such gains or losses are reduced will depend upon the amount of the security sold short relative to the amount the Fund owns. There will be certain additional transaction costs associated with short sales against the box, but the Fund will endeavor to offset these costs with the income from the investment of the cash proceeds of short sales.
U.S. Government Securities. The Fund may invest in debt obligations of varying maturities issued or guaranteed by the United States government, instrumentalities ("U.S. Government Securities"). Direct obligations of the U.S. Treasury include a variety of securities that differ in their interest rates, maturities and dates of issuance. U.S. Government Securities also include securities issued or guaranteed by the Federal Housing Administration, Farmers Home Loan Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association, General Services Administration, Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage Association, Maritime Administration, Tennessee Valley Authority, District of Columbia Armory Board and Student Loan Marketing Association. The Fund may also invest in instruments that are supported by the right of the issuer to borrow from the U.S. Treasury and instruments that are supported by the credit of the instrumentality. Because the U.S. government is not obligated by law to provide support to an instrumentality it sponsors, the Fund will invest in obligations issued by such an instrumentality only if Warburg determines that the credit risk with respect to the instrumentality does not make its securities unsuitable for investment by the Fund.
Securities of Other Investment Companies. The Fund may invest in securities of other investment companies to the extent permitted under the Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under the 1940 Act, the Fund may hold securities of another investment company in amounts which (i) do not exceed 3% of the total outstanding voting stock of such company, (ii) do not exceed 5% of the value of the Fund's total assets and (iii) when added to all other investment company securities held by the Fund, do not exceed 10% of the value of the Fund's total assets.
Reverse Repurchase Agreements and Dollar Rolls. The Fund may also enter into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Reverse repurchase agreements involve the sale of securities held by the Fund pursuant to its agreement to repurchase them at a mutually agreed upon date, price and rate of interest. At the time the Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing cash or liquid high-grade debt securities having a value not less than the repurchase price (including accrued interest). The assets contained in the segregated account will be marked-to-market daily and additional assets will be placed in such account on any day in which the assets fall below the repurchase price (plus accrued interest). The Fund's liquidity and ability to manage its assets might be affected when it sets aside cash or portfolio securities to cover such commitments. Reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale may decline below the price of the securities the Fund has sold but is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund's obligation to repurchase the securities, and the Fund's use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.
The Fund also may enter into "dollar rolls," in which the Fund sells fixed-income securities for delivery in the current month and simultaneously contracts to repurchase similar but not identical (same type, coupon and maturity) securities on a specified future date. During the roll period, the Fund would forego principal and interest paid on such securities. The Fund would be compensated by the difference between the current sales price and the forward price for the future purchase, as well as by the interest earned on the cash proceeds of the initial sale. At the time the Fund enters into a dollar roll transaction, it will place in a segregated account maintained with an approved custodian cash or other liquid high-grade debt obligations having a value not less than the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that its value is maintained. Reverse repurchase agreements are considered to be borrowings under the 1940 Act.
When-Issued Securities and Delayed-Delivery Transactions. The Fund may utilize up to 20% of its total assets to purchase securities on a "when-issued" basis or purchase or sell securities for delayed delivery (i.e., payment or delivery occur beyond the normal settlement date at a stated price and yield). When-issued transactions normally settle within 30-45 days. The Fund will enter into a when-issued transaction for the purpose of acquiring portfolio securities and not for the purpose of leverage, but may sell the securities before the settlement date if Warburg deems it advantageous to do so. The payment obligation and the interest rate that will be received on when-issued securities are fixed at the time the buyer enters into the commitment. Due to fluctuations in the value of securities purchased or sold on a when-issued or delayed-delivery basis, the yields obtained on such securities may be higher or lower than the yields available in the market on the dates when the investments are actually delivered to the buyers.
When the Fund agrees to purchase when-issued or delayed-delivery securities, its custodian will set aside cash, U.S. Government Securities or other liquid high-grade debt obligations or other securities that are acceptable as collateral to the appropriate regulatory authority equal to the amount of the commitment in a segregated account. Normally, the custodian will set aside portfolio securities to satisfy a purchase commitment, and in such a case the Fund may be required subsequently to place additional assets in the segregated account in order to ensure 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. When the Fund engages in when-issued or delayed-delivery transactions, it relies on the other party to consummate the trade. Failure of the seller to do so may result in the Fund's incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
Warrants. The Fund may invest up to 5% of net assets in warrants (valued at the lower of cost or market) (other than warrants acquired by the Fund as part of a unit or attached to securities at the time of purchase), provided that not more than 2% of net assets may be invested in warrants not listed on a recognized U.S. or foreign stock exchange.
Because a warrant does not carry with it the right to dividends or voting rights with respect to the securities which it entitles a holder to purchase, and because it does not represent any rights in the assets of the issuer, warrants may be considered more speculative than certain other types of investments. Also, the value of a 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 its expiration date.
Non-Publicly Traded and Illiquid Securities. The Fund may not invest more than 15% of its net assets, in non-publicly traded and illiquid securities, including securities that are illiquid by virtue of the absence of a readily available market, repurchase agreements which have a maturity of longer than seven days and time deposits maturing in more than seven days. Securities that have legal or contractual restrictions on resale but have a readily available market are not considered illiquid for purposes of this limitation. Repurchase agreements subject to demand are deemed to have a maturity equal to the notice period.
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 "Securities 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 Securities 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 Securities 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 to the general public or to certain institutions may not be indicative of the liquidity of such investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by the SEC allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. Warburg anticipates that the market for certain restricted securities as institutional commercial paper will expand further as a result of this regulation and use 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.
An investment in Rule 144A Securities will be considered illiquid and therefore subject to the Fund's limit on the purchase of illiquid securities unless the Fund's Board of Directors (the "Board") or its delegates determines that the Rule 144A Securities are liquid. In reaching liquidity decisions, the Board or its delegates may consider, inter alia, the following factors: (i) the unregistered nature of the security; (ii) the frequency of trades and quotes for the security; (iii) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (iv) dealer undertakings to make a market in the security and (v) the nature of the security and the nature 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).
Borrowing. The Fund may borrow up to 30% of its total assets for temporary or emergency purposes, including to meet portfolio redemption requests so as to permit the orderly disposition of portfolio securities or to facilitate settlement transactions on portfolio securities. Investments (including roll-overs) will not be made when borrowings exceed 5% of the Fund's net assets. Although the principal of such borrowings will be fixed, the Fund's assets may change in value during the time the borrowing is outstanding. The Fund expects that some of its borrowings may be made on a secured basis. In such situations, either the custodian will segregate the pledged assets for the benefit of the lender or arrangements will be made with a suitable subcustodian, which may include the lender.
Non-Diversified Status. The Fund is classified as non-diversified within the meaning of the 1940 Act, which means that it is not limited by such Act in the proportion of its assets that it may invest in securities of a single issuer. The Fund's investments will be limited, however, in order to qualify as a "regulated investment company" for purposes of the Code. See "Additional Information Concerning Taxes." To qualify, the Fund will comply with certain requirements, including limiting its investments so that at the close of each quarter of the taxable year (i) not more than 25% of the market value of its total assets will be invested in the securities of a single issuer, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the Fund will not own more than 10% of the outstanding voting securities of a single issuer.
The investment limitations numbered 1 through 10 may not be changed without the affirmative vote of the holders of a majority of the Fund's outstanding shares. Such majority is defined as the lesser of (i) 67% or more of the shares present at the meeting, if the holders of more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the outstanding shares. Investment limitations 11 through 16 may be changed by a vote of the Board at any time.
1. Borrow money except that the Fund may (a) borrow from banks for temporary or emergency purposes and (b) enter into reverse repurchase agreements; provided that reverse repurchase agreements, dollar roll transactions that are accounted for as financings and any other transactions constituting borrowing by the Fund may not exceed 30% of the value of the Fund's total assets. For purposes of this restriction, short sales, the entry into currency transactions, options, futures contracts, options on futures contracts, forward commitment transactions and dollar roll transactions that are not accounted for as financings (and the segregation of assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the value of the Fund's total assets at the time of purchase to be invested in the securities of issuers conducting their principal business activities in the same industry; provided that there shall be no limit on the purchase of U.S. government securities.
3. Make loans, except that the Fund may purchase or hold fixed-income securities, including loan participations and assignments and structured securities; lend portfolio securities; and enter into repurchase agreements.
4. Underwrite any securities issued by others except to the extent that the investment in restricted securities and the sale of securities in accordance with the Fund's investment objective, policies and limitations may be deemed to be underwriting.
5. Purchase or sell real estate or invest in real estate limited partnerships, oil, gas or mineral exploration or development programs or oil, gas and mineral leases, except that the Fund may invest in (a) securities secured by real estate, mortgages or interests therein and (b) securities of companies that invest in or sponsor oil, gas or mineral exploration or development programs.
6. Make short sales of securities or maintain a short position, except the Fund may maintain short positions in forward currency contracts, options, futures contracts and options on futures contracts and make short sales "against the box."
7. Purchase securities on margin, except that the Fund may obtain any short-term credits necessary for the clearance of purchases and sales of securities. For purposes of this restriction, the deposit or payment of initial or variation margin in connection with transactions in currencies, options, futures contracts or related options will not be deemed to be a purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase and sell futures contracts, including those relating to securities, currencies and indexes, and options on futures contracts, securities, currencies or indexes, and purchase and sell currencies or securities on a forward commitment or delayed-delivery basis.
9. Issue any senior security except as permitted in these Investment Restrictions.
10. Purchase securities of other investment companies except in connection with a merger, consolidation, acquisition, reorganization or offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the extent necessary to secure permitted borrowings and to the extent related to the deposit of assets in escrow in connection with the writing of covered put and call options and purchase of securities on a forward commitment or delayed-delivery basis and collateral and initial or variation margin arrangements with respect to currency transactions, options, futures contracts, and options on futures contracts.
12. Invest more than 15% of the value of the Fund's net assets in securities which may be illiquid because of legal or contractual restrictions on resale or securities for which there are no readily available market quotations. For purposes of this limitation, repurchase agreements with maturities greater than seven days shall be considered illiquid securities.
13. Purchase any security if as a result the Fund would then have more than 5% of its total assets invested in securities of companies (including predecessors) that have been in continuous operation for fewer than three years.
14. Purchase or retain securities of any company if, to the knowledge of the Fund, any of the Fund's officers or Directors or any officer or director of Warburg 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.
15. Invest 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 U.S. or foreign stock exchange.
16. Make additional investments (including roll-overs) if the Fund's borrowings exceed 5% of its net assets.
The aggregate of all Rule 144A Securities, non-publicly traded and illiquid securities and securities of companies (including predecessors) that have been in continuous operation for less than three years is limited to 15% of total assets. These and other non-fundamental investment limitations are currently required by one or more states in which shares of the Fund are sold. These may be more restrictive than the limitations set forth above. Should the Fund determine that any such commitment is no longer in the best interest of the Fund and its shareholders, the Fund will revoke the commitment by terminating the sale of Fund shares in the state involved. In addition, the relevant state may change or eliminate its policy regarding such investment limitations.
If a percentage restriction (other than the percentage limitation set forth in No. 1 above) is adhered to at the time of an investment, a later increase or decrease in the percentage of assets resulting from a change in the values of portfolio securities or in the amount of the Fund's assets will not constitute a violation of such restriction.
The Prospectuses discuss the time at which the net asset value of the Fund is determined for purposes of sales and redemptions. The following is a description of the procedures used by the Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including securities traded through the NASDAQ National Market System) or foreign securities exchange or traded in an over-the-counter market will be valued at the most recent sale as of the time the valuation is made or, in the absence of sales, at the mean between the bid and asked quotations. If there are no such quotations, the value of the securities will be taken to be the highest bid quotation on the exchange or market. Options or futures contracts will be valued similarly. A security which is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Notwithstanding the foregoing, in determining the market value of portfolio investments, the Fund may employ outside organizations (a "Pricing Service") which may use a matrix, formula or other objective method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. The procedures of Pricing Services are reviewed periodically by the officers of the Fund under the general supervision and responsibility of the Board, which may replace a Pricing Service at any time. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which constitutes fair value as determined by the Board. Amortized cost involves valuing a portfolio instrument at its initial cost 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. The amortized cost method of valuation may also be used with respect to other debt obligations with 60 days or less remaining to maturity. All other securities and other assets of the Fund will be valued at their fair value as determined in good faith pursuant to consistently applied procedures established by the Board. In addition, the Board or its delegates may value a security at fair value if it determines that such security's value determined by the methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is completed at various times prior to the close of business on each business day in New York (i.e., a day on which the New York Stock Exchange (the "NYSE") is open for trading). In addition, securities trading in a particular country or countries may not take place on all business days in New York. Furthermore, trading takes place in various foreign markets on days which are not business days in New York and days on which the Fund's net asset value is not calculated. As a result, calculation of the Fund's net asset value may not take place contemporaneously with the determination of the prices of certain portfolio securities used in such calculation. Events affecting the values of portfolio securities that occur between the time their prices are determined and the close of regular trading on the NYSE will not be reflected in the Fund's calculation of net asset value unless the Board or its delegates deems that the particular event would materially affect net asset value, in which case an adjustment may be made. All assets and liabilities initially expressed in foreign currency values will be converted into U.S. dollar values at the prevailing rate as quoted by a Pricing Service. If such quotations are not available, the rate of exchange will be determined in good faith pursuant to consistently applied procedures established by the Board.
Warburg is responsible for establishing, reviewing and, where necessary, modifying the Fund's investment program to achieve its investment objective. Purchases and sales of newly issued portfolio securities are usually principal transactions without brokerage commissions effected directly with the issuer or with an underwriter acting as principal. Other purchases and sales may be effected on a securities exchange or over-the-counter, depending on where it appears that the best price or execution will be obtained. The purchase price paid by the Fund to underwriters of newly issued securities usually includes a concession paid by the issuer to the underwriter, and purchases of securities from dealers, acting as either principals or agents in the after market, are normally executed at a price between the bid and asked price, which includes a dealer's mark-up or mark-down. Transactions on U.S. 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 most foreign exchanges, commissions are generally fixed. There is generally no stated commission in the case of securities traded in domestic or foreign over-the-counter markets, but the price of securities traded in over-the-counter markets includes an undisclosed commission or mark-up. U.S. Government Securities are generally purchased from underwriters or dealers, although certain newly issued U.S. Government Securities may be purchased directly from the U.S. Treasury or from the issuing agency or instrumentality.
Warburg will select specific portfolio investments and effect transactions for the Fund and in doing so seeks to obtain the overall best execution of portfolio transactions.
In evaluating prices and executions, Warburg will consider the factors it deems relevant, which may include the breadth of the market in the security, the price of the security, the financial condition and execution capability of a broker or dealer and the reasonableness of the commission, if any, for the specific transaction and on a continuing basis. Warburg may, in its discretion, effect transactions in portfolio securities with dealers who provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Fund and/or other accounts over which Warburg exercises investment discretion. Warburg may place portfolio transactions with a broker or dealer with whom it has negotiated a commission that is in excess of the commission another broker or dealer would have charged for effecting the transaction if Warburg determines in good faith that such amount of commission was reasonable in relation to the value of such brokerage and research services provided by such broker or dealer viewed in terms of either that particular transaction or of the overall responsibilities of Warburg. Research and other services received may be useful to Warburg in serving both the Fund and its other clients and, conversely, research or other services obtained by the placement of business of other clients may be useful to Warburg in carrying out its obligations to the Fund. Research may include furnishing advice, either directly or through publications or writings, as to the value of securities, the advisability of purchasing or selling specific securities and the availability of securities or purchasers or sellers of securities; furnishing seminars, information, analyses and reports concerning issuers, industries, securities, trading markets and methods, legislative developments, changes in accounting practices, economic factors and trends and portfolio strategy; access to research analysts, corporate management personnel, industry experts, economists and government officials; comparative performance evaluation and technical measurement services and quotation services; and products and other services (such as third party publications, reports and analyses, and computer and electronic access, equipment, software, information and accessories that deliver, process or otherwise utilize information, including the research described above) that assist Warburg in carrying out its responsibilities. Research received from brokers or dealers is supplemental to Warburg's own research program. The fees to Warburg under its advisory agreements with the Fund are not reduced by reason of its receiving any brokerage and research services.
During the fiscal years ended October 31, 1993 and October 31, 1994, the Fund paid an aggregate of approximately $9,637 and $11,288, respectively, in commissions to broker-dealers for execution of portfolio transactions. The Fund did not pay any such commissions in the fiscal year ended October 31, 1995.
Investment decisions for the Fund concerning specific portfolio securities are made independently from those for other clients advised by Warburg. Such other investment clients may invest in the same securities as the Fund. When purchases or sales of the same security are made at substantially the same time on behalf of such other clients, transactions are averaged as to price and available investments allocated as to amount, in a manner which Warburg believes to be equitable to each client, including the Fund. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or sold for the Fund. To the extent permitted by law, Warburg may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for the Fund may be executed through Counsellors Securities Inc., the Fund's distributor ("Counsellors Securities"), if, in Warburg's judgment, the use of Counsellors Securities is likely to result in price and execution at least as favorable as those of other qualified brokers, and if, in the transaction, Counsellors Securities charges the Fund a commission rate consistent with those charged by Counsellors Securities to comparable unaffiliated customers in similar transactions. All transactions with affiliated brokers will comply with Rule 17e-1 under the 1940 Act. No portfolio securities have been executed through Counsellors Securities since the commencement of the Fund's operations.
In no instance will portfolio securities be purchased from or sold to Warburg or Counsellors Securities or any affiliated person of such companies. In addition, the Fund will not give preference to any institutions with whom the Fund enters into distribution or shareholder servicing agreements concerning the provision of distribution services or support services. See the Prospectuses, "Shareholder Servicing."
Transactions for the Fund may be effected on foreign securities exchanges. In transactions for securities not actively traded on a foreign securities exchange, the Fund will deal directly with the dealers who make a market in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principal for their own account. On occasion, securities may be purchased directly from the issuer. Such portfolio securities are generally traded on a net basis and do not normally involve brokerage commissions. Securities firms may receive brokerage commissions on certain portfolio transactions, including options, futures and options on futures transactions and the purchase and sale of underlying securities upon exercise of options.
The Fund may participate, if and when practicable, in bidding for the purchase of securities for the Fund's portfolio directly from an issuer in order to take advantage of the lower purchase price available to members of such a group. The Fund will engage in this practice, however, only when Warburg, in its sole discretion, believes such practice to be otherwise in the Fund's interest.
The Fund's portfolio turnover rate is calculated by dividing the lesser of purchases or sales of its portfolio securities for the year by the monthly average value of the portfolio securities. Securities with remaining maturities of one year or less at the date of acquisition are excluded from the calculation.
The Fund does not intend to seek profits through short-term trading, but the rate of turnover will not be a limiting factor when the Fund deems it purchase securities. Certain practices that may be employed by the Fund could result in high portfolio turnover. For example, portfolio securities may be sold in anticipation of a rise in interest rates (market decline) or purchased in anticipation of a decline in interest rates (market rise) and later sold. In addition, a security may be sold and another of comparable quality purchased at approximately the same time to take advantage of what Warburg believes to be a temporary disparity in the normal yield relationship between the two securities. These yield disparities may occur for reasons not directly related to the investment quality of particular issues or the general movement of interest rates, such as changes in the overall demand for, or supply of, various types of securities. In addition, options on securities may be sold in anticipation of a decline in the price of the underlying security (market decline) or purchased in anticipation of a rise in the price of the underlying security (market rise) and later sold.
Officers and Board of Directors
The names (and ages) of the Fund's Directors and officers, their addresses, present positions and principal occupations during the past five years and other affiliations are set forth below.
Richard N. Cooper (61) . . . . . Director Room 7E47OHB National Intelligence Counsel; Central Intelligence Agency Professor at Harvard University; 930 Dolly Madison Blvd. Director or Trustee of Circuit City McClain, Virginia 22107 Stores, Inc. (retail electronics and appliances) and Phoenix Home Life Insurance Co.
Donald J. Donahue (71) . . . . . Director 99 Indian Field Road Chairman of Magma Copper Company since Greenwich, Connecticut 06830 January 1987; Director or Trustee of GEV Corporation and Signet Star Reinsurance Company; Chairman and Director of NAC Holdings from September 1990-June 1993.
Jack W. Fritz (68) . . . . . . . Director 2425 North Fish Creek Road Private investor; Consultant and P.O. Box 483 Director of Fritz Broadcasting, Inc. and Wilson, Wyoming 83014 Fritz Communications (developers and operators of radio stations); Director of Advo, Inc. (direct mail advertising).
John L. Furth* (65) . . . . . Chairman of the Board and President 466 Lexington Avenue Vice Chairman and Director of E.M. New York, New York 10017-3147 Warburg, Pincus & Co., Inc. ("EMW"); Associated with EMW since 1970; Director and officer of other investment companies advised by Warburg.
Thomas A. Melfe (63) . . . . . . Director 30 Rockefeller Plaza Partner in the law firm of Donovan New York, New York 10112 Leisure Newton & Irvine; Director of Municipal Fund for New York Investors, Inc.
Alexander B. Trowbridge (66) . . Director 1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc. Suite 700 (business consulting) from January 1990- Washington, DC 20036 January 1994; President of the National 1980-1990; Director or Trustee of New England Mutual Life Insurance Co., ICOS Corporation (biopharmaceuticals), P.H.H. Corporation (fleet auto management; housing and plant relocation service), WMX Technologies Inc. (solid and hazardous waste collection and disposal), The Rouse SunResorts International Ltd. (hotel and real estate management), Harris Corp. The Gillette Co. (personal care products) and Sun Company Inc. (petroleum refining and marketing).
Dale C. Christensen (48) . . . . President and Co-Portfolio Manager of the New York, New York 10017-3147 Portfolio Manager or Co-Portfolio Manager of other Warburg Pincus Funds; Managing Director of EMW; Associated with EMW since 1989; Vice President at Citibank, N.A. from 1985-1989; President of other investment companies advised by Warburg.
* Indicates a Director who is an "interested person" of the Fund as defined in the 1940 Act.
Arnold M. Reichman (47) . . . . . Executive Vice President 466 Lexington Avenue Managing Director and Assistant Secretary New York, New York 10017-3147 of EMW; Associated with EMW since 1984; Senior Vice President, Secretary and Chief Securities; Officer of other investment companies advised by Warburg.
Eugene L. Podsiadlo (38) . . . . Senior Vice President 466 Lexington Avenue Managing Director of EMW; Associated New York, New York 10017-3147 with EMW since 1991; Vice President of Citibank, N.A. from 1987-1991; Senior Vice President of Counsellors Securities and officer of other investment companies advised by Warburg.
Stephen Distler (42) . . . . . . Vice President and Chief Financial New York, New York 10017-3147 Managing Director, Controller and Assistant Secretary of EMW; Associated with EMW since 1984; Treasurer of Counsellors Securities; Officer of other investment companies advised by Warburg.
Eugene P. Grace (44) . . . . . . Vice President and Secretary 466 Lexington Avenue Associated with EMW since April 1994; New York, New York 10017-3147 Attorney-at-law from September 1989-April 1994; life insurance agent, New York Life Insurance Company from 1993-1994; General Counsel and Secretary, Home Unity Savings Bank from 1991-1992; Vice President and Chief Compliance Officer of Counsellors Securities; Vice President and Secretary of other investment companies advised by Warburg.
Howard Conroy (41) . . . . . . . . Vice President, Treasurer and Chief 466 Lexington Avenue Accounting Officer New York, New York 10017-3147 Associated with EMW since 1992; Associated with Martin Geller, C.P.A. from 1990-1992; Vice President, Finance with Gabelli/Rosenthal & Partners, L.P. until 1990; Vice President, Treasurer and Chief Accounting Officer of other investment companies advised by Warburg.
Karen Amato (32) . . . . . . . . Assistant Secretary 466 Lexington Avenue Associated with EMW since 1987; New York, New York 10017-3147 Assistant Secretary of other investment companies advised by Warburg.
No employee of Warburg or PFPC Inc., the Fund's co-administrator ("PFPC"), or any of their affiliates receives any compensation from the Fund for acting as an officer or director of the Fund. Each Director who is not a director, trustee, officer or employee of Warburg, PFPC or any of their affiliates receives an annual fee of $1,000, and $250 for each meeting of the Board attended by him for his services as Director and is reimbursed for expenses incurred in connection with his attendance at Board meetings.
(for the fiscal year ended October 31, 1995)
* Each Director also serves as a Director or Trustee of 15 other investment companies advised by Warburg.
** Mr. Furth is considered to be an interested person of the Fund and Warburg, as defined under Section 2(a)(19) of the 1940 Act, and, accordingly, receives no compensation from the Fund or any other investment company managed by Warburg.
Mr. Dale C. Christensen, president and co-portfolio manager of the Fund, earned a B.S. in Agriculture from the University of Alberta and a B.Ed in Mathematics from the University of Calgary, both located in Canada. Mr. Christensen is also co-portfolio manager of Warburg Pincus Fixed Income Fund, Warburg Pincus Intermediate Maturity Government Fund and Warburg Pincus New York Intermediate Municipal Fund. Mr. Christensen directs the fixed income group at Warburg, which he joined in 1989, providing portfolio management for Warburg Pincus Funds and institutional clients around the world.
Mr. Christensen was a vice president in the International Private Banking division and the domestic pension fund management division at Citicorp from 1984 to 1989. Prior to that, Mr. Christensen was a fixed income portfolio manager at CIC Asset Management from 1982 to 1984.
Mr. Laxmi C. Bhandari, co-portfolio manager of the Fund, earned a Ph.D in Finance and a M.B.A. from the University of Chicago, his P.G.D.M. degree (M.B.A. equivalent) from the Indian Institute of Management, Ahmedabad, India and B.Com. degree from Rajasthan University, India. He has been with the Fund since joining EMW in 1993, specializing in derivative-based products. Mr. Bhandari was a vice president in charge of Arbitrage Trading at the Paribas Corporation from 1991 to 1993. Prior to that Mr. Bhandari was a vice president of Asset Liability Management at Chemical Bank from 1987 to 1991 and an assistant professor of Advanced Portfolio Management and Advanced Corporate Finance at the University of Alberta from 1982 to 1987.
As of December 28, 1995, Directors and officers of the Fund as a group owned of record less than 1% of the Fund's outstanding Common Shares. As of the same date, Mr. Furth may be deemed to have beneficially owned 41.79% of the Fund's outstanding Common Shares, including shares owned by clients for which Warburg has investment discretion. Mr. Furth disclaims ownership of these shares and does not intend to exercise voting rights with respect to these shares. No Directors or officers owned of record any Advisor Shares.
Warburg serves as investment adviser to the Fund, Counsellors Funds Service, Inc. ("Counsellors Service") serves as a co-administrator to the Fund and PFPC serves as a co-administrator to the Fund pursuant to separate written agreements (the "Advisory Agreement," the "Counsellors Service Co- Administration Agreement" and the "PFPC Co-Administration Agreement," respectively). The services provided by, and the fees payable by the Fund to, Warburg under the Advisory Agreement, Counsellors Service under the Counsellors Service Co-Administration Agreement and PFPC under the PFPC Co- Administration Agreement are described in the Prospectuses. Prior to March 1, 1994, PFPC served as administrator to the Fund and Counsellors Service served as administrative services agent to the Fund pursuant to separate written agreements.
Warburg agrees that if, in any fiscal year, the expenses borne by the Fund exceed the applicable expense limitations imposed by the securities regulations of any state in which shares of the Fund are registered or qualified for sale to the public, it will reimburse the Fund to the extent required by such regulations. Unless otherwise required by law, such reimbursement would be accrued and paid on a monthly basis. At the date of this Statement of Additional Information, the most restrictive annual expense limitation applicable to the Fund is 2.5% of the first $30 million of the average net assets of the Fund, 2% of the next
$70 million of the average net assets of the Fund and 1.5% of the remaining average net assets of the Fund.
During the fiscal years ended October 31, 1993, October 31, 1994, and October 31, 1995, Warburg earned $289,161, $834,884 and $773,318, respectively, and waived $283,419, $492,915 and $435,848, respectively, in investment advisory fees. During the fiscal year ended October 31, 1993, Warburg reimbursed the Fund for $134,982 in expenses. During the fiscal years ended October 31, 1993, October 31, 1994, and October 31, 1995, PFPC earned $66,625, $105,872 and $92,798, respectively, in administration or, in the case of the most recent fiscal year, co-administration fees. During the fiscal years ended October 31, 1994 and October 31, 1995, PFPC waived $52,936 and $49,312, respectively, in such fees. During the fiscal years ended October 31, 1993, October 31, 1994, and October 31, 1995, Counsellors Service earned $14,339, $69,888 and $77,332, respectively, in administrative services fees, or in the case of the most recent fiscal year, co-administration fees.
Fiduciary Trust Company International ("Fiduciary") is custodian of the Fund's assets pursuant to a custodian agreement (the "Custodian Agreement"). Under the Custodian Agreement, Fiduciary (i) maintains a separate account or accounts in the name of the Fund, (ii) holds and transfers portfolio securities on account of the Fund, (iii) makes receipts and disbursements of money on behalf of the Fund, (iv) collects and receives all income and other payments and distributions on account of the Fund's portfolio securities and (v) makes periodic reports to the Board concerning the Fund's custodial arrangements. Fiduciary is authorized to select one or more foreign or domestic banks or trust companies and securities depositories to serve as sub-custodian on behalf of the Fund. The principal business address of Fiduciary is Two World Trade Center, New York, New York 10048.
PNC Bank, National Association ("PNC") also provides certain custodial services generally in connection with purchases and sales of Fund shares. PNC is an indirect, wholly owned subsidiary of PNC Bank Corp., and its principal business address is Broad and Chestnut Streets, Philadelphia, Pennsylvania 19101.
State Street Bank and Trust Company ("State Street") serves as the shareholder servicing, transfer and dividend disbursing agent of the Fund pursuant to a Transfer Agency and Service Agreement, under which State Street (i) issues and redeems shares of the Fund, (ii) addresses and mails all communications by the Fund to record owners of Fund shares, including reports to shareholders, dividend and distribution notices and proxy material for its meetings of shareholders, (iii) maintains shareholder accounts and, if requested, sub-accounts and (iv) makes periodic reports to the Board concerning the transfer agent's operations with respect to the Fund. State Street has delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary ("BFDS"), responsibility for most shareholder servicing functions. BFDS's principal business address is 2 Heritage Drive, Boston, Massachusetts 02171.
The Fund's charter authorizes the Board to issue three billion full and fractional shares of common stock, $.001 par value per share ("Common Shares"), of which one billion shares are designated Common Stock - Series 1 and one billion shares are designated Common Stock - Series 2 (the "Advisor Shares"). Only Common Shares and Advisor Shares have been issued by the Fund.
All shareholders of the Fund in each class, upon liquidation, will participate ratably in the Fund's net assets. Shares do not have cumulative voting rights, which means that holders of more than 50% of the shares voting for the election of Directors can elect all Directors. Shares are transferable but have no preemptive, conversion or subscription rights.
The Fund may, in the future, enter into agreements ("Agreements") with institutional shareholders of record, broker-dealers, financial institutions, depository institutions, retirement plans and financial intermediaries ("Institutions") to provide certain distribution, shareholder servicing, administrative and/or accounting services for their clients or customers (or participants in the case of retirement plans) ("Customers") who are beneficial owners of Advisor Shares. See the Advisor Prospectus, "Shareholder Servicing." Agreements will be governed by a distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. The Distribution Plan requires the Board, at least quarterly, to receive and review written reports of amounts expended under the Distribution Plan and the purposes for which such expenditures were made.
An Institution with which the Fund has entered into an Agreement may charge a Customer one or more of the following types of fees, as agreed upon by the Institution and the Customer, with respect to the cash management or other services provided by the Institution: (i) account fees (a fixed amount per month or per year); (ii) transaction fees (a fixed amount per transaction processed); (iii) compensation balance requirements (a minimum dollar amount a Customer must maintain in order to obtain the services offered); or (iv) account maintenance fees (a periodic charge based upon the percentage of assets in the account or of the dividend paid on those assets). Services provided by an Institution to Customers are in addition to, and not duplicative of, the services to be provided under the Fund's co-administration and distribution arrangements. A Customer of an Institution should read the relevant Prospectus and Statement of Additional Information in conjunction with the Agreement and other literature describing the services and related fees that would be provided by the Institution to its Customers prior to any purchase of Fund shares. Prospectuses are available from the Fund's distributor upon request. No preference will be shown in the selection of Fund portfolio investments for the instruments of Institutions.
The Distribution Plan will continue in effect for so long as its continuance is specifically approved at least annually by the Board, 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 Distribution Plan ("Independent Directors"). Any material amendment of the Distribution Plan would require the approval of the Board in the same manner. The Distribution Plan may not be amended to increase materially the amount to be spent under it without shareholder approval of the Advisor Shares. The Distribution Plan may be terminated 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 Advisor Shares of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of the Fund's shares is equal to the per share net asset value of the relevant class of shares of the Fund. Information on how to purchase and redeem Fund shares and how such shares are priced is included in the Prospectuses under "Net Asset Value."
Under the 1940 Act, the Fund may suspend the right of redemption or postpone the date of payment upon redemption for any period during which the NYSE is closed, other than customary weekend and holiday closings, or during which trading on the NYSE is restricted, or during which (as determined by the SEC) an emergency exists as a result of which disposal or fair valuation of portfolio securities is not reasonably practicable, or for such other periods as the SEC may permit. (The Fund may also suspend or postpone the recordation of an exchange of its shares upon the occurrence of any of the foregoing
If the Board determines that conditions exist which make payment of redemption proceeds wholly in cash unwise or undesirable, the Fund may make payment wholly or partly in securities or other investment instruments which may not constitute securities as such term is defined in the applicable securities laws. If a redemption is paid wholly or partly in securities or other property, a shareholder would incur transaction costs in disposing of the redemption proceeds. The Fund intends to comply with Rule 18f-1 promulgated under the 1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the "Plan") is available to shareholders who wish to receive specific amounts of cash periodically. Withdrawals may be made under the Plan by redeeming as many shares of the Fund as may be necessary to cover the stipulated withdrawal payment. 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 may reduce the shareholder's investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in the Fund. All dividends and distributions on shares in the Plan are automatically reinvested at net asset value in additional shares of the Fund.
An exchange privilege with certain other funds advised by Warburg is available to investors in the Fund. The funds into which exchanges of Common Shares currently can be made are listed in the Common Share Prospectus. Exchanges may also be made between certain Warburg Pincus Advisor Funds.
The exchange privilege enables shareholders to acquire shares in a fund with a different investment objective 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 Common Shares or Advisor Shares being acquired, as relevant, may legally be sold. Prior to any exchange, the investor should obtain and review a copy of the current prospectus of the relevant class of each fund into which an exchange is being considered. Shareholders may obtain a prospectus of the relevant class of the fund into which they are contemplating an exchange from Counsellors Securities.
Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange are redeemed at the then-current net asset value of the relevant class and the proceeds are invested on the same day, at a price as described above, in shares of the relevant class of the fund being acquired. Warburg reserves the right to reject more than three exchange requests by a shareholder in any 30-day period. The exchange privilege may be modified or terminated at any time upon 60 days' notice to shareholders.
The discussion set out below of tax considerations generally affecting the Fund and its shareholders is intended to be only a summary and is not intended as a substitute for careful tax planning by prospective shareholders. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a "regulated investment company" under Subchapter M of the Code. If it qualifies as a regulated investment company, the Fund will pay no federal income taxes on its taxable net investment income (that is, taxable income other than net realized capital gains) and its net realized capital gains that are distributed to shareholders. To qualify under Subchapter M, the Fund must, among other things: (i) distribute to its shareholders at least 90% of its taxable net investment income (for this purpose consisting of taxable net investment income and net realized short-term capital gains); (ii) derive at least 90% of its gross income from dividends, interest, payments with respect to loans of securities, gains from the sale or other disposition of securities, or other income (including, but not limited to, gains from options, futures, and forward contracts) derived with respect to the Fund's securities; (iii) derive less than 30% of its annual gross income from the sale or other disposition of securities, options, futures or forward contracts held for less than three months; and (iv) diversify its holdings so that, at the end of each fiscal quarter of the Fund (a) at least 50% of the market value of the Fund's assets is represented by cash, U.S. Government Securities and other securities, with those other securities limited, with respect to any one issuer, to an amount no greater in value than 5% of the Fund's total assets and to not more than 10% of the outstanding voting securities of the issuer, and (b) not more than 25% of the market value of the Fund's assets is invested in the securities of any one issuer (other than U.S. Government Securities or securities of other regulated investment companies) or of two or more issuers that the Fund controls and that are determined to be in the same or similar trades or businesses or related trades or businesses. In meeting these requirements, the Fund may be restricted in the selling of securities held by the Fund for less than three months and in the utilization of certain of the investment techniques described above and in the Fund's Prospectuses. As a regulated investment company, the Fund will be subject to a 4% non- deductible excise tax measured with respect to certain undistributed amounts of ordinary income and capital gain required to be but not distributed under a prescribed formula. The formula requires payment to shareholders during a calendar year of distributions representing at least 98% of the Fund's taxable ordinary income for the calendar year and at least 98% of the excess of its capital gains over capital losses realized during the one-year period ending October 31 during such year, together with any undistributed, untaxed amounts of ordinary income and capital gains from the previous calendar year. The Fund expects to pay the dividends and make the distributions necessary to avoid the application of this excise tax.
The Fund's transactions, if any, in foreign currencies, forward contracts, options and futures contracts (including options and forward contracts on foreign currencies) will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses recognized by the Fund (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund, defer Fund losses and cause the Fund to be subject to hyperinflationary currency rules. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (i) will require the Fund to mark-to- market certain types of its positions (i.e., treat them as if they were closed out) and (ii) may cause the Fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The Fund will monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any foreign currency, forward contract, option, futures contract or hedged investment so that (a) neither the Fund nor its shareholders will be treated as receiving a materially greater amount of capital gains or distributions than actually realized or received, (b) the Fund will be able to use substantially all of its losses for the fiscal years in which the losses actually occur and (c) the Fund will continue to qualify as a regulated investment company.
A shareholder of the Fund receiving dividends or distributions in additional shares should be treated for federal income tax purposes as receiving a distribution in an amount equal to the amount of money that a shareholder receiving cash dividends or distributions receives, and should have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or capital gain distribution should be aware that, although the price of shares purchased at that time may reflect the amount of the forthcoming distribution, those who purchase just prior to a distribution will receive a distribution that will nevertheless be taxable to them. Upon the sale or exchange of shares, a shareholder will realize a taxable gain or loss depending upon the amount realized and the 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, as described in the Prospectuses, will be long-term or short-term depending upon the shareholder's holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced, including replacement through the reinvestment of dividends and capital gains 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 increased to reflect the disallowed loss.
Each shareholder will receive an annual statement as to the federal income tax status of his dividends and distributions from the Fund for the prior calendar year. Furthermore, shareholders will also receive, if appropriate, various written notices after the close of the Fund's taxable year regarding the federal income tax status of certain dividends and distributions that were paid (or that are treated as having been paid) by the Fund to its shareholders during the preceding year.
If a shareholder fails to furnish a correct taxpayer identification number, fails to report fully dividend or interest income, or fails to certify that he has provided a correct taxpayer identification number and that he is not subject to "backup withholding," the shareholder may be subject to a 31% "backup withholding" tax with respect to (i) taxable dividends and distributions and (ii) the proceeds of any sales or repurchases of shares of the Fund. An individual's taxpayer identification number is his social security number. Corporate shareholders and other shareholders specified in the Code are or may be exempt from backup withholding. The backup withholding tax is not an additional tax and may be credited against a taxpayer's federal income tax liability. Dividends and distributions also may be subject to state and local taxes depending on each shareholder's particular situation.
Investment in Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign entities classified under the Code as "passive foreign investment companies" ("PFICs"), the Fund may be subject to federal income tax on a portion of an "excess distribution" or gain from the disposition of the shares, even though the income may have to be distributed as a taxable dividend by the Fund to its shareholders. In addition, gain on the disposition of shares in a PFIC generally is treated as ordinary income even though the shares are capital assets in the hands of the Fund. Certain interest charges may be imposed on either the Fund or its shareholders with respect to any taxes arising from excess distributions or gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its share of earnings of a PFIC on a current basis. Generally, the election would eliminate the interest charge and the ordinary income treatment on the disposition of stock, but such an election may have the effect of accelerating the recognition of income and gains by the Fund compared to a fund that did not make the election. In addition, information required to make such an election may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue Service (the "IRS") were published providing a mark-to-market election for regulated investment companies. The IRS subsequently issued a notice indicating that final regulations will provide that regulated investment companies may elect the mark-to-market election for tax years ending after March 31, 1992 and before April 1, 1993. Whether and to what extent the notice will apply to taxable years of the Fund is unclear. If the Fund is not able to make the foregoing election, it may be able to avoid the interest charge (but not the ordinary income treatment) on disposition of the stock by electing, under proposed regulations, each year to mark-to-market the stock (that is, treat it as if it were sold for fair market value). Such an election could result in acceleration of income to the Fund.
From time to time, the Fund may quote the total return of its Common Shares and/or Advisor Shares in advertisements or in reports and other communications to shareholders. With respect to the Fund's Common Shares, the Fund's average annual total return for the one-year period ended October 31, 1995 was 10.65% (9.86% without waivers), the average annual total return for the five-year period beginning November 1, 1990 (commencement of operations) and ended October 31, 1995 was 8.46% (6.88% without waivers). These figures are calculated by finding the average annual compounded rates of return for the one-, five- and ten- (or such shorter period as the relevant class of shares has been offered) year periods that would equate the initial amount invested to the ending redeemable value according to the following formula: P (1 + T)[*GRAPHIC OMITTED-SEE FOOTNOTE BELOW] = ERV. For purposes of this formula, "P" is a hypothetical investment of $1,000; "T" is average annual total return; "n" is number of years; and "ERV" is the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the one-, five- or ten-year periods (or fractional portion thereof). Total return or "T" is computed by finding the average annual change in the value of an initial $1,000 investment over the period and assumes that all dividends and distributions are reinvested during the period.
* The expression (1 + T) is being raised to the nth power.
The Fund may advertise, from time to time, comparisons of the performance of its Common Shares and/or Advisor Shares with that of one or more other mutual funds with similar investment objectives. The Fund may advertise average annual calendar year-to-date and calendar quarter returns, which are calculated according to the formula set forth in the preceding paragraph, except that the relevant measuring period would be the number of months that have elapsed in the current calendar year or most recent three months, as the case may be. Investors should note that this performance may not be representative of the Fund's total return in longer market cycles.
Yield is calculated by annualizing the net investment income generated by the Fund over a specified thirty-day period according to the following formula:
YIELD = 2[(a-b +1)[*GRAPHIC OMITTED-SEE FOOTNOTE BELOW]-1]
For purposes of this formula: "a" is dividends and interest earned during the period; "b" is expenses accrued for the period (net of reimbursements); "c" is the average daily number of shares outstanding during the period that were entitled to receive dividends; and "d" is the maximum offering price per share on the last day of the period. The Fund's yield for the thirty-day period ending October 31, 1995 was 8.76%.
The performance of a class of Fund Shares will vary from time to time depending upon market conditions, the composition of the Fund's portfolio and operating expenses allocable to it. As described above, total return is based on historical earnings and is not intended to indicate future performance. Consequently, any given performance quotation should not be considered as representative of performance for any specified period in the future. Performance information may be useful as a basis for comparison with other investment alternatives. However, the Fund's performance will fluctuate, unlike certain bank deposits or other investments which pay a fixed yield for a stated period of time. Any fees charged by Institutions or other institutional investors directly to their customers in connection with investments in Fund shares are not reflected in the Fund's performance figures and such fees, if charged, will reduce the actual return received by customers on their investments.
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent accountants for the Fund. The financial statements for the fiscal years ended October 31, 1994 and October 31, 1995 that appear in this Statement of Additional Information have been audited by Coopers & Lybrand, whose report thereon appears elsewhere herein and have been included herein in reliance upon the report of such firm of independent accountants given upon their authority as experts in accounting and auditing.
* The expression (a-b+1) is being raised to the 6th power.
The financial statements for the periods beginning with commencement of the Fund through October 31, 1992 have been audited by Ernst & Young LLP ("Ernst & Young"), independent accountants, as set forth in their report and have been included in reliance on such report and upon the authority of such firm as experts in accounting and auditing. Ernst & Young's address is 787 7th Avenue, New York, New York 10019.
Willkie Farr & Gallagher serves as counsel for the Fund as well as counsel to Warburg, Counsellors Service and Counsellors Securities.
As of December 28, 1995, the name, address and percentage of ownership of each person (other than Mr. Furth, see "Management of the Fund") that owns of record 5% or more of a class of the Fund's outstanding shares were as follows:
Charles Schwab & Co., Inc., Attn: Mutual Funds Department, 101 Montgomery Street, San Francisco, CA 94104-4122 -- 29.61%; and Nat'l Financial Svsc Corp., FBO Customers, Church Street Station, New York, NY 10008-3908 -- 9.44%. The Fund believes that these entities are not the beneficial owners of shares held of record by them. Mr. Lionel I. Pincus, Chairman of the Board and Chief Executive Officer of EMW, may be deemed to have beneficially owned 44.21% of the Common Shares outstanding, including shares owned by clients for which Warburg has investment discretion and by companies that EMW may be deemed to control. Mr. Pincus disclaims ownership of these shares and does not intend to exercise voting rights with respect to these shares.
The Fund's audited financial statements for the fiscal year ended October 31, 1995 follow the Report of Independent Accountants.
Commercial paper rated A-1 by Standard and Poor's Ratings Group ("S&P") 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 sign designation. Capacity for timely payment on commercial paper rated A-2 is satisfactory, but the relative degree of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1 (or related supporting institutions) are considered to have a superior capacity for repayment of short-term promissory obligations. Issuers rated Prime-2 (or related supporting institutions) are considered to have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics of issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained.
The following summarizes the ratings used by S&P for corporate bonds:
AAA - This is the highest rating assigned by S&P to a debt obligation and indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and repay principal and differs from AAA 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 - This is the lowest investment grade. Debt rated BBB an adequate capacity to pay interest and repay principal. Although 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 bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest principal in accordance with the terms of the obligation. BB represents a lower degree of speculation than B and C 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.
BB - Debt rated BB has less near-term vulnerability to default than other speculative issues. However, they face 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.
B - Debt rated B has a greater vulnerability to default but currently have 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 or BBB 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. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating.
C - This rating 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.
Additionally, the rating CI is reserved for income bonds on which no interest is being paid. Such debt is rated between debt rated C and debt rated D.
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 also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.
To provide more detailed indications of credit quality, the ratings from "AA" to "CCC" 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 ratings used by Moody's for corporate bonds:
Aaa - Bonds that 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 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 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.
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 desirable investments. 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 numerical modifiers (1, 2 and 3) with respect to the bonds rated "Aa" through "B". 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.
Caa - 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.
Ca - 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.
C - Bonds which 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.
WARBURG PINCUS FIXED INCOME FUNDS
To the Boards of Directors, Trustees and Shareholders of Warburg Pincus Fixed Income Funds:
We have audited the accompanying statement of assets and liabilities including the schedule of investments of the Warburg Pincus Intermediate Maturity Government Fund and the statements of net assets of the Warburg Pincus Fixed Income Fund, Warburg Pincus Global Fixed Income Fund and Warburg Pincus New York Intermediate Municipal Fund (all Funds collectively referred to as the 'Warburg Pincus Fixed Income Funds') as of October 31, 1995, and the related statements of operations for the year then ended and the statements of changes in net assets for each of the two years and the financial highlights for each of the three years in the period then ended. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of each of the Warburg Pincus Fixed Income Funds for each of the two years in the period ended October 31, 1992, were audited by other auditors, whose report dated December 15, 1992, expressed an unqualified opinion.
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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 1995, by correspondence with the custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Warburg Pincus Fixed Income Funds as of October 31, 1995, and the results of their operations for the year then ended, and the changes in their net assets for each of the two years and the financial highlights for each of the three years in the period then ended, in conformity with generally accepted accounting principles.
WARBURG PINCUS GLOBAL FIXED INCOME FUND
The objective of Warburg Pincus Global Fixed Income Fund (the 'Fund') is maximum total return -- consistent with prudent management -- through a combination of interest income, currency gains and capital appreciation. The Fund's holdings mainly include a wide range of investment-grade, income-producing securities of governmental and corporate issuers.
For the 12 months ended October 31, 1995, the Fund gained 10.65%, vs. gains of 15.85% in the Salomon Brothers World Government Bond Index (Currency-Hedged) and 8.77% in the Lipper World Income Fund Average. The Fund's 30-day annualized SEC yield was 8.76% as of October 31, 1995. Its total net assets were $63,641,044.
The combination of low inflation, falling interest rates and an overall slowdown in the world's economic growth provided a strong backdrop for most global bond markets during the period. By region, our largest exposure during the year was to bonds of European issuers, which generated strong returns for the portfolio. We remain bullish on the prospects of Europe's bond markets (European issues represented 67.50% of the Fund's assets as of October 31, 1995), particularly those of Germany and Denmark.
Other areas of emphasis in the portfolio currently are Southeast Asian convertible bonds, which we think represent particularly good values, and Latin American debt issues. While the latter fell sharply following the December 20, 1994, devaluation of the Mexican peso, exacting a toll on the Fund's returns, their performance has since recovered, and we expect significantly improved performance from them going forward. Our largest exposure in Latin America is in Argentina and Brazil (6.1% of the Fund at the end of October), followed by Mexico (4.0%). It should be noted that all of these issues are U.S. dollar denominated and thus there is no direct currency risk.
We have extended the Fund's duration in recent months (it stood at 4.9 years on October 31, vs. 4.0 years at the end of April), reflecting a more positive outlook on the general direction of interest rates. Our longest duration exposure is in Australia and Europe.
We have maintained the Fund's defensive stance in terms of currency exposure, and through October approximately 95% of the portfolio was either U.S. dollar-denominated or hedged into dollars. While this strategy proved less than timely earlier in the fiscal year, given the U.S. currency's general weakness against most foreign currencies, it proved its merits over the past several months when the dollar rebounded.
WARBURG PINCUS GLOBAL FIXED INCOME FUND
GROWTH OF $10,000 INVESTED IN WARBURG PINCUS GLOBAL FIXED INCOME FUND SINCE INCEPTION AS OF OCTOBER 31, 1995
The graph below illustrates the hypothetical investment of $10,000 in Warburg Pincus Global Fixed Income Fund (the 'Fund') from November 1, 1990 (inception) to October 31, 1995, assuming the reinvestment of dividends and capital gains at net asset value, compared to the Salomon Brothers World Government Bond Index (Currency-Hedged) ('Salomon')* and the Lipper World Income Fund Average ('Lipper')** for the same time period.
All figures cited here represent past performance and do not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares upon redemption may be worth more or less than original cost. For periods ending 9/30/95 and 10/31/95, respectively, without waivers or reimbursement of Fund expenses, average annual total returns would have been 9.73% and 9.86% for 1-year, and 6.80% and 6.88% since inception.
* The Salomon Brothers World Government Bond Index (Currency-Hedged) is a market capitalization-weighted index designed to track major government debt markets and is currency-hedged into U.S. dollars.
** The Lipper World Income Fund Average represents approximately 220 funds that invest in non-U.S. dollar and U.S. dollar debt instruments with unspecified maturities and durations, or other income producing securities.
*** The Fund changed its comparative index in the above chart from the J.P. Morgan Global Government Bond Index ('JPMG-GLB') used in the preceding year to the Salomon Brothers World Government Bond Index ('Salomon'). The primary reason for the change is that the Fund's investment strategy is biased towards hedging and the Salomon Index is hedged. In contrast, the JPMG-GLB Index is unhedged. The one year performance for the period ending 10/31/95 for Salomon and JPMG-GLB was 15.85% vs. 15.35%, respectively.
WARBURG PINCUS GLOBAL FIXED INCOME FUND
See Accompanying Notes to Financial Statements.
WARBURG PINCUS GLOBAL FIXED INCOME FUND STATEMENT OF NET ASSETS (CONT'D)
'D' Credit ratings given by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group are unaudited. * Cost for Federal income tax purposes is $64,063,170.
+ Unless otherwise indicated below, all securities are denominated in the currency of the issuers' country of origin.
(A) Denominated in Dollars (U.S.) (B) Denominated in European Currency Units (ECU)
See Accompanying Notes to Financial Statements.
WARBURG PINCUS FIXED INCOME FUNDS For the Year Ended October 31, 1995
See Accompanying Notes to Financial Statements.
WARBURG PINCUS FIXED INCOME FUNDS STATEMENTS OF CHANGES IN NET ASSETS
See Accompanying Notes to Financial Statements.
WARBURG PINCUS GLOBAL FIXED INCOME FUND (For a Share of the Fund Outstanding Throughout Each Year)
+ The Fund commenced operations on November 1, 1990.
See Accompanying Notes to Financial Statements.
TAX STATUS OF 1995 DIVIDENDS (Unaudited)
Dividends paid by the Fund taxable as ordinary income amounted to $.49 per share.
Because the Fund's fiscal year is not the calendar year, amounts to be used by calendar year taxpayers on their Federal return will be reflected on Form 1099-DIV and will be mailed in January 1996.
WARBURG PINCUS FIXED INCOME FUNDS
The Warburg Pincus Fixed Income Funds are comprised of the Warburg Pincus Fixed Income Fund (the 'Fixed Income Fund') and the Warburg Pincus Intermediate Maturity Government Fund (the 'Intermediate Government Fund') which are registered under the Investment Company Act of 1940, as amended (the '1940 Act'), as diversified, open-end management investment companies and the Warburg Pincus Global Fixed Income Fund (the 'Global Fixed Income Fund') and the Warburg Pincus New York Intermediate Municipal Fund (the 'New York Municipal Fund') which are registered under the 1940 Act as non-diversified, open-end management investment companies.
Investment objectives for each Fund are as follows: the Fixed Income Fund seeks to generate high current income consistent with reasonable risk with capital appreciation a secondary objective; the Global Fixed Income Fund seeks to maximize total investment return consistent with prudent investment management, consisting of a combination of interest income, currency gains and capital appreciation; the Intermediate Government Fund seeks to achieve as high a level of current income as is consistent with preservation of capital; and the New York Municipal Fund seeks to maximize current interest income exempt from Federal income tax and New York State and New York City personal income tax to the extent consistent with prudent investment and preservation of capital.
The net asset value of each Fund is determined daily as of the close of regular trading on the New York Stock Exchange. Each Fund's investments are valued at market value, which is currently determined using the last reported sales price. If no sales are reported, investments are generally valued at the last reported bid price. In the absence of market quotations, investments are generally valued at fair value as determined by or under the direction of the Fund's governing Board. Short-term investments that mature in 60 days or less are valued on the basis of amortized cost, which approximates market value.
The books and records of the Funds are maintained in U.S. dollars. Transactions denominated in foreign currencies are recorded at the current prevailing exchange rates. All assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the current exchange rate at the end of the period. Translation gains or losses resulting from changes in the exchange rate during the reporting period and realized gains and losses on the settlement of foreign currency transactions are reported in the results of operations for the current period. The Global Fixed Income Fund isolates that portion of gains and losses on investments in debt securities which are due to changes in the foreign exchange rate from that which are due to changes in market prices of debt securities.
Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes.
Dividends from net investment income are declared daily and paid monthly for the Fixed Income Fund, the Intermediate Government Fund and the New York Municipal Fund. Dividends from net investment income are declared and paid quarterly for the Global Fixed Income Fund. Distributions for all Funds of net realized capital gains, if any, are declared and paid annually. However, to the extent that a net realized capital gain can be reduced by a capital loss carryover, such gain will not be distributed.
WARBURG PINCUS FIXED INCOME FUNDS NOTES TO FINANCIAL STATEMENTS (CONT'D) Income and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles.
Certain amounts in the Statements of Changes in Net Assets have been reclassified to conform to current year presentation.
No provision is made for Federal taxes as it is each Fund's intention to continue to qualify for and elect the tax treatment applicable to regulated investment companies under the Internal Revenue Code and make the requisite distributions to its shareholders which will be sufficient to relieve it from Federal income and excise taxes.
Costs incurred by the Global Fixed Income Fund in connection with its organization have been deferred and are being amortized over a period of five years from the date the Global Fixed Income Fund commenced its operations.
Each Fund may enter into repurchase agreement transactions. Under the terms of a typical repurchase agreement, a Fund acquires an underlying security subject to an obligation of the seller to repurchase. The value of the underlying security collateral will be maintained at an amount at least equal to the total amount of the purchase obligation, including interest. The collateral is in the Fund's possession.
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, Pincus Counsellors, Inc. ('Warburg'), a wholly owned subsidiary of Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), serves as each Fund's investment adviser. For its investment advisory services, Warburg receives the following fees based on each Fund's average daily net assets:
For the year ended October 31, 1995, investment advisory fees and waivers were as follows:
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of Warburg, and PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary of PNC Bank Corp. ('PNC'), serve as each Fund's co-administrators. For administrative services, CFSI currently receives a fee calculated at an annual rate of
WARBURG PINCUS FIXED INCOME FUNDS NOTES TO FINANCIAL STATEMENTS (CONT'D) .10% of each Fund's average daily net assets. For the year ended October 31, 1995, administrative services fees earned by CFSI were as follows:
For its administrative services, PFPC currently receives a fee calculated at an annual rate of .10% of the average daily net assets of the Fixed Income Fund, the Intermediate Government Fund and the New York Municipal Fund. For the Global Fixed Income Fund, PFPC currently receives a fee calculated at an annual rate of .12% of the first $250 million in average daily net assets, .10% of the next $250 million in average daily net assets, .08% of the next $250 million in average daily net assets and .05% of average daily net assets over $750 million.
For the year ended October 31, 1995, administrative services fees earned and voluntarily waived by PFPC were as follows:
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of Warburg, serves as each Fund's distributor. No compensation is paid by the Funds to CSI for distribution services.
For the year ended October 31, 1995, purchases and sales of investment securities (excluding short-term investments) and United States government and agency obligations were as follows:
WARBURG PINCUS FIXED INCOME FUNDS NOTES TO FINANCIAL STATEMENTS (CONT'D)
At October 31, 1995, the net unrealized appreciation from investments for those securities having an excess of value over cost and net unrealized depreciation from investments for those securities having an excess of cost over value (based on cost for Federal income tax purposes) was as follows:
4. FORWARD FOREIGN CURRENCY CONTRACTS
The Fixed Income Fund and the Global Fixed Income Fund may enter into forward currency contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The Funds will enter into forward contracts primarily for hedging purposes. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date.
At October 31, 1995, the Global Fixed Income Fund had the following open forward foreign currency contracts:
Each Fund may enter into futures contracts for hedging purposes to the extent permitted by its investment policies and objectives. To enter into a futures contract, a Fund must make a deposit of an initial margin with its custodian in a segregated account. Subsequent payments, which are dependent on
WARBURG PINCUS FIXED INCOME FUNDS NOTES TO FINANCIAL STATEMENTS (CONT'D) the daily fluctuations in the value of the underlying instrument, are made or received by a Fund each day (daily variation margin) and are recorded as unrealized gains or losses until the contracts are closed. When the contract is closed, a Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transactions and a Fund's basis in the contract. Risks of entering into futures contracts include the possibility that a change in the value of the contract may not correlate with the changes in the value of the underlying instruments. The Fixed Income Fund and the Global Fixed Income Fund entered into futures contracts during the year ended October 31, 1995. However, the Fixed Income Fund and Global Fixed Income Fund had no futures contracts open at October 31, 1995.
The Global Fixed Income Fund and the Intermediate Government Fund are each authorized to issue three billion full and fractional shares of capital stock, $.001 par value per share, of which one billion shares are designated Series 2 Shares (the Advisor Shares). The Fixed Income Fund and the New York Municipal Fund are each authorized to issue an unlimited number of full and fractional shares of beneficial interest, $.001 par value per share, of which one billion shares are designated Series 2 Shares (the Advisor Shares). At October 31, 1995, no Advisor Shares were outstanding.
[THIS PAGE INTENTIONALLY LEFT BLANK]
WARBURG PINCUS FIXED INCOME FUNDS NOTES TO FINANCIAL STATEMENTS (CONT'D)
6. CAPITAL SHARE TRANSACTIONS (cont'd)
Transactions in shares of each Fund were as follows:
Net assets at October 31, 1995, consisted of the following:
At October 31, 1995, capital loss carryovers available to offset possible future capital gains of each Fund were as follows:
Item 24. Financial Statements and Exhibits
(a) Financial Statements relating to Common Shares.
(1) Financial Statements included in Part A:
(2) Financial Statements included in Part B: (a) Report of Coopers & Lybrand L.L.P., Independent (b) Statement of Net Assets (d) Statement of Changes in Net Assets (f) Notes to Financial Statements
Exhibit No. Description of Exhibit
(b) Amendment to Articles of Incorporation.
4 Form of Stock Certificates.(1)
6 Form of Distribution Agreement.(2)
(1) Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Pre- Effective Amendment No. 2 to the Registration Statement of Warburg, Pincus Post-Venture Capital Fund, Inc. filed on September 25, 1995 (Securities Act File No. 33-61225).
(2) Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Post- Effective Amendment No. 10 to the Registration Statement on Form N-1A of Warburg, Pincus International Equity Fund, Inc. filed on September 22, 1995 (Securities Act File No. 33-27031).
8(a) Form of Custodian Agreement with PNC Bank,
(b) Form of Custodian Agreement with Fiduciary Trust Company
9(a) Form of Transfer Agency Agreement.(3)
(b) Form of Co-Administration Agreement with Counsellors
(b-1) Form of Co-Administration Agreement with PFPC Inc. (3)
(c) Forms of Services Agreements.(4)
10 Opinion and Consent of Willkie Farr & Gallagher, counsel to the Fund.
11(a) Consent of Coopers & Lybrand L.L.P., Independent Accountants.
(b) Consent of Ernst & Young LLP, Independent Accountants.
13 Form of Purchase Agreement. (2)
14 Form of Retirement Plans.(5)
15(a) Shareholder Services Plan. (6)
(3) Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Pre- Effective Amendment No. 1 to the Registration Statement on Form N-1A of Warburg, Pincus Trust filed on June 14, 1995 (Securities Act File No. 33-58125).
(4) Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Pre- Effective Amendment No. 1 to the Registration Statement on Form N-1A of Warburg, Pincus Japan Growth Fund, Inc. filed on December 18, 1995 (Securities Act File No. 33-63653).
(5) Incorporated by reference to Post-Effective Amendment No. 1 to the Registration Statement of Warburg, Pincus Managed Bond Trust, filed on February 28, 1995 (Securities Act File No. 33-73672).
(6) Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Post- Effective Amendment No. 12 to the Registration Statement on Form N-1A of Counsellors Cash Reserve Fund, Inc. filed on June 28, 1995 (Securities Act File No. 2-94840).
(b) Amended and Restated Distribution Plan. (4)
(c) Form of Rule 18f-3 Plan.(7)
16 Schedule for Computation of Total Return and Yield Quotations relating to Common Shares.
17 Financial Data Schedule relating to Common Shares.
(7) Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Post- Effective Amendment No. 13 to the Registration Statement on Form N-1A of Warburg, Pincus International Equity Fund, Inc. filed on December 28, 1995 (Securities Act File No. 33-27031).
Item 25. Persons Controlled by or Under Common Control
Warburg, Pincus Counsellors, Inc. ("Warburg"), Registrant's investment adviser, may be deemed a controlling person of Registrant because it possesses or shares investment or voting power with respect to more than 25% of the outstanding securities of Registrant. E.M. Warburg, Pincus & Co., Inc. ("EMW") controls Warburg through its ownership of a class of voting preferred stock of Warburg. John L. Furth, director of the Fund, and Lionel I. Pincus, Chairman of the Board and Chief Executive Officer of EMW, may be deemed to be controlling persons of the Fund because they may be deemed to possess or share investment power over shares owned by clients of Warburg and certain other entities.
Item 26. Number of Holders of Securities
Registrant, officers and directors or trustees of Warburg, of Counsellors Securities Inc. ("Counsellors Securities") and of Registrant are covered by insurance policies indemnifying them for liability incurred in connection with the operation of Registrant. These policies provide insurance for any "Wrongful Act" of an officer, director or trustee. Wrongful Act is defined as breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by an officer, Director or Trustee in connection with the operation of Registrant. Insurance coverage does not extend to (a) conflicts of interest or gaining in fact any profit or advantage to which one is not legally entitled, (b) intentional non-compliance with any statute or regulation or (c) commission of dishonest, fraudulent acts or omissions. Insofar as it relates to Registrant, the coverage is limited in amount and, in certain circumstances, is subject to a deductible.
Under Article VII of the Registrant's charter, no provision of the charter shall be effective to protect or purport to protect any director or officer of the Registrant against any liability to the Registrant 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.
Under Article V, Sections 1 and 2, of Registrant's By-Laws, any past or present director or officer of Registrant will be indemnified to the fullest extent permitted by law against liability and all expenses reasonably incurred by him in connection with any action, suit or proceeding to which he may be a part or otherwise involved by reason of his being or having been a director or officer of Registrant. This provision does not authorize indemnification when it is determined, in the manner specified in the By-Laws, that the director or officer would otherwise be liable to Registrant or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of his duties ("disqualifying conduct"). Expenses of a director or officer may be paid by Registrant in advance of the final disposition of any action, suit or proceeding upon the satisfaction of certain conditions including receipt of any undertaking by the director or officer to repay the expenses to Registrant in the event that it is ultimately determined that indemnification of the expenses is not authorized under the charter and upon the satisfaction of any other conditions set forth in Registrant's By- Laws.
Under Article V, Section 6, of Registrant's By-laws, Registrant may purchase insurance on behalf of a director, officer, employee or agent of Registrant against liability arising out of his acting as such or while serving in similar capacities in other entities at Registrant's request. Registrant may not obtain insurance for liabilities arising out of disqualifying conduct.
Registrant's Investment Advisory Agreement with Warburg and Distribution Agreement with Counsellors Securities contain provisions designed to protect certain persons from liability, as follows: Section 5 of the Investment Advisory Agreement provides that Warburg will not be liable for any error of judgment or mistake of law or for any loss suffered by Registrant in connection with matters to which the Agreement relates, except that Warburg is not protected from liability by reason of disqualifying conduct. Section 4 of the Distribution agreement provides that Registrant will indemnify Counsellors Securities and its officers, directors and control persons from liability arising out of a misstatement or omission in Registrant's Registration Statement, other than liability arising out of statements made by Counsellors Securities and liability arising out of disqualifying conduct.
Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission ("SEC") 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 Registrant of expenses incurred or paid by a director, officer or controlling person of 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, 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.
Item 28. Business and Other Connections of
Warburg, a wholly owned subsidiary of Warburg, Pincus Counsellors G.P., acts as investment adviser to Registrant. Warburg renders investment advice to a wide variety of individual and institutional clients. The list required by this Item 28 of officers and directors of Warburg, together with information as to their other business, profession, vocation or employment of a substantial nature during the past two years, is incorporated by reference to Schedules A and D of Form ADV filed by Warburg (SEC File No. 801-07321).
(a) Counsellors Securities acts as distributor for Registrant, as well as for The RBB Fund, Inc., Warburg Pincus Capital Appreciation Fund, Warburg Pincus Cash Reserve Fund, Warburg Pincus Emerging Growth Fund, Warburg Pincus Emerging Markets Fund, Warburg Pincus Fixed Income Fund, Warburg Pincus Institutional Fund, Inc., Warburg Pincus Intermediate Maturity Government Fund, Warburg Pincus International Equity Fund, Warburg Pincus Japan Growth Fund, Warburg Pincus Japan OTC Fund, Warburg Pincus New York Intermediate Municipal Fund, Warburg Pincus Post-Venture Capital Fund, Warburg Pincus New York Tax Exempt Fund, Warburg Pincus Short-Term Tax-Advantaged Bond Fund, Warburg Pincus Small Company Value Fund and Warburg Pincus Trust.
(b) For information relating to each director, officer or partner of Counsellors Securities, reference is made to Form BD (SEC File No. 8-32482) filed by Counsellors Securities under the Securities Exchange Act of 1934.
Item 30. Location of Accounts and Records
(1) Warburg, Pincus Global Fixed Income Fund New York, New York 10017-3147 (Fund's Articles of Incorporation, by-laws and minute books)
(2) State Street Bank and Trust Company (records relating to its functions as transfer agent and
(records relating to its functions as co-administrator)
(4) Counsellors Funds Service, Inc. New York, New York 10017-3147 (records relating to its functions as co-administrator)
(5) PNC Bank, National Association (records relating to its functions as custodian)
(6) Fiduciary Trust Company International New York, New York 10048
New York, New York 10017-3147 (records relating to its functions as distributor)
(8) Warburg, Pincus Counsellors, Inc. New York, New York 10017-3147 (records relating to its functions as investment adviser)
(a) Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of Registrant's latest annual report to shareholders, upon request and without charge.
(b) Registrant hereby undertakes to call a meeting of its shareholders for the purpose of voting upon the question of removal of a director or directors of Registrant when requested in writing to do so by the holders of at least 10% of Registrant's outstanding shares. Registrant undertakes further, in connection with the meeting, to comply with the provisions of Section 16(c) of the 1940 Act relating to communications with the shareholders of certain common-law trusts.
Pursuant to the requirements of the Securities Act of 1933, and the Investment Company Act of 1940, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and the State of New York, on the 11th day of January, 1995.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment has been signed below by the following persons in the capacities and on the date indicated.
/s/ Lionel I. Pincus Chairman of the Board January 11, 1996 Lionel I. Pincus and Director
/s/ John L. Furth Chief Executive January 11, 1996 John L. Furth Officer and Director
/s/ Dale C. Christensen President January 11, 1996
/s/ Reuben S. Leibowitz Chief Financial January 11, 1996 Reuben S. Leibowitz Officer and Vice
/s/ Stephen Distler Treasurer and January 11, 1996
/s/ Richard N. Cooper Director January 11, 1996
/s/ Donald J. Donahue Director January 11, 1996
/s/ Jack W. Fritz Director January 11, 1996
/s/ Thomas A. Melfe Director January 11, 1996
/s/ Alexander B. Trowbridge Director January 11, 1996
(b) Amendment to Articles of Incorporation.
4 Form of Stock Certificates.(1)
6 Form of Distribution Agreement.(2)
8(a) Form of Custodian Agreement with PNC Bank,
(b) Form of Custodian Agreement with Fiduciary Trust Company
9(a) Form of Transfer Agency Agreement.(3)
(b) Form of Co-Administration Agreement with Counsellors Funds Service,
(1)Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Pre- Effective Amendment No. 2 to the Registration Statement of Warburg, Pincus Post-Venture Capital Fund, Inc. filed on September 25, 1995 (Securities Act File No. 33-61225).
(2)Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Post- Effective Amendment No. 10 to the Registration Statement on Form N-1A of Warburg, Pincus International Equity Fund, Inc. filed on September 22, 1995 (Securities Act File No. 33-27031).
(3)Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Pre- Effective Amendment No. 1 to the Registration Statement on Form N- 1A of Warburg, Pincus Trust filed on June 14, 1995 (Securities Act File No. 33-58125).
(b-1) Form of Co-Administration Agreement with PFPC Inc. (3)
(c) Forms of Services Agreements. (4)
10 Opinion and Consent of Willkie Farr & Gallagher, counsel to the Fund.
11(a) Consent of Coopers & Lybrand L.L.P., Independent Accountants.
(b) Consent of Ernst & Young LLP, Independent Accountants.
13 Form of Purchase Agreement. (2)
14 Form of Retirement Plans. (5)
15(a) Shareholder Services Plan. (6)
(b) Amended and Restated Distribution Plan. (4)
(c) Form of Rule 18f-3 Plan. (7)
16 Schedule for Computation of Total Return and Yield Quotations relating to Common Shares.
17 Financial Data Schedule relating to Common Shares.
(4)Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Pre- Effective Amendment No. 1 to the Registration Statement on Form N-1A of Warburg, Pincus Japan Growth Fund, Inc. filed on December 18, 1995 (Securities Act File No. 33-63653).
(5)Incorporated by reference to Post-Effective Amendment No. 1 to the Registration Statement of Warburg, Pincus Managed Bond Trust, filed on February 28, 1995 (Securities Act File No. 33-73672).
(6)Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A of Counsellors Cash Reserve Fund, Inc. filed on June 28, 1995 (Securities Act File No. 2-94840).
(7)Incorporated by reference; material provisions of this exhibit substantially similar to those of the corresponding exhibit in Post- Effective Amendment No. 13 to the Registration Statement on Form N-1A of Warburg, Pincus International Equity Fund, Inc. filed on December 28, 1995 (Securities Act File No. 33-27031). | 485A24E | 485A24E | 1996-01-16T00:00:00 | 1996-01-16T15:37:30 |
0000936392-96-000015 | 0000936392-96-000015_0001.txt | <DESCRIPTION>ASSET PURCHASE AGREEMENT DATED DECEMBER 16, 1995
THIS DOCUMENT IS A COPY OF THE PURCHASE AGREEMENT DATED AS OF DECEMBER 16, 1995 AMONG GTI CORPORATION, COMPONENT INTERTECHNOLOGIES, INC., AND COMPONENT-IRELAND HOLDING CORPORATION FILED ON JANUARY 5, 1996 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
Dated as of December 16, 1995
Exhibit A Form of Employment Agreement Exhibit B Form of Escrow Agreement Exhibit C Form of Purchaser Note Exhibit D Preliminary Allocation Schedule Exhibit E Form of Bill of Sale Exhibit F Form of Assignment and Assumption Agreements Exhibit G Form of Intellectual Property Agreement Exhibit H Form of Legal Opinion of Maloney, Gerra, Mehlman & Katz Exhibit I Form of Legal Opinion of Kirkpatrick & Lockhart LLP Exhibit J Form of Trademark License Agreement Exhibit K Form of Share Transfer Document
Schedule I Calculation of Net Working Capital Schedule 3.3 Governmental Consents and Approvals Schedule 3.8 Absence of Changes Schedule 3.11 Compliance with Laws Schedule 3.12(c) Anticipated Environmental Claims Schedule 3.12(e) Existing Environmental Condition Schedule 3.15(a) Owned Real Property Schedule 3.15(b) Leased Real Property Schedule 3.16 Tangible Personal Property Schedule 5.1(a) Conduct of Business Schedule 5.4(b) Governmental and Other Consents Schedule 5.8 Use of Intellectual Property
ASSET PURCHASE AGREEMENT, dated as of December 16, 1995 by and among GTI CORPORATION, a Delaware corporation ("Seller"), COMPONENT INTERTECHNOLOGIES, INC., a Delaware corporation ("Purchaser"), and COMPONENT IRELAND HOLDING CORPORATION, a Delaware corporation ("Holding").
W I T N E S S E T H:
WHEREAS, Seller is engaged in, among other businesses, the business of developing, manufacturing, marketing and selling glass components, welded leads, glass-to-metal seals, welded resistor elements, pins and pinned arrays for the glass diode, resistor, automotive and component packaging markets, and application specific printed circuit boards for automotive and electrical lighting manufacturers, through a division of Seller known as its Electronic Components Group (the "Group") which directly operates manufacturing facilities in Hadley, Pennsylvania and Hartselle, Alabama indirectly operates a manufacturing facility in Abbeyfeale, Republic of Ireland, and has an office in
WHEREAS, Seller owns 24,999 shares of GTI-Ireland Limited which operates the Group's manufacturing facility in Abbeyfeale, Republic of Ireland;
WHEREAS, G.S. O'B. Nominees Limited, as nominee for Seller, owns one (1) share of GTI-Ireland representing the remaining outstanding issued share capital of GTI-Ireland (all of the issued and outstanding shares of GTI-Ireland, hereinafter the "Shares").
WHEREAS, Purchaser desires to purchase from Seller, and Seller desires to sell to Purchaser certain assets and business of the Group (including the Shares, which are being acquired by Holding, a wholly-owned subsidiary of Purchaser) as a going concern all upon the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, Purchaser and Seller hereby agree as follows:
SECTION 1.1. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings:
"Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority.
"Acquired Assets" has the meaning specified in Section 2.1 of this Agreement; provided, however, for purposes of the representations and warranties in Article III, the term "Acquired Assets" also includes the assets of GTI-Ireland.
"Acquisition" means the acquisition of the Acquired Assets by Purchaser and the related transactions and arrangements contemplated by this Agreement.
"Adjustment Amount" has the meaning specified in Section 2.9 of this Agreement.
"Adjustment Date" has the meaning specified in Section 2.9 of this Agreement.
"Affiliate" means, with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person.
"Affiliated Group" means an affiliated group as defined in Section 1504 of the Code (or any analogous combined, consolidated or unitary group defined under any Tax Law) of which Seller is or has been a member.
"Agreed Net Working Capital" means $4,555,000, the working capital of the Division as agreed by Purchaser and Seller which was determined in the manner described on Schedule I.
"Agreement" or "this Agreement" means this Asset Purchase Agreement, dated as of the date set forth on the first page hereof, between Seller and Purchaser (including all of the Exhibits and Schedules hereto), and all amendments hereto made in accordance with the provisions of Section 10.8.
"Assigned Uncollected Receivables" has the meaning specified in Section 5.14(b) of this Agreement.
"Assignment and Assumption Agreement" has the meaning specified in Section 2.7.
"Basket Amount" has the meaning specified in Section 8.7 of this Agreement.
"Business" means the business of the Group of developing, manufacturing, marketing and selling (a) glass components, welded leads, glass-to-metal seals, welded resister elements, pins and pinned arrays for the glass diode, resister, automotive and component packaging markets and (b) application-specific printed circuit boards for automotive and electrical lighting manufacturers, and all other business which, prior to the date hereof, has been conducted by the Group and continues to be conducted by the Group on the date hereof.
"Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in The City of New York.
"Cash Portion of the Purchase Price" has the meaning specified in Section 2.3 of this Agreement.
"CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended through the date hereof.
"CERCLIS" means the Comprehensive Environmental Response, Compensation and Liability Information System, as updated through the date hereof.
"Closing" has the meaning specified in Section 2.6 of this Agreement.
"Closing Balance Sheet" means the audited balance sheet (including the related notes and schedules thereto) of the Division to be prepared pursuant to Section 2.9(a) and to be dated as of the date immediately preceding the Closing Date.
"Closing Date" has the meaning specified in Section 2.6 of this Agreement.
"Closing Net Working Capital" means the net working capital of the Division as of the date immediately preceding the Closing Date, derived from the Closing Balance Sheet and determined in the manner described in Schedule I.
"Code " means the Internal Revenue Code of 1986, as amended through the date hereof.
"Competitive Business" has the meaning specified in Section 5.9 of this Agreement.
"Continuing Directors" means Donald Moore, Sean McHenry and Maurice Dore.
"control" (including the terms "controlled by" and "under common control with"), with respect to the relationship between or among two or more Persons, means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including, without limitation, the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person.
"De Minimis Tax" has the meaning specified in Section 6.7 of this Agreement.
"Directors" means Sean McHenry, Gary Luick, Donald Moore and Maurice Dore.
"Division" means the Group (and includes the Division Subsidiary) and the Business; provided, however, that such term shall not include Seller's Leesburg, Indiana facility previously operated as a part of the Group, nor any of the properties, assets or liabilities thereof.
"Division Books and Records" means the inventory, asset, employee, personnel, maintenance, repair, financial, tax and other books, records, manuals, schedules and files of Seller and the Division Subsidiary relating to the Division, the Acquired Assets, the Division Employees and the Division Subsidiary, including without limitation, advertising materials, catalogues, price lists, correspondence, mailing lists, customer lists, supplier lists, photographs, production data, sales materials and records, purchasing materials, quality control records and procedures and, in the case of the Division Subsidiary, all corporate and stock books and records, in each case, in whatever form or medium such books and records are maintained.
"Division Employees" means the employees of Seller or the Division Subsidiary, employed in the operation of the Division, as set forth on Schedule 3.20(a).
"dollars" and "$" means the lawful currency of the United States of America.
"Employee Plan" means any plan, contract, commitment, program, policy, arrangement, understanding or plan or practice providing benefits to any employee, former employee, director or agent of a Person (whether or not the Person maintains, contributes to, or is bound by any such plan, contract, commitment, program, policy, arrangement, understanding or practice), including, without limitation, (1) any "employee benefit plan" (within the meaning of Section 3(3) of ERISA), (2) any profit-sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, severance, welfare or incentive plan, contract, commitment, program, policy, arrangement, understanding or practice, (3) any plan, contract, commitment, program, policy, arrangement, understanding or practice providing for "fringe benefits" or perquisites, including, without limitation, benefits relating to automobiles, clubs, vacation, child care, parenting, sabbatical or sick leave and medical, dental, hospitalization, life insurance and other types of insurance, (4) any pension plan covered by Title IV of ERISA or subject to the minimum funding standards of Section 214 of the Code, and (5) any multiemployer plan (within the meaning of Section 3(37) of ERISA).
"Employment Agreement" means the Employment Agreement to become effective as of the Closing Date by and between Purchaser and Donald J. Moore, in the form of Exhibit A.
"Encumbrance(s)" means any security interest, pledge, mortgage, lien (including, without limitation, environmental and tax liens), charge, encumbrance, adverse claim, preferential arrangement with a creditor or restriction of any kind, including, without limitation, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.
"Environment" means surface waters, groundwaters, soil, subsurface strata and ambient air.
"Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, CERCLA Section 104(e) letters, PRP notices or letters, claims, liens, notices of non-compliance or violation, investigations, proceedings, consent orders or consent agreements relating in any way to any Environmental Law or any Environmental Permit (hereafter "Claims") including, without limitation, (a) any and all Claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (b) any and all Claims by any Person seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the Environment.
"Environmental Condition" means a condition relating to or arising or resulting from a failure to comply with any applicable Environmental Law or Environmental Permit or from a Release of Hazardous Materials into the Environment.
"Environmental Laws" means any Law, now in effect, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including, without limitation, the CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq.; the Atomic Energy Act, 42 U.S.C. Section Section 2011 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C. Sections 301 et seq.
"Environmental Permits" means all permits, approvals, registrations, identification numbers, licenses and other authorizations required under any applicable Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974 and the related regulations, in each case as amended as of the date hereof and as the same may be amended or modified from time to time.
"ERISA Affiliate" means (1) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which Seller is a member, (2) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which Seller or the Division is a member, (3) any member of an affiliated service group within the meaning of Section 414(m) of the Code of which the Division, any corporation described in clause (1) above or any trade or business described in clause (2) above is a member or (4) any organization which is deemed to be a member of any of the foregoing by reason of IRS Regulations under Section 414(o) of the Code.
"Escrow Account" has the meaning specified in Section 2.3 of this Agreement.
"Escrow Agent" means LaSalle National Trust, N.A.
"Escrow Agreement" means the Escrow Agreement to be executed on the Closing Date among Purchaser, Seller and the Escrow Agent, in the form of Exhibit B hereto.
"Escrow Amount" means the amount deposited with and held by the Escrow Agent pursuant to the terms of this Agreement and the Escrow Agreement.
"Estimated Adjustment Amount" has the meaning specified in Section 2.3(a) of this Agreement.
"Estimated Closing Balance Sheet" means Seller's good faith estimate of the Closing Balance Sheet, to be prepared by Seller prior to the Closing and delivered to Purchaser pursuant to Section 2.6 of this Agreement.
"Estimated Closing Net Working Capital" means Seller's good faith estimate of the Closing Net Working Capital, derived from the Estimated Closing Balance Sheet and determined in the manner described on Schedule I.
"Excluded Liabilities" has the meaning specified in Section 2.2 of this Agreement.
"Excluded Representations" has the meaning specified in Section 8.1 of this Agreement.
"Financial Statements" has the meaning specified in Section 3.4 of this Agreement.
"Financing Sources" means the lender, lenders and/or other providers of debt and/or equity financing to Purchaser in connection with the Acquisition.
"Foreign Subsidiary" means any Subsidiary that is not created or organized in the United States or under the Laws of the United States, or any state thereof.
"GAAP" means United States generally accepted accounting principles and practices as in effect as of the date of this Agreement and as of the Closing Date applied consistently by Seller throughout the relevant periods.
"Governmental Authority" means any United States federal, state or local or any foreign government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.
"Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.
"Groundwater Remediation Project" means the low profile type air stripper groundwater remediation system located at the Division's plant in Hadley, Pennsylvania.
"Group" has the meaning specified in the recitals to this Agreement and includes the Division Subsidiary.
"GTI-Ireland" means GTI-Ireland Limited, a limited liability company organized under the laws of the Republic of Ireland.
"GTI-Ireland Receivables" means all Receivables of Seller from and all other Indebtedness payable to Seller by GTI-Ireland.
"Hazardous Materials" means any materials or substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "contaminants" or "pollutants", or words of similar import, under any applicable Environmental Law.
"Holding" has the meaning specified in the Preamble of this Agreement.
"Indebtedness" means, with respect to any Person, (a) all indebtedness of such Person, whether or not contingent, for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services except trade accounts payable and accrued liabilities that arise in the ordinary course of business, (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of Seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (f) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any capital stock of such Person or any other Person or any warrants, rights or options to acquire such capital stock, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends but only to the extent such obligation is payable (i) at a fixed or determinable date, whether by operation of a sinking fund or otherwise, (ii) at the option of any Person other than such Person or (iii) upon the occurrence of a condition not solely within the control of such Person, such as a redemption required to be made out of future earnings, (h) all Indebtedness of others referred to in clauses (a) through (f) above guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (iv) otherwise to assure a creditor against loss, and (i) all Indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Encumbrance on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness.
"Indemnified Party" means either a Seller Indemnified Party or a Purchaser Indemnified Party, as the context so requires.
"Independent Accounting Firm" has the meaning specified in Section 2.9 of this Agreement.
"Intangible Personal Property" means the rights of Seller arising under or in connection with all agreements, including the Material Contracts, licenses, including the Licensed Intellectual Property, Owned Intellectual Property, leases, including the Leases, software and copyright licenses, permits, including the Permits, sale orders, purchase orders, guarantees, commitments and other intangible personal property of Seller, in each case, used by the Division in the operation of the Business.
"Intellectual Property" means (a) inventions, whether or not patentable, whether or not reduced to practice, and whether or not yet made the subject of a pending patent application or applications, (b) national (including the United States) and multinational statutory invention registrations, patents, patent registrations and patent applications (including all reissues, divisions, continuations, continuations-in-part, extensions and reexaminations) and all rights therein provided by international treaties or conventions and all improvements to the inventions disclosed in each such registration, patent or application, (c) trademarks, service marks, trade dress, logos, trade names, brand names and corporate names, whether or not registered, including all common law rights, and registrations and applications for registration thereof, (d) copyrights (registered or otherwise) and registrations and applications for registration thereof, and all rights therein provided by international treaties or conventions, (e) computer software, including, without limitation, source codes, operating systems and specifications, data, data bases, files, documentation and other materials related thereto, data and documentation, (f) trade secrets and confidential, technical and business information, (g) whether or not confidential, technology (including know-how), manufacturing and production processes and techniques, research and development information, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, (h) copies and tangible embodiments of all the foregoing, (i) all rights to obtain and rights to apply for patents, and to register trademarks and copyrights, and j) all rights to sue or recover and retain damages and costs and attorneys' fees for present and past infringement of any of the foregoing.
"Intellectual Property Agreement" has the meaning specified in Section 2.7 of this Agreement.
"Inventories " means all inventory, merchandise, finished goods, raw materials, work in process, packaging, supplies and similar personal property owned by Seller and held or stored by or for the Division, including the Division Subsidiary, for use in their operation of the Business as of a particular date and any prepaid deposits for any of the same at such date.
"Irish Properties" means both freehold and leasehold properties together with all buildings erected thereon and other structures, facilities or improvements currently or hereafter located thereon including all fixtures and fittings owned by GTI-Ireland and located in Ireland and particulars of which are set forth in Schedule 3.15.
"IRS" means the Internal Revenue Service of the United States.
"Knowledge" with respect to Seller means (i) the actual knowledge of any director, officer or other person having supervisory or management responsibilities of Seller (including any officer or director of the Division Subsidiary and any other person having supervisory or management responsibilities for the Division), of a particular fact and (ii) imputed knowledge of any officer or director of the Division Subsidiary and any other person having supervisory or management responsibilities for the Division, of a particular fact. "Knowledge" with respect to Purchaser means the actual or imputed knowledge of any director, officer or other person having supervisory or management responsibilities of Purchaser, of a particular fact. Imputed knowledge of a particular Person with respect to a particular fact means that such Person would have had actual Knowledge of such fact except for the fact that such Person was grossly reckless in the performance of such Person's professional responsibilities.
"Law" means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order, other requirement or rule of law.
"Leased Real Property" means the real property leased by Seller or the Division Subsidiary for use by the Division as tenant, together with, to the extent leased by Seller or the Division Subsidiary for use by the Division, all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property attached or appurtenant thereto, and all easements, licenses, rights and appurtenances relating to the foregoing.
"Leases" means, collectively, the lease agreements listed on Schedule 3.15(b) pursuant to which Seller or the Division Subsidiary leases the Leased Real Property.
"Liabilities" means any and all debts (including all Indebtedness), liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including, without limitation, those arising under any Law (including, without limitation, any Environmental Law), Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking.
"Licensed Intellectual Property" means all Intellectual Property licensed or sublicensed to Seller or the Division Subsidiary from a third party for use by the Division, including but not limited to, all licenses with respect to all management information systems and software applications, including but not limited to, (i) the Division's Novell Netware 3.11 operating system, and (ii) Fourth Shift Manufacturing, Labor Card System, Manufacturing System and Impact Award software applications.
"Loss" has the meaning specified in Section 8.2 of this Agreement.
"Material Adverse Effect" means any circumstance, change in, or effect on, the Business, the Acquired Assets or the Division that, individually or in the aggregate (a) is, or is reasonably likely to be, materially adverse to the business, operations, assets or Liabilities, employee relationships, customer or supplier relationships, business or financial prospects, results of operations or the condition (financial or otherwise) of the Division, including the Division Subsidiary, taken as a whole or (b) is reasonably likely to materially adversely affect the ability of Purchaser to operate or conduct the Business in the manner in which it is currently operated or conducted by the Division.
"Material Contracts" has the meaning specified in Section 3.13 of this Agreement.
"Owned Intellectual Property" means all Intellectual Property in and to which Seller or the Division Subsidiary holds right, title and interest or has the right to acquire right, title and interest and which is used by the Division in the operation of the Business, including, but not limited to, the trade name GTI-Ireland but not including the trademark or trade name "GTI."
"Owned Real Property" means the real property owned by Seller located in Hadley and Clarks Mills, Pennsylvania and described on Schedule 3.15(g), together with all buildings and other structures, facilities or improvements currently or hereafter located thereon, all fixtures, systems, equipment and items of personal property attached or appurtenant thereto and all easements, licenses, rights and appurtenances relating to the foregoing.
"PBGC" means the U.S. Pension Benefit Guaranty Corporation.
"Permits" has the meaning specified in Section 3.12 of this Agreement.
"Permitted Encumbrances" means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) liens for taxes, assessments and governmental charges or levies not yet due and payable which are not in excess of the amount accrued therefor on the Reference Balance Sheet; (b) Encumbrances imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar liens arising in the ordinary course of business securing obligations that (i) are not overdue and (ii) are not in excess of $5,000 in the case of a single property or $25,000 in the aggregate at any time; (c) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; and (d) with respect to Owned Real Property, minor survey exceptions, reciprocal easement agreements and other customary encumbrances on title to real property that (i) were not incurred in connection with any Indebtedness, (ii) do not render title to the property encumbered thereby unmarketable and (iii) do not, individually or in the aggregate, materially adversely affect the value or use of such property for its current and anticipated purposes.
"Person" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Purchase Price" has the meaning specified in Section 2.3 of this Agreement.
"Purchase Price Bank Account" means the following bank account of the Seller:
530 B Street, 4th Floor
"Purchaser" has the meaning specified in the Preamble to this Agreement.
"Purchaser Indemnified Party" has the meaning specified in Section 8.2(a).
"Purchaser Note" has the meaning specified in Section 2.3 of this Agreement.
"Purchaser's Accountants " means Ernst & Young, L. L. P., independent accountants of Purchaser.
"Real Property" means, collectively, the Leased Real Property and the Owned Real Property.
"Receivables" means any and all accounts receivable, notes and other amounts receivable by Seller or the Division Subsidiary from third parties, customers, arising from the conduct of the Business by the Division before the Closing Date. Receivables do not include the GTI-Ireland Receivables.
"Reference Balance Sheet" has the meaning specified in Section 3.4 of this Agreement.
"Regulations" means the Treasury Regulations (including Temporary Regulations) promulgated by the United States Department of Treasury with respect to the Code or other federal tax statutes.
"Release" means disposing of, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and the like of any Hazardous Materials into or upon any land or water or air or otherwise entering into the Environment.
"Restricted Period" has the meaning specified in Section 5.9 of this Agreement.
"Return" or "Tax Return" means any return, declaration, report, claim or refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
"Sale of Purchaser" means a transaction effecting a sale of all the outstanding voting securities of Purchaser, a sale of all or substantially all of Purchaser's assets, or a merger or consolidation of Purchaser in which Purchaser is not the surviving entity, in each case, consummated by a third party which, immediately prior to such transaction, was not an Affiliate of Purchaser.
"Secretary" means G.S. O'B. Registrars Limited.
"Seller" has the meaning specified in the preamble to this Agreement.
"Seller Indemnified Party" has the meaning specified in Section 8.3 of this Agreement.
"Seller's Accountants" means Arthur Andersen & Co., independent accountants of Seller.
"Share Transfer Forms" has the meaning specified in Section 2.7(a) of this Agreement.
"Shares" has the meaning specified in the recitals to this Agreement.
"Subsidiary" means with respect to any Person, any other Person in which such first Person has a direct or indirect voting equity or voting ownership interest equal to or in excess of 50%.
"Tangible Personal Property" has the meaning specified in Section 3.16 of this Agreement.
"Tax" or "Taxes" means (a) any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions and additional amounts imposed with respect thereto) imposed by any government or taxing authority, including, without limitation: taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, disability, workers' compensation, unemployment compensation, natural resources, occupation or net worth; taxes or other charges in the nature of excise, withholding, advance corporate, ad valorem, stamp, transfer, value added, alternative minimum, all-on minimum, estimated severance, premium, environmental, or gains taxes or other tax of any kind whatsoever; license, registration and documentation fees; and customs duties, tariffs, and similar charges and (b) liability for the payment of any amounts of the type described in clause (a) arising as a result of being (or ceasing to be) a member of any Affiliated Group (or being included (or required to be included) in any Tax Return relating thereto); and (c) liability for the payment of any amounts of the type described in clause (a) as a result of any express or implied obligation to indemnify or otherwise assume or succeed to the liability, or pay any amount in respect of the Taxes, of any other person.
"Tax Returns" or "Returns" means returns, declarations, reports, claims for refund, information returns or other documents (including any related or supporting schedules, statements or information) and including any amendment thereof filed or required to be filed in connection with the determination, assessment or collection of Taxes or the administration of any laws, regulations or administrative requirements relating to any Taxes.
"Third Party Claims" has the meaning specified in Section 8.2 of this Agreement.
"Trademark License Agreement" has the meaning specified in Section 5.8(c) of this Agreement.
"Transaction Documents" has the meaning specified in Section 8.1 of this Agreement.
"USTs" has the meaning specified in Section 3.12 of this Agreement.
"WARN" has the meaning specified in Section 3.20 of this Agreement.
SECTION 2. 1. Purchase and Sale of Acquired Assets.
(a) Purchase and Sale of Acquired Assets. Upon the terms and subject to the conditions of this Agreement, Seller agrees to sell, assign, transfer, convey and deliver to Purchaser (except the Shares which are being sold, assigned, transferred, conveyed and delivered to Holding), free and clear of all Encumbrances whatsoever (except as expressly provided herein), and Purchaser agrees to purchase and accept from Seller, on the Closing Date, all of the right, title and interest of Seller, as of the close of business on the day immediately preceding the Closing Date, in, to and under all of the assets and Business comprising the Division including, without limitation, the following assets (collectively the "Acquired Assets"):
(ii) the Tangible Personal Property;
(iii) the Intangible Personal Property;
(iv) the Shares and all other shares of capital stock or equity interests, if any, in the Division Subsidiary;
(v) the Owned Real Property and Seller's interest in the
(vi) the Division Books and Records;
(vii) all prepaid expenses of the Division and security deposits with respect to the Leases or any other Acquired Assets;
(x) causes of action, lawsuits, judgments, claims and demands of any nature available to or being pursued by Seller with respect to the Division or ownership, use, function or value of any of the
(xi) cash held by GTI-Ireland in an amount at least equal to
(xii) to the extent not described above, all other assets comprising the Division.
(b) Excluded Assets. The following assets used in the Business of the Division (collectively the "Excluded Assets") shall be retained by Seller, and shall not be assigned or transferred to Purchaser:
(i) the trademark or trade name "GTI" except that the trademark or trade name "GTI-Ireland" shall be licensed to the Division Subsidiary pursuant to a Trademark License Agreement substantially in the form of Exhibit J annexed hereto;
(ii) Seller's Leesburg, Indiana facility, including any of the properties, assets or liabilities thereof,
(iii) all of the personal property of Seller at Seller's headquarters in San Diego, California which are used in connection with
(iv) all cash of the Division in excess of $250,000.
SECTION 2.2. Liabilities Assumed by Purchaser: Excluded Liabilities.
(a) In connection with its purchase of the Acquired Assets, as of the close of business on the date immediately preceding the Closing Date, Purchaser shall assume and agree to pay, perform and discharge as they come due only the following Liabilities of the Division and no other liabilities (collectively the "Assumed Liabilities"):
(i) the accounts payable of the Division reflected on the Closing Balance Sheet incurred in the ordinary course of business of the Division prior to the Closing Date;
(ii) the accrued expenses of the Division reflected on the Closing Balance Sheet incurred in the ordinary course of business of the Division prior to the Closing Date; provided, however, that there shall be excluded therefrom any amounts in excess of $160,000 accrued by Seller or the Division Subsidiary for the Division with respect to employee medical benefit plans of Seller or the Division Subsidiary for
(iii) the Liabilities and obligations of Seller or GTI- Ireland incurred in the ordinary course of business of the Division prior to the Closing Date and existing on the Closing Date, under the agreements, leases, licenses, permits, purchase orders, commitments and other items of Intangible Personal Property included in the Acquired Assets, but only to the extent the rights and benefits
thereunder are legally and validly assigned or otherwise transferred or conveyed to Purchaser.
(b) Notwithstanding anything to the contrary set forth in this Agreement, (i) all Liabilities other than the Assumed Liabilities (the "Excluded Liabilities") shall be retained by the Seller, and (ii) Seller shall convey, transfer and assign the Acquired Assets to Purchaser and the Shares to Holding, in each case free and clear of all Encumbrances and without any assumption by Purchaser or Holding of any Liabilities or obligations of Seller whatsoever. In addition, neither Holding nor Purchaser shall be responsible for any Liabilities of the Division Subsidiary other than the Assumed Liabilities relating to the Division Subsidiary and Seller shall indemnify and hold harmless Purchaser and its Affiliates (including, but not limited to, Holding) from any Loss incurred by Purchaser or any such Affiliate on account of any Liabilities of the Division Subsidiary other than the Assumed Liabilities relating to the Division Subsidiary. The limitations on indemnification included in Section 8.7 shall not apply to any claim for indemnification under this Section 2.2(b). In all other respects any claim for indemnification pursuant to this Section 2.2(b) shall be governed by the provisions applicable to indemnification in Article VIII. Excluded Liabilities shall include, but are not limited to:
(i) any Liability for Taxes arising out of the operation of the Division or the ownership of the Acquired Assets and the assets of the Division Subsidiary for all periods up until the close of business on the day immediately preceding the Closing Date (other than in the case of Taxes of Seller, payroll, property and sales and use Taxes and, in the case of Taxes of the Division Subsidiary, payroll and property Taxes, but in each case only to the extent such Taxes are reflected on the Closing Balance Sheet and in the case of such Taxes of Seller in an aggregate amount not to exceed $10,000) and, except as expressly provided herein, any Liability of Seller or any Affiliate of Seller for Taxes arising in connection with the transfer of the Acquired Assets or the consummation of the Acquisition;
(ii) any Liability occurring or relating to any period prior to the Closing Date, arising under or in connection with or by reason of the Real Property or the real property owned or leased by the Division Subsidiary or arising thereunder in connection with the consummation of
(iii) any Liability for professional fees, costs and expenses incurred by Seller or theDivision Subsidiary pursuant to or in
(iv) any Liability or obligation arising out of any breach of warranty, product liability, breach of contract (including any Lease), tort, infringement or violation of Law in connection with the operation of the Division, the ownership of the Acquired Assets or the assets of
(v) any Liability of Seller or the Division Subsidiary arising out of any Environmental Claim, Environmental Condition, violation of
or violation of Environmental Permit, relating to any period or any condition existing prior to the Closing Date, including without limitation any Liability arising out of or relating to the Groundwater Remediation Project provided that subject to the provisions of clause (viii) of this Section 2.2(b) Purchaser shall operate the Groundwater Remediation Project in accordance with the work plan and plans and specifications as approved or permitted by the Pennsylvania Department
(vi) any Liability or obligation of Seller to or in connection with any Division Employee (including any employee of the Division Subsidiary) or other employee of Seller or the Division Subsidiary arising, occurring or relating to any period up until the close of business on the day immediately preceding the Closing Date, including any Liability arising under any Employee Plan of Seller or the Division Subsidiary or pursuant to which any employee of Seller or the Division Subsidiary is entitled to benefits; provided that (A) Purchaser shall assume up to $160,000 of accrued expenses of Seller as reflected on the Closing Balance Sheet in connection with the employee medical benefit plans of Seller or the Division Subsidiary for the Division Employees and (B) the Division Subsidiary shall retain Liabilities under the Employee Plans of the Division Subsidiary listed on Schedule 3.20 incurred in the ordinary course of business of the Division Subsidiary prior to the Closing Date and existing on the Closing Date;
(vii) any and all Liabilities relating to or arising out of the ownership of Seller's Leesburg, Indiana facility which comprises a part
(viii) any and all Liabilities relating to or arising out of the operation of the Groundwater Remediation Project to the extent the costs of such operation in the regular operation thereof exceed $100,000 (subject to annual increase at a rate commensurate with increases in the U.S. Consumer Price Index for Pittsburgh, Pennsylvania) in any calendar year; and
(ix) any and all Liabilities related in any way to the operations or assets of Seller which are not part of the Business or the Acquired Assets as of the Closing Date.
Subject to the adjustment set forth in this Section 2.3 and in Section 2.9, the aggregate purchase price for the Acquired Assets (the "Purchase Price") shall be the sum of (i) twelve million five hundred thousand dollars ($12,500,000) plus (ii) the amount of the Assumed Liabilities. The Purchase Price shall be paid by Purchaser at the Closing as follows:
(a) in cash by wire transfer of immediately available funds an amount equal to twelve million dollars ($12,000,000) (the "Cash Portion of the Purchase Price") payable as follows:
(i) to the Purchase Price Bank Account, an amount equal to eleven million seven hundred fifty thousand dollars ($11,750,000) less the amount, if any, by which the Agreed Net Working Capital exceeds the Estimated Closing Net Working Capital (such excess, if any, being the "Estimated Adjustment Amount"); provided, however, the amount paid to the Purchase Price Bank Account pursuant to this Section 2.3(a)(i) shall not be less than $11,750,000 unless the Agreed Net Working Capital is greater than the sum of the Estimated Closing Net Working
(ii) to an interest bearing escrow account with the Escrow Agent (the "Escrow Account"), two hundred fifty thousand dollars ($250,000), to be held in accordance with the terms of Section 2.10 of this Agreement and the Escrow Agreement; and
(b) issuance and delivery by Purchaser to Seller of a promissory note in the form of Exhibit C in the principal amount of five hundred thousand dollars ($500,000) (the "Purchaser Note").
SECTION 2.4. The Purchaser Note.
(a) The Purchaser Note shall (i) bear simple interest at the rate of eight percent (8 %) per annum, payable semi-annually in arrears, (ii) mature and become due and payable in full on the earlier of (A) the date that is three (3) years following the date of issuance or (B) the closing date of any Sale of Purchaser, (iii) be subordinate and junior in right of payment to all indebtedness incurred by Purchaser to the Financing Sources, on terms acceptable to the Financing Sources and Seller, and (iv) be prepayable, at the option of Purchaser, at any time in whole or in part, without penalty or premium.
(b) Purchaser shall have the right, at its option exercisable by three (3) days written notice to Seller, to recover immediately, but after deducting or giving effect to any amounts theretofore recovered by Purchaser from the Escrow Account or otherwise, (i) any and all amounts with respect to which there has been a final determination that a Purchaser Indemnified Party is entitled to indemnification from Seller under this Agreement and (ii) any and all amounts required to be paid by Seller to Purchaser pursuant to the closing adjustment provided in Section 2.9(c) hereof, in either case by offset against any amounts then owing under the Purchaser Note. Any such amounts so offset against the Purchaser Note shall be applied first against accrued and unpaid interest thereon and second against the principal thereof.
SECTION 2.5. Allocation of Purchase Price. Purchaser and Seller agree that the Purchase Price of the Division shall be allocated among the acquired assets as described in Exhibit D, which allocation is intended to be in compliance with Section 1060 of the Code. Within fifteen (15) days after the date the Closing Balance Sheet is deemed final pursuant to Section 2.9, Seller shall prepare and deliver to Purchaser a final allocation schedule consistent with Exhibit D. Purchaser and Seller agree that no portion of the Purchase Price shall be allocated to Seller's covenants contained in Section 5.9. Purchaser, Seller and, to the extent required, the Division Subsidiaries will file all Tax Returns (including amended returns and claims for refund) and information reports in a manner consistent with such allocation. Nothing in this Agreement shall be construed to mean that a party hereto or other Person (a) must use, for any one or more purposes, any price or other allocation set forth or provided for in this Agreement if any such party or Person reasonably believes or reasonably is advised in writing by its professional advisor that such use is not in accordance with Law or (b) must make or file or cooperate in the making or filing of any Tax Return or report to any Governmental Authority in any manner that such party or Person reasonably believes or reasonably is advised is not in accordance with Law.
(a) Upon the terms and subject to the conditions of this Agreement, the sale and purchase of the Division contemplated by this Agreement shall take place at a closing (the "Closing") to be held at the offices of Winston & Strawn, 200 Park Avenue, New York, New York 10166 at 9:00 a.m. December 21, 1995 or at such other place or at such other time as Purchaser and Seller may mutually agree upon in writing (the day on which the Closing takes place being the "Closing Date").
(b) On the Business Day immediately preceding the Closing Date, Seller will deliver to Purchaser the Estimated Closing Balance Sheet together with a certificate of Seller's Chief Financial Officer that such balance sheet represents Seller's good faith estimate of the Closing Balance Sheet and was in all material respects prepared in accordance with the requirements of this Agreement.
(c) Notwithstanding the time of the Closing on the Closing Date, the parties agree that the Closing shall be deemed to have occurred from and after the close of business on the day immediately preceding the Closing Date.
SECTION 2.7. Closing Deliveries by Seller. At the Closing, Seller shall deliver or cause to be delivered to Purchaser or Purchaser's nominee:
(a) Share Transfer Forms (the "Share Transfer Forms") in the form of Exhibit K annexed hereto with respect to transfer of the Shares duly executed by the registered holders thereof in favor of the Purchaser or as it may direct together with the related share certificates or, in the case of any lost share certificate, an indemnity in lieu thereof in terms satisfactory to
(b) such waivers or consents as the Purchaser may require to enable the Purchaser or its nominees to be registered as holders of the Shares and in particular a waiver by the Seller and G.S. O'B. Nominees Limited, as nominee for Seller, of the provisions of the Articles of Association of the
(c) documentation necessary to cause such persons as the Purchaser may nominate to be validly appointed as additional Directors of the Division Subsidiary and upon such appointment forthwith cause the Directors (other than the Continuing Directors) and the Secretary of the Division Subsidiary to retire from their respective offices and as employees, each delivering to the Purchaser a letter under seal acknowledging that the person so retiring has no claim outstanding for compensation for loss of office, redundancy, unfair
(d) all the statutory and other books (duly written up to date) of the Division Subsidiary and their certificates of incorporation and common
(e) a duly executed Bill of Sale in the form of Exhibit E transferring to Purchaser good and marketable title to all of the Tangible Personal Property included in the Acquired Assets, free and clear of all
(f) duly executed counterparts of one or more Assignment and Assumption Agreements in the form of Exhibit F (the "Assignment and Assumption Agreements") assigning to Purchaser all of Seller's right, title and interest in, to and under each of the contracts, leases and other items comprising the Intangible Personal Property (except to the extent transferred under the Intellectual Property Agreement), together with the consents of any third parties which are required to make each such assignment effective as to such
(g) a duly executed counterpart of an Intellectual Property Agreement (the "Intellectual Property Agreement") in the form of Exhibit G sufficient to assign to Purchaser all of Seller's right, title and interest in, to and under the Owned Intellectual Property and the Licensed Intellectual
(h) documents or instruments of title to all vehicles (and other items of Tangible Personal Property, the ownership of which is evidenced by documents or instruments of title) included in the Acquired Assets duly endorsed for transfer to Purchaser;
(i) a receipt for the Cash Portion of the Purchase Price and the
(j) a duly executed counterpart of the Escrow Agreement;
(k) a general warranty deed with respect to the Owned Real Property and an assignment of leases with respect to the Leased Real Property;
(1) a duly executed counterpart of the Trademark License
(m) the opinions, certificates and other documents required to be delivered pursuant to Section 7.2; and
(n) such other instruments of sale. transfer, conveyance and assignment as Purchaser and its counsel may reasonably request.
SECTION 2.8. Closing Deliveries by Purchaser.
(a) At the Closing, Purchaser shall deliver or cause to be delivered to Seller:
(i) the Cash Portion of the Purchase Price;
(ii) the Purchaser Note, duly executed by Purchaser;
(iii) duly executed counterparts of the Assignment and Assumption Agreements, and the Intellectual Property Agreements;
(iv) a duly executed counterpart of the Escrow Agreement;
(v) a duly executed counterpart of the Trademark License
(vi) the opinions, certificates and other documents required to be delivered pursuant to Section 7.1; and
(vii) such other instruments of sale, transfer, conveyance and assignment as Seller and its counsel may reasonably request.
(b) At the Closing, in accordance with Section 2.10 of this Agreement and the Escrow Agreement, Purchaser shall deliver or cause to be delivered to Escrow Agent the Escrow Amount.
SECTION 2.9. Post Closing Adjustment.
(a) Closing Balance Sheet. As promptly as practicable, but in any event within sixty (60) calendar days following the Closing Date, Purchaser shall deliver to Seller (i) the Closing Balance Sheet, together with a report thereon of Purchaser's Accountants stating that the Closing Balance Sheet fairly presents the financial position of the Division as of the Closing Date (A) in conformity with GAAP applied on a basis consistent with the preparation of the Reference Balance Sheet and consistent with historic first-in, first-out valuation and (B) in accordance with the requirements of this Agreement, (ii) a reasonably detailed explanation of any material differences between the Closing Balance Sheet and the Estimated Closing Balance Sheet and the reasons therefor, and (iii) a statement of the calculation of Closing Net Working Capital (the
(i) Subject to clause (ii) of this Section 2.9(b), the Closing Balance Sheet and the Net Working Capital Calculation delivered by Purchaser to Seller shall be deemed to be and shall be final, conclusive and binding on the parties hereto.
(ii) Seller may dispute any amounts reflected on the Closing Balance Sheet and the Net Working Capital Calculation but only on the basis that the amounts reflected on the Closing Balance Sheet and the Net Working Capital Calculation were not arrived at in accordance with GAAP applied on a basis consistent with the preparation of the Reference Balance Sheet; provided, however, that Seller shall have notified Purchaser and Purchaser's Accountants in writing of each disputed item, specifying the amount thereof in dispute and setting forth, in reasonable detail, the basis for such dispute, within twenty (20) Business Days of Purchaser's delivery of the Closing Balance Sheet and the Net Working Capital Calculation to Seller. In the event of such a dispute, Seller's Accountants and Purchaser's Accountants shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, conclusive and binding on the parties hereto. If Seller's Accountants and Purchaser's Accountants are unable to reach a resolution with such effect within twenty (20) Business Days after receipt by Purchaser and Purchaser's Accountants of Seller's written notice of dispute, Seller's Accountants and Purchaser's Accountants shall submit the items remaining in dispute for resolution to a "Big 6" firm of independent accountants mutually acceptable to Seller and Purchaser or, if Purchaser and Seller cannot agree on such a firm or if such firm shall decline to act, to another "Big 6" firm designated by the President of The American Institute of Certified Public Accountants (either of such firms being referred to herein as the "Independent Accounting Firm"), which shall, within thirty (30) Business Days after such submission, determine and report to Purchaser and Seller upon such remaining disputed items, and such report shall be final, conclusive and binding on Seller and Purchaser. The fees and disbursements, of the Independent Accounting Firm shall be allocated between Seller and Purchaser in the same proportion that the aggregate amount of such remaining disputed items so submitted to the Independent Accounting Firm that is unsuccessfully disputed by Seller and Purchaser (as finally determined by the Independent Accounting Firm) bears to the total amount of such remaining disputed items so submitted.
(iii) The Purchaser shall provide Seller and Seller's Accountants full access to the books and records of Purchaser to the extent required by Seller in order to verify the information in the Closing Balance Sheet and the Net Working Capital Calculation. In addition, to the extent information required to prepare the Closing Balance Sheet or the Net Working Capital Calculation is included in books and records of Seller that are not part of the Division Books
Seller shall, at mutually agreeable times, provide Purchaser or Purchaser's Accountants full access to such information and the opportunity to discuss such information with Seller's Accountants or the Seller's chief financial officer.
(c) Adjustment. The Closing Balance Sheet and the Net Working Capital Calculation shall be deemed final for the purposes of this Section 2.9 upon the date (the "Adjustment Date") that is the earliest of (i) the failure of Seller to notify Purchaser of a dispute within twenty (20) Business Days after Purchaser's delivery of the Closing Balance Sheet to Seller, (ii) pursuant to Section 2.9(b)(ii), by Purchaser's Accountants and Seller's Accountants and (iii) the resolution of all disputes, pursuant to Section 2.9(b)(ii), by the Independent Accounting Firm. The amount, if any, by which the Agreed Net Working Capital exceeds the Closing Net Working Capital is hereinafter referred to as the "Adjustment Amount." In the event the Agreed Net Working Capital is greater than the sum of the Closing Net Working Capital plus $75,000 and the Adjustment Amount exceeds the Estimated Adjustment Amount, Purchaser shall deliver written notice to the Escrow Agent and Seller specifying the amount of such excess (unless the Cash Portion of the Purchase Price was not reduced by the Estimated Adjustment Amount pursuant to Section 2.3(a)(i) hereof in which case Purchaser shall deliver written notice to the Escrow Agent and Seller specifying the excess of the Agreed Net Working Capital over the Closing Net Working Capital), and the Escrow Agent shall, within two (2) Business Days of its receipt of such notice and in accordance with the terms of the Escrow Agreement, pay to Purchaser the aggregate amount of excess specified in such notice out of the Escrow Account by wire transfer in immediately available funds; provided, however, in the event that such excess exceeds the amount in the Escrow Account, Purchaser may, at its option (but without duplication), (x) set off the amount by which such excess exceeds the amount in the Escrow Account against the amounts owing under the Purchaser Note, and/or (y) request in writing payment of such amount directly from Seller, in which case, Seller shall, within two (2) Business Days after receipt of such written request, pay to Purchaser by wire transfer in immediately available funds an amount equal to the amount by which such excess exceeds the amount in the Escrow Account. In the event the Cash Portion of the Purchase Price was reduced by the Estimated Adjustment Amount pursuant to Section 2.3(a)(i) hereof and the Adjustment Amount is less than the Estimated Adjustment Amount (i) within two (2) Business Days after such determination has become final, conclusive and binding, Purchaser shall pay to Seller the amount of such shortfall by wire transfer of immediately available funds.
SECTION 2. 10. Escrow. At the Closing, Seller and Purchaser shall enter into the Escrow Agreement with the Escrow Agent. In accordance with the terms hereof and of the Escrow Agreement, Purchaser shall deposit the Escrow Amount into the Escrow Account to be held, managed and paid out by the Escrow Agent in accordance with the terms of the Escrow Agreement. In the event of an adjustment pursuant to Section 2.9(c) hereof, the Escrow Agent shall make payment to the Purchaser as provided in Section 2.9(c). In addition, if, at any time there has been a final determination that any amounts are owed by Seller to a Purchaser Indemnified Party in accordance with Article VI or VIII hereof, Purchaser shall instruct Escrow Agent (with notice to Seller) to pay such amounts to Purchaser out of the Escrow Account and Escrow Agent shall make such payment in accordance with the terms of the Escrow Agreement.
All of the fees and expenses of the Escrow Agent incurred pursuant to the Escrow Agreement shall be paid by Purchaser.
As an inducement to Purchaser to enter into this Agreement, Seller hereby represents and warrants to Purchaser as follows:
SECTION 3. 1. Organization, Authority and Qualification.
(a) Seller is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all necessary corporate power and authority to own, operate or lease the properties and assets which comprise the Division and to carry on the Business of the Division as it has been and is currently conducted. Seller is duly licensed or qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the Division operates the Business, all of which jurisdictions are set forth on Schedule 3.1 hereof. Seller has full power and authority (i) to execute, deliver and perform this Agreement and the other Transaction Documents to which it is a signatory, and (ii) to perform its respective obligations hereunder and thereunder. All corporate actions taken by Seller have been duly authorized and approved by Seller's Board of Directors and, if required under the Delaware General Corporation Law, Seller's stockholders. True and correct copies of the Certificate of Incorporation and By-laws of Seller, each as in effect on the date hereof, have been delivered to Purchaser. This Agreement has been, and upon their execution the Transaction Documents of which Seller is a signatory shall have been, duly executed and delivered by Seller and this Agreement constitutes, and upon their execution each of the Transaction Documents to which Seller is a party will constitute, a legal, valid and binding obligation of Seller enforceable against Seller in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy and insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally.
(b) GTI-Ireland is a limited liability company duly organized, validly existing and in good standing under the laws of the Republic of Ireland. True and correct copies of the Memorandum of Association and Articles of Association, each in effect on the date hereof, have been delivered to Purchaser. The total authorized share capital of GTI-Ireland is IRL.l,000,000 divided into 1,000,000 shares of IRL.1 each. As of the date hereof, 25,000 Shares are issued and outstanding, all of which Shares are validly issued, fully paid and nonassessable and of which 24,999 are owned beneficially and of record by Seller, free and clear of all Encumbrances and one (1) share is owned beneficially and of record by G. S. O'B. Nominees Limited as nominee for Seller. None of the issued and outstanding Shares of GTI-Ireland were issued in violation of any preemptive rights or similar rights arising under the laws of the Republic of Ireland. There are no options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the capital stock of GTI-Ireland, directly or indirectly, obligating Seller or GTI-Ireland to issue or sell any shares of capital stock of, or any other interest in, GTI-Ireland. There are no outstanding contractual obligations of GTI-Ireland to repurchase, redeem or otherwise acquire any Shares or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other Person. Upon consummation of the transactions contemplated by this Agreement, Purchaser will acquire good, valid, beneficial and marketable title to the Shares of GTI-Ireland. There are no voting trusts, stockholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the shares of capital stock of GTI-Ireland. There are no Subsidiaries of Seller engaged in the Business other than GTI-Ireland and no portion of the Business is conducted through or by any Person other than Seller and GTI-Ireland. Neither Seller nor any Subsidiary of Seller has any direct or indirect equity interest in any other corporate or other entities conducting any portion of the Business or having any right, title or interest in or to any of the Acquired Assets.
SECTION 3.2. No Conflict. Assuming the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions described in Schedule 3.3, the execution, delivery and performance by Seller of this Agreement and the Transaction Documents to which Seller is a party do not and will not (a) violate, conflict with or result in the breach of any provision of the Certificate of Incorporation or By-laws (or other organizational documents) of Seller or the Division Subsidiary (b) conflict with or violate (or cause an event which is reasonably likely to have a Material Adverse Effect as a result of) any Law or Governmental Order applicable to Seller, the Division Subsidiary or any of the Acquired Assets, or (c) except as set forth in Schedule 3.2 hereof, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the Acquired Assets pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Seller or the Division Subsidiary is a party or by which any of the Acquired Assets or any of such assets or properties is bound or affected.
SECTION 3.3. Governmental Consents and Approvals. The execution, delivery and performance of this Agreement and the Transaction Documents to which Seller is a signatory do not and will not require on the part of Seller or the Division Subsidiary any consent, approval, authorization or other order of, action by, filing with or notification to any Governmental Authority, except as described in Schedule 3.3 hereof.
SECTION 3.4. Financial Information, Books and Records and Operating Data.
(a) Attached as Schedule 3.4 hereto are true and complete copies of the unaudited Balance Sheets of the Group as of December 31, 1991, December 31, 1992, December 31, 1993, December 31, 1994 and September 30, 1995 (the balance sheet dated December 31,
1994 is hereinafter referred to as the "Reference Balance Sheet") and the unaudited statements of operations of the Division for each of the four years ended December 31, 1994 and the nine (9) months ended September 30, 1995 (collectively, the "Financial Statements"). The Financial Statements (i) were prepared by Seller in accordance with the books of account and other financial records of the Division; (ii) present fairly the financial condition and results of operations of the Division as of the respective dates thereof and for the periods covered thereby; (iii) have been prepared in accordance with GAAP applied on a basis consistent with the past practices of Seller for the Division; and (iv) include all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the financial condition of the Division and the results of operations of the Division as of the dates thereof or for the periods covered thereby; provided, however, that the Financial Statements are subject to normal year-end adjustments and lack complete footnotes and other presentation items in conformity with GAAP.
(b) The books of account and other financial records of the Division (i) reflect all material items of income and expense and all assets and Liabilities of the Division, (ii) are in all material respects complete and correct, and do not contain or reflect any material inaccuracies or discrepancies, and (iii) have been maintained in accordance with good business and accounting practices in all material respects.
SECTION 3.5. No Undisclosed Liabilities. The Division has no Liabilities other than Liabilities (i) reflected on the Reference Balance Sheet, (ii) disclosed in Schedule 3.5 hereof, (iii) incurred in the ordinary course of the Business, consistent with the past practices of the Division and which do not and are not reasonably likely to have a Material Adverse Effect. Reserves are reflected on the balance sheets included in the Financial Statements in amounts that have been established on a basis consistent with the past practices of the Division and in accordance with GAAP.
SECTION 3.6. Receivables. Schedule 3.6 hereof sets forth an aged list of the Receivables of the Division as of November 30, 1995, showing separately those Receivables that, as of such date, had been due and outstanding (a) 25 days or less, (b) 26 to 55 days, (c) 56 to 85 days, (d) 86 to 115 days and (e) more than 115 days. Except as set forth on Schedule 3.6, all such Receivables arose from the sale of Inventory or services to Persons not affiliated with Seller and in the ordinary course of the Business consistent with past practice and custom of the Division, constitute or will constitute, as the case may be, only valid, undisputed claims of Seller not subject to valid claims of set-off or other defenses or counterclaims other than normal cash discounts accrued in the ordinary course of the Business consistent with past practice. Subject to the amounts of normal and customary reserves for doubtful accounts, all such Receivables are or will be good and collectible and have been collected by Seller prior to or will be collected by Purchaser, without resort to litigation or extraordinary collection activity, within one hundred twenty (120) days after the Closing Date.
(a) Subject to amounts reserved therefor on the Reference Balance Sheet as adjusted for operations and transactions through the Closing Date consistent with the past practice and custom of Seller for the Division, the values at which all Inventories are carried on the Reference Balance Sheet reflect Seller's historical inventory valuation policy for the Division of stating such Inventories at the lower of cost (determined using the first-in, first-out method for substantially all Inventories) or market value. Seller or the Division Subsidiary has good and marketable title to the Inventories free and clear of all Encumbrances. Except as set forth on Schedule 3.17, the Inventories do not consist of, in any material amount in excess of the reserve, items that are obsolete, damaged or slow-moving; and the Inventories do not consist of any items held on consignment. Neither Seller nor the Division Subsidiary is under any obligation or liability with respect to accepting returns of items of Inventory or merchandise in the possession of its customers other than as set forth in Schedule 3.7. Except in the ordinary course of the Business consistent with past practice, no clearance or extraordinary sale of the Inventories has been conducted since the date of the Reference Balance Sheet. Neither Seller nor the Division Subsidiary has acquired or committed to acquire or manufacture Inventory for sale which is not of a quality and quantity usable in the ordinary course of the Business and consistent with past practice, nor has Seller or the Division Subsidiary changed the price of any Inventory except for (i) price reductions to reflect any reduction in the cost thereof to Seller or the Division Subsidiary, (ii) reductions and increases responsive to normal competitive conditions and consistent with past sales practices; and (iii) increases to reflect any increase in the cost thereof to Seller or the Division Subsidiary. Schedule 3.7 is a complete list of the addresses of all warehouses and other facilities in which the Inventories are located.
(b) Subject to the reserve, the Inventories are in good and merchantable condition, are suitable and usable for the purposes for which they are intended and are in a condition such that they can be sold in the ordinary course of the Business consistent with past practice.
SECTION 3.8. Conduct in the Ordinary Course; Absence of Certain Changes, Events and Conditions. Since December 31, 1994. except as disclosed on Schedule 3.8 or specifically contemplated by this Agreement, the business of the Division has been conducted in the ordinary course and consistent with past practice. As amplification and not in limitation of the foregoing, except as disclosed in or specifically contemplated by this Agreement, or in the ordinary course of the Business consistent with past practice of Seller and the Division Subsidiary, since such date, neither Seller nor the Division Subsidiary has, with respect to the Division or any Acquired Assets:
(a) amended or terminated any contract lease or license listed on any schedule attached hereto, or the rights thereunder;
(b) permitted or allowed any material assets or properties (whether tangible or intangible) to be subjected to any Encumbrance, other than Permitted Encumbrances and Encumbrances that will be released at or prior to
(c) discharged or otherwise obtained the release of any material Encumbrance or paid or otherwise discharged any material Liability;
(d) suffered any Material Adverse Effect or the occurrence of any event or events which, individually, or in the aggregate, has or have had, or should reasonably be expected to have, a Material Adverse Effect;
(e) made any loan to, guaranteed any Indebtedness of or otherwise incurred any Indebtedness on behalf of any Person;
(f) failed to pay any creditor any material amount owed to such creditor upon the later of when such amount became due or within the applicable
(g) redeemed any of the capital stock of the Division Subsidiary or declared, made or paid any dividends or distributions (whether in cash, securities or other property) to the holders of capital stock of the Division
(h) made any material changes in the customary methods of operations, including, without limitation, practices and policies relating to manufacturing, purchasing, Inventories, marketing, selling and pricing;
(i) made any capital expenditure or commitment for any capital expenditure in excess of twenty-five thousand dollars ($25,000) individually or one hundred thousand dollars ($100,000) in the aggregate;
(j) issued any purchase orders or otherwise agreed to make any purchases involving exchanges in value in excess of twenty-five thousand dollars ($25,000) individually or one hundred thousand ($100,000) in the
(k) sold, transferred, leased, subleased, licensed or otherwise disposed of any properties or assets, real, personal or mixed (including, without limitation, leasehold interests and intangible assets);
(1) entered into any agreement, arrangement or transaction with any of its directors, officers, employees or shareholders (or with any relative, beneficiary, spouse or Affiliate of such Person);
(m) (i) granted any material increase, or announced any material increase, in the wages, salaries, compensation, bonuses, incentives, pension or other benefits payable by Seller or the Division Subsidiary to any of its employees, including, without limitation, any increase or change pursuant to any Employee Plan or (ii) established or increased or promised to increase any material benefits under any Employee Plan, in either case except as required by Law;
(n) written down or written up (or failed to write down or write up in accordance with GAAP consistent with past practice) the value of any Inventories or Receivables or revalued any material assets;
(o) amended, terminated, canceled or compromised any material claims or waived any other material rights;
(p) made any change in any method of accounting or accounting practice or policy other than such changes as are required by GAAP;
(q) accelerated or discounted the collection of Receivables, nor delayed the payment of accounts payable, and collection and payment of such Receivables and accounts payable, respectively, have at all times been made in the ordinary course of business;
(r) failed, in any material respect, to maintain the Acquired Assets in accordance with good business practice and in good operating
(s) allowed any Permit or Environmental Permit to lapse or terminate or failed to renew any such Permit or Environmental Permit or any insurance policy that is scheduled to terminate or expire within forty-five (45) calendar days of the Closing Date;
(t) incurred any Indebtedness for borrowed money;
(u) terminated, discontinued, closed or disposed of any plant, facility or other material business operation, or laid off employees, or implemented any early retirement, separation or program providing early retirement window benefits within the meaning of Section 1.401(a)-4 of the Regulations or announced or planned any such action or program for the future in each case for more than twenty (20) employees;
(v) disclosed any secret or confidential Intellectual Property (except by way of issuance of a patent) or permitted to lapse or become abandoned any material Intellectual Property (or any registration or grant thereof or any application relating thereto) to which, or under which, Seller or the Division Subsidiary has any right, title, Interest or license;
(w) made any material express or deemed election or settled or compromised any material liability, with respect to Taxes;
(x) suffered any casualty loss or damage with respect to any of the Acquired Assets which in the aggregate have a replacement cost of more than twenty-five thousand dollars ($25,000) whether or not such loss or damage shall have been covered by insurance;
(y) agreed, whether in writing or otherwise, to take any of the actions specified in this Section 3.8 or granted any options to purchase, rights of first refusal, rights of first offer or any other similar rights or commitments with respect to any of the actions specified in this Section 3.8, except as expressly contemplated by this Agreement.
SECTION 3.9. Limitation. Except as set forth in Schedule 3.9 (which, with respect to each Action disclosed therein, sets forth the parties and nature of the proceeding), there are no Actions by or against the Division (or by or against Seller or any Affiliate of Seller relating to the Business or the Division), or affecting any of the Acquired Assets, pending before any Governmental Authority or, to Seller's Knowledge, threatened to be brought by or before any Governmental Authority. None of the matters disclosed in Schedule 3.9 has or has had or is reasonably likely to have a Material Adverse Effect or could affect the legality, validity or enforceability of this Agreement or the consummation of the transactions contemplated hereby. Except as set forth in Schedule 3.9, neither Seller, any Affiliate of Seller, the Division nor any of the Acquired Assets is subject to any Governmental Order, (nor to Seller's Knowledge, is any such Governmental Order threatened to be imposed by any Governmental Authority) relating to or affecting the Division or the Acquired Assets.
SECTION 3.10. Certain Interests. Except as disclosed in Schedule 3.10, neither Seller, the Division, any other Affiliate of Seller, nor any officer or director of Seller or the Division and, to the Knowledge of Seller, no relative or spouse (or relative of such spouse) who resides with, or is a dependent of, any such Person: (a) has any direct or indirect financial interest in any competitor, supplier or customer of the Division, or (b) owns, directly or indirectly, in whole or in part, or has any other interest in any tangible or intangible property which the Division uses or has used in the conduct of the Business or otherwise.
SECTION 3.11. Compliance with Laws. Except as disclosed in Schedule 3.11, the Business of the Division is and has been conducted in all material respects in accordance with all Laws and Governmental Orders applicable thereto and neither Seller nor the Division Subsidiary is in violation of any such Law or Governmental Order, except violations which are not material to the Division or the Business. Neither Seller nor the Division Subsidiary has received notice of violation of any Law applicable to the Division's operation of the Business.
SECTION 3.12. Environmental and Other Permits and Licenses: Related Matters.
(a) Except as set forth on Schedule 3,12(a), Seller and the Division Subsidiary, currently hold all the health and safety and other permits, licenses, authorizations, certificates, exemptions and approvals of Governmental Authorities, including, without limitation, Environmental Permits, necessary or proper for the current use, occupancy and operation by the Division of each Acquired Asset, the Groundwater Remediation Project and the conduct of the Business (collectively, "Permits"), and all such Permits are in full force and effect, all of which Permits are listed on Schedule 3.12(a). Neither Seller nor the such Division Subsidiary has received any notice from any Governmental Authority revoking, canceling, rescinding, materially modifying or refusing to renew any Permit or providing written notice of
Law. The Division is in compliance, in all material respects, with the Permits and the requirements of the Permits. Schedule 3.12(a) identifies all Permits that will require reissuance by or the consent of any Governmental Authority in connection with the consummation of the transactions contemplated by this Agreement.
(b) (i) Hazardous Materials have not been Released or treated on and have not been generated, used, handled or stored on, or transported to or from, any Real Property (or, to Seller's Knowledge, any property adjoining any Real Property), except in compliance with all applicable Environmental Laws; (ii) Seller and the Division Subsidiary have disposed of all wastes, including those wastes containing Hazardous Materials, in compliance with all applicable Environmental Laws and Environmental Permits; (iii) except as described in Schedule 3.12(b), there are no past, pending or, to Seller's Knowledge. threatened Environmental Claims against Seller or the Division Subsidiary relating to any Real Property and neither Seller nor the Division Subsidiary has received any notice of any such Environmental Claims; (iv) no Real Property and, to Seller's Knowledge, no property adjoining any Real Property, is listed or proposed for listing on the National Priorities List under CERCLA or on the CERCLIS or any analogous state or foreign list of sites requiring investigation or cleanup; and (v) neither Seller nor the Division Subsidiary has transported or arranged for the transportation of any Hazardous Materials to any location that is listed or proposed for listing on the National Priorities List under CERCLA or on the CERCLIS or any analogous state or foreign list or which is the subject of any Environmental Claim.
(c) Except as set forth on Schedule 3.12(c), there are no circumstances with respect to any Real Property or other Acquired Assets or the operation of the Business which could reasonably be anticipated (i) to form the basis of an Environmental Claim against Seller or the Division Subsidiary (or following the Closing, Purchaser) or relating to any Real Property or Acquired Asset or (ii) to cause such Real Property or Acquired Asset to be subject to any restrictions on ownership, occupancy, use or transferability under any applicable Environmental Law.
(d) Except as set forth on Schedule 3.12(d), there are not now and never have been any underground storage tanks, as such term is defined in the Resource Conservation and Recovery Act, as amended, and the regulations promulgated thereunder ("USTs"), located on any Real Property or, to Seller's Knowledge, on any property adjoining any Real Property.
(e) Except as disclosed in Schedule 3.12(e), there is no existing practice, action or activity of Seller or the Division and no existing condition of the Acquired Assets or the Business which will give rise to any civil or criminal Liability under, or violate or prevent compliance with, or result in any Environmental Claim under, any applicable Environmental Law or any applicable health, occupational safety or other similar Law.
(a) Schedule 3.13 lists each of the following contracts and agreements (including, without limitation, oral arrangements) of Seller or the Division Subsidiary relating to the Division (such contracts and agreements, together with all contracts, agreements, leases and subleases concerning the management or operation of any Real Property including, without limitation, brokerage contracts listed or otherwise disclosed in Schedule 3.15 and all agreements relating to Intellectual Property set forth in Schedule 3.14, being "Material Contracts"):
(i) each contract and agreement for the purchase of Inventory, spare parts, other materials or personal property with any supplier or for the furnishing of services to the Division or otherwise related to the Business under the terms of which the Division: (A) is reasonably likely to pay or otherwise give consideration of more than five thousand dollars ($5,000) in the aggregate during the calendar year ending 1995, (B) is reasonably likely to pay or otherwise give consideration of more than fifteen thousand dollars ($15,000) in the aggregate over the remaining term of such contract and (C) cannot be canceled by the Division without penalty or further payment and without more than thirty (30) days
(ii) each contract and agreement for the sale of Inventory or other personal property or for the furnishing of services by the Division which: (A) is reasonably likely to involve consideration of more than five thousand dollars ($5,000) in the aggregate during the calendar year ending 1995, (B) is reasonably likely to involve consideration of more than fifteen thousand dollars ($15,000) in the aggregate over the remaining term of the contract or (C) cannot be canceled by the Division without penalty or further payment and without more than thirty (30) days notice;
(iii) all broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing, consulting and advertising contracts and agreements;
(iv) all management contracts and contracts with independent contractors or consultants (or similar arrangements);
(v) all contracts and agreements with any Governmental
(vi) any agreement for the employment of any individual by or for the Division on a full-time, consulting or other basis;
(vii) all contracts and agreements that limit or purport to limit the ability of the Division to compete in any line of business or with any Person or in any geographic area or during any period of
(viii) all contracts and agreements between or among Seller or the Division Subsidiary and an Affiliate of Seller;
(ix) all contracts and agreements providing for benefits
(x) a letter of intent between Seller and MagneTek Inc. providing for purchases through December 31, 1996 by MagneTek Inc. from the Division of circuit boards having an aggregate purchase price of not less than one million dollars ($1,000,000), which letter of intent has not been rescinded or modified in any way; and
(xi) all other contracts and agreements, whether or not made in the ordinary course of the Business, which are material to the Division or the conduct of the Business or the absence of which could have a Material Adverse Effect.
For purposes of this Section 3.13 and Sections 3.14, 3.15 and 3.16, the term "lease" shall include any and all leases, subleases, sale/leaseback agreements or similar arrangements.
(b) Except as disclosed in Schedule 3.13, each Material Contract: (i) is valid and binding on Seller or the Division Subsidiary, as applicable, and to Seller's Knowledge, on the other respective parties thereto and is in full force and effect and (ii) upon consummation of the transactions contemplated by this Agreement, shall continue in full force and effect without penalty or other adverse consequence. Seller or the Division Subsidiary, as applicable, is not, and to Seller's Knowledge, no other party thereto is, in material breach of, or material default under, any Material Contract.
(c) Except as disclosed in Schedule 3.13, to Seller's Knowledge there is no contract, agreement or other arrangement granting any Person any preferential right to purchase, other than in the ordinary course of the Business consistent with past practice, any of the Acquired Assets.
(d) Seller has heretofore delivered to Purchaser true, correct and completed copies of each Material Contract and all material ancillary documents pertaining thereto.
(a) Schedule 3.14 sets forth a true and complete list of all Owned Intellectual Property and a true and complete list of all Licensed Intellectual Property, including any license or sublicense thereof. Except as otherwise described in Schedule 3.14, in each case where a registration or application for registration listed in Schedule 3.14, is held by assignment, the assignment has been duly recorded with the United States Patent and Trademark Office, or in the case of any foreign registration or application for registration, with
Authority in such foreign jurisdiction. Except as disclosed in Schedule 3.14, to Seller's Knowledge the rights of Seller or the Division Subsidiary in or to such Intellectual Property do not conflict with or infringe on the rights of any other Person, and neither Seller nor the Division Subsidiary has received any claim or written notice from any Person, to such effect.
(b) Except as disclosed in Schedule 3.14: (i) all the Owned Intellectual Property is owned by Seller or the Division Subsidiary free and clear of any Encumbrance, (ii) Seller or such Division Subsidiary has the right, pursuant to valid and enforceable licenses, to use the Licensed Intellectual Property in the manner in which the Licensed Intellectual Property is currently being used, and (iii) no Actions have been made or asserted or are pending (nor, to Seller's Knowledge has any such Action been threatened) against Seller or a Division Subsidiary either (A) based upon or challenging or seeking to deny or restrict the use of any of the Intellectual Property or (B) alleging that any services provided or products sold by the Division are being provided or sold in violation of any patents or trademarks, or any other similar rights of any Person. To Seller's Knowledge, no Person is using any patents, copyrights, trademarks, service marks, trade names, trade secrets or similar property that are confusingly similar to the Owned Intellectual Property or that infringe upon the Owned Intellectual Property or upon the rights of Seller or the Division Subsidiary therein. Except as disclosed in Schedule 3.14. neither Seller nor the Division Subsidiary has granted any license or other right to any other Person with respect to the Owned Intellectual Property. The consummation of the transactions contemplated by this Agreement will not result in the termination or impairment of any of the Owned Intellectual Property or any of the rights of Seller or the Division Subsidiary in any of the Licensed Intellectual Property.
(c) The Intellectual Property described in Schedule 3.14 constitutes all the Intellectual Property used, held or currently intended to be used by the Division in the conduct of the Business and there are no other items of Intellectual Property that are material to the Division or the Business.
SECTION 3.15. Real Property. Seller holds good and marketable fee simple title with respect to Owned Real Property and Seller or a Division Subsidiary has a good and valid leasehold estate in and to the Leased Real Property leased for use by the Division free and clear of all Encumbrances except Permitted Encumbrances.
(a) Schedule 3.15(a) lists: (i) the street address of each parcel of Owned Real Property and (ii) the date on which each parcel of Owned Real Property was acquired.
(b) Schedule 3.15(b) lists: (i) the street address of each parcel of Leased Real Property and (ii) the identity of the lessor, lessee and current occupant (if different from lessee) of each such parcel of Leased Real Property.
(c) Seller has delivered to Purchaser true and complete copies of all Leases listed in Schedule 3.15(b) and any and all material ancillary documents pertaining thereto. Each such Lease is legal, valid, binding, enforceable and in full force and effect, except as enforceability may be limited by applicable bankruptcy and insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally, and such lease or sublease will not cease to be legal, valid, binding, enforceable and in full force and effect on terms identical to those currently in effect as a result of the consummation of the transactions contemplated by this Agreement, nor will the consummation of the transactions contemplated by this Agreement constitute a breach or default under such Lease or otherwise give the landlord a right to terminate such Lease.
(d) The Real Property is zoned to permit the uses for which the Real Property is currently being used. The present uses of Real Property and the current operations of the facilities, do not violate, in any material respect, any provision of any applicable building codes, subdivision regulations, fire regulations, health regulations or Environmental Laws. Each parcel of Real Property is separately assessed from all other properties for purposes of ad valorem taxation.
(e) There are no condemnation proceedings or eminent domain proceedings of any kind pending or, to Seller's Knowledge, threatened against the Real Property.
(f) The rental set forth in each Lease is the actual rental being paid, and there are no separate agreements or understandings with respect to the same.
(g) Seller has no Knowledge of any facts indicating a material defect in the structural integrity of any of the buildings or improvements located on any Real Property or in the systems and/or equipment currently being used therein which has not been disclosed to Purchaser in writing.
(h) No labor has been performed or material furnished for the Real Property for which Seller or the Division Subsidiary has not heretofore paid and for which payment is past due.
(i) There exists (and to Seller's Knowledge there will be no material changes in) full and adequate utility service and vehicular, pedestrian access and other rights and easements to the Real Property necessary for the ownership, operation, maintenance and use of the Real Property by the Purchaser in a manner consistent with the current use of the Real Property by the Seller.
(j) GTI-Ireland has in its possession or under its control all of the deeds and documents necessary to prove title to the Irish Properties, and these title documents are properly stamped.
(k) There are no planning applications relating to the Irish Properties which have been submitted by or on behalf of GTI-Ireland to the relevant Local Authority and in respect of which no decision has been given or which is the subject matter of any pending appeal to An Bord Pleanala.
(1) The Irish Properties are not affected by any special amenity area order, preservation order, conservation order or any other order under the Planning Acts.
(m) The Irish Properties are not subject to any adverse estate, right, interest, covenant, restriction, stipulation, easement, option, right of preemption, wayleave, profit-a-prendre, license or other right or informal arrangement in favor of any third party (whether in the nature of a public or private right or obligation) and none is in the course of being acquired, and there is no agreement or commitment to give or create any of the foregoing, and none has been proposed or is necessary to permit the owner or occupier of any adjoining land to gain access to his land or to comply with fire regulations or to repair and maintain any buildings or other erections on his land, and where any of the foregoing have been disclosed in Schedule 3.15 no breach thereof has occurred, and all rights of light, air and support are enjoyed fully as of right.
(n) Where the title to the Irish Properties or any part thereof is unregistered, no event has occurred in consequence of which compulsory registration should have been effected under the provisions of the Registration of Title Act, 1964.
(o) Where the title to the Irish Properties or any part thereof is registered in the Land Registry, GTI-Ireland is registered with an absolute freehold or leasehold title thereof, none of the burdens specified in sections 59,72 and 73 of the Registration of Title Act, 1964 affect the same and there have been no deaths or voluntary transfers on such title within the past 12 and 10 years, respectively.
(p) No part of the Irish Properties comprises a family home within the meaning of the Family Home Protection Act, 1976 and, in respect of any portion of the title to the Irish Properties where the same is unregistered, there have been no conveyances within the meaning of the said Act made on or since July 12, 1976 where either a spouse's prior written consent was required unless (if so required) such spouse's prior written consent was obtained.
SECTION 3.16 Tangible Personal Property.
(a) Schedule 3.16 lists the items or distinct groups of equipment, supplies, furniture, fixtures, personalty, vehicles and other tangible personal property (the "Tangible Personal Property") used in the Business or owned or leased by Seller or the Division Subsidiary and located at the locations set forth in Schedule 3.15. The Tangible Personal Property constitutes all of the personalty of the types and categories listed on Schedule 3.16, used in or necessary, in all material respects, in the conduct of the Business as it has been historically conducted and is currently conducted by the Division.
(b) Seller has delivered to Purchaser true and complete copies of all leases and subleases for Tangible Personal Property and any and all material ancillary documents pertaining thereto. Each such lease or sublease is legal, valid, binding, enforceable and in full force and effect, except as enforceability may be limited by applicable bankruptcy and insolvency, reorganization, moratorium or similar laws affecting the enforcement of generally, and such lease or sublease will not cease to be legal, valid, binding, enforceable and in full force and effect on terms identical to those currently in effect as a result of the consummation of the transactions contemplated by this Agreement, nor will the consummation of the transactions contemplated by this Agreement constitute a breach or default under such lease or sublease or otherwise give the lessor a right to terminate such lease or sublease.
(a) Except as disclosed on Schedule 3.17, Seller (or in the case of Acquired Assets owned or leased by GTI-Ireland, GTI-Ireland) owns, leases or licenses or otherwise has the legal right to use all of the Acquired Assets, including without limitation, the Owned Intellectual Property, the Licensed Intellectual Property, the Owned Real Property, the Leased Real Property, and the Tangible Personal Property, and enjoys the right to the benefits of all of the other Intangible Personal Property, including without limitation, the Material Contracts. Seller (or in the case of Acquired Assets owned or leased by GTI-Ireland, GTI-Ireland) has good and marketable title to or in the case of leased or subleased Acquired Assets, valid and subsisting leasehold interests in the Acquired Assets, free and clear of all Encumbrances, except (i) as disclosed in Schedule 3.17 and (ii) Permitted Encumbrances.
(b) The Acquired Assets constitute all the properties, assets and rights used in the Business or held by the Division in connection with the conduct of the Business. The Acquired Assets constitute all of the properties, assets and rights as are necessary in the conduct of the Business as presently conducted. Except as set forth in Schedule 3.17, at all times Seller has caused the Acquired Assets taken as a whole to be maintained in accordance with good business practice, and all of the Acquired Assets taken as a whole are, in all material respects (i) in good operating condition and repair, ordinary wear and tear excepted, (ii) capable of operating at or near rated capacity and (iii) suitable for the purposes for which they are used and intended to be used. There are no Acquired Assets with a book value in excess of ten thousand dollars ($10,000) that are idle or not currently in productive use.
(c) Following the consummation of the transactions contemplated by this Agreement, Purchaser will continue to own, pursuant to good and marketable title, or lease, under valid and subsisting leases, or otherwise retain its respective interest in the Acquired Assets without incurring any penalty or other adverse consequence, including, without limitation, any increase in rentals, royalties, or licenses or other fees imposed as a result of, or arising from, the consummation of the transactions contemplated by this Agreement. Immediately following the Closing, Purchaser shall have access to all documents, books, records, agreements and financial data of any sort used in the conduct of the Business by the Division.
SECTION 3.18. Customers. Listed in Schedule 3.18 are the names and addresses of the Division's fifteen (15) largest Customers and the amount of sales for the nine (9) month period ended September 1995. Except as set forth in Schedule 3.18, Seller has not received any actual notice or has any valid reason to believe that any customer of the Division listed in Schedule 3.18 has ceased, or will cease, to use the products, equipment, goods or services of the
Division, or has substantially reduced, or will substantially reduce, the use of such products, equipment, goods or services at any time.
SECTION 3.19. Suppliers. Listed in Schedule 3.19 are the names and addresses of the twelve (12) largest suppliers from which the Division ordered raw materials, supplies, merchandise and other goods during the nine (9) month period ended September 1995 and the amount for which each such supplier invoiced Seller during such period. Seller has not received any actual notice or has any valid reason to believe that any such supplier will not sell raw materials, supplies, merchandise and other goods to Purchaser at any time after the Closing Date on terms and conditions substantially similar to those used in its current sales to the Division, subject only to general and customary price increases.
SECTION 3.20. Employment and Employee Benefit Matters.
(a) Employment and Labor Relations. Schedule 3.20(a) contains a correct and complete list of all Division Employees, including with respect to each such Division Employee, (i) current wage or salary and other material terms of compensation; (ii) number of years of employment with Seller or a Division Subsidiary, (iii) position or title; (iv) facility or location assigned to; and (v) status, (full or part-time). Neither Seller nor the Division Subsidiary is a party to any collective bargaining, employment, labor or similar agreement (other than any Employee Plans), whether written or oral, which relates to the Division Employees. Except as set forth in Schedule 3.20(a) with respect to any Division Employee:
(i) there is no unfair labor practice charge or complaint against Seller or the Division Subsidiary pending or to Seller's Knowledge, threatened before the National Labor Relations Board or any
(ii) there has not occurred nor, to Seller's Knowledge, has there been threatened, a labor strike, request for representation, work slowdown or stoppage or lockout;
(iii) there has not been any representation, claim or petition pending before or, to Seller's Knowledge, threatened to be brought before the National Labor Relations Board or any other
(iv) no charges are pending before or, to Seller's Knowledge, threatened to be brought before the Equal Employment Opportunity Commission or any state, local or foreign agency or any Governmental Authority responsible for the prevention of unlawful
(v) no claim relating to employment is pending in any federal, state or local court or in or before any other adjudicatory body and, to Seller's Knowledge, no such claims have been threatened;
(vi) Neither Seller nor the Division Subsidiary has received notice of the intent of any federal, state, local or foreign agency responsible for the enforcement of labor or employment Regulations to conduct an investigation of or relating to the Division, and no such investigation is in progress;
(vii) Seller and the Division Subsidiary have paid in full to all Division Employees all wages, salaries, commissions, bonuses, benefits and other compensation due and payable to or on behalf of
(viii) Neither Seller nor the Division Subsidiary is a party to, or otherwise bound by, any Governmental order relating to the Division Employees.
(b) Employee Plans - General.
(i) Schedule 3.20(b) is a correct and complete list of all Employee Plans covering Division Employees including a brief description of the benefits provided thereunder. Except to the extent disclosed in Schedule 3.20(c) concerning the Division Subsidiary's liability to contribute to any pension or related death or disability scheme to or in respect of Division Employees employed by the Division Subsidiary in respect of service after Closing, Purchaser shall not, as a result of or in connection with the Acquisition or Purchaser's employment of any of the Division Employees following the Closing, assume or become liable for any Liability or obligation whatsoever, arising under or relating to, any Employee Plan.
(ii) Except to the extent disclosed in Schedule 3.20(c) concerning the Division Subsidiary's liability to contribute to any pension or related death or disability scheme to or in respect of Division Employees employed by the Division Subsidiary in respect of service after Closing, no event has occurred with respect to any Employee Plan which has given rise to or could give rise to the imposition of any Encumbrance on any of the Acquired Assets, including without limitation, pursuant to any provision of the Code or ERISA, or which has given rise to or could give rise to any claim against or Liability of Purchaser following the Closing.
(c) Employee Plans - Division Subsidiary.
(i) Schedule 3.20(c)(i) contains a complete and accurate list and a fair summary description of all existing pension and death benefit schemes (the "Pension Schemes") and sickness, disability or related benefit schemes (the "Related Benefit Schemes") of the Division Subsidiary.
(ii) With the exception of the Pension Schemes and the Related Benefit Schemes, there are not in existence nor has any
establish any retirement, death, sickness, disability or other benefit schemes for officers or employees or any dependent of any of them, nor are there any obligations to, or in respect of, present or former officers or employees or any dependent of any of them with regard to retirement, death or disability to which the Division Subsidiary is a party or pursuant to which the Division Subsidiary is or may become liable to make payments, and no pension, retirement or sickness gratuity is currently being paid or has been promised by the Division Subsidiary to or in respect of any former Director or former employee or any dependent of any of them.
(iii) The Pension Schemes are exempt approved schemes within the meaning of Section 16 of the Irish Finance Act, 1972 and neither the Seller nor the Division Subsidiary is aware of any reason why the said exempt approved status might be withdrawn.
(iv) True copies of all the trust deeds, rules and other material documents constituting and governing the Pension Schemes are listed in Schedule 3.20(c)(iv) and have been delivered to the Purchaser and, except as may be expressed otherwise therein, such documents are up-to-date and satisfactory to ensure continued treatment of the Pension Schemes as exempt approved schemes as aforesaid.
(v) True copies of all explanatory booklets, announcements and other communications to employees relating to the Pension Schemes and the Related Benefit Schemes are listed in Schedule 3.20(c)(v) and have been delivered to the Purchaser, and the Division Subsidiary has no obligation under the Pension Schemes or the Related Benefit Schemes in respect of any present or former officer or employee or any dependent of any of them other than under the documents listed in Schedule 3.20(c)(iv) and Schedule 3.20(c)(v).
(vi) The Purchaser has been notified of the basis on which the Division Subsidiary contributes to the Pension Schemes and the Related Benefit Schemes.
(vii) The membership data and related information supplied to the Purchaser in connection with the Pension Schemes and the Related Benefit Schemes and listed in Schedule 3.20(c)(vii) is true, complete and accurate in all material respects.
(viii) All contributions and expenses due under the Pension Schemes and the Related Benefit Schemes up to the Closing Date have been paid. The contributions and expenses payable to the Pension Schemes have been applied in accordance with the provisions thereof and the trusts upon which they are to be held.
(ix) Each of the Pension Schemes is registered with the Pensions Board as required by the Irish Pensions Act, 1990. Each Pension Scheme and each Related Benefit Scheme has at all times been duly administered in all material respects in accordance with full compliance with, and will until the Closing Date continue to be duly administered in all material respects in accordance and full compliance with, all applicable laws, regulations and requirements (including Revenue and trust requirements).
(x) There are no actions, suits or claims (other than routine claims for benefits) outstanding, pending or, to the Division Subsidiary's Knowledge, threatened against the trustees or administrator of the Pension Schemes or against the Division Subsidiary in respect of any act, event, omission or other matter arising out of or in connection with the Pension Schemes or the Related Benefit Schemes or the Related Benefit Schemes or the provisions of pension or related death and disability benefits generally.
(xi) No discretion or power has been exercised under the Pension Schemes or the Related Benefit Schemes in respect of the employees, directors, former employees and former directors of the Division Subsidiary to augment a benefit thereunder, admit to membership thereof a director or employee who would not otherwise have been eligible for admission to membership thereof, provide thereunder in respect of a member thereof a benefit which would not otherwise be provided thereunder in respect of such member or pay a contribution thereto which would not otherwise have been paid.
(xii) All death in service benefits (other than refunds of contributions) which may be payable under the Pension Schemes and any benefits payable under the Related Benefit Schemes are fully insured at normal rates and there is no reason why such insurance might be avoided.
(xiii) The Pension Schemes and the Related Benefit Schemes do not contain any provision which gives rise or could give rise to a claim against the Division Subsidiary or the trustees of any of the Pension Schemes under Article 119 of the Treaty of Rome or Part VII of the Irish Pensions Act, 1990.
(xiv) Every employee or former employee of the Division Subsidiary who is or was entitled to membership of the Pension Schemes or the Related Benefit Schemes has been invited to join the Pension Scheme or the Related Benefit Scheme which he is or was entitled to become a member of as of the date on which he became entitled.
(xv) No intention to amend, discontinue in whole or in part or exercise any discretion in relation to any Pension Scheme or
been communicated to any member or other beneficiary of any of the Pension Schemes or the Related Benefit Schemes.
(d) Americans With Disabilities Act. Seller and the Division Subsidiary is in material compliance with the requirements of the Americans With Disabilities Act with respect to the Division Employees and the Acquired Assets.
(e) WARN Act. Subject to Purchaser's commitment to offer employment to the Division Employees pursuant to Section 5.6 hereof, Seller and the Division Subsidiary is in material compliance with the applicable requirements of the Workers Adjustment and Retraining Notification Act ("WARN") and has no liabilities pursuant to WARN.
(f) Transfer of Certain Assets and Liabilities from the Amended and Restated Cash or Deferred Profit Sharing Plan for Employees of GTI and Its Affiliates ("GTI Plan") to New Plan Sponsored by Purchaser. Immediately after execution of this Agreement, (i) Purchaser will adopt a qualified profit sharing plan containing cash or deferred features in accordance with Section 401(k) of the Code which contains the same substantive material provisions as does the GTI Plan ("Purchaser Plan"), and (ii) Seller shall amend the GTI Plan to reflect and implement the provisions of this paragraph. Purchaser, promptly after preparing and adopting the Purchaser Plan, shall submit, or cause to be submitted, to the IRS a request that the IRS issue to Purchaser a determination letter to the effect that the Purchaser Plan meets all of the qualification requirements of the Code, including Sections 401(a) and 401(k) of the Code, and the Treasury Regulations thereunder. Upon the later of the (i) Closing; (ii) delivery to Seller of a copy of a favorable determination letter from the IRS to the effect that the Purchaser Plan meets all of the Code qualification requirements described above or, alternatively, a written opinion of Purchaser's counsel that the Purchaser Plan is either qualified or has been submitted to the IRS as part of a determination letter request and the Purchaser Plan in both form and operation meets all of the qualification requirements of the Code; and (iii) thirty days after the filing by Purchaser with the IRS of a thirty-day notice of transfer of assets and liabilities on Form 5310-A in accordance with Section 6058(b) of the Code, unless Seller and Purchaser mutually agree that, by virtue of both the GTI Plan and the Purchaser Plan being defined contribution, individual account plans with no suspense accounts maintained in their trust funds, such thirty-day notice to the IRS is not required, Seller shall direct the Trustee of the GTI Plan to transfer directly to the Purchaser Plan and the trust fund thereunder all of the assets and liabilities under the GTI Plan covering Division Employees who, subsequent to the Closing, will continue to be employed by Purchaser ("Transferred Division Employees"). Upon such transfer of assets and liabilities from the GTI Plan and the trust fund thereunder to the Purchaser Plan and the trust fund thereunder, the benefits of the Transferred Division Employees under the Purchaser Plan shall be no less than the benefits of the Transferred Division Employees under the GTI Plan immediately prior to such transfer of assets and liabilities. From and after such transfer of assets and liabilities from the GTI Plan and the trust fund thereunder to the Purchaser Plan and the trust fund thereunder, Seller and the GTI Plan shall have no further obligation to the Transferred Division Employees with respect to their accrued benefits under the GTI Plan immediately prior to the transfer of assets and liabilities covering the Transferred Division Employees. Seller and Purchaser shall cause their employees, counsel and agents to prepare all documents and carry out all transactions necessary to implement this paragraph of the Agreement.
(g) Group Long-Term Disability Plan. Seller currently maintains a group long-term disability plan covering certain of Seller's employees, including the Transferred Division Employees. As of the Closing, Purchaser shall cover all Transferred Division Employees under a group long-term disability plan providing benefits at least as great as the group long-term disability plan sponsored by Seller provided to the Transferred Division Employees immediately prior to the Closing and, from and after the Closing, the Transferred Division Employees shall no longer be covered by Seller's group long-term disability plan; provided that Seller shall continue to be responsible for, and Purchaser shall have no Liability with respect to, any events occurring prior to the Closing Date relating to the disability of any of the Transferred Division Employees.
(h) Compliance with Statutes. GTI-Ireland has in relation to each of its employees (and so far as relevant to each of its former employees) complied in all material respects with:
(i) all obligations imposed on it by Article 119 of the Treaty of Rome and all statutes, regulations and codes of conduct and practice relevant to the relations between it and its employees or any trade union, and has maintained current, adequate and suitable records regarding the service of each of its employees;
(ii) all collective agreements, customs and practices for the time being dealing with such relations or the conditions of
(iii) all relevant orders and awards made under any relevant statute, regulation or code of conduct or practice affecting the conditions of service of its employees;
(iv) all obligations imposed by the European Communities (Safeguarding of Employees' Rights on the Transfer of Undertakings) Regulations, 1980 in relation to any sale, purchase or other transfer coming within the terms of those Regulations; and
(v) all obligations imposed by the Safety, Health and Welfare at Work Act, 1989.
(i) Redundancies. Within a period of one year preceding the date of this Agreement, GTI-Ireland has not given notice of any redundancies to the Minister for Labor nor started consultations with any independent trade union or unions under the provisions of Part II of the Protection of Employment Act, 1977 or Regulation 7 of the European Communities
(Safeguarding of Employees' Rights on the Transfer of Undertakings) Regulations, 1980, nor has GTI-Ireland failed to comply with any such obligation under the said Part II or Regulation 7.
SECTION 3.21. Representations and Warranties with Respect to Tax Matters.
(a) Except as otherwise set forth in Schedule 3.21, Seller hereby represents and warrants the following with respect to each of the Division and the Division Subsidiary:
(i) Filing of Returns. There have been properly completed and filed on a timely basis and in correct form and in compliance with all applicable Laws and regulations all Tax Returns required to be filed by or with respect to the Division or the Division Subsidiary. As of the time of filing, the foregoing Tax Returns correctly and completely reflected the facts regarding the income, business, assets, operations, activities, status, other matters or any other information shown or required to be shown thereon. An extension of time within which to file any Tax Return that has not been filed has not been requested or granted. No claim has ever been made by a taxing authority in a jurisdiction where the Division or the Division Subsidiary does not file Tax Returns with respect to a particular Tax that it is or may be subject to taxation by that jurisdiction with respect to such Tax.
(ii) Payment of Taxes. With respect to all amounts in respect of Taxes imposed in whole or in part on the Division or the Division Subsidiary or for which the Division or the Division Subsidiary is or could be liable, whether to taxing authorities (as, for example, under Law) or to other persons or entities (as, for example, under Tax allocation agreements), with respect to all taxable periods or portions of periods ending on or before the Closing Date, all applicable Tax Laws in respect of Taxes and agreements have been fully complied with, and all such amounts required to be paid or payable by the Division or the Division Subsidiary to taxing authorities or others (whether or not shown on any Tax Return) on or before the date hereof have been paid.
(iii) Liens. There are no liens for Taxes (other than for current Taxes not yet due and payable for which adequate provision has been made on the Reference Balance Sheet or shall have been made on the Closing Balance Sheet) on the assets of the Division or the Division Subsidiary.
(iv) Safe Harbor Lease Property. None of the Acquired Assets (including the assets of the Division Subsidiary) is property that is required to be treated as being owned by any other person pursuant to the so-called safe harbor lease provisions of former Section 168(f)(8) of the Code or any similar provision of Law.
(v) Security for Tax-Exempt Obligations. None of the Acquired Assets (including the assets of the Division Subsidiary) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code or any similar provision of Law.
(vi) Tax-Exempt Use Property. Except for the GTI-Ireland trademark or trade name and the other assets of the Division Subsidiary, none of the Acquired Assets is "tax-exempt use property" within the meaning of Section 168(h) of the Code or any similar provision of Law.
(vii) Foreign Person. Seller is not a person other than a United States person within the meaning of the Code.
(viii) No Withholding. The transactions contemplated herein are not subject to the tax withholding provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or of any other provision of Law.
(ix) Audit History. No issues have been raised and no requests for information have been made by any taxing authority in connection with any of the Tax Returns or with respect to any Taxes to which the Division or the Division Subsidiary are or may be subject nor does any basis for raising such an issue exist. No waivers of statutes of limitation with respect to the Tax Returns or any Taxes to which the Division or the Division Subsidiary may be subject have been given by or requested from Seller or the Division Subsidiary. Schedule 3.21 sets forth by Tax, taxing authority and taxable period (A) each Tax Return filed by, or with respect to, the Division Subsidiary or any predecessor for any taxable period ending on or after December 31, 1992, (B) the taxable periods of the Division Subsidiaries as to which the respective statutes of limitations with respect to such Taxes have not expired, and (C) with respect to such taxable periods, those years for which examinations have been completed, those years for which examinations are presently being conducted, those years for which examinations have not been initiated, and those years for which required Tax Returns have not yet been filed. Seller has delivered to Purchaser correct and complete copies of all such Tax Returns and all examination reports, statements of deficiencies or other notices from or correspondence with, taxing authorities with respect thereto. Except to the extent shown on Schedule 3.21, all deficiencies asserted or assessments made as a result of any examinations have been fully paid, or are fully reflected as a liability on the Reference Balance Sheet, or are being contested and an adequate reserve therefor has been established and is fully reflected on the Reference Balance Sheet. No power of attorney has been granted with respect to any matter relating to Taxes that could affect the Division or the Division Subsidiary.
(x) Tax-Sharing or Allocation Agreements. The Division Subsidiary is not a party to or bound by (nor will the Division Subsidiary become a party to or bound by) any tax-indemnity, tax-sharing, or tax-allocation agreement.
(xi) Prior Affiliated Groups. The Division Subsidiary has never been a member of an Affiliated Group nor has ever been included in any group, consolidated or unitary Return. The Division Subsidiary does not have any liability for the Taxes of any Person under Treas. Reg. Section 1.1502-6 (or any similar provision of Law), or as a transferee or successor, by contract or otherwise.
(xii) Tax Elections. All material elections with respect to Taxes affecting the Division Subsidiary are set forth in Schedule 3.21.
(xiii) Section 341(f) Consent. The Division Subsidiary has not filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any similar provision of Law) or agreed to have Section 341(f)(2) of the Code (or any similar provision of Law) apply to any disposition of any asset owned by it.
(xiv) International Boycott. The Division Subsidiary has not participated in nor will participate in an international boycott within the meaning of Section 999 of the Code or any similar provision of Law.
(xv) Reassessments or Other Proposals. To Seller's Knowledge there are no proposed reassessments of any property owned by the Division or the Division Subsidiary or other proposals (other than changes in Law applicable to taxpayers generally) that could increase the amount of any Tax to which the Division Subsidiary could be subject.
(xvi) Permanent Establishment. Neither the Division nor the Division Subsidiary has or has had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country except that GTI-Ireland has a permanent establishment in the Republic of Ireland.
(xvii) Doing Business; Taxable Nexus. Neither the Division nor the Division Subsidiary is doing business in or engaged in a trade or business in, or has a taxable nexus with, any jurisdiction in which it has not filed all applicable Tax Returns.
(xviii) Records. The Division and the Division Subsidiary has maintained such records in respect of each transaction, event and item (including as required to support otherwise allowable deductions, losses and credits) as are required under applicable Laws in respect of Taxes.
(xix) Partnerships: Trusts. Neither the Division nor the Division Subsidiary is or has been, (i) a party to any joint venture, partnership, or other arrangement or contract that could be treated as a partnership for federal income or other tax purposes or (ii) a beneficiary, or holder of a beneficial interest, of any trust.
(xx) Basis, Carryovers and Carryback in Division Subsidiary Schedule 3.21 sets forth the following information with respect to the Division Subsidiary as of the most recent practicable date: (A) the United States tax basis of the Division Subsidiary in its assets; and (B) the amount of any net operating loss, net capital loss, unused investment or other credit, unused foreign tax credit, excess charitable deduction or other carryover or carryback item allocable to the Division Subsidiary, each identified as to whether it arises under the Laws of the United States or the Laws of Ireland.
(xxi) Unpaid Tax. The unpaid Taxes of the Division and the Division Subsidiary shall not exceed the reserve for tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Closing Balance Sheet (rather than in any notes thereto).
(xxii) Foreign Subsidiaries. The Division Subsidiary is the only Foreign Subsidiary of the Division. The Division Subsidiary is not (i) engaged in a United States trade or business for federal income tax purposes; (ii) a passive foreign investment company within the meaning of the Code; (iii) a foreign personal holding company within the meaning of the Code; or (iv) a foreign investment company within the meaning of the Code.
(xxiii) Subpart F Information. Schedule 3.21 sets forth for the Division Subsidiary (i) a reasonable good faith estimate of the amount of current and accumulated earnings and profits and "subpart F income" within the meaning of Section 952(a) of the Code, for the 1995 taxable year, each as of September 30, 1995, and the respective amounts expected as of the Closing Date; and (ii) the amount of previously taxed income within the meaning of Section 959 of the Code as of the date hereof and the amount expected as of the Closing Date. As of the Closing Date after the Effective Time without giving effect to the financing provided by the Financial Sources or the various agreements of the Purchaser and the Division Subsidiary in connection with such financing all of the current and accumulated earnings and profits of the Division Subsidiary shall consist of previously taxed income within the meaning of Section 959 of the Code.
(xxiv) Subpart F Inclusion. Purchaser would not be required to include any amount in gross income with respect to the Division
Section 951 of the Code if the taxable year of the Division Subsidiary were deemed to end on the Closing Date after the Effective Time.
(xxv) No Foreign Subsidiary has (i) made an election, or is required, to treat any asset of such Foreign Subsidiary as owned by another person for tax purposes; or (ii) carried out or been engaged in any transaction or arrangement such that any Law provides that there may be substituted for the amount or value or the actual consideration given or received (or to be given or received) by such Foreign Subsidiary any different amount or value for taxation purposes.
(xxvi) Carryover of Unabsorbed Losses. There is no restriction on the Division Subsidiary's utilization of any unabsorbed losses sustained in prior periods to offset income earned by the Division Subsidiary after the Closing in the lines of business conducted by the Division Subsidiary as of the date hereof.
(xxvii) Corporation Tax Rate. Under currently applicable Law, except for certain immaterial items which in 1995 do not exceed $25,000 in the aggregate, the profits, if any, of GTI-Ireland are derived from the manufacture and sale of goods and as such are, and will be through financial years to December 31, 2010, subject to corporation tax under the laws of The Republic of Ireland at a rate equal to 10% of such profits.
(xxviii) Corporate Form. The Division Subsidiary is taxable as a corporation under the laws of the United States.
(xxix) Advance Corporation Taxes. No distribution by the Division Subsidiary is or would be subject to the advance corporation tax imposed by the Finance Act of 1983 of The Republic of Ireland, as amended, or other withholding or additional taxes.
(xxx) Close Company. The Division Subsidiary is not a "close company" as such term is used in the Corporation Tax Act, 1976, as amended or similar provision of Law.
(xxxi) Location of Activity. The Republic of Ireland is the location of each of the following activities with respect to the Division Subsidiary: (A) negotiation of material contracts, (B) decisions with respect to important policy matters, (C) head office, (D) custody of books and records, (E) preparation and examination of accounts, (i) audit of accounts, (F) custody of minute books, company seal and other organizational items, (G) declaration of dividends, (H) realization of profits, and (I) maintenance of bank accounts.
(b) Limitation on Certain Representations and Warranties. The representations and warranties with respect to the Division set forth in subsections (a)(i) and (ii) of this Section
3.21 are not applicable to the extent that the Acquired Assets (including the assets of the Division Subsidiary) cannot be made subject to Tax Liens and Purchaser or the Division Subsidiary cannot be made liable for Taxes relating to the matters constituting breaches of such representations and warranties.
(c) Indemnification. For purposes of Seller's indemnification of Purchaser pursuant to Section 6.1, the representations and warranties of Seller contained in this Section 3.21 shall be deemed to have been made with no exception for items disclosed in the Schedules hereto.
(a) Schedule 3.22 sets forth a list of each insurance policy of Seller and the Division Subsidiary providing property or liability insurance, including product liability insurance, under which the operation of the Division has been insured, and pursuant to which the Seller, the Division Subsidiary or the Division has been named as a direct beneficiary, a named insured or other principal beneficiary of coverage. Purchaser has heretofore been delivered true, correct and complete copies of all such policies of insurance. The amounts of all such policies and risks covered thereby are in accordance with all requirements of Law, all agreements to which Seller is a party and prudent business practice. Schedule 3.22 also identifies all risks relating to the operation of the Division which have been designated as being self-insured. Neither Seller nor the Division Subsidiary has been refused any insurance with respect to any of the Acquired Assets or the operation of the Division, nor has such coverage been limited, by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last three (3) years.
(b) With respect to each such insurance policy: the policy is legal, valid, binding, enforceable in accordance with its terms, except for policies that have expired under their terms in the ordinary course and except as enforceability may be limited by applicable bankruptcy and insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally, and is in full force and effect. At the time of the Closing, all insurance policies currently in effect will be outstanding and in full force and effect but except for policies in the name of GTI-Ireland which will be retained by GTI-Ireland, none of such policies will be transferred to Purchaser.
(a) No representation or warranty of Seller in this Agreement, nor any statement or certificate furnished or to be furnished to Purchaser pursuant to this Agreement, or in connection with the transactions contemplated by this Agreement, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading.
(b) Seller has no Knowledge of any facts pertaining to the Division, the Acquired Assets or the Business which are reasonably likely to have a Material Adverse Effect and which have not been disclosed in this Agreement, the Schedules and Exhibits hereto and the Transaction Documents except for any facts relating solely to general economic, business or political developments affecting the economy or business generally.
SECTION 3.24. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller or any Affiliate of Seller.
As an inducement to Seller to enter into this Agreement, Purchaser hereby represents and warrants to Seller as follows:
SECTION 4. 1. Organization and Authority of Purchaser. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power and authority to enter into this Agreement and the Transaction Documents to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Transaction Documents of which Purchaser is a signatory, the performance by Purchaser of its obligations hereunder and thereunder and the consummation by Purchaser of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Purchaser. This Agreement has been, and upon their execution, the Transaction Documents of which Purchaser is a signatory will be, duly executed and delivered by Purchaser, and this Agreement constitutes, and upon execution the Transaction Documents of which Purchaser is a signatory will constitute, legal, valid and binding obligations of Purchaser enforceable against Purchaser in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy and insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally.
SECTION 4.2. No Conflict. Assuming the making and obtaining of all filings, notifications, consents, approvals, authorizations and other actions referred to in Section 4.3, the execution, delivery and performance of this Agreement and the Transaction Documents of which Purchaser is a signatory do not and will not to Purchaser's Knowledge (a) violate, conflict with or result in the breach of any provision of the Certificate of Incorporation or By-laws of Purchaser, (b) conflict with or violate any Law or Governmental Order applicable to Purchaser or (c) conflict with, or result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation, or cancellation of, or result in the creation of any Encumbrance on any of the assets or properties of Purchaser pursuant to any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Purchaser is a party or by which any of such assets or properties is bound or affected which would have a material adverse effect on the ability of Purchaser to perform under this Agreement and to consummate the transactions contemplated by this Agreement and the Transaction Documents.
SECTION 4.3. Governmental Consents and Approvals. Except for the consents referred to in Sections 7.2(o) and 7.2(p), to Purchaser's Knowledge, the execution, delivery and performance by Purchaser of this Agreement and the Transaction Documents of which Purchaser is a signatory do not and will not require any consent, approval, authorization or other order of, action by, filing with, or notification to any Governmental Authority.
SECTION 4.4. Brokers. Except for Lincolnshire Management, Inc., Performance Group, Inc. and Patton Group, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser or any Affiliate of Purchaser. Purchaser shall be solely responsible for payment of the fees and expenses of Lincolnshire Management, Inc., Performance Group, Inc. and Patton Group.
SECTION 4.5. Litigation. There is no Action pending, or, to Purchaser's Knowledge, threatened against or related to Purchaser which could materially adversely affect or restrict Purchaser's ability to consummate the transactions contemplated hereby.
SECTION 5.1. Conduct of Business of the Division Prior to the Closing.
(a) Seller covenants and agrees that, except as described in Schedule 5.1(a) or as contemplated by this Agreement, between the date hereof and the Closing Date, the Division shall conduct the Business in the ordinary course consistent with the Division's prior practices. Without limiting the generality of the foregoing, except as described in Schedule 5.1(a) , Seller shall cause the Division to (i) continue its advertising and promotional activities, and pricing and purchasing policies in accordance with past practice; (ii) not shorten or lengthen the customary payment cycles for any of its Receivables or payables, respectively; (iii) use its best efforts to (A) keep available to Purchaser the services of the Division Employees, (B) preserve the Division's current relationships with its customers, suppliers and other Persons with which it has significant business relationships; (iv) exercise, but only after notice to Purchaser any rights of renewal pursuant to the terms of any of the leases or subleases set forth in Schedule 3.15(b) and licenses set forth on Schedule 3.13 which by their terms would otherwise expire; and (v) not engage in any practice, take any action, fail to take any action or enter into any transaction which
any representation or warranty of Seller in this Agreement to be untrue in any material respect or result in a breach in any material respect of any covenant made by Seller herein.
(b) Seller covenants and agrees that, prior to the Closing without the prior written consent of Purchaser, Seller will not do, nor cause the Division to do any of the things which are required to be disclosed on Schedule 3.8 except that Seller may withdraw cash from the Division Subsidiary in order to reduce the cash held by the Division Subsidiary at Closing to not less than $250,000.
SECTION 5.2. Access to Information.
(a) From the date hereof until the Closing, upon reasonable notice, Seller shall and shall cause the Division and its respective officers, directors, employees, agents, representatives, accountants and counsel to: (i) afford the officers, employees and authorized agents, accountants, counsel, Financing Sources and representatives of Purchaser reasonable access, during normal business hours, to the offices, properties, plants, other facilities, books and records of the Division and of Seller relating to the Division and to those officers, directors, employees, agents, accountants and counsel of Seller who have any knowledge relating to the Division , and (ii) furnish to the officers, employees and authorized agents, accountants, counsel, Financing Sources and representatives of Purchaser such additional financial and operating data and other information regarding the Acquired Assets (or legible copies thereof) as Purchaser may from time to time reasonably request, and (iii) furnish to the officers, employees and authorized agents, accountants, counsel, Financing Sources and representatives of Purchaser such audited and unaudited financial statements and any other financial or other information or other information necessary for the preparation by Purchaser of documents required for financing the purchase of the Acquired Assets (or legible copies thereof) to the extent such financial or other information currently exists or can be obtained without unreasonable effort and expense.
(b) In order to facilitate the resolution of any claims made by or against or incurred by Purchaser or Seller after the Closing Date or for any other reasonable purpose, for a period of five (5) years following the Closing, Seller and Purchaser shall (i) retain the books and records in their possession which relate to the Acquired Assets and the business of the Division for periods prior to the Closing and (ii) upon reasonable notice, afford the officers, employees and authorized agents and representatives of the other party reasonable access (including the right to make photocopies), during normal business hours, to such books and records.
(c) Notwithstanding the provisions of Section 5.2(b) hereof, the Seller may, at its own expense, copy all of the Division Books and Records that are being delivered to the Purchaser at Closing and retain such copies among the Seller's books and records after the Closing. In addition, after the Closing Purchaser shall make available to Seller during reasonable business hours, at no cost to Purchaser and in such manner as not to interfere with Purchaser's business operations, such personnel of Purchaser and the Division Subsidiary as are required by Seller to wind up all administrative matters relating to the operation of the Division.
SECTION 5.3. Confidentiality. Each party hereto agrees to, and shall cause its respective agents, representatives, Affiliates, employees, officers and directors to treat and hold as confidential (and not disclose or provide access to any Person to) all information relating to trade secrets, processes, patent and trademark applications, product development, price, customer and supplier lists, pricing and marketing plans, policies and strategies, details of client and consultant contracts, operations methods, product development techniques, business acquisition plans, new personnel acquisition plans and all other confidential information with respect to the Division. In the event that such party or any such agent, representative, Affiliate, employee, officer or director becomes legally compelled to disclose any such information, such party shall provide Purchaser (in the case the disclosure is required to be made by Seller) or Seller (in the case where the disclosure is required to be made by Purchaser) with prompt written notice of such requirement so that Purchaser or Seller, as the case may be, may seek a protective order or other remedy or waive compliance with this Section 5.3. In the event that such protective order or other remedy is not obtained, or Purchaser or Seller, as the case may be, waives compliance with this Section 5.3, such party shall furnish only that portion of such confidential information which is legally required to be provided and exercise its reasonable best efforts to obtain assurances that confidential treatment will be accorded such information. Each Person in possession of such confidential information shall, prior to, at, or as soon as practicable following the Closing, promptly furnish to Seller or Purchaser, as applicable, any and all copies (in whatever form or medium) of all such confidential information then in the possession of such Person or any of its agents, representatives, Affiliates, employees, officers and directors and, except as otherwise required by Section 5.2(b), destroy any and all additional copies then in the possession of such Person or any of its agents, representatives, Affiliates, employees, officers and directors of such information and of any analyses, compilations, studies or other documents prepared, in whole or in part, on the basis thereof; provided, however, that this Section 5.3 shall not apply to any information that, at the time of disclosure, is available publicly and was not disclosed in breach of this Agreement by such Person, its agents, representatives, Affiliates, employees, officers or directors; provided further that, with respect to Intellectual Property, specific information shall not be deemed to be within the foregoing exception merely because it is embraced in general disclosures in the public domain. In addition, with respect to Intellectual Property, any combination of features shall not be deemed to be within the foregoing exception merely because the individual features are in the public domain unless the combination itself and its principle of operation are in the public domain. Each party hereto agrees and acknowledges that remedies at law for any breach of its obligations under this Section 5.3 are inadequate and that in addition thereto the other party hereto shall be entitled to seek equitable relief, including injunction and specific performance, in the event of any such breach. Notwithstanding any other provision of this Section 5.3, the obligations of Seller and its agents, representatives, Affiliates, employees, officers and directors under this Section 5.3 shall survive the Closing and the obligations of Purchaser and its agents, representatives, Affiliates, employees, officers and directors under this Section 5.3 shall terminate upon the Closing.
SECTION 5.4. Regulatory and Other Authorizations: Notices and Consents.
(a) Each party hereto shall use its best efforts to obtain any authorizations, consents, orders and approvals of all Governmental Authorities and officials that may be or become necessary for its or their execution and delivery of, and the performance of its or their respective obligations pursuant to, this Agreement and the Transaction Documents and will cooperate fully with the other parties hereto in promptly seeking to obtain all such authorizations, consents, orders and approvals.
(b) Seller shall give or cause to be given promptly such notices to third parties and use its best efforts to obtain such third party consents and estoppel certificates as are listed on Schedules 3.2 and 3.3 hereto.
(c) Purchaser shall cooperate and assist Seller in giving such notices and obtaining such consents and estoppel certificates; provided, however, that Purchaser shall have no obligation to give any guarantee or other consideration of any nature in connection with any such notice, consent or estoppel certificate or to consent to any change in the terms of any agreement or arrangement which Purchaser, in its sole discretion, may deem adverse to the interests of Purchaser, the Division or the Business.
(d) As of the Date hereof each party hereto knows of no reason why all the consents, approvals and authorizations necessary for the consummation of the transactions contemplated hereby will not be obtained or received.
(e) Seller and Purchaser further agree that, in the event that any consent, approval or authorization necessary or desirable to preserve for the Division any right or benefit under any lease, license, contract, commitment or other agreement or arrangement to which Seller or a Division Subsidiary is a party is not obtained or received prior to the Closing, subject to the right of Purchaser in such event not to consummate the purchase of the Acquired Assets pursuant to this Agreement, Seller will, subsequent to the Closing, cooperate fully with Purchaser in attempting to obtain such consent, approval or authorization as promptly thereafter as practicable. In such event, if such consent, approval or authorization cannot be obtained, Seller shall use its best efforts to provide Purchaser with the rights and benefits of the affected lease, license, contract, commitment or other agreement or arrangement for the term of such lease, license, contract or other agreement or arrangement.
SECTION 5.5. Notice of Developments. Prior to the Closing, each party to this Agreement shall promptly notify the other party to this Agreement in writing of any of the following matters which come to such party's attention: (i) all events, circumstances, facts and occurrences, including the commencement or threat of any Action, arising subsequent to the date of this Agreement which are reasonably likely to result in a breach of a material representation or warranty or covenant of such party in this Agreement or which has the effect of making any representation or warranty of such party in this Agreement untrue or incorrect, and (ii) all other material developments affecting the Assets, Liabilities, business, financial condition, operations, results of operations, customer or supplier relations or employee relations, projections, forecasts, or Business or financial prospects of the Division.
(a) Immediately following the Closing Date, Purchaser will offer to employ those persons who are employed full-time by the Seller in the Business on the Closing Date on terms and conditions substantially identical to those in effect on the Closing Date including, but not limited to, medical insurance coverage comparable to the coverage in effect for such persons on the Closing Date. Notwithstanding anything herein to the contrary, Purchaser shall not in any way be or become liable or obligated to any such Division Employees under any Employee Plan of Seller, except the management bonus program of Seller to the extent the related liability is accrued on the Closing Balance Sheet.
(b) Seller provides self-insured medical benefits to the Division Employees. Because Purchaser has agreed to provide medical insurance under Section 5.6(a) following the Closing to those Division Employees employed full-time by the Seller in the Business on the Closing Date, Seller and Purchaser do not believe that those employees will be entitled to so-called "COBRA" coverage from Seller following the Closing. Nevertheless, as a precaution Seller intends to send to such employees the notice contemplated by Section 498OB(f)(6) of the Code. In the event that any such employee or beneficiary of any employee attempts to elect to receive COBRA insurance coverage under Seller's medical plan following the Closing, Seller shall so notify Purchaser. In such event, Purchaser agrees to indemnify Seller for all costs, including without limitation, the cost of medical and hospital care, incurred by Seller as a result of any such person receiving COBRA insurance coverage from Seller less any insurance premiums actually received by Seller from such employee or beneficiary of such employee.
SECTION 5.7. No Solicitation or Negotiation. Seller agrees that neither Seller, nor any of its Affiliates, officers, directors, representatives or agents will (a) solicit, initiate, consider, encourage or accept any other proposals or offers from any Person (i) relating to any acquisition or purchase of all or any portion of the Acquired Assets (other than Inventory to be sold in the ordinary course of the Business consistent with past practice or Tangible Personal Property obsolete or surplus to the requirements of the Business), or (ii) to enter into any other extraordinary business transaction involving or otherwise relating to the Division, or (b) participate in any discussions, conversations, negotiations and other communications regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way, assist or participate in, facilitate or encourage any effort or attempt by any other Person to seek to do any of the foregoing. Seller, and its respective officers, directors, representatives, agents and Affiliates shall immediately cease and cause to be terminated all existing discussions, conversations, negotiations and other communications with any Persons heretofore conducted with respect to any of the foregoing. Seller shall notify Purchaser promptly if any such proposal or offer, or any inquiry or other contact with any Person with respect thereto, is made and shall, in any such notice to Purchaser, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact and the terms and conditions of such proposal, offer, inquiry or other contact. Seller further agrees not to, and to cause the Division not to, without the prior written consent of Purchaser, release any Person from, or waive any provision of, any confidentiality or standstill agreement to which Seller or the Division Subsidiary is a party or by which Seller or the Division Subsidiary is bound.
SECTION 5.8. Use of Intellectual Property.
(a) Except as described on Schedule 5.8 from and after the Closing, neither Seller nor any of its Affiliates shall use any of the Owned Intellectual Property or Licensed Intellectual Property which has been assigned or transferred to Purchaser pursuant to this Agreement.
(b) The Purchaser will, as promptly as practicable following the Closing Date, remove or obliterate all references to "GTI Corporation" from its signs, purchase orders, invoices, sales orders, labels, letterheads, shipping documents and other materials, and Purchaser shall not put into use after the Closing Date any such materials not in existence on the Closing Date that bear any references to "GTI Corporation" or any name, mark, or logo similar thereto. Notwithstanding the foregoing, Purchaser shall be entitled for a period of six (6) months following the Closing Date to use any signs, purchase orders, invoices, sales orders, labels, letterheads, packing materials or shipping documents existing on the Closing Date that bear any name, mark or logo similar thereto, in each case where the removal of any such reference or any such similar name, mark or logo would be impractical.
(c) Notwithstanding Section 5.8(b), at the Closing Seller will enter into a license agreement (the "Trademark License Agreement") substantially in the form of Exhibit J hereto pursuant to which Seller will grant to GTI-Ireland on a royalty-free exclusive basis, for a period of six (6) months from the Closing Date, a license to use the name "GTI-Ireland" in connection with the operation of the Business.
(a) For a period of two (2) years after the Closing Date ("Restricted Period"), Seller agrees that it and its Affiliates shall not engage, directly or indirectly, anywhere in Hadley, Pennsylvania or Hartselle, Alabama, or in any other location in the States of Pennsylvania or Alabama, or in any location in the United States of America, Japan, the Phillippines, China, Hong Kong, Malaysia, and other parts of southeast Asia, as well as Austria, the United Kingdom, Hungary and The Netherlands and any other region, county, city or locality therein where the Division is currently transacting, or during the past five (5) years, has been transacting business (the "Restricted Territory") in any business that manufactures (i) glass components, welded leads, glass-to-metal seals, welded resistor elements, pins and pinned arrays for the glass diode, resistor, automotive and component packaging markets, (ii) equipment used to produce any of the components identified in clause (i), and (iii) unique, application-specific printed circuit boards for automotive and electrical lighting manufacturers but only with respect to the products and
equipment in those categories that are manufactured by the Division on the date hereof (a "Competitive Business"). Seller further agrees that during the Restricted Period it and its Affiliates shall not, without the prior written consent of Purchaser, directly or indirectly, own any interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as partner, stockholder, consultant or otherwise, any Person which engages or intends to engage in a Competitive Business in the Restricted Territory.
(b) As a separate and independent covenant, Seller further agrees with Purchaser that, during the Restricted Period, Seller and its Affiliates will not in any way, directly, or indirectly, for the purpose of conducting or engaging in any Competitive Business, solicit, advise or otherwise do, or attempt to do, business with any customers of the Division with whom the Division or Seller had any dealings during the period of time in which the Division was an Affiliate of Seller, or take away or interfere or attempt to interfere with any customer, trade, business or patronage of Purchaser or the Division, or interfere with or attempt to interfere with any officers, employees, representatives or agents of Purchaser or the Division or induce or attempt to induce any of them to leave the employ of Purchaser or the Division or violate the terms of their contracts, or any employment arrangements.
(c) The Restricted Period shall be extended by the full length of any period during which such Seller is in breach of the terms of this Section 5.9.
(d) It is expressly understood, acknowledged and agreed by Seller that Seller's covenant set forth in this Section 5.9 constitutes an essential element of this Agreement and that, but for such covenant, Purchaser would not have executed and delivered this Agreement nor be willing to perform the transactions contemplated herein.
(e) Without intending in any way to limit the remedies available to Purchaser, Seller further acknowledges and agrees that if Seller breaches any of the covenants contained in this Section 5.9, Purchaser may seek injunctive relief (without being required to post bond or any other undertaking as a condition to obtaining such relief) in any court of competent jurisdiction to restrain the breach or the threatened breach of, or otherwise specifically to enforce, any of such covenants.
(f) The parties agree and intend that the covenants contained in this Section shall be construed as a series of separate covenants, one for each applicable county, state, country or province. Except for geographic coverage, each such separate covenant shall be deemed identical in terms. It is expressly understood and agreed that, whenever possible, each provision, term and covenant of this Section shall be interpreted in such a manner as to be effective and valid under applicable Law.
(g) Promptly after the Closing, Purchaser shall make a notification (the "Notification") of this Agreement to the Ireland Competition Authority (the "Authority") under the Competition Act, 1991. Seller shall provide such assistance as reasonably necessary with respect to the Notification. Purchaser shall bear the costs of the Notification. Purchaser and
Seller shall amend Section 5.9 of this Agreement as necessary to conform to any certificate or license issued by the Authority with respect to the Notification provided that such amendment shall not impose any material additional burdens on Seller.
SECTION 5.10. Environmental Matters. Following the Closing Date, Purchaser will operate the Groundwater Remediation Project at the Owned Real Property in accordance with the work plan and plans and specifications as approved or permitted by the Pennsylvania Department of Environmental Protection; provided, however, Purchaser shall have no obligation hereunder to spend more than $100,000 (subject to annual increase at a rate commensurate with increases in the U.S. Consumer Price Index for Pittsburgh, Pennsylvania) in any year to operate such equipment.
SECTION 5.11. Bulk Transfer Laws. Purchaser hereby waives compliance by Seller with the provisions of any so-called bulk transfer laws of any jurisdiction in connection with the sale of the Business to Purchaser. Seller shall, without gross-up for Taxes, indemnify and hold harmless Purchaser against any and all liabilities which may be asserted by third parties against Purchaser as a result of the Seller's noncompliance with any such bulk transfer law.
SECTION 5.12. Office Space. Seller agrees to provide to Purchaser at no charge for a period not to exceed one (1) month, the office space and related services currently being used by the Division in the San Diego, California office of Seller; provided, however, Purchaser, shall promptly reimburse Seller for any out-of-pocket expenses incurred by Seller on account of telephone calls, facsimile transmissions and similar items made by any employee of Purchaser during such period.
SECTION 5.13. This Section intentionally left blank.
(a) The Purchaser shall notify all account debtors of the Division that all payments with respect to Receivables are to be made to the Purchaser. If payment for such Receivables is made to the Seller, the Seller shall immediately endorse all checks to the order of the Purchaser, and deliver the endorsed checks to the Purchaser. In the event such payment is made by wire transfer to the Seller, the Seller shall, immediately after receipt of bank notice, remit to the Purchaser by wire transfer of immediately available funds the amount paid to the Seller. In any event, if any funds which represent payments with respect to such Receivables are paid to the Seller such funds shall be held in trust by the Seller for the benefit of the Purchaser. The Seller hereby constitutes and appoints the Purchaser and all persons designated by the Purchaser as Seller's true and lawful attorney-in-fact, with full power to endorse Seller's name to any checks or other items of payment or proceeds relating to the Receivables. Both the appointment of Purchaser as Seller's attorney and Purchaser's rights and powers are coupled with an interest and are irrevocable until payment in full of all Receivables.
(b) If, after one hundred twenty (120) days following the Closing Date, there are any Receivables included on the Closing Balance Sheet that have not been paid and the amount of such Receivables exceeds, in the aggregate, the total dollar amount equivalent to the reserve against Receivables set forth on the Closing Balance Sheet then the Purchaser shall have the right to so advise the Seller and to assign to the Seller the total of such Receivables (the "Assigned Uncollected Receivables"). Concurrently with the assignment of the Assigned Uncollected Receivables to the Seller and as a condition thereto, the Seller shall pay to the Purchaser an amount equal to one hundred percent (100%) of the uncollected portion of the Assigned Uncollected Receivables in excess of the reserve. In furtherance of the foregoing, all payments received by the Purchaser from a customer with respect to Receivables will be treated as payments of the oldest outstanding Receivable from that customer, unless there exists a bona fide dispute with respect to payment of a particular Receivable. The Seller shall be solely responsible for the collection of the Assigned Uncollected Receivables; provided, however, Seller shall only attempt to collect the Assigned Uncollected Receivables in a reasonable commercial manner consistent with Seller's efforts with respect to collection of Seller's own Receivables. If payment for such Assigned Uncollected Receivables is made to Purchaser, Purchaser shall immediately endorse all checks to the order of Seller, and deliver the endorsed checks to Seller. In the event such payment is made by wire transfer to Purchaser, Purchaser shall, immediately after receipt of bank notice, remit to Seller by wire transfer of immediately available funds the amount paid to Purchaser. In any event, if any funds which represent payments with respect to such Assigned Uncollected Receivables are paid to Purchaser such funds shall be held in trust by Purchaser for the benefit of the Seller.
(c) The Purchaser shall use reasonable diligence and shall make all reasonable efforts to collect all Assigned Uncollected Receivables in a timely manner; provided, however, that the Purchaser shall not be required to threaten or institute legal proceedings in connection therewith. The Purchaser shall not be obligated to incur any out-of-pocket expenses with respect to disputed Assigned Uncollected Receivables unless the Seller advances to the Purchaser an amount reasonably required to cover such out-of-pocket expenses, in which case the Purchaser shall be required to incur out-of-pocket expenses with respect to such disputed amounts only to the extent of the funds advanced by the Seller. The Purchaser shall not release, waive, amend, or settle any dispute in a manner adverse to the Seller in respect of, or otherwise relinquish any rights with respect to, the Assigned Uncollected Receivables without the prior written consent of the Seller. In connection with the granting or withholding or any such consent, the Seller shall act in a commercially reasonable manner. The Seller shall defend, indemnify and hold the Purchaser harrnless from any and all Loss (as defined in Section 8.2(a)) arising out of or in any way connected with, the collection of Assigned Uncollected Receivables.
(d) If after one hundred twenty (120) days following the Closing Date the aggregate amount paid to Purchaser on account of the Receivables exceeds the amount of net Receivables reflected on the Closing Balance Sheet (ie., total Receivables less the amount of reserve against Receivables set forth on the Closing Balance Sheet), Purchaser shall pay to Seller promptly after the end of such one hundred twenty (120) day period an amount equal to the amount collected by Purchaser in excess of the amount of net Receivables as reflected on the Closing Balance Sheet.
(e) The rights of the Purchaser to receive payment from the Seller under this Section shall be governed in all respects by the provisions applicable to indemnification by the Seller and the Purchaser in Article VIII, except that the limitations as to amounts included in Section 8.7 before indemnification is available shall not apply to any claim for indemnification under this Section 5.14.
SECTION 5.15. Sewage Facility Notice. Purchaser is hereby advised that there is no currently existing community sewage system available to the Owned Real Property, and that a permit for an individual sewage system will have to be obtained from the appropriate local agency pursuant to the Pennsylvania Sewage Facilities Act. Seller hereby notifies Purchaser that Purchaser should contact the appropriate local agency which administers the Pennsylvania Facilities Act before signing this Agreement to determine the procedures and requirements for obtaining a permit for an individual sewage system.
SECTION 5.16. Deed Notices. Seller shall make and include in the appropriate Transaction Documents relating to the transfer of title to the Owned Real Property the acknowledgments, if any, required by Section 405 of the Solid Waste Management Act, Act of July 7, 1980, P.L. 380, No. 97 (35 P.S.A Section 5018.405) and Section 512 of the Hazardous Sites Cleanup Act of October 18, 1988, P.L. 756, No. 108 (35 P.S. Section 6020.512).
SECTION 5.17. Receivables, Inventory and Encumbrances. The Seller agrees to conduct the Business in such a manner as to cause the net Receivables at Closing, the net Inventories at Closing and the GTI-Ireland Receivables at Closing to be at least equal to $3.4 million, $2.8 million and the amount specified on Schedule II, respectively. The Seller also agrees to use its reasonable best efforts to obtain the release prior to the Closing Date of all Encumbrances on or against the Acquired Assets except for Permitted Encumbrances.
SECTION 5.18. Further Action. Each of the parties hereto shall use all best reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Law, and to execute and deliver such documents and other instruments or papers as may be required to carry out the provisions of this Agreement and to consummate and render effective the transactions contemplated by this Agreement.
(a) Seller agrees, to indemnify and hold harmless Purchaser and the Division Subsidiary from and against the following Taxes (except to the extent amounts, other than deferred taxes to take into account timing differences between Tax income and financial income, have been specifically identified and reserved therefor as taxes on the face of the Closing Balance Sheet) and, except as otherwise provided in Section 6.1 hereof, against any loss, damage, liability or expense (including reasonable fees for attorneys and other outside consultants, incurred) in contesting or otherwise in connection with any such Taxes or pursuing any claim hereunder: (i) Taxes imposed with respect to periods ending on or before the Closing Date; (ii) with respect to taxable periods beginning before the Closing Date and ending after the Closing Date, Taxes imposed which are allocable, pursuant to Section 6.01(b), to the portion of such period ending on the Closing Date; (iii) Taxes imposed on Purchaser as a result of any breach of warranty or misrepresentation under Section 3.21, failure by Seller to fulfill its obligations under this Article VI, or the actual amount of current and accumulated earnings and profits of the Division Subsidiary as of the Closing Date being in the aggregate more than $100,000 higher than such amounts set forth in the statement referenced in the parenthetical clause of Section 6.6(d)(i); (iv) unpaid Taxes of any Person (including Seller and its Subsidiaries) under Treas. Reg. Section 1. 1502-6 (or any similar provision of Law), or as a transferee or successor, by contract or otherwise; and (v) any and all stock transfer, stamp, or similar Taxes payable in connection with the transactions contemplated hereby except as otherwise provided in Section 6.6(e) of this Agreement.
(b) In the case of Taxes that are payable with respect to a taxable period that begins before the Closing Date and ends after the Closing Date, the portion of any such Tax that is allocable to the portion of the period ending on the Closing Date shall be:
(i) in the case of Taxes that are either (x) based upon or related to income or receipts, or (y) imposed in connection with any sale or other transfer or assignment of property (other than conveyances pursuant to this Agreement, as provided under Section 6.01(a)(iv)), deemed equal to the amount which would be payable if the taxable year ended with the
(ii) in the case of Taxes not described in subparagraph (i) that are imposed on a periodic basis and measured by the level of any item, deemed to be the amount of such Taxes for the entire period (or, in the case of such Taxes determined on an arrears basis, the amount of such Taxes for the immediately preceding period) multiplied by a fraction the numerator of which is the number of calendar days in the period ending on the Closing Date and the denominator of which is the number of calendar days in the entire period.
SECTION 6.2. Tax Returns. Tax Returns not yet filed for any taxable period that commences prior to the Closing Date shall be prepared, and each item thereon treated, in a manner consistent with past practices of Seller except as set forth in Schedule 6.2.
SECTION 6.3. Refunds. Any Tax refund (or comparable benefit resulting from a reduction in Tax liability) for a period ending as of or prior to the Closing Date arising out of the carryback of a loss or credit incurred by Purchaser or the Division Subsidiary in a taxable period ending after the Closing Date shall be the property of Purchaser or such Division Subsidiary, as the case may be.
(a) In the case of an audit or administrative or judicial proceeding that relates to periods ending on or before the Closing Date, Seller shall have the right, at its expense, to participate in and control the conduct of such audit or proceeding but only to the extent that such audit or proceeding relates solely to a potential adjustment for which Seller has acknowledged Seller's liability and the issue underlying the potential adjustment does not recur for any period ending subsequent to the Closing Date. Seller shall keep Purchaser fully informed of the progress of any such audit or proceeding and, if it appears in the sole discretion of Purchaser, that such audit or proceeding may adversely affect Purchaser or a Division Subsidiary, Purchaser also may participate in any such audit or proceeding. If Seller does not assume the defense of any such audit or proceeding promptly, Purchaser may defend and settle the same (for Seller's account) in such reasonable manner as it may deem appropriate. In the event that a potential adjustment as to which Seller would be liable is present in the same proceeding as a potential adjustment for which Purchaser would be liable, Purchaser shall have the right, at its expense, to control the audit or proceeding with respect to the latter potential adjustment.
(b) With respect to a potential adjustment for which both Seller and Purchaser or a Division Subsidiary, could be liable, or which involves an issue that recurs for any period ending after the Closing Date (whether or not the subject of audit at such time), (i) both Purchaser and Seller may participate in the audit or proceeding, and (ii) the audit or proceeding shall be controlled by that party which would bear the burden of the greater portion of the dollar amount of the adjustment and any corresponding adjustments that may reasonably be anticipated for future Tax periods. The principle set forth in the preceding sentence shall govern also for purposes of deciding any issue that must be decided jointly (in particular, choice of judicial forum) in circumstances in which separate issues are otherwise controlled hereunder by Purchaser and Seller.
(c) Except as provided in Section 6.4(a) above, neither Purchaser nor Seller shall enter into any compromise or agree to settle any claim pursuant to any Tax audit or proceeding which would adversely affect the other party for such year or a subsequent year without the written consent of the other party, which consent may not be unreasonably withheld.
(a) Seller and Purchaser agree to treat all payments made by either to or for the benefit of the other under this Article VI, under other indemnification provisions of this Agreement and for any misrepresentations or breach of warranties or covenants as adjustments to the purchase price or as capital contributions for Tax purposes and that such treatment shall govern for purposes hereof except to the extent that the laws of a particular jurisdiction provide otherwise, in which case such payments shall be made in an amount sufficient to indemnify the relevant party on an after-tax basis.
(b) Notwithstanding any provision herein to the contrary, the obligation of Seller to indemnify and hold harmless Purchaser pursuant to this Article VI, and the representations and warranties contained in Section 3.21, shall terminate as of the close of business on the 120th day following expiration of the applicable statutes of limitations with respect to the Tax liabilities in question (giving effect to any waiver, mitigation or extension thereof).
SECTION 6.6. Additional Tax Agreements.
(a) Tax Elections. Seller covenants and agrees that no new elections with respect to Taxes or any changes in current elections with respect to Taxes affecting the Acquired Assets (including the Division Subsidiary) shall be made after the date of this Agreement without prior written consent of Purchaser.
(b) Clearance Certificate. As a condition precedent to the consummation of the transactions contemplated by this Agreement, Seller shall provide Purchaser with a clearance certificate or similar document(s) that may be required by any state, local or foreign taxing authority in order to relieve Purchaser of any obligation to withhold any portion of the Purchase Price or to pay the Taxes of Seller except as specifically waived by Purchaser in writing; provided, however, that Seller shall not be required to provide Purchaser with a tax clearance certificate in Pennsylvania or other similar certificates that cannot be obtained prior to the Closing, provided further, however, that the failure to provide such certificates shall not relieve Seller of any of its indemnification obligations under Section 6.1 hereof.
(c) Nonforeign Affidavit. Seller shall furnish Purchaser an affidavit, stating, under penalty of perjury, that the indicated number is the transferor's United States taxpayer identification number and that the transferor is net a foreign person, pursuant to Section 1445(b)(2) of the Code.
(d) Cooperation and Records Retention. Seller and Purchaser shall (i) each provide the other, and Purchaser shall cause the Division Subsidiaries to provide Seller, with such assistance as may reasonably be requested by any of them in connection with the preparation of any Tax Return, audit, or other examination by any taxing authority or judicial or administrative proceedings relating to liability for Taxes (it being understood that, without limiting the generality of the foregoing, Seller shall, within 10 days after the filing of Seller's federal corporate income tax return for 1995, but in no event later than October 1, 1996, provide Purchaser with a statement setting forth in reasonable detail a computation, under the federal income tax laws of the United States, of the current and accumulated earnings and profits of the Division Subsidiary as of the Closing Date), (ii) each retain and provide the other, and Purchaser shall retain and cause the Division Subsidiaries to retain and provide Seller with, any records or other information that may be relevant to such Tax Return, audit or examination, proceeding, or determination, and (iii) each provide the other with any final determination of any such audit or examination, proceeding, or determination that affects any amount required to be shown on any Tax Return of the other for any period. Without limiting the generality of the foregoing, Purchaser shall retain, and shall cause the Division Subsidiaries to retain, and Seller shall retain, until the applicable statutes of limitations (including any extensions) have expired, copies of all Tax Returns, supporting work schedules, and other records or information that may be relevant to such returns for all tax periods or portions thereof ending before or including the Closing Date and shall not destroy or otherwise dispose of any such records without first providing the other party with a reasonable opportunity to review and copy the same.
(e) Transfer Taxes. Except for real property transfer taxes attributable to the transfer of the Owned Real Property and stock transfer stamp taxes attributable to the sale of the Shares, both of which will be borne equally by Seller and Purchaser, Seller will pay any sales, use, transfer, and documentary taxes and recording and filing fees applicable to the transfer of the Acquired Assets to Purchaser at Closing provided that Purchaser has delivered to Seller at Closing appropriate evidence that Inventories have been acquired for resale within the meaning of applicable sales and use tax Law.
(f) Preparation of W-2's. etc, Seller and Purchaser agree that Purchaser has purchased substantially all the property used in a separate unit of Seller's trade or business, and, in connection therewith, Purchaser shall employ individuals who immediately before the Closing Date were employed in such unit by Seller. Accordingly, pursuant to Revenue Procedure 84-77 (1984-2 C.B. 753), provided that Seller provide Purchaser with all necessary payroll records for the calendar year which includes the Closing Date, Purchaser shall furnish a Form W-2 to each employee employed by Purchaser who had been employed by Seller disclosing all wages and other compensation paid for such calendar year, and taxes withheld therefrom, and Seller shall be relieved of the responsibility to do so.
SECTION 6.7. Minimum Claim. Anything in this Article VI to the contrary notwithstanding, Purchaser shall not have a claim under this Article VI for indemnification against Seller unless the amount of such claim exceeds $1,000 (any such claim not in excess of $1,000, a "De Minimis Tax") or the amount of such claim when added to all other claims for which such party could have sought indemnification under this Article VI but for the provisions of this Section 6.7, exceeds $10,000; provided, however, that in determining such amounts all representations, warranties and covenants in this Agreement shall be read without regard to any disclosure set forth in this Agreement. In the event the total amount of Purchaser's claims for De Minimis Taxes exceeds $10,000, Purchaser may then obtain indemnification for all such claims.
SECTION 6.8. Section 338 Election. Purchaser agrees it will not make an election under Section 338 of the Code with respect to the Division Subsidiary.
SECTION 7.1. Conditions to Obligations of Seller. The obligation of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing Date, of each of the following conditions:
(a) Representations, Warranties and Covenants. The representations and warranties of Purchaser contained in this Agreement shall have been true and correct in all material respects when made and shall be true and correct in all material respects as of the Closing Date, with the same force and effect as if made as of the Closing Date. The covenants and agreements contained in this Agreement to be complied with by Purchaser on or before the Closing shall have been complied with in all material respects;
(b) No Proceeding or Litigation. (i) No Action shall have been commenced by any Governmental Authority against Seller or Purchaser seeking to restrain or materially and adversely alter the transactions contemplated by this Agreement and (ii) no injunction or order of any Governmental Authority or any Law shall be in effect which, in the case of each of (i) and (ii), in the reasonable, good faith determination of Seller, is likely to render it impossible or unlawful to consummate such transactions; provided, however, that the provisions of this Section 7.1(b) shall not apply if Seller has directly or indirectly solicited or encouraged any such Action;
(c) Organizational Documents and Board Resolution. Seller shall have received true and complete copies of resolutions duly and validly adopted by the Board of Directors of Purchaser evidencing its authorization of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby accompanied by a certificate of the Secretary or Assistant Secretary of Purchaser, dated as of the Closing Date, stating that no amendments have been made thereto from the date thereof through the Closing Date;
(d) Incumbency Certificate. Seller shall have received a certificate of the Secretary or an Assistant Secretary of Purchaser certifying the names and signatures of the officers of Purchaser, authorized to sign this Agreement and the Transaction Documents to be delivered by Purchaser hereunder;
(e) Good Standing Certificates, Seller shall have received recently dated good standing certificates for Purchaser from the Secretary of State of Delaware and from the Secretary of State of each other jurisdictions in which the ownership of the Acquired Assets, or the
operation of the Business in such jurisdiction, requires Purchaser to qualify to do business as a foreign corporation;
(f) Legal Opinion. Seller shall have received from Maloney, Geffa, Mehlman & Katz, counsel to Purchaser, a legal opinion, addressed to Seller and dated the Closing Date in the form attached as
(g) Certificate of Donald Moore. Donald Moore shall have delivered to Seller a certificate or letter stating that to the best of Mr. Moore's Knowledge, the representations and warranties of Seller contained in this Agreement are true and correct in all material
(h) Purchaser's Deliveries. Purchaser shall have delivered to Seller at or before the Closing the items specified in Section 2.8 hereof.
SECTION 7.2. Conditions to Obligations of Purchaser. The obligations of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfilment, at or prior to the Closing, of each of the following conditions:
(a) Representations, Warranties and Covenants. The representations and warranties of Seller contained in this Agreement shall have been true and correct in all material respects when made and shall be true and correct in all material respects as of the Closing Date with the same force and effect as if made as of the Closing Date. The covenants and agreements contained in this Agreement to be complied with by Seller on or before the Closing shall have been complied with
(b) No Proceeding or Litigation. (i) No Action shall have been commenced by any Governmental Authority against Seller or Purchaser seeking to restrain or materially and adversely alter the transactions contemplated hereby and (ii) no injunction or order of any Governmental Authority or Law shall be in effect, which, in the case of each of (i) and (ii), is likely to render it impossible or unlawful to consummate the transactions contemplated by this Agreement or has or is reasonably likely to have a Material Adverse Effect, in each case, in the reasonable good faith determination of Purchaser; provided, however, that the provisions of this Section 7.2(b) shall not apply if Purchaser has directly or indirectly solicited or encouraged any
(c) Consents and Approval. Purchaser and Seller shall have received, each in form and substance satisfactory to Purchaser, all authorizations, consents, orders and approvals of all Governmental Authorities and officials and all third party consents and estoppel certificates which Purchaser, in its reasonable determination, deems necessary or required for the consummation of the transactions
(d) Current Ratio. There shall have been no material adverse variation of the Division's ratio of current assets to current liabilities or Net Working Capital (determined in the
manner described in Schedule I) between the date of the Reference Balance Sheet to the Closing Date;
(e) Employment Agreement. Purchaser shall have received the Employment Agreement, duly executed by the parties thereto other than
(f) Organizational Documents and Board Resolutions. Purchaser shall have received true and complete copies of (i) the Certificate of Incorporation, as amended to date, of Seller, certified by the Secretary of State of Delaware, as of a date not earlier than five (5) Business Days prior to the Closing Date, (ii) the By-laws of Seller, and (iii) resolutions duly and validly adopted by the Board of Directors of Seller and the Division Subsidiary evidencing its authorization of the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, in each case, accompanied by a certificate of the Secretary or Assistant Secretary of Seller, dated as of the Closing Date, stating that no amendments have been made thereto from the date thereof through the Closing Date;
(g) Incumbency Certificate, Purchaser shall have received an incumbency (determined in the manner described in Schedule I) certificate of each of Seller certifying as to the names and signatures of the persons authorized on behalf of Seller to sign this Agreement and all of the Transaction Documents to be delivered by Seller
(h) Legal Opinion. Purchaser shall have received from Kirkpatrick & Lockhart LLP, counsel to Seller, a legal opinion, dated the Closing Date, addressed to Purchaser and, if requested by Purchaser, the Financing Sources, in the form attached as Exhibit I hereto with such changes as Purchaser shall reasonably request;
(i) Good Standing Certificates. Purchaser shall have received recently dated good standing certificates for Seller from the Secretary of State of Delaware and from the Secretary of State of each other jurisdictions in which the ownership of the Acquired Assets, or the operation of the Business in such jurisdiction, requires Seller to qualify to do business as a foreign corporation;
(j) No Material Adverse Effect. No event or events shall have occurred, or be reasonably likely to occur, which, individually or in the aggregate, have, or is reasonably likely to have, a Material
(k) Current Assets. The current assets of the Division as shown on the Estimated Closing Balance Sheet shall include not less than $3.4 million of net Receivables and $2.8 million of net Inventories;
(1) Release of Liens. All Encumbrances on or against the Acquired Assets shall have been released except Permitted Encumbrances or Encumbrances caused to be placed on or against the Acquired Assets
(m) Title Insurance. Purchaser shall have received an ALTA owner's policy of title insurance, or an unconditional undertaking to issue the same, issued by Purchaser's title insurance company and containing such endorsements and providing for such co-insurance or reinsurance with direct access as Purchaser may reasonably require, insuring Purchaser's title to the Owned Real Property, subject only to
(n) Seller's Deliveries. Seller shall have delivered to Purchaser at the Closing the items specified in Section 2.7;
(o) Industrial Development Authority Approval. The Purchaser is satisfied at its absolute discretion that the Seller has procured all necessary consents or waivers from the Industrial Development Authority and the Shannon Free Airport Development Company in respect of the sale of the Shares as contemplated by this Agreement;
(p) Minister for Enterprise and Employment Approval. The Purchaser is satisfied at its absolute discretion that the Minister for Enterprise and Employment has stated in writing that he does not intend to make an order under Section 9 of the Mergers, Takeovers and Monopolies (Control) Act, 1978 (as amended in relation to the proposed purchase of the Shares or, in the event of the said Minister making an order subject to conditions, that the Purchaser has notified the Seller in writing that it accepts such conditions or, in the event of no such order being made and the said Minister not stating in writing that he does not intend to make such an order, that the relevant period within the meaning of Section 6 of the said Act has elapsed; and
(q) GTI-Ireland. The GTI-Ireland Receivables at Closing shall be not less than the amount set forth on Schedule II.
SECTION 8. 1. Survival of Representations and Warranties.
(a) The representations and warranties of Seller contained in this Agreement, and all statements contained in this Agreement, the Schedules and the Exhibits to this Agreement, and any certificate, Financial Statement, or report or other document delivered by Seller pursuant to this Agreement or in connection with the transactions contemplated by this Agreement (collectively, the "Transaction Documents"), shall survive the Closing for a period terminating at the close of business on June 30, 1997, except that (i) the representations and warranties of Seller contained in each of Sections 3.1, 3.24 and Seller's representations and warranties (including Seller's representations and warranties contained in Section 3.17) relating to title to the Acquired Assets shall survive the Closing indefinitely, notwithstanding any applicable statute of limitations, (ii) the representations and warranties of Seller and the Division contained in Section 3.12 and 3.21 and the agreements and covenants to the parties contained in Article VI shall
survive the Closing through the expiration of any applicable statute of limitations period (including any tolling thereof), and (iii) notwithstanding anything herein to the contrary, any fraudulent misrepresentations (including any intentional failure to disclose a material fact) or intentional breaches of covenants or agreements in this Agreement shall survive the Closing indefinitely, notwithstanding any applicable statute of limitations (,each such period is referred to herein as a "Survival Period"). Neither any Survival Period, nor the liability of Seller with respect to breaches of representations and warranties, shall be reduced by any investigation made at any time by or on behalf of Purchaser. The representations and warranties referred to in clauses (i) through (iii) in this Section 8.1 (a) are hereafter referred to as the "Excluded Representations").
(b) The representations and warranties of Purchaser contained in this Agreement, and all statements contained in this Agreement, Purchaser's Schedules and the Exhibits to this Agreement, and any certificate or other document delivered pursuant to this Agreement or in connection with the transactions contemplated by this Agreement shall survive the Closing for a period terminating at the close of business on June 30, 1997. Neither the period of survival nor the liability of Purchaser with respect to breaches of representations and warranties shall be reduced by any investigation made at any time by or on behalf of Seller.
(c) Notwithstanding the provisions of Section 8.1 or 8.2, as the case may be, any matter with respect to which a claim has been asserted by notice by any Indemnified Party to Seller or Purchaser, as the case may be, that is pending or unresolved at the end of the applicable Survival Period shall continue to be covered by this Article VIII notwithstanding the termination or expiration of such Survival Period until such claim is finally and fully satisfied or otherwise resolved by the parties under this Agreement or by a court of competent jurisdiction and any amounts payable hereunder are finally determined and paid by Seller or Purchaser, as the case may be, to such Indemnified Party.
SECTION 8.2. Indemnification by Seller.
(a) Seller shall indemnify and hold harmless Purchaser, the Division Subsidiary and their Affiliates, officers, directors, employees, agents, successors and assigns (each a "Purchaser Indemnified Party") for any and all Liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable attorneys' and consultants' fees and expenses) suffered or incurred by them (including, without limitation, in connection with any Action brought or otherwise initiated by any of them or required to enforce the provisions hereunder) (hereinafter a "Loss"), arising out of or resulting from:
(i) the breach of any representation or warranty made by Seller contained in this Agreement or in the Transaction
(ii) the breach of any covenant or agreement by Seller contained in this Agreement or in the Transaction Documents;
(iv) any other matter as to which Seller, pursuant to any other provision of this Agreement, has agreed to indemnify Purchaser.
(b) A Purchaser Indemnified Party shall give Seller notice of any matter which such Purchaser Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, promptly, but in any event within thirty (30) days of such determination, stating the amount of the Loss, if known, and the method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises; provided, however, that the failure to provide such notice shall not release Seller from any of its obligations or reduce the amount of Seller's Liabilities under this Article VIII except to the extent such Seller is materially prejudiced by such failure (to the extent determined by counsel of competent jurisdiction) and shall not relieve such Seller from any other obligation or Liability that it may have to any Purchaser Indemnified Party otherwise than under this Article VIII. The obligations and Liabilities of Seller under this Article VIII with respect to Losses arising from claims of any third party which are subject to the indemnification provided for in this Article VIII ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: If a Purchaser Indemnified Party shall receive actual notice of any Third Party Claim, Purchaser Indemnified Party shall give Seller notice of such Third Party Claim promptly, but in any event within thirty (30) days of the receipt by Purchaser Indemnified Party of such notice; provided, however, that the failure to provide such notice shall not release Seller from any of its obligations under this Article VIII except to the extent such Seller is materially prejudiced by such failure and shall not relieve such Seller from any other obligation or Liability that it may have to any Purchaser Indemnified Party otherwise than under this Article VIII. If Seller acknowledges in writing its obligation to indemnify Purchaser Indemnified Party hereunder against any Losses that may result from a Third Party Claim, then Seller shall be entitled to assume and control the defense of such Third Party Claim, at its expense and through counsel of its choice, if Seller gives notice of its intention to do so to Purchaser Indemnified Party within thirty (30) days of the receipt of such notice from Purchaser Indemnified Party; provided, however, that if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the judgment of Purchaser Indemnified Party, in its sole and absolute discretion, for the same counsel to represent both Purchaser Indemnified Party and Seller, then Purchaser Indemnified Party shall be entitled to retain its own counsel, in each jurisdiction for which Purchaser Indemnified Party determines counsel is required, at the expense of Seller. In the event Seller exercises the right to undertake the defense against a Third Party Claim as provided above, Purchaser Indemnified Party shall cooperate with Seller in such defense and make available to Seller, at Seller's expense, all witnesses, pertinent records, materials and information in Purchaser Indemnified Party's possession or under Purchaser Indemnified Parry's control relating thereto as is reasonably required by Seller. Similarly, in the event Purchaser Indemnified Party is, directly or indirectly, conducting the defense of a Third Party Claim, Seller shall cooperate with Purchaser Indemnified Party in such defense and make available to Purchaser Indemnified Party, at Seller's expense, all such witnesses, records, materials and information in Seller's possession or under Seller's control relating thereto as is
reasonably required by Purchaser Indemnified Party. In furtherance of the foregoing, Seller shall be obligated to keep Purchaser Indemnified Party fully informed in a timely fashion of all developments pertaining to a Third Party Claim and to furnish Purchaser Indemnified Party with true copies of all pleadings, judgements, papers and settlement agreements in connection therewith. No Third Party Claim may be settled by Seller without the prior written consent of Purchaser Indemnified Party unless the settlement provides for a full and unconditional release of the Purchaser Indemnified Party.
(c) Notwithstanding anything to the contrary set forth herein, Seller shall have no obligation to indemnify any Purchaser Indemnified Party for any misrepresentation in this Agreement to the extent that the item misrepresented was actually known prior to Closing by either Adam J. Pelzman or T.J. Maloney of Lincolnshire Management, Inc.
SECTION 8.3. Indemnification by Purchaser.
(a) Seller and its Affiliates, officers, directors, employees, agents, successors and assigns (each a "Seller Indemnified Party") shall be indemnified and held harmless by Purchaser for any and all Liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable attorneys' and consultants' fees and expenses) suffered or incurred by them (including, without limitation, in connection with any Action brought or otherwise initiated by any of them or required to enforce the provisions hereunder) (hereinafter a "Loss"), arising out of or resulting from:
(i) the breach of any representation or warranty made by Purchaser contained in this Agreement or the Transaction
(ii) the breach of any covenant or agreement by Purchaser contained in this Agreement or the Transaction
(iii) The Assumed Liabilities and any Liabilities arising out of any act, failure to act, transaction, facts or circumstances occurring in connection with Purchaser's ownership of the Acquired Assets or operation of the Business for all periods subsequent to the Closing Date.
(b) A Seller Indemnified Party shall give Purchaser notice of any matter which a Seller Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, promptly, but in any event within thirty (30) days of such determination, stating the amount of the Loss, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises; provided, however, that the failure to provide such notice shall not release Purchaser from any of its obligations or reduce the amount of Seller's Liabilities under this Article VIII except to the extent Purchaser is materially prejudiced by such failure (to the extent determined by counsel of competent jurisdiction) and shall not relieve Purchaser from any other obligation or Liability that it may have to any Seller Indemnified Party otherwise than under this Article VIII. The obligations and Liabilities of Purchaser under this Article VIII with respect to Losses arising from claims of any third party which are subject to the indemnification provided for in this Article VIII ("Third Party Claims") shall be governed by and contingent upon the following additional terms and conditions: If a Seller Indemnified Party shall receive actual notice of any Third Party Claim, Seller Indemnified Party shall give Purchaser notice of a Third Party Claim promptly, but in any event within thirty (30) days of the receipt by Seller Indemnified Party of such notice; provided, however, that the failure to provide such notice shall not release Purchaser from any of its obligations under this Article VIII except to the extent Purchaser is materially prejudiced by such failure and shall not relieve Purchaser from any other obligation or Liability that it may have to any Seller Indemnified Party otherwise than under this Article VIII. If Purchaser acknowledges in writing its obligation to indemnify Seller Indemnified Party hereunder against any Losses that may result from a Third Party Claim, then Purchaser shall be entitled to assume and control the defense of a Third Party Claim, at its expense and through counsel of its choice, if it gives notice of its intention to do so to Seller Indemnified Party within thirty (30) days of the receipt of such notice from Seller Indemnified Party; provided, however, that if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the judgment of Seller Indemnified Party, in its sole and absolute discretion, for the same counsel to represent both Seller Indemnified Party and Purchaser, then Seller Indemnified Party shall be entitled to retain its own counsel, in each jurisdiction for which Seller Indemnified Party determines counsel is required, at the expense of Purchaser. In the event Purchaser exercises the right to undertake any such defense of a Third Party Claim as provided above, Seller Indemnified Party shall cooperate with Purchaser in such defense and make available to Purchaser, at Purchaser's expense, all witnesses, pertinent records, materials and information in Seller Indemnified Party's possession or under Seller Indemnified Party's control relating thereto as is reasonably required by Purchaser. Similarly, in the event Seller Indemnified Party is, directly or indirectly, conducting the defense of a Third Party Claim, Purchaser shall cooperate with Seller Indemnified Party in such defense and make available to Seller Indemnified Party, at Purchaser's expense, all such witnesses, records, materials and information in Purchaser's possession or under Purchaser's control relating thereto as is reasonably required by Seller Indemnified Party. No Third Party Claim may be settled by Purchaser without the prior written consent of Seller Indemnified Party unless the settlement provides for the full and unconditional release of the Seller Indemnified Party.
SECTION 8.4. Recourse Against Escrow Amount. Subject to and in accordance with the terms of the Escrow Agreement, a Purchaser Indemnified Party shall have the right to recover Losses for which such Purchaser Indemnified Party is entitled to indemnification under this Article VIII or under Article VI hereof from the Escrow Amount held by the Escrow Agent in the Escrow Account.
SECTION 8.5. Tax Matters. Anything in this Article VIII to the contrary notwithstanding, the rights and obligations of Purchaser with respect to indemnification by Seller for any and all Tax matters shall be governed exclusively by Article VI and nothing set forth in this Article VIII shall be in derogation of, or shall be deemed to modify or amend, any of the provisions of Article VI.
SECTION 8.6. Other Remedies. The indemnification provisions of this Article VIII and of Article VI are in addition to, and not in derogation of, any statutory, equitable, or common law remedy which any party hereto may have for breach of any representation, warranty, or covenant set forth in this Agreement or in any Schedule or Exhibit annexed hereto.
SECTION 8.7. Minimum Claim. Anything in this Article VIII or Article VI to the contrary notwithstanding, neither Purchaser (on behalf of itself and any Purchaser Indemnified Party) nor Seller (on behalf of itself and any Seller Indemnified Party) shall have a claim for indemnification against the other unless the amount of such claim (or the amount of such claim when added to all other claims for which such party could have sought indemnification hereunder but for the provisions of this Section 8.7), other than claims arising out of a breach of an Excluded Representation or with respect to an Excluded Liability (including any matter covered by Article VI), exceeds $100,000 (the "Basket Amount); provided, however, that (i) in determining amounts to be included in the Basket Amount, if any, but for no other purpose, all representations, warranties and covenants in this Agreement shall be read without regard to any materiality standard or any knowledge qualification set forth in this Agreement, and (ii) this Section 8.7 shall not be applicable with regard to any post-closing adjustment of the Purchase Price pursuant to Section 2.9. In the event a party's total claims for indemnification against the other hereunder exceeds the Basket Amount, as determined hereunder, such party may thereupon seek indemnification in accordance with this Article VIII for any and all such claims regardless of the Basket Amount.
SECTION 8.8. Maximum Claim. Anything in this Article VIII or Article VI to the contrary notwithstanding, neither Purchaser nor Seller shall have any liability under this Article VIII in respect of any Losses (exclusive of any Losses arising out of a breach of an Excluded Representation or with respect to any Excluded Liability (including any matter covered by Article VI)) to the extent the aggregate of such Losses when added to all other Losses under Section 8.2, with respect to Seller, and under Section 8.3, with respect to Purchaser, exceeds $12,500,000.
SECTION 9. 1. Termination. This Agreement may be terminated at any time prior to the Closing only as follows:
(a) by Purchaser if, between the date hereof and the time scheduled for the Closing: (i) an event or condition occurs that has resulted in or that is reasonably likely to result in a Material Adverse Effect; (ii) any representation or warranty of Seller set forth in this Agreement shall not have been true and correct in all material respects when made or ceases to be true and correct in all material respects at any time subsequent to the date hereof and the Seller shall have failed to cure any material misstatement or omission subsequent to the date hereof promptly after notice by Purchaser; (iii) Seller shall not have complied in all material respects with any covenant or agreement to be complied with by it prior to the Closing Date; or (iv) Seller or the Division Subsidiary makes a general assignment- for the benefit of creditors, or any proceeding shall be instituted by or against Seller or the Division Subsidiary seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up or reorganization, arrangement, adjustment, protection, relief or composition of its debts under any Law relating to bankruptcy, insolvency or reorganization.
(b) by Purchaser or Seller if the Closing shall not have occurred on or prior to December 31, 1995; provided, however, that the right to terminate this Agreement under this Section 9.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior
(c) by Purchaser or Seller in the event that any Governmental Authority shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable.
SECTION 9.2. Effect of Termination. In the event of termination of this Agreement as provided in Section 9.1, this Agreement shall forthwith be canceled and rendered null and void in its entirety, except that the provisions of Sections 5.3 and 10.1 shall survive any such termination.
SECTION 9.3. Waiver. Each party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of any other party, (b) waive any inaccuracies in the representations and warranties of any other party contained herein or in any document delivered by such other party pursuant hereto, or (c) waive compliance with any of the agreements or conditions of any other party contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition, of this Agreement. The failure of any party to assert any of its rights hereunder shall not constitute a waiver of any of such rights.
(a) Except as otherwise specified in this Agreement, and whether or not the transactions contemplated shall be consummated, all costs and expenses, limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses in performing and complying with all conditions to be performed under this Agreement.
(b) If the Closing does not occur solely because of the failure by Seller to satisfy any of the closing conditions set forth in Section 7.2 and such failure constitutes a breach of this Agreement by Seller, then Seller shall reimburse Purchaser for its reasonable fees and expenses promptly upon Purchaser's submission of reasonably detailed invoices therefor (including, without limitation, the reasonable costs and expenses of its legal counsel and accountants and commitment and due diligence fees and related costs incurred to obtain financing commitments to fund the contemplated purchase of the Acquired Assets from Seller) which have been incurred by Purchaser in connection with the preparation and negotiation of this Agreement and the transactions contemplated hereby. Such amount shall be in addition to, and not in lieu of, any other remedy available to Purchaser.
SECTION 10.2. Notices. All notices, requests, claims, demands and other communications hereunder (collectively, "Notices") shall be in writing and shall be given or made by delivery in person, by reputable overnight courier service, by telecopy (followed promptly by first class mail), or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 10.2):
Attn: John C. Rodney, Esq.
(b) if to Purchaser or Holding:
780 Third Avenue, 45th Floor New York, New York 10017
Maloney, Gerra, Mehlman & Katz 405 Lexington Avenue, 36th Floor New York, New York 10174 Attn: Ralph A. Geffa, Jr., Esq. Melvin Katz, Esq.
SECTION 10.3. Public Announcements. No party to this Agreement shall make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other party, which consent shall not be unreasonably withheld, and the parties shall cooperate as to the timing and contents of any such press release or public announcement.
SECTION 10.4. Headings. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. All references herein to Articles, Sections or clauses refer to specific provisions of this Agreement.
SECTION 10.5. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, such term or provision shall be ineffective only to the extent invalid, illegal or incapable of being enforced, without affecting in any manner whatsoever the remainder of the term or provision and all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.
SECTION 10.6. Assignment. Prior to the Closing, the respective rights and obligations of the parties under this Agreement may not be assigned by operation of law or otherwise without the express written consent of Seller and Purchaser (which consent may be granted or withheld in the sole discretion of Seller or Purchaser); provided, however, that Purchaser may (i) assign this Agreement to an Affiliate of Purchaser without the consent of Seller and (ii) assign its rights under this Agreement to one or more Financing Sources as collateral security for Purchaser's obligations to such Financing Sources in connection with this Agreement. Notwithstanding any such assignment of this Agreement, Purchaser shall continue to be liable for all of Purchaser's obligations hereunder.
SECTION 10.7. No Third Party Beneficiaries. Except for the provisions of Article VIII relating to Indemnified Parties, this Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 10. 8. Amendment. This Agreement may not be amended or modified except (a) by an instrument in writing signed by, or on behalf of, Seller and Purchaser or (b) by a waiver in accordance with Section 9.3.
SECTION 10.9. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of tile State of New York, applicable to contracts executed in and to be performed entirely within that state (without giving effect to principles of conflicts of laws of New York or that of other jurisdictions).
SECTION 10.10. Consent to Jurisdiction and Venue. Purchaser and Seller hereby irrevocably submit to the exclusive jurisdiction of any New York State or federal court sitting in the City of New York in any action or proceeding arising out of or relating to this Agreement, including any appeal and any action for enforcement or recognition of any judgement relating thereto, and Purchaser, GTI-Ireland and Seller hereby irrevocably agree that all claims in respect of such action or proceeding may not be heard or determined in any court or before any panel other than such New York State or federal court. Each of the parties hereto agrees that a final judgement in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgement or in any other manner provided by law. Each of the parties hereto hereby irrevocably waives, to the fullest extent it may legally and effectively do so, any objection it may have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent it may legally and effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. Each of the parties hereto irrevocably consents to service of process in any such Action in the manner provided for the delivery of notices in Section 10.2; provided that nothing herein shall affect the right of any such party to serve process in any other manner permitted by law.
SECTION 10.11. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
SECTION 10.12. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement is not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity.
SECTION 10.13. Schedules and Exhibits. The Schedules and Exhibits annexed hereto and referred to herein are a part of this Agreement for all purposes. Unless otherwise expressly stated, terms which are specifically defined in this Agreement shall have the same meanings when used in the Schedule and Exhibits hereto.
SECTION 10.14. Entire Agreement. This Agreement and the Transaction Documents constitute the entire agreement of the parties hereto with respect to the subject matter hereof and thereof and supersedes all prior agreements and undertakings, both written and oral, between Seller and Purchaser with respect to the subject matter hereof and thereof.
SECTION 10.15. Delivery of Schedules. Not later than Tuesday, December 19, 1995, Seller shall deliver to Purchaser all of the Schedules to this Agreement. Each Schedule shall be subject to the approval of Purchaser. If Seller fails to furnish any Schedule within the period specified above or if Purchaser disapproves any of the Schedules, Purchaser may in its discretion (i) extend the time for delivery, (ii) terminate this Agreement or (iii) waive the requirement as to a particular Schedule. Prior to Tuesday, December 19, 1995, Seller may modify the representations and warranties in Section 3.21 which relate solely to the tax status of the Division Subsidiary. Purchaser shall have the right to terminate this Agreement in the event any such modification is not reasonably acceptable to Purchaser.
IN WITNESS WHEREOF, Seller, Purchaser and Holding have executed or caused this Agreement to be executed by their respective officers thereunto duly authorized, in each case, as of the date first written above. | 8-K/A | EX-99 | 1996-01-16T00:00:00 | 1996-01-16T17:21:48 |
0000107815-96-000002 | 0000107815-96-000002_0002.txt | <DESCRIPTION>14TH SUPPLEMENTAL INDENTURE OF WE
(formerly First Wisconsin Trust Company)
Mortgage and Deed of Trust dated June 1, 1950 Of Wisconsin Natural Gas Company
Fourteenth Supplemental Indenture Dated January 1, 1996
Mortgage and Deed of Trust dated June 1, 1950 of Wisconsin Natural Gas Company
Trustee not responsible for validity of Fourteenth Supplemental
Meanings of terms in Fourteenth Supplemental Indenture................ 4 Effective Time of Covenants, Declarations and Agreements Contained in Execution of Fourteenth Supplemental Indenture in counterparts........ 4
* 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 the first day of January, 1996, made by and between WISCONSIN ELECTRIC POWER COMPANY, a corporation organized and existing under the laws of the State of Wisconsin (hereinafter called "Wisconsin Electric"), party of the first part, 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 Mortgage and Deed of Trust dated June 1, 1950, hereinafter mentioned, party of the second part;
WHEREAS, WISCONSIN NATURAL GAS COMPANY (hereinafter called "Wisconsin Natural") has heretofore executed and delivered to the Trustee its Mortgage and Deed of Trust dated June 1, 1950, as amended September 1, 1957, September 15, 1986, January 15, 1992 and November 1, 1992, (said Mortgage and Deed of Trust, as so amended, being hereinafter sometimes referred to as the "Original Indenture" and, together with all supplemental indentures 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 Bonds at any time issued and outstanding thereunder, and to declare the terms and conditions upon which Bonds are to be issued thereunder; and indentures supplemental thereto dated June 1, 1950, October 15, 1955, September 1, 1957, October 15, 1961, November 1, 1962, October 1, 1965, September 15, 1967, September 15, 1969, July 1, 1971, September 15, 1986, January 15, 1992, November 1, 1992 and January 1, 1994, respectively, have heretofore been entered into between the Company and the Trustee; and
WHEREAS, prior to the date hereof, Bonds have been issued by Wisconsin Natural under said Mortgage and Deed of Trust and said indentures supplemental thereto as follows:
(1) $3,500,000 principal amount of First Mortgage Bonds, 2 7/8% Series due 1975, which are described in the First Supplemental Indenture dated June 1, 1950, all of which have been retired for sinking fund purposes or paid at maturity prior to the date of execution hereof;
(2) $2,500,000 principal amount of First Mortgage Bonds, 3 3/8% Series due 1980, which are described in the Second Supplemental Indenture dated October 15, 1955, all of which have been retired for sinking fund purposes or paid at maturity prior to the date of execution hereof;
(3) $2,500,000 principal amount of First Mortgage Bonds, 5 1/2% Series due 1982, which are described in the Third Supplemental Indenture dated September 1, 1957, all of which have been retired for sinking fund purposes or redeemed prior to the date of execution hereof;
(4) $4,000,000 principal amount of First Mortgage Bonds, 4 3/4% Series due 1986, which are described in the Fourth Supplemental Indenture dated October 15, 1961, all of which have been retired for sinking fund purposes or paid at maturity prior to the date of execution hereof;
(5) $5,000,000 principal amount of First Mortgage Bonds, 4 3/8% Series due 1987, which are described in the Fifth Supplemental Indenture dated November 1, 1962, all of which have been retired for sinking fund purposes or paid at maturity prior to the date of execution hereof;
(6) $8,000,000 principal amount of First Mortgage Bonds, 4 7/8% Series due 1990, which are described in the Sixth Supplemental Indenture dated October 1, 1965, all of which have been retired for sinking fund purposes or paid at maturity prior to the date of execution hereof;
(7) $10,000,000 principal amount of First Mortgage Bonds, 6 3/8% Series due 1992, which are described in the Seventh Supplemental Indenture dated September 15, 1967, all of which have been retired for sinking fund purposes or paid at maturity prior to the date of execution hereof;
(8) $10,000,000 principal amount of First Mortgage Bonds, 8 3/4% Series due 1994, which are described in the Eighth Supplemental Indenture dated September 15, 1969, all of which have been retired for sinking fund purposes or redeemed prior to the date of execution hereof;
(9) $10,000,000 principal amount of First Mortgage Bonds, 8 3/8% Series due 1996, which are described in the Ninth Supplemental Indenture dated July 1, 1971, all of which have been retired for sinking fund purposes or redeemed prior to the date of execution hereof;
(10) $30,000,000 principal amount of First Mortgage Bonds, 9 1/4% Series due 2016, which are described in the Tenth Supplemental Indenture dated September 15, 1986, all of which have been retired for sinking fund purposes or redeemed prior to the date of execution hereof;
(11) $10,000,000 principal amount of First Mortgage Bonds, 5 5/8% Series due January 15, 1995, which are described in the Eleventh Supplemental Indenture dated January 15, 1992, all of which have been paid at maturity prior to the date of execution hereof;
(12) $10,000,000 principal amount of First Mortgage Bonds, 6 5/8% Series due January 15, 1997, which are described in the Eleventh Supplemental Indenture dated January 15, 1992, all of which remain outstanding at the
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 12.01 of the Original Indenture that, upon any merger of Wisconsin Natural into another corporation, the due and punctual payment of the principal and interest of all Bonds at the time outstanding according to their tenor, and, subject to the provisions of Section 12.03 of the Original Indenture, the due and punctual performance and observance of all the covenants and conditions of the Indenture shall, by supplemental indenture, and as a condition of such merger, be expressly assumed by the successor corporation resulting from such merger; and
WHEREAS, it is provided in Section 12.02 of the Original Indenture that a successor corporation resulting from a merger of Wisconsin Natural into another corporation, all on the terms set forth in Section 12.01 of the Original Indenture, shall upon executing, acknowledging and delivering to the Trustee, and causing to be recorded and filed, as required by Section 4.10 of the Original Indenture, an indenture supplemental thereto, as provided in Section 12.01 of the Original Indenture, in form satisfactory to the Trustee, succeed to and be substituted for Wisconsin Natural with the same effect as if it had been named therein as the party of the first part; 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 Sections 12.01 and 12.02 of the Original Indenture; and
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 Bonds and related coupons, or any of them, issued or to be issued under the Indenture, as follows:
Wisconsin Electric hereby assumes, as of the effective time specified in Article III hereof, (a) the due and punctual payment of the principal and interest of all Bonds outstanding under the Indenture at such time, according to their tenor, and (b) subject to the provisions of Section 12.03 of the Original Indenture, the due and punctual performance and observance of all the covenants and conditions of the Indenture to be kept or performed by Wisconsin Natural.
It is hereby declared that, in accordance with Section 12.03 of the Original Indenture, the lien of the Indenture shall not extend to any or all of the property or franchises of Wisconsin Electric, unless Wisconsin Electric, in its discretion, shall hereafter subject the same to the lien thereof or unless Wisconsin Electric shall hereafter exercise certain privileges under the Indenture as referred to in such Section 12.03; provided, the foregoing provisions of this paragraph notwithstanding, the Indenture shall, from and after the effective time specified in Article III hereof, constitute a lien, of the rank provided in the Indenture, upon all properties and franchises acquired by Wisconsin Electric from Wisconsin Natural in such merger which were subject to the lien of the Indenture immediately prior to such merger and upon all additions, extensions, improvements, repairs and replacements to or about the plants or properties included in the trust estate immediately prior to such merger, appurtenant to the trust estate as so constituted (as distinguished from the additions, extensions, improvements, repairs and replacements to or about the plants or properties appurtenant to the plants or properties of Wisconsin Electric and additional plants or properties thereafter acquired by Wisconsin Electric upon which the Indenture, by its terms, will not constitute a lien).
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; and said Firstar Trust 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 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-4.2 | 1996-01-16T00:00:00 | 1996-01-16T10:54:46 |
0000089954-96-000001 | 0000089954-96-000001_0000.txt | 1933 Act File No. 2-54929
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Post-Effective Amendment No. 53 ........... X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
TRSUT FOR SHORT-TERM U.S. GOVERNMENT SECURITIES (Exact Name of Registrant as Specified in Charter)
(Address of Principal Executive Offices)
John W. McGonigle, Esquire, Federated Investors Tower, (Name and Address of Agent for Service) It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b) on pursuant to paragraph (b) 60 days after filing pursuant to paragraph (a) on pursuant to paragraph (a) of Rule 485.
Registrant has filed with the Securities and Exchange Commission a declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940, and:
filed the Notice required by that Rule on ; or intends to file the Notice required by that Rule on or about X during the most recent fiscal year did not sell any securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to Rule 24f-2(b)(2), need not file the Notice.
Dickstein, Shapiro & Morin, L.L.P. 2101 L Street, N.W.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Securities Amount Maximum Aggregate Amount of Being Being Offering Price Offering Registration Registered Registered Per Unit Price* Fee Shares 5,665,833,601 $1.00 $5,665,833,601 $100
*Registrant has elected to calculate its filing fee in the manner described in Rule 24e-2 of the Investment Company Act of 1940. The total amount of securities redeemed during the previous fiscal year was 5,665,833,601. The total amount of redeemed securities used for reductions pursuant to paragraph (a) of Rule 24e-2 or paragraph (c) of Rule 24f-2 during the current year was -0-. The amount of redeemed securities being used for reduction of the registration fee in this Amendment is 5,665,833,601.
This Post-Effective Amendment No. 53 to the Registration Statement of TRUST FOR SHORT-TERM U.S. GOVERNMENT SECURITIES is comprised of the following papers and documents:
1.The facing sheet to register a definite number of shares of beneficial interest, no par value, of TRUST FOR SHORT-TERM U.S. GOVERNMENT SECURITIES;
2.The legal opinion of counsel for the Registrant, as to the legality of shares being offered; and as to the eligibility to become effective pursuant to Paragraph (b) of Rule 485; and
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, TRUST FOR SHORT-TERM U.S. GOVERNMENT SECURITIES certifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania on the 16th day of January, 1996.
Trust for Short Term U.S. Government Securities S. Elliott Cohan, Assistant Secretary Attorney in Fact for John F. Donahue
Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed below by the following person in the capacity and on the date indicated:
S. Elliott Cohan Attorney In Fact January 16, 1996 Assistant Secretary For the Persons
John F. Donahue* Chairman and Trustee
David M. Taylor* Treasurer (Principal Financial
John T. Conroy, Jr.* Trustee
Lawrence D. Ellis, M.D.* Trustee
Edward L. Flaherty, Jr.* Trustee
John E. Murray, Jr.* Trustee | 485B24E | 485B24E | 1996-01-16T00:00:00 | 1996-01-16T13:46:25 |
0000950152-96-000097 | 0000950152-96-000097_0001.txt | MAX & ERMA'S RESTAURANTS, INC.
1. PURPOSE. This plan (the "Plan") is intended as an incentive and to encourage stock ownership by certain key employees, officers and directors of, and consultants and advisers who render services to, Max & Erma's Restaurants, Inc., a Delaware corporation (the "Company"), and any current or future subsidiaries or parent of the Company by the granting of stock options (the "Options") as provided herein. By encouraging such stock ownership, the Company seeks to attract, retain and motivate employees, officers, directors, consultants and advisers of training, experience and ability. The Options granted under the Plan may be either incentive stock options ("ISOs") which meet the requirements of section 422 of the Internal Revenue Code of 1986, as amended from time to time hereafter (the "Code"), or options which do not meet such requirements ("Non-Statutory Options").
2. EFFECTIVE DATE. The Plan will become effective on December 12, 1995 (the "Effective Date").
(a) The Plan will be administered by a committee (the "Committee") appointed by the Board of Directors of the Company (the "Board") which consists of not fewer than three members of the Board. If any class of equity securities of the Company is registered under section 12 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), all members of the Committee will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i) promulgated under the 1934 Act (or any successor rule of like tenor and effect) and "outside directors" as defined in section 162(m) of the Code and the regulations promulgated thereunder and will not be eligible to receive any options under this Plan except pursuant to paragraph 4(b) of the Plan.
(b) Subject to the provisions of the Plan, the Committee is authorized to establish, amend and rescind such rules and regulations as it deems appropriate for its conduct and for the proper administration of the Plan, to make all determinations under and interpretations of, and to take such actions in connection with the Plan or the Options granted thereunder as it deems necessary or advisable. All actions taken by the Committee under the Plan are final and binding on all persons. No member of the Committee is liable for any action taken or determination made relating to the Plan, except for willful misconduct.
(c) The Company will indemnify each member of the Committee against costs, expenses and liabilities (other than amounts paid in settlements to which the Company does not consent, which consent will not be unreasonably withheld) reasonably incurred by such member in connection with any action to which he or she may be a party by reason of service as a member of the Committee, except in relation to matters as to which he or she is adjudged in such action to be personally guilty of negligence or willful misconduct in the performance of his or her duties. The foregoing right to indemnification is in addition to such other rights as the Committee member may enjoy as a matter of law, by reason of insurance coverage of any kind, or otherwise.
(a) The Committee may grant Options and Tax Offset Payments, as defined in paragraph 10, to such key employees of (or, in the case of Non-Statutory Options only, to directors who are not employees of and to consultants and advisers who render services to) the Company or its subsidiaries or parent as the Committee may select from time to time (the "Optionees"); provided, however, that if any class of equity securities of the Company is registered under section 12 of the 1934 Act, any member of the Board who is not an employee of the Company may not receive any Option or Tax Offset Payment under the Plan except pursuant to paragraph 4(b) of the Plan. The Committee may grant more than one Option to an individual under the Plan.
(b) If any class of equity securities of the Company is registered under section 12 of the 1934 Act, on October 15 of each year, each member of the Board who is not an employee of the Company, including members of the Committee, will automatically receive under this Plan a Non-Statutory Option to purchase 3,000 shares of the Company's common stock, $.10 par value, at an exercise price equal to 100% of the fair market value of the shares on the date of grant. Such Option will not be exercisable until a period of one year from the date of grant and will terminate on the fifth anniversary of the date of grant. This paragraph 4(b) may not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended from time to time, or the rules thereunder.
(c) No ISO may be granted to an individual who, at the time an ISO is granted, is considered under section 422(b)(6) of the Code as owning stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its parent or any subsidiary corporation; provided, however, this restriction will not apply if at the time such ISO is granted the option price per share of such ISO is at least 110% of the fair market value of such share, and such ISO by its terms is not exercisable after the expiration of five years from the date it is granted. This paragraph 4(c) has no application to Options granted under the Plan as Non-Statutory Options.
(d) The aggregate fair market value (determined as of the date the ISO is granted) of shares with respect to which ISOs are exercisable for the first time by any Optionee during any calendar year under the Plan or any other incentive stock option plan of the Company or a parent or subsidiary of the Company may not exceed $100,000. This paragraph 4(d) has no application to Options granted under the Plan as Non-Statutory Options.
5. STOCK SUBJECT TO PLAN. The shares subject to Options under the Plan are the shares of common stock, $.10 par value, of the Company (the "Shares"). The Shares issued pursuant to Options granted under the Plan may be authorized and unissued Shares, Shares purchased on the open market or in a private transaction, or Shares held as treasury stock. The aggregate number of
Shares for which Options may be granted under the Plan may not exceed 400,000, subject to adjustment in accordance with the terms of paragraph 13 of the Plan. The maximum number of Shares for which Options may be granted under the Plan during the term of the Plan to any one individual may not exceed 200,000 subject to adjustment in accordance with the terms of paragraph 13 of the Plan. The unpurchased Shares subject to terminated or expired Options may again be offered under the Plan. The Committee, in its sole discretion, may permit the exercise of any Option as to full Shares or fractional Shares. Proceeds from the sale of Shares under Options will be general funds of the Company.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) At the time of grant, the Committee will determine whether the Options granted will be ISOs or Non-Statutory Options. All Options and Tax Offset Payments granted will be authorized by the Committee and, within a reasonable time after the date of grant, will be evidenced by stock option agreements in writing ("Stock Option Agreements"), in the form attached hereto as Exhibit A, or in such other form and containing such terms and conditions not inconsistent with the provisions of this Plan as the Committee may determine. Any action under paragraph 13 may be reflected in an amendment to, or restatement of, such Stock Option Agreements.
(b) The Committee may grant Options and Tax Offset Payments having terms and provisions which vary from those specified in the Plan if such Options or Tax Offset Payments are granted in substitution for, or in connection with the assumption of, existing options granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company is a party.
7. PRICE. The Committee will determine the option price per Share (the "Option Price") of each Option granted under the Plan. Notwithstanding the foregoing, the Option Price of each ISO granted under the Plan may not be less than the fair market value of a Share on the date of grant of such Option. The date of grant will be the date the Committee acts to grant the Option or such later date as the Committee specifies and the fair market value will be determined in accordance with paragraph 26(c) and without regard to any restrictions other than a restriction which, by its terms, will never lapse.
8. OPTION PERIOD. The Committee will determine the period during which each Option may be exercised (the "Option Period"); provided, however, any ISO granted under the Plan will have an Option Period which does not exceed 10 years from the date of grant.
9. NONTRANSFERABILITY OF OPTIONS. An Option will not be transferable by the Optionee otherwise than by will or the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee or by the Optionee's guardian or legal representative.
10. TAX OFFSET PAYMENTS. The Committee has the authority and discretion under the Plan to make cash grants to Optionees to offset a portion of the taxes which may become payable upon exercise of Non-Statutory Options or on certain dispositions of Shares acquired under ISOs ("Tax Offset Payments"). In the case of Non-Statutory Options, such Tax Offset Payments will be in an amount determined by multiplying a percentage established by the Committee by the difference between the fair market value of a Share on the date of exercise and the Option Price, and by the number of Shares as to which the Option is being exercised. If the Tax Offset Payment is being made on account of the disposition of Shares acquired under an ISO, such Tax Offset Payments will be in an amount determined by multiplying a percentage established by the Committee by the difference between the fair market value of a Share on the date of disposition, if less than the fair market value on the date of exercise, and the Option Price, and by the number of Shares acquired under an ISO of which an Optionee is disposing. The percentage will be established, from time to time, by the Committee at that rate which the Committee, in its sole discretion, determines to be appropriate and in the best interest of the Company to assist Optionees in the payment of taxes. The Company has the right to withhold and pay over to any governmental entities (federal, state or local) all amounts under a Tax Offset Payment for payment of any income or other taxes incurred on exercise.
(a) The Committee, in its sole discretion, will determine the terms and conditions of exercise and vesting percentages of Options granted hereunder. Notwithstanding the foregoing or the terms and conditions of any Stock Option Agreement to the contrary, (i) if the Optionee's employment is terminated as a result of disability or death, his or her Options will be exercisable to the extent and for the period specified in paragraph 12(b); (ii) if the Optionee's employment is terminated other than as a result of disability or death or for cause, his or her Options will be exercisable to the extent and for the period specified in paragraph 12(a); (iii) if a merger or similar reorganization or sale of substantially all of the Company's assets occurs, all outstanding Options will be exercisable to the extent and for the period specified in paragraph 13(b) or paragraph 13(c), whichever paragraph applies; and (iv) if a change in control occurs, all outstanding Options will be exercisable for the period specified in paragraph 13(d).
(b) An Option may be exercised only upon delivery of a written notice to the Committee, any member of the Committee, or any officer of the Company designated by the Committee to accept such notices on its behalf, specifying the number of Shares for which it is exercised.
(c) Within five business days following the date of exercise of an Option, the Optionee or other person exercising the Option will make full payment of the Option Price in cash or, with the consent of the Committee, (i) by tendering previously acquired Shares (valued at fair market value, as determined by the Committee, as of such date of tender); (ii) with a full recourse promissory note of the Optionee for the portion of the Option Price in excess of the par value of Shares subject to the Option, under terms and conditions determined by the Committee; (iii) any combination of the foregoing; or (iv) if the Shares subject to the Option have been registered under the Securities Act of 1933, as amended (the "1933 Act"), and there is a regular public market for the Shares, by delivering to the Company on the date of exercise of the Option written notice of exercise together with:
(A) written instructions to forward a copy of such notice of exercise to a broker or dealer, as defined in section 3(a)(4) and 3(a)(5) of the 1934 Act ("Broker"), designated in such notice and to deliver to the specified account maintained with the Broker by the person exercising the Option a certificate for the Shares purchased upon the exercise of the
(B) a copy of irrevocable instructions to the Broker to deliver promptly to the Company a sum equal to the purchase price of the Shares purchased upon exercise of the Option and any other sums required to be paid to the Company under paragraph 18 of the Plan.
(d) If Tax Offset Payments sufficient to allow for withholding of taxes are not being made at the time of exercise of an Option, the Optionee or other person exercising such Option will pay to the Company an amount equal to the withholding amount required to be made less any amount withheld by the Company under paragraph 18.
(a) Upon termination of an Optionee's employment with the Company, any parent or subsidiary of the Company, or any successor corporation to either the Company or any parent or subsidiary of the Company, other than (i) termination of employment by reason of death or disability, as defined in paragraph 26(b), or (ii) termination of employment for cause, as defined in paragraph 26(f), the Optionee will have 30 days after the date of termination (but not later than the expiration date of the Stock Option Agreement) to exercise all Options held by him or her to the extent the same were exercisable on the date of termination; provided, however, if such termination is a result of the Optionee's retirement with the consent of the Company and if the Committee, in its sole discretion, so permits, such Option shall then be exercisable to the extent of 100% of the Shares subject thereto. The Committee will determine in each case whether a termination of employment is a retirement with the consent of the Company and, subject to applicable law, whether a leave of absence is a termination of employment. The Committee may cancel an Option during the 30-day period after termination of employment referred to in this paragraph if the Optionee engages in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company or any parent or subsidiary of the Company.
(b) Upon termination of employment by reason of death or disability, the Optionee's personal representative, or the person or persons to whom his or her rights under the Options pass by will or the laws of descent or distribution, will have one year after the date of such termination (but not later than the expiration date of the Stock Option Agreement) to exercise all
Options held by Optionee to the extent the same were exercisable on the date of termination; provided, however, the Committee, in its sole discretion, may permit the exercise of all or any portion of any Option granted to such Optionee not otherwise exercisable.
(c) Upon termination of employment for cause (as defined in paragraph 26(f)), all Options held by such Optionee will terminate on the date of termination.
(a) If a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, redesignation or other change in the Company's capitalization occurs, the Committee will proportionately adjust or substitute the aggregate number of Shares for which Options may be granted under this Plan, the number of Shares subject to outstanding Options and the Option Price of the Shares subject to outstanding Options to reflect the same. The Committee will make such other adjustments to the Options, the provisions of the Plan and the Stock Option Agreements as may be appropriate and equitable, which adjustments may provide for the elimination of fractional Shares.
(b) In the event of a change of the Company's common stock, $.10 par value, resulting from a merger or similar reorganization as to which the Company is the surviving corporation, or a merger or similar reorganization involving only a change in the state of incorporation or an internal reorganization not involving a change in control as defined in paragraph 26(a), the number and kind of Shares which thereafter may be purchased pursuant to an Option under the Plan and the number and kind of Shares then subject to Options granted hereunder and the price per Share thereof will be appropriately adjusted in such manner as the Board may deem equitable to prevent dilution or enlargement of the rights available or granted hereunder.
(c) Except as otherwise determined by the Board, a merger or a similar reorganization which the Company does not survive (other than a merger or similar reorganization involving only a change in the state of incorporation or an internal reorganization not involving a change in control as defined in paragraph 26(a)), or a sale of all or substantially all of the assets of the Company, will cause every Option hereunder to terminate, to the extent not then exercised, unless any surviving entity agrees to assume the obligations hereunder on terms reasonably acceptable to the Board; provided, however, that, in the case of such a merger or similar reorganization, or such a sale of all or substantially all of the assets of the Company, if there is no such assumption, the Board, in its sole discretion, may provide that some or all of the unexercised portion of any one or more of the outstanding Options will be immediately exercisable and vested as of such date prior to such merger, similar reorganization or sale of assets as the Board determines. If the Board makes an Option fully exercisable under this paragraph 13(c), the Board will notify the Optionee that the Option will be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period.
(d) If a change in control (as defined in paragraph 26(a)) occurs, all outstanding Options granted under this Plan will become immediately exercisable to the extent of 100% of the Shares subject thereto notwithstanding any contrary waiting or vesting periods specified in this Plan or in any applicable Stock Option Agreement.
14. SALE OF OPTION SHARES. If any class of equity securities of the Company is registered pursuant to section 12 of the 1934 Act, any Optionee or other person exercising the Option who is subject to section 16 of the 1934 Act by virtue of his or her relationship to the Company shall not sell or otherwise dispose of the Shares subject to Option unless at least six months have elapsed from the date of the grant of the Option.
15. RIGHTS AS SHAREHOLDER. The Optionee has no rights as a shareholder with respect to any Shares covered by an Option until the date of issuance of a stock certificate to the Optionee for such Shares.
16. NO CONTRACT OF EMPLOYMENT. Nothing in the Plan or in any Option or Stock Option Agreement confers on any Optionee any right to continue in the employment or service of the Company or any parent or subsidiary of the Company or interfere with the right of the Company to terminate such Optionee's employment or other services at any time. The establishment of the Plan will in no way, now or hereafter, reduce, enlarge or modify the employment relationship between the Company or any parent or subsidiary of the Company and the Optionee. Options granted under the Plan will not be affected by any change of duties or position as long as the Optionee continues to be employed by the Company or any parent or subsidiary of the Company.
17. AGREEMENTS AND REPRESENTATIONS OF OPTIONEES. As a condition to the exercise of an Option, the Committee, in its sole determination, may require the Optionee to represent in writing that the Shares being purchased are being purchased only for investment and without any present intent at the time of the acquisition of such Shares to sell or otherwise dispose of the same.
18. WITHHOLDING TAXES. The Company or any parent or subsidiary of the Company has the right (a) to withhold from any salary, wages, or other compensation for services payable by the Company or any parent or subsidiary of the Company to or with respect to an Optionee, or to demand payment from the Optionee or other person to whom the Company is delivering certificates for Shares purchased upon exercise of an Option of, amounts sufficient to satisfy any federal, state or local withholding tax liability attributable to such Optionee's (or any beneficiary's or personal representative's) receipt or disposition of Shares purchased under any Option or (b) to take any such other action as it deems necessary to enable it to satisfy any such tax withholding obligations. The Committee, in its sole discretion, may permit an Optionee to elect to have Shares that would be acquired upon exercise of Options (valued at fair market value as of the date of exercise) withheld by the Company in satisfaction of such Optionee's withholding tax liabilities.
19. EXCHANGES. The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan to be conditioned upon the granting to the Optionee of a new
Option for the same or a different number of Shares as the Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such Optionee. Subject to the provisions of the Plan, such new Option will be exercisable at the then fair market value of the Shares, during such period and on such other terms and conditions as are specified by the Committee at the time the new Option is granted. Upon surrender, the Options surrendered will be cancelled, and the Shares previously subject to them will be available for the grant of other Options. The Committee also may grant Tax Offset Payments to any Optionee surrendering such Option for a new Option.
20. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan, the grant and exercise of Options thereunder, and the obligation of the Company to sell and deliver the Shares under such Options, will be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. Options issued under this Plan are not exercisable prior to (i) the date upon which the Company has registered the Shares for which Options may be issued under the 1933 Act and the completion of any registration or qualification of such Shares under state law, or any ruling or regulation of any government body which the Company, in its sole discretion, determines to be necessary or advisable in connection therewith, or (ii) receipt by the Company of an opinion from counsel to the Company stating that the exercise of such Options may be effected without registering the Shares subject to such Options under the 1933 Act or under state or other law.
21. ASSUMPTION. The Plan may be assumed by the successors and assigns of the Company.
22. EXPENSES. The Company will bear all expenses and costs in connection with administration of the Plan.
23. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may terminate, amend or modify the Plan at any time without further action on the part of the shareholders of the Company; provided, however, that (a) no amendment to the Plan may cause the ISOs granted hereunder to fail to qualify as incentive stock options under the Code; and (b) any amendment to the Plan which requires the approval of the shareholders of the Company under the Code, the regulations promulgated thereunder or the rules promulgated under section 16 of the 1934 Act will be subject to approval by the shareholders of the Company in accordance with the Code, such regulations or such rules. No amendment, modification or termination of the Plan may adversely affect in any manner any Option previously granted to an Optionee under the Plan without the consent of the Optionee or the transferee of such Option.
24. TERM OF PLAN. The Plan will become effective on the Effective Date, subject to the approval of the Plan by the holders of a majority of the shares of stock of the Company entitled to vote within twelve months of the date of the Plan's adoption by the Board, and the exercise of all Options granted prior to such approval will be subject to such approval. The Plan will terminate on the tenth anniversary of the Effective Date, or such earlier date as may be determined by the
Board. Termination of the Plan, however, will not affect the rights of Optionees under Options previously granted to them, and all unexpired Options will continue in force and operation after termination of the Plan except as they may lapse or terminate by their own terms and conditions.
25. LIMITATION OF LIABILITY. The liability of the Company under this Plan or in connection with any exercise of an Option is limited to the obligations expressly set forth in the Plan and in any Stock Option Agreements, and no term or provision of this Plan or of any Stock Option Agreements will be construed to impose any further or additional duties, obligations or costs on the Company not expressly set forth in the Plan or the Stock Option Agreements.
(a) CHANGE IN CONTROL. A "change in control" will be deemed to have occurred if and when (i) a person, partnership, corporation, trust or other entity ("Person") acquires or combines with the Company, or 50 percent or more of its assets or earning power, in one or more transactions, and after such acquisition or combination, less than a majority of the outstanding voting shares of the Person surviving such transaction (or the ultimate parent of the surviving Person) is owned by the owners of the voting shares of the Company outstanding immediately prior to such acquisition or combination; or (ii) during any period of two consecutive years during the term of this Plan, individuals who at the beginning of such period are members of the Board ("Original Board Members") cease for any reason to constitute at least a majority of the Board, unless the election of each Board member who was not an Original Board Member has been approved in advance by Board members representing at least two-thirds of the Board members then in office who were Original Board Members.
(b) DISABILITY. The term "disability" means a physical or mental condition resulting from bodily injury, disease, or mental disorder which renders the Optionee incapable of continuing the Optionee's usual and customary employment or service with the Company or any parent or subsidiary of the Company.
(c) FAIR MARKET VALUE. If the Shares are publicly traded, the term "fair market value" as used in this Plan means (i) the closing price quoted in the Nasdaq National Market, if the Shares are so quoted, (ii) the last quote reported by Nasdaq for small-cap issues, if the Shares are so quoted, (iii) the mean between the bid and asked prices as reported by Nasdaq, if the Shares are so quoted, or (iv) if the Shares are listed on a securities exchange, the closing price at which the Shares are quoted on such exchange, in each case at the close of the date immediately before the Option is granted or, if there be no quotation or sale on that date, the next preceding date on which the Shares were quoted or traded. In all other cases, the fair market value will be determined in accordance with procedures established in good faith by the Committee and with respect to ISOs, conforming to regulations issued by the Internal Revenue Service regarding incentive stock options.
(d) KEY EMPLOYEES. The term "key employees" means those executive, administrative, operational and managerial employees who are determined by the Committee to be eligible for Options under the Plan.
(e) PARENT AND SUBSIDIARY. The terms "subsidiary" and "parent" as used in the Plan have the respective meanings set forth in sections 424(f) and (e) of the Code.
(f) TERMINATION FOR CAUSE. The term "termination of employment for cause" means termination of employment for (a) the commission of an act of dishonesty, including but not limited to misappropriation of funds or property of the Company; (b) the engagement in activities or conduct injurious to the reputation of the Company; (c) the conviction or entry of a guilty or no contest plea to a misdemeanor (involving an act of moral turpitude) or a felony; (d) the violation of any of the terms and conditions of any written agreement the Optionee may have with the Company or its parent or subsidiary (following 30 days' written notice from the Company specifying the violation and the employee's failure to cure such violation within such 30-day period) or (e) any refusal to comply with the written directives, policies or regulations established from time to time by the Board.
[ISO /or/ NSO] No. 96-
MAX & ERMA'S RESTAURANTS, INC.
Max & Erma's Restaurants, Inc. (the "Company") hereby grants, effective this ____ day of _____________________________________, 19___ (the "Effective Date") to __________________________________ (the "Optionee") an option to purchase _________ shares of its common stock, $.10 par value (the "Option Shares"), at a price of ______________________Dollars ($__________) per share pursuant to the Company's 1996 Stock Option Plan (the "Plan"), subject to the following:
1. RELATIONSHIP TO THE PLAN. This option is granted pursuant to the Plan, and is in all respects subject to the terms, provisions and definitions of the Plan and any amendments thereto. The Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and conditions thereof. The Optionee accepts this option subject to all the terms and provisions of the Plan (including without limitation provisions relating to nontransferability, exercise of the option, sale of the option shares, termination of the option, adjustment of the number of shares subject to the option, and the exercise price of the option). The Optionee further agrees that all decisions and interpretations made by the Compensation Committee (the "Committee"), as established under the Plan, and as from time to time constituted, are final, binding, and conclusive upon the Optionee and his or her heirs. This option [IS/IS NOT] an Incentive Stock Option under the Plan.
2. TIME OF EXERCISE. This option may be exercised, from time to time, in full or in part, by the Optionee to the extent the option is vested based upon the number of full years the Optionee is an employee of the Company after the Effective Date (the "Vested Percentage") and remains exercisable (subject to the provisions herein and the Plan) until it has been exercised as to all of the Option Shares or the _____ anniversary of the Effective Date, whichever occurs first. The Optionee is entitled to exercise this option to the extent of the percentage of, and not to exceed in the aggregate, the maximum number of the Option Shares, based upon the Vested Percentage, from time to time, as determined in accordance with the following schedule:
After the Effective Date Vested Percentage
Notwithstanding the foregoing, this option may not be exercised unless (i) the Option Shares are registered under the Securities Act of 1933, as amended, and are registered or qualified under applicable state securities or "blue sky" laws, or (ii) the Company has received an opinion of counsel to the Company to the effect that the option may be exercised and Option Shares may be issued by the Company pursuant thereto without such registration or qualification. If this option is not otherwise exercisable by reason of the foregoing sentence, the Company will take reasonable steps to comply with applicable state and federal securities laws in connection with such issuance.
3. METHODS OF EXERCISE. This option is exercisable by delivery to the Company of written notice of exercise which specifies the number of shares to be purchased and the election of the method of payment therefor, which will be one of the methods of payment specified in paragraph 11(c) of the Plan. If payment is otherwise than payment in full in cash, the method of payment is subject to the consent of the Committee. Upon receipt of payment for the shares to be purchased pursuant to the option or, if applicable, the shares to be delivered pursuant to the election of an alternative payment method, the Company will deliver or cause to be delivered to the Optionee, to any other person exercising this option, or to a broker or dealer if the method of payment specified in clause (iii) of paragraph 11(c) of the Plan is elected, a certificate or certificates for the number of shares with respect to which this option is being exercised, registered in the name of the Optionee or other person exercising the option, or if appropriate, in the name of such broker or dealer; provided, however, that if any law or regulation or order of the Securities and Exchange Commission or other body having jurisdiction over the exercise of this option will require the Company or Optionee (or other person exercising this option) to take any action in connection with the shares then being purchased, the delivery of the certificate or certificates for such shares may be delayed for the period necessary to take and complete such action.
4. ACQUISITION FOR INVESTMENT. This option is granted on the condition that the acquisition of the Option Shares hereunder will be for the account of the Optionee (or other person exercising this option) for investment purposes and not with a view to resale or distribution, except that such condition will be inoperative if the Option Shares are registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such shares may be resold without registration. At the time of any exercise of the option, the Optionee (or other person exercising this option) will execute such further agreements as the Company may require to implement the foregoing condition and to acknowledge the Optionee's (or such other person's) familiarity with restrictions on the resale of the Option Shares under applicable securities laws.
5. DISPOSITION OF SHARES. The Optionee or any other person who may exercise this option will notify the Company within seven (7) days of any sale or other transfer of any Option Shares. If any class of equity securities of the Company is registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended, and the Optionee or any other person who may exercise this option is subject to section 16 of that Act by virtue of such Optionee's or person's relationship to the Company, the Optionee or other person exercising this Option agrees not to sell or otherwise dispose of any Option Shares unless at least six (6) months have elapsed from the Effective Date.
6. WITHHOLDING. As a condition to the issuance of any of the Option Shares under this option, Optionee or any person who may exercise this option authorizes the Company to withhold in accordance with applicable law from any salary, wages or other compensation for services payable by the Company to or with respect to Optionee any and all taxes required to be withheld by the Company under federal, state or local law as a result of such Optionee's or such person's receipt or disposition of Option Shares purchased under this option. If, for any reason, the Company is unable to withhold all or any portion of the amount required to be withheld, Optionee (or any person who may exercise this option) agrees to pay to the Company upon exercise of this option an amount equal to the withholding required to be made less the amount actually withheld by the Company.
7. GENERAL. This Agreement will be construed as a contract under the laws of the State of Ohio without reference to Ohio's choice of law rules. It may be executed in several counterparts, all of which will constitute one Agreement. It will bind and, subject to the terms of the Plan, benefit the parties and their respective successors, assigns, and legal representatives.
IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the date first above written.
OPTIONEE: MAX & ERMA'S RESTAURANTS, INC. | 10-K | EX-10.P | 1996-01-16T00:00:00 | 1996-01-16T09:56:33 |
0000804188-96-000002 | 0000804188-96-000002_0001.txt | FOR IMMEDIATE RELEASE: January 15, 1996
CONTACT: Mr. William H. Buckland
ADDITIONAL SHARES IN CAPITAL ASSOCIATES, INC.
McLean, Virginia - MCC Financial Corporation (MCC) announced today that on January 9 and 10, 1996, it acquired an additional 550,000 shares of common stock of Capital Associates, Inc. (CAI) of Denver, Colorado, through private stock transactions pursuant to agreements executed on November 10, 1995 with Gary M. Jacobs and Jack M. Durliat, two of CAI's largest shareholders. On November 10, 1995, MCC acquired 65,120 shares of common stock of CAI, and voting control of CAI through the delivery of proxies for shares to be purchased in the future (including the 550,000 shares purchased on January 9 and 10, 1996) from Mr. Jacobs and Mr. Durliat.
The purchase price for the 550,000 shares was $3.30 per share (or approximately $1.8 million). This price per share reflects the CAI one for two stock split effective as of November 3, 1995.
The stock transaction raises MCC's share ownership of CAI to 2,138,369 shares. As a result of the agreements executed on November 10, 1995, MCC's share ownership of CAI will increase to 2,833,369 shares or approximately 55% of CAI's outstanding shares on a post split basis.
MCC is an aircraft and equipment lessor located in McLean, Virginia that specializes in aircraft operating leases to the regional airline industry. William H. Buckland and James D. Walker acquired MCC from Fairchild Industries, Inc. in 1988.
CAI is one of the larger independent leasing companies in the United States, and principally engaged in (1) buying, selling, leasing and remarketing new and used equipment, (2) managing equipment on and off-lease, (3) sponsoring, co-sponsoring, managing and co-managing publicly-registered income funds, and (4) arranging equipment-related financing. In its fiscal year ended May 31, 1995, CAI had net income of $1.1 million on revenues of $104.9 million and total assets of $158.7 million. CAI is headquarter in Denver, Colorado and is listed on NASDAQ.
MCC originally acquired 23% of CAI in a private transaction in June 1994. Both Buckland and Walker are currently members of CAI's Board of Directors. Walker was elected Chairman of the Board at the October 27, 1995 stockholders' meeting.
Walker, MCC's President and CEO, stated: "This transaction continues to indicate our confidence that CAI is building value through its leasing activities that will be recognized in the future." | 8-K | EX-99 | 1996-01-16T00:00:00 | 1996-01-16T13:42:25 |
0000950147-96-000015 | 0000950147-96-000015_0000.txt | /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the quarterly period ended November 30, 1995
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
(Exact name of small business issuer as
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
100 West Clarendon Avenue, Suite 2300 Phoenix, Arizona 85013 (Address of principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
The number of outstanding shares of the registrant's Common Stock on January 13, 1995 was 4,075,420.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One) / / Yes /X/ No
Cash and cash equivalents $ 660,192 Prepaid expenses and other 261,566 Property and equipment, net 344,266 Deferred debenture issuance costs, net 3,748
Less unamortized debenture discount (3,971) Notes payable to stockholders 160,000
Preferred stock $.01 par value, authorized 12,000,000 shares: $100 Class A, nonvoting cumulative convertible preferred stock, Series 1, $.01 par value; authorized 1,000,000 shares; none issued and outstanding (liquidation preference of $100 per share) -- $10 Class A, nonvoting cumulative convertible preferred stock, Series 2, $.01 par value; authorized 1,000,000 shares; 388,180 shares issued and outstanding (liquidation preference of $10 per share) 3,882 Class A, voting cumulative convertible preferred stock, Series 3, $.01 par value; authorized 100,000 shares; none issued and outstanding (liquidation preference of
Common stock of $.01 par value, authorized 12,000,000 shares; 4,075,420 shares issued and outstanding 40,754
The accompanying notes are an integral part of these statements.
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1994
Cash flows from operating activities: Net income $ 43,088 $ 228,745 Adjustments to reconcile net income to net cash provided (used) in operating activities: Depreciation and amortization 57,600 36,107 Gain on fixed asset disposal (8,004) -- Gain on retirement of debentures (7,067) -- Provision for losses on accounts receivable (6,619) (3,899) Changes in assets and liabilities: Decrease (increase) in receivables 41,563 (250,158) Increase in prepaid expenses (174,226) (79,616) Decrease (increase) in other assets 23,907 (23,861) Increase (decrease) in accounts payable (3,525) 25,755 Increase (decrease) in accrued expenses (19,123) 31,863 Decrease in deferred income (13,566) (504) Increase (decrease) in accrued rent 8,484 (27,789)
Net cash used by operating activities (57,488) (63,357)
Cash flows from financing activities: Repurchase of debentures (59,743) -- Disposition of fixed assets 8,250 -- Purchases of fixed assets (46,394) (6,183)
Net cash used by financing activities (97,887) (6,183)
Net decrease in cash and cash equivalents (155,375) (69,540)
Cash and cash equivalents at beginning of period 815,567 347,681
Cash and cash equivalents at end of period $ 660,192 $ 278,141
(a) Interest paid during the period - Debentures 8,978 -- Notes payable to stockholders 4,839 4,839
The accompanying notes are an integral part of these statements.
NOVEMBER 30, 1995 AND 1994
1. The condensed 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 at the fiscal year end have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of Management, the adjustments included in the accompanying interim financial statements are all of a normal recurring nature and present fairly the Company's financial position and the results of operations and cash flows for the periods indicated.
The results of operations for the period ended November 30, 1995, are not necessarily indicative of the results to be expected for the complete fiscal year.
2. For the quarter and six months ended November 30, 1995, loss per common share is computed by dividing net loss, after giving appropriate effect to undeclared preferred stock dividends payable and accrued during the period ($87,342 and $174,684 for the quarter and six months, respectively) by the weighted average number of common shares outstanding during the period.
For the quarter and six months ended November 30, 1994, earnings per share is calculated as follows. Note that the inclusion of common stock equivalents (Series 2 Preferred stock, options and warrants) and potentially dilutive convertible debt has an immaterial dilutive effect. Accordingly, only one earnings per share figure is reported in the Statements of Operations for each quarter and six month period.
Quarter Six Months Quarter Six Months
Net Income $ 209,239 $ 228,745 $ 209,239 $ 228,745 that are not CSEs based common shares 209,239 228,745 218,437 247,167
shares outstanding 4,075,420 4,075,420 4,075,420 4,075,420 equivalents: stock 970,450 970,450 970,450 970,450 warrants 1,552,970 1,642,590 2,729,418 2,729,418 Adjusted shares outstanding 6,598,840 6,688,460 7,827,088 7,827,088
Earnings per share .03 .03 .03 .03
Item 2 Management's Discussion and Analysis or Plan of Operations For the Quarter and Six Months Ended November 30, 1995
Service revenues totaled $1,447,717 and $3,009,678 for the quarter and six months ended November 30, 1995, compared to $1,592,365 and $2,924,570 for the same periods in fiscal 1995, representing a decrease of $144,648 (9%) for the current quarter compared to the quarter ended November 30, 1994 and an increase of $85,108 (3%) for the six months ended November 30, 1995 compared to the same period last year. The Company's vision and hearing programs accounted for $627,195 (43%) and $1,284,131 (43%) of total service revenues during the quarter and six months ended November 30, 1995 compared to $612,464 (38%)and $1,096,168 (37%) for the same periods last year. The increase in vision and hearing revenue during the current fiscal year was the result of the increase in vision cardholders attributable to one existing sponsor who added insured cardholders in the latter part of the quarter and six months ended November 1994. Beginning toward the end of fiscal 1995 and continuing through the six months ended November 30, 1995, one sponsor, whose cardholders are covered under the Company's vision, hearing and dental plans, has reduced its total number of uninsured cardholders by approximately 20,000. At November 30, 1995, there were approximately 386,000 vision cardholders in force compared to approximately 397,000 cardholders at November 30, 1994. Vision provider fee revenue declined by $12,053 (19%) and $33,547 (23%) during the quarter and six months ended November 30, 1995, as compared to the same periods in fiscal 1995 due in part to a modification of the Company's agreements with its providers that for certain new sponsors, the providers are not required to pay a fee based on gross sales to that sponsor's members.
The Company's dental program accounted for $448,164 (31%) and $913,567 (30%) of total service revenues during the current quarter and six months compared to $486,652 (31%) and $802,399 (27%) for the same periods in fiscal 1995. The decline in this line of business was primarily due to the loss of approximately 20,000 uninsured cardholders as discussed above. Subsequent to November 30, 1995, the Company received a letter of intent from a new sponsor whereby approximately 60,000 uninsured cardholders will be covered under the Company's dental plan beginning January and February 1996. There were approximately 77,000 dental cardholders at November 30, 1995, compared to approximately 114,000 at November 30, 1994.
On December 30, 1992, the Company completed the sale of its pharmacy line of business to Med Net (formerly Medi-Mail, Inc.) for 298,333 unregistered and 35,000 registered shares of Medi-Mail Common Stock. The Company contracted to provide certain administrative services with respect to the pharmacy line of business until December 31, 1993. However, due to delays encountered by Medi-Mail during the conversion of the claims processing, the Company entered into a month to month agreement to continue to provide administrative services to Medi-Mail. Medi-Mail terminated the agreement in August 1995; therefore, the Company did not generate any revenues related to the pharmaceutical program for the quarter ended November 30, 1995 compared to $118,171 (7%) for the quarter ended November 30, 1994. Pharmaceutical revenues constituted $78,281 (3%) of total service revenues during the six months ended November 30, 1995, compared to $249,957 (9%) during fiscal 1994.
The Company makes available to its providers, buying group program that enables the provider to purchase frames from the manufacturers at discounts from wholesale costs. These discounted prices are generally lower than a provider could negotiate individually due to the large volume of purchases of the buying group. Buying group revenues accounted for $371,533 (26%) and $733,687 (24%) of total service revenues for the quarter and six months ended November 30, 1995 compared to $375,014 (25%) and $776,046 (27%) for the same periods in fiscal 1995.
Past and future revenues in all lines of business are directly related to the number of cardholders enrolled in the Company's benefit programs. However, there may be significant pricing differences depending on whether the benefit is insured in part or whole by the plan sponsor. The Company's cardholder base principally is derived from a limited number of sponsors.
The cost of services increased by $103,266 (12%) and $226,899 (13%) from $859,610 and $1,699,373 during the quarter and six months ended November 30, 1994 compared to $962,876 and $1,926,272 during the same periods in fiscal 1996. These costs primarily relate to servicing cardholders, providers, and sponsors under the Company's vision, hearing and dental benefit programs. The increase in cost of services during the current quarter and six months was due to incremental costs incurred related to servicing cardholders.
General and administrative expenses were $296,747 and $591,082 during the current quarter and six months, which represents an increase of $30,106 (11%) and $58,526 (10%) compared to the same periods in fiscal 1995. These costs include depreciation, legal and professional fees, insurance, and consulting fees related to National Health Enterprises (NHE). The increase in the current year was primarily due to increased consulting fees to NHE and other consultants.
Selling and marketing expenses were $249,111 and $448,282 for the quarter and six months ended November 30, 1995, representing a decrease of $20,145 (8%) and an increase of $13,101 (2%) from the same periods in the prior year. Selling and marketing expenses include marketing fees, broker commissions, inside sales and marketing salaries and related expenses, travel related to the Company's sales activities and an allocation of other overhead expenses relating to the Company's sales and marketing functions. A significant amount of the Company's marketing activities are performed by NHE.
The Company had cash and cash equivalents of $660,192 at November 30, 1995, compared to $278,141 at November 30, 1994. The increase of $382,051 was due primarily to positive cash flows generated from operations as well as the sale of Medi-Mail common stock in January 1995.
At November 30, 1995, the Company had aggregate outstanding long-term liabilities of $440,004, consisting of $189,000 of Convertible Subordinated Debentures, less $3,971 of unamortized discount, $160,000 of subordinated notes payable to stockholders, and $94,975 in accrued rent.
Although the Company has realized a loss from operations during the current quarter, based on the anticipated increased levels of cardholders, the Company expects to generate positive cash flows and income from operations beginning in the latter part of fiscal 1996.
Information regarding legal proceedings is incorporated by reference from the Company's report on Form 10-KSB for the year ended May 31, 1995.
Item 3. Defaults Upon Senior Securities
(b) The Company determined not to pay the quarterly dividend otherwise scheduled for payment in January 1996, on shares of its Series 2 Preferred Stock. The dividend is cumulative. The arrearage is $1,106,850 as of November 30, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held on December 10, 1995.
(c) There was one matter voted upon at the meeting, as follows:
The following nominees were elected for one-year terms as directors of the Company: William R. Cohen William L. Richter Gerald L. Cohen Samuel A. Oolie Kenneth L. Blum, Sr.
The results of voting for each nominee were as follows: Number of votes cast for: 3,186,645 Number of votes cast against: 1,360
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this report:
(b) No reports on Form 8-K were filed during the quarter ended November 30, 1995.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: 1/12/96 /s/ Mark L. Smith Mark L. Smith, Vice President | 10QSB | 10QSB | 1996-01-16T00:00:00 | 1996-01-16T16:47:31 |
0000906342-96-000005 | 0000906342-96-000005_0000.txt | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended July 31, 1995 Commission File No. 0-5653
(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 (Zip Code)
including area code: (610) 667-8225
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.
Indicate the number of shares outstanding of each of the Registrant's classes on common stock, as of the latest practicable date.
Item 1. This Amendment is filed for the purpose of including the required Financial Data Schedule for the subject report, as filed herewith.
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 15, 1996 By:/s/ Albert M. Zlotnick
SIX MONTHS ENDED JULY 31, 1995
Appendix A to Item 601(c) of Regulations S-K (Article 5 of Regulation S-X | 10-Q/A | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T14:54:36 |
0000950130-96-000112 | 0000950130-96-000112_0000.txt | NEW YORK, NEW YORK 10016
SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14f-1 THEREUNDER
This Information Statement ("Information Statement") is being mailed on or about January 12, 1996, as a part of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") to the holders of record of Common Stock at the close of business on or about January 12, 1996. You are receiving this Information Statement in connection with the possible election of persons designated by Parent to a majority of the seats on the Board of Directors of the Company.
The Merger Agreement provides that in the event the Purchaser acquires at least a majority of the Shares on a fully diluted basis pursuant to the Offer, Parent shall be entitled to designate for appointment or election to the Board upon written notice to the Company, such number of persons so that the designees of the Parent (the "Parent Designees") constitute the same percentage (but in no event less than a majority) of the Company's Board of Directors (rounded up to the next whole number) as the percentage of Shares acquired in connection with the Offer. Prior to consummation of the Offer, the Board of Directors of the Company will obtain the resignation of such number of directors as is necessary to enable such number of Parent Designees to be so elected. Notwithstanding the foregoing, the parties have agreed to use their respective best efforts to ensure that at least three of the members of the Company's Board of Directors shall, at all times prior to the Effective Time (as defined in Section 2.2 of the Merger Agreement) be, Continuing Directors (as defined in Section 8.4 of the Merger Agreement).
The following information is based on the Company's Proxy Statement dated as of June 26, 1995, and, except as indicated, such information is given as of such date.
You are urged to read this Information Statement carefully. You are not, however, required to take any action. Capitalized terms used herein and not otherwise defined herein shall have the meaning set forth in the Schedule 14D- 9.
The information contained in this Information Statement concerning Parent has been furnished to the Company by Parent, and the Company assumes no responsibility for the accuracy or completeness of such information.
INFORMATION WITH RESPECT TO THE COMPANY
There were 173,068,379 shares of common stock, par value $.25 per share ("Common Stock"), of the Company outstanding on December 31, 1995 and each share is entitled to one vote on each matter and provides the holder with certain preferred stock purchase rights.
As of December 31, 1995, the only officer or Director owning 1% or more of the Company's Common Stock was Bernard L. Schwartz, Chairman of the Board of Directors and Chief Executive Officer of the Company, who owned beneficially 3,574,402 shares constituting approximately 2.0% of the Company's outstanding voting securities. All Directors and current executive officers as a group (27 persons) owned beneficially 5,864,853 shares constituting approximately 3.3% of outstanding voting securities.
Based upon filings made with the Company, the only reported 5% Stockholder as of [June 16, 1995] is Fidelity Investments, FMR Corp. ("FMR") on behalf of advisory accounts and/or investment companies. FMR reported ownership of 10,710,508 (6.3%) shares of the Company's Common Stock, as adjusted to reflect the two-for-one stock split distributed on September 29, 1995. FMR represented that the shares were acquired for investment purposes for managed accounts, trusts or employee benefit plans.
The Company has three classes of Directors serving staggered three-year terms. Class I currently consists of three Directors and Classes II and III consist of four Directors. The terms of the Class I, Class II and Class III Directors expire on the date of the Annual Meeting in 1998, 1996 and 1997, respectively.
The Company has a standing Audit and Government Compliance Committee (the "Audit Committee"), Nominating Committee, and Compensation and Stock Option Committee (the "Compensation Committee"). The Audit Committee, which met three times during fiscal 1995, is comprised of four members: Messrs. Hodes, Ruderman, Shapiro and Stanton. The Audit Committee reviews and acts or reports to the Board with respect to government procurement compliance matters as well as various auditing and accounting matters, including the selection of the Company's independent auditors, the accounting and financial practices and controls of the Company, audit procedures and findings, and the nature of services performed for the Company by, and the fees paid to, the independent auditors. The Nominating Committee, which met once in fiscal 1995, is comprised of Messrs. Kekst, Shapiro and Stanton. The Nominating Committee is chartered to establish criteria for recommendations for director nominees and in connection therewith, to consider the participation and contribution of current Directors. The Nominating Committee does not generally accept nominees randomly received from third parties, including Stockholders. The Compensation Committee, which met twice during fiscal 1995, is comprised of four members: Messrs. Gittis, Hodes, Kekst and Shapiro. The Compensation Committee reviews and provides recommendations to the Board of Directors regarding executive compensation matters. The Compensation Committee is also responsible for the administration of the Company's Stock Option and Incentive Stock Purchase Plans, Restricted Stock Purchase Plan and the Incentive Compensation Plan for Senior Executives.
The Board of Directors held seven meetings during fiscal 1995. No Director attended fewer than 75% of the meetings of the Board of Directors and of its committees. Directors are paid a fixed fee of $25,000 per year. Non-employee Directors are also paid $6,000 for personal attendance at each meeting. Audit Committee members are paid $2,000 per year and $1,000 per meeting. Compensation Committee members are paid $500 per year. The Company provides certain life insurance and medical benefits to certain non-employee Directors. For fiscal 1995 the value of these benefits was $13,565 for Mr. Gittis, $15,515 for Mr. Hodes, $14,553 for Mr. Kekst, $14,223 for Mr. Ruderman, $12,928 for Mr. Shapiro and $14,170 for Mr. Yankelovich. In addition, Mr. Shapiro received compensation in the amount of $35,570 with respect to early cancellation of a prior life insurance policy.
The Company has purchased insurance from the Reliance Insurance Company insuring the Company against obligations it might incur as a result of its indemnification of its officers and Directors for certain liabilities they might incur, and insuring such officers and Directors for additional liabilities against which they might not be indemnified by the Company. The insurance expires on April 1, 1996, and costs $321,300. Pursuant to the New York Business Corporation Law, the Company has entered into Indemnity Agreements with its Directors and executive officers. The Indemnity Agreements are intended to provide the full indemnity protection authorized by New York law.
The following table provides certain relevant information as of June 26, 1995 concerning the Directors and their principal occupations:
(1) Member of Executive Committee. (2) Member of Pension Advisory Committee.
SECURITIES OWNED BY DIRECTORS AND EXECUTIVE OFFICERS
The following table presents the number of shares of Common Stock beneficially owned by the Directors, the named executive officers in the Summary Compensation Table ("NEOs"), and all Directors and officers as a group on December 31, 1995. Individuals have sole voting and investment power over the stock unless otherwise indicated in the footnotes.
* Represents holdings of less than one percent.
(1) Includes shares which, as of December 31, 1995, may be acquired within sixty days pursuant to the exercise of options (which shares are treated as outstanding for the purposes of determining beneficial ownership and computing the percentage set forth); shares held by trusts of which Directors and their wives are trustees; shares held by a trust in which an officer and Director is a trustee; and shares held for the benefit of officers as of March 31, 1995 in the Loral Master Savings Plan (the "Savings Plan").
(2) Except as noted, all shares are owned directly with sole investment and voting power. All Directors other than Messrs. Schwartz, Lanza, Gittis, Lazarus, Shinn and Simon have the right to exercise Loral stock options for 20,000 shares at $8.86 per share; such exercisable shares are included in the table.
(3) Includes 160,000 shares held by Mr. Schwartz's wife, 2,400,000 shares exercisable under Company Stock Option Plans, and 12,224 shares in the Savings Plan.
(4) Includes 63,428 shares exercisable under Company Stock Option Plans, 7,310 shares in the Savings Plan, and 3,936 shares restricted under the Company's Restricted Stock Purchase Plan.
(5) Includes 800 shares as to which Mr. Hodes disclaims beneficial ownership held by Mr. Hodes' minor child.
(6) Includes 525,700 shares exercisable under Company Stock Option Plans, 4,254 shares in the Savings Plan, and 9,362 shares restricted under the Company's Restricted Stock Purchase Plan.
(7) Includes 6,222 shares in the Savings Plan, and 3,936 shares restricted under the Company's Restricted Stock Purchase Plan.
(8) Includes 4,000 shares held by Mr. Lazarus' wife.
(9) Includes 12,000 shares owned jointly with Mr. Ruderman's wife.
(10) Includes 8,000 shares as to which Mr. Shapiro disclaims beneficial ownership held by Mr. Shapiro's wife.
(11) Includes 44 shares in the Savings Plan, and 3,936 shares restricted under the Company's Restricted Stock Purchase Plan.
(12) Includes 3,242,728 shares exercisable under Company Stock Option Plans, 52,614 shares in the Savings Plan, and 28,550 shares restricted under the Company's Restricted Stock Purchase Plan.
(a) Value of shares awarded under the Restricted Stock Purchase Plan in 1993. Shares awarded under the plan vest and become freely transferable in accordance with a formula based upon Loral earnings. The total number of shares vesting under the plan each year is equal to 3% of the Company's pre-tax profit divided by the grant value (currently $52.50 per share) of restricted shares outstanding. Any shares not earned at the earlier of completion of the seventh year or termination of employment, will be forfeited. Dividends are paid on the restricted shares awarded. As of March 31, 1995, the number, as adjusted to reflect the two-for-one stock split distributed on September 29, 1995, and value of restricted stock holdings, respectively, were 9,362 shares and $198,357 for Mr. Lanza, 3,936 shares and $83,394 for each of Messrs. DeBlasio, LaPenta, and Targoff.
(b) Under the 1994 Incentive Stock Purchase Plan, the Compensation Committee may permit participants to defer up to 100% of their annual bonus into a Restricted Stock Purchase Account (the "Restricted Account"). The Restricted Account will be used to purchase Loral Common Stock equal to 150% of the deferred bonus, subject to limits the Committee may establish from time to time. The shares in the Restricted Account earn dividends and generally vest 25% per year commencing upon the second anniversary of the grant date. The Committee may establish specified performance conditions that, if attained, will result in accelerated vesting. All non-vested shares are forfeited upon termination of employment and the remaining balance of the Restricted Account equal to the lesser of the original cost or the market value of the shares is returned to the participant. No shares have been issued under this plan.
(c) Stock options, which have been adjusted to reflect a two-for-one stock split distributed on October 7, 1993 and a two-for-one stock split distributed on September 29, 1995, generally vest over a four and one-half to six year period.
(d) Includes annual Board of Directors fee in 1995, 1994 and 1993 of $25,000 for Messrs. Schwartz and Lanza, company matching contributions of $3,100 in 1995, $3,598 in 1994 and $3,722 in 1993 to the Savings Plan for Messrs. DeBlasio, LaPenta and Targoff and the value of supplemental life insurance programs attributable to 1995, 1994 and 1993 in the amounts of $63,252, $72,399 and $61,266 for Mr. Schwartz, $5,713, $1,787 and $1,562 for Mr. DeBlasio, $4,146, $5,022 and $4,159 for Mr. LaPenta, and $6,017, $7,160 and $5,970 for Mr. Targoff, respectively, and $6,965 attributable to 1995 for Mr. Lanza.
OPTION EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
(a) As adjusted to reflect the two-for-one stock split distributed on September 29, 1995. (b) Market value of underlying securities at exercise date or year-end, as the case may be, minus the exercise price.
EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS
The Company has an employment agreement with Mr. Schwartz, which expires on March 31, 2000. Pursuant to the agreement, Mr. Schwartz's annual base salary was $908,300 for fiscal 1995, to be increased annually by the percentage change in a specified consumer price index. Under the agreement, Mr. Schwartz is entitled to annual incentive compensation equal to 3% of the increase over 9 1/4% in the Company's shareholders' equity as adjusted for stock issuances, other non-operating charges or credits and before dividends. In accordance with the incentive bonus provisions, Mr. Schwartz received fiscal 1995 incentive compensation of $5,214,426. The agreement also includes a cap on maximum annual incentive compensation of $9 million, as adjusted for inflation.
Pursuant to the agreement, if Mr. Schwartz is removed as Chairman of the Board of Directors or as Chief Executive Officer other than for cause, or if his duties, authorities or responsibilities are diminished, or if there is a change of control (as defined to encompass the Company becoming a subsidiary of another company, the acquisition of 35% or more of the voting securities of the Company by a particular stockholder or group, or a change in 35% of the Company's directors at the insistence of the shareholder group), Mr. Schwartz may elect to terminate the contract. In any such event, or upon his death or disability, Mr. Schwartz will be entitled to receive a lump sum payment discounted at 9% per annum, in an amount equal to his base salary as adjusted for defined consumer price index changes for the remainder of the term, an amount of incentive compensation equal to the highest received by Mr. Schwartz in any of the prior three years, times the number of years (including partial fiscal years) remaining during the term, and an amount calculated to approximate the annual compensation element reflected in the difference between fair market value and exercise price of stock options granted to Mr. Schwartz. All such sums are further increased to offset any tax due by Mr. Schwartz under the excise tax and related provisions of Section 4999 of the Internal Revenue Code but subject to a cap equal to 200% of any such tax.
The Company also has an employment agreement with Mr. Lanza for a five year term expiring March 31, 1997. Pursuant to the agreement, Mr. Lanza's annual base salary was $634,500 for fiscal 1995, to be increased annually by the percentage change in a specified consumer price index. Under the agreement, Mr. Lanza is entitled to annual incentive compensation under the growth in shareholders' equity formula applicable under Mr. Schwartz's employment agreement, but at 1 1/2% of the increase over the 9 1/4% threshold. As a result, Mr. Lanza received fiscal 1995 incentive compensation of $2,607,213. If Mr. Lanza becomes disabled, he will receive 50% of his salary for the remainder of the term.
The Company has established Supplemental Life Insurance Programs for certain key employees including the executives listed in the Summary Compensation Table. For Messrs. Schwartz, Lanza, DeBlasio, LaPenta and
Targoff, the Plans are funded with "Split-Dollar" insurance policies in the face amounts of $20,500,000, $1,000,000, $1,060,000, $1,200,000 and $1,450,000 respectively. In the event of death, the Company will be entitled to receive an amount not less than the Company's cumulative contributions. If any of such officers terminates his employment prior to the time that the Company's contributions equal the cash value of the insurance policy, he will be responsible for repayment of the remainder of the Company's contribution to the extent cash becomes available in the policy. Such officers contribute to the payment for this program.
The individuals named in the Summary Compensation Table participate in a pension plan that generally provides an annual benefit for each year of membership for the first 14 years of Loral service, of 1.2% of such remuneration up to the Social Security Wage Base and 1.45% of such remuneration in excess of that Base, and for 15 or more years of Loral service, 1.5% of such remuneration up to the Social Security Wage Base and 1.75% of such remuneration in excess of that Base, all subject to certain vesting and other requirements. These individuals also participate in a supplemental plan which generally makes up for certain reductions in such benefits caused by Internal Revenue Code limitations. Remuneration covered by the plans primarily includes salary and bonus.
Estimated annual benefits upon retirement for Messrs. Schwartz, Lanza, DeBlasio, LaPenta and Targoff under the pension and supplemental plans are $1,117,000, $486,000, $249,000, $344,000 and $295,000, respectively. The retirement benefits have been computed assuming that (i) employment will be continued until normal retirement, or until the expiration of current employment agreements, if later; and (ii) current levels of creditable compensation and the Social Security Wage Base will continue without increases or adjustments throughout the remainder of the computation period.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Schwartz is Chairman, Chief Executive Officer, 27% owner, and controlling shareholder of K&F Industries, Inc. ("K&F"), which acquired the Company's Aircraft Braking and Engineered Fabrics businesses in April 1989. Certain other individuals named in the Summary Compensation Table are directors of K&F's operating subsidiaries. Mr. Schwartz and the other individuals named in the Summary Compensation Table receive compensation from K&F for rendering advisory services to K&F. Such compensation is not included in the Summary Compensation Table but is considered by the Compensation Committee regarding compensation from Loral. In September 1994, the Company exchanged its $30 million 14.75% pay-in-kind subordinated convertible K&F debenture due in 2004 for $11,514,000 in cash, net of expenses, and a 22.5% voting equity interest in K&F. Pursuant to agreements between the Company and K&F, the parties provide services to each other and share certain expenses relating to a production program, real property occupancy, benefits administration, treasury, accounting and legal services. The related charges agreed upon by the parties were established to reimburse each party for the actual cost incurred without profit or fee. The Company believes that the arrangements with K&F are as favorable to the Company as could have been obtained from unaffiliated parties. The Company's billings to and from K&F in fiscal 1995 were $3,014,000 and $15,000, respectively. The Company's sales to K&F in fiscal 1995 were $4,181,000.
Mr. Robert B. Hodes, a Director and a member of the Executive, Audit, Pension Advisory, and Compensation Committees, is of counsel to the law firm of Willkie Farr & Gallagher, which is general counsel to the Company.
For the fiscal year ended March 31, 1995, the Company paid fees and disbursements in the amount of $182,000 for corporate communications consultations to Kekst and Company Incorporated, of which company Mr. Gershon Kekst, a Director and member of the Executive, Nominating, and Compensation Committees, is President and the principal stockholder. Kekst and Company Incorporated continues to render such services to the Company.
INFORMATION WITH RESPECT TO PARENT
Set forth below are the names, ages, present principal occupations, five year employment history and other directorships held in public companies of the Parent Designees.
MARCUS C. BENNETT, 60, Director since 1995; Senior Vice President and Chief Financial Officer of Parent since March 16, 1995; Vice President and Chief Financial Officer of Martin Marietta Corporation since 1988; served as Vice President of Finance of Martin Marietta Corporation from 1984 to 1988; serves as Chairman of Martin Marietta Materials, Inc., a majority owned subsidiary of Martin Marietta Corporation, and Orlando Central Park, Inc. and Chesapeake Park, Inc., wholly owned subsidiaries of Martin Marietta Corporation; director of Carpenter Technology, Inc.; member of the Financial Executives Institute, MAPI Finance Council and The Economic Club of Washington; serves as a director of the Private Sector Council and as a member of its CFO Task Force.
VANCE D. COFFMAN, (51), Director since 1996; Executive Vice President and Chief Operating Officer since 1996; President and Chief Operating Officer, Space and Strategic Missiles Sector from March 1995 to December 1995; previously served in Lockheed Corporation as Executive Vice President, from 1992-1995; and President of Lockheed Space Systems Division from 1988-1992.
JOHN F. EGAN, 60, Vice President, Corporate Development, of Lockheed Martin Corporation since March 1995, after having served in a similar position at Lockheed Corporation and served as Vice President for planning and technology for Lockheed Electronics Group from 1986 to 1993 following the acquisition of Sanders Associates, Inc., by Lockheed Corporation. Joined Sanders Associates, Inc. in 1973 as Director of Business Development for the Federal Systems Group; became General Manager of two product divisions in 1975 and became Vice President, Corporate Development in 1978. Dr. Egan is a member of the Chief of Naval Operations Executive Panel and the Naval Studies Board, National Research Council.
JOHN E. MONTAGUE, 41, Vice President, Financial Strategies, for Lockheed Martin Corporation since March 1995, after having served as Vice President of Corporate Development and Investor Relations for Martin Marietta Corporation from 1991 to 1995; served as Director of Corporate Development prior to being promoted to Vice President in 1991; served as Manager of Strategic Planning for Martin Marietta Information & Communications Systems in Denver from 1984 to 1985; and joined Martin Marietta Corporation in 1977 as a member of the Engineering staff of Martin Marietta Denver Aerospace. Mr. Montague is a member of the Board of Directors of Martin Marietta Corporation and of Rational Software Corporation.
FRANK H. MENAKER, JR., 55, Vice President and General Counsel for Lockheed Martin Corporation since March 1995, after having served in the same capacity for Martin Marietta Corporation since 1981. He joined Martin Marietta Corporation in 1970 as an Assistant Division Counsel for aerospace operations in Baltimore; became a Corporate Assistant General Counsel in 1973 and in 1977 was named General Counsel of that corporation's aerospace operations. Mr. Menaker is Chair of the ABA Public Contract Law Section, a member of the Board of Directors of the National Chamber Litigation Center, and a member of the Steering Committee for the Lawyer's Committee for Human Rights.
LILLIAN M. TRIPPETT, 42, Corporate Secretary and Associate General Counsel of Lockheed Martin Corporation since March 1995, after having served as Corporate Secretary and Assistant General Counsel of Martin Marietta Corporation since April 1993. Ms. Trippett joined Martin Marietta Corporation in July 1989 as a Director of Washington Operations. Prior to joining Martin Marietta Corporation, she served for fourteen years on the staff of the Committee on Science, Space, and Technology in the House of Representatives. From 1983-1989 she served as Counsel to the Subcommittee on Space, Science and Applications, specializing in space commercialization. Ms. Trippett is a member of the International Institute of Space Law of the International Astronautical Federation, American Bar Association and the American Society of Corporate Secretaries.
ROBERT B. CORLETT, 56, Vice President, Human Resources, of Lockheed Martin Corporation since March 1995, after having served in the same capacity for Lockheed Corporation since 1991; served as Vice President, Human Resources, for the former Lockheed Aeronautical Systems, Company in 1987, after leaving the Corporation in 1980 and rejoining the Corporation in 1987; served as Director of Industrial Relations in 1979 and in 1971 transferred to the Lockheed California Company, where he held a variety of Human Resources positions leading to his appointment as Manager of Union Relations in 1975. Mr. Corlett serves on the Board of Directors and Executive Committee of the Labor Policy Association, and is a member of the Personnel Roundtable, the Aerospace Human Resources Council, and the Human Resource Roundtable of the University of California at Los Angeles.
WALTER E. SKOWRONSKI, 47, Vice President and Treasurer of Lockheed Martin Corporation since March 1995, after having served in the same capacity for Lockheed Corporation since 1992, and as its staff Vice President--Investor Relations since 1990. Prior to joining Lockheed Corporation in 1990, Mr. Skowronski was Assistant Treasurer of Boston Edison Company and from 1987 to 1990 was an instructor of Corporate Finance and Investor Relations at Northeastern University's Graduate School of Business Administration. Mr. Skowronski is a former director of the National Investor Relations Institute and served as its Chairman and Chief Executive Officer.
SECURITY OWNERSHIP OF NOMINATED DIRECTORS
No Parent Designee directly or beneficially owns shares of Common Stock of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions or series of transactions, since April 1, 1995, to which the Company or any of its subsidiaries was or is to be a party in which the amount involved exceeds $60,000 and in which any of the Parent Designees had or will have a direct or indirect material interest, nor has any Parent Designee been indebted to the Company or its subsidiaries in an amount in excess of $60,000 or been involved in a material business relationship with the Company or its subsidiaries. | SC 14F1 | SC 14F1 | 1996-01-16T00:00:00 | 1996-01-16T08:18:35 |
0000812073-96-000005 | 0000812073-96-000005_0006.txt | AMENDED AND RESTATED DISTRIBUTION PLAN FOR GREATER CINCINNATI FUND (CLASS A SHARES)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
WHEREAS, The Nottingham Investment Trust, an unincorporated business trust organized and existing under the laws of the Commonwealth of Massachusetts (the "Trust"), engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the
WHEREAS, the Trust is authorized to issue an unlimited number of shares of beneficial interest (the "Shares"), in separate series representing the interests in separate funds of securities and other assets; and
WHEREAS, the Trust offers a series of such Shares representing interests in the Greater Cincinnati Fund (the "Fund") of the Trust, which Shares are classified into Class A Shares and Class B Shares of the Fund;
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are not interested persons of the Trust (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "Non-Interested Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable likelihood that this Plan will benefit the Trust and its shareholders, have approved this Plan by votes cast at a meeting called for the purpose of voting hereon and on any agreements related hereto; and
NOW, THEREFORE, the Trust hereby amends and restates this Plan in accordance with Rule 12b-1 under the 1940 Act, on the following terms and conditions:
XXXV. Distribution and Servicing Activities. Subject to the supervision of the Trustees of the Trust, the Trust may, directly or indirectly, engage in any activities primarily intended to result in the sale of Class A Shares of the Fund or the servicing of Class A shareholder accounts, which activities may include, but are not limited to, the following: (a) payments to the Trust's Distributor and to securities dealers and others in respect of the sale of Class A Shares of the Fund or the servicing of Class A shareholder accounts; (b) payment of compensation to and expenses of personnel (including personnel of organizations with which the Trust has entered into agreements related to this Plan) who engage in or support distribution of Class A Shares of the Fund or who render shareholder support services not otherwise provided by the Trust's transfer agent, administrator, or custodian, including but not limited to, answering inquiries regarding the Trust, processing shareholder transactions, providing personal services and/or the maintenance of shareholder accounts, providing other shareholder liaison services, responding to shareholder inquiries, providing information on shareholder investments in the Fund, and providing such other shareholder services as the Trust may reasonably request; (c) formulation and implementation of marketing and promotional activities, including, but not limited to, direct mail promotions and television, radio, newspaper, magazine and other mass media advertising; (d) preparation, printing and distribution of sales literature; (e) preparation, printing and distribution of prospectuses and statements of additional information and reports of the Trust for recipients other than existing shareholders of the Trust; and (f) obtaining such information, analyses and reports with respect to marketing and promotional activities as the Trust may, from time to time, deem advisable. The Trust is authorized to engage in the activities listed above, and in any other activities primarily intended to result in the sale of Class A Shares of the Fund or the servicing of Class A shareholder accounts, either directly or through other persons with which the Trust has entered into agreements related to this Plan.
XXXVI. Maximum Expenditures. The expenditures to be made by the Trust pursuant to this Plan and the basis upon which payment of such expenditures will be made shall be determined by the Trustees of the Trust, but in no event may such expenditures exceed an amount calculated at the rate of 0.50% per annum of the average daily net asset value of the Class A Shares of the Fund for each year or portion thereof included in the period for which the computation is being made, elapsed since the inception of this Plan to the date of such expenditures. Notwithstanding the foregoing, in no event may such expenditures paid by the Trust as service fees exceed an amount calculated at the rate of 0.25% of the average annual net assets of the Class A Shares of the Fund, nor may such expenditures paid as service fees to any person who sells Class A Shares of the Fund exceed an amount calculated at the rate of 0.25% of the average annual net asset value of such shares. Such payments for distribution and shareholder servicing activities may be made directly by the Trust or to other persons with which the Trust has entered into agreements related to this Plan.
XXXVII. Term and Termination. A. This Plan shall be amended and restated, originally effective as of the 2nd day of January, 1995, and amended and restated to reflect the reclassification of the Shares of the Fund, effective as of the 1st day of September, 1995. Unless terminated as herein provided, this Plan shall continue in effect for one year from September 1, 1995 and shall continue in effect for successive periods of one year thereafter, but only so long as each such continuance is specifically approved by votes of a majority of both (i) the Trustees of the Trust and (ii) the Non-Interested Trustees, cast at a meeting called for the purpose of voting on such approval.
B. This Plan may be terminated at any time with respect to the Fund by a vote of a majority of the Non-Interested Trustees or by a vote of a majority of the outstanding voting securities of the Class A Shares of the Fund as defined in the 1940 Act.
XXXVIII. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Section 2 hereof unless such amendment is approved by a vote of the majority of the outstanding voting securities of the Class A Shares of the Fund as defined in the 1940 Act with respect to which a material increase in the amount of expenditures is proposed, and no material amendment to this Plan shall be made unless approved in the manner provided for annual renewal of this Plan in Section 3(a) hereof.
XXXIX. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of the Non-Interested Trustees of the Trust shall be committed to the discretion of such Non-Interested Trustees.
XL. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees of the Trust and the Trustees shall review quarterly a written report of the amounts expended pursuant to this Plan and any related agreement and the purposes for which such expenditures were made.
XLI. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 6 hereof, for a period of not less than six years from the date of this Plan. Any such related agreement or such reports for the first two years will be maintained in an easily accessible place.
XLII. Limitation of Liability. Any obligations of the Trust hereunder shall not be binding upon any of the Trustees, officers or shareholders of the Trust personally, but shall bind only the assets and property of the Trust. The term "The Nottingham Investment Trust" means and refers to the Trustees from time to time serving under the Declaration of Trust of the Trust, a copy of which is on file with the Secretary of The Commonwealth of Massachusetts. The execution of this Plan has been authorized by the Trustees, and this Plan has been signed on behalf of the Trust by an authorized officer of the Trust, acting as such and not individually, and neither such authorization by such Trustees nor such execution by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the assets and property of the Trust as provided in the Agreement and Declaration of Trust.
IN WITNESS THEREOF, the parties hereto have caused this Plan to be executed as of the date first written above. | 485BPOS | EX-99.B15.E | 1996-01-16T00:00:00 | 1996-01-16T16:43:37 |
0000899140-96-000020 | 0000899140-96-000020_0001.txt | <DESCRIPTION>AGMT. AND DECLARATION OF TRUST
AGREEMENT AND DECLARATION OF TRUST
This AGREEMENT AND DECLARATION OF TRUST, made at Boston, Massachusetts this 20th day of January, 1987, by and between the Settlor and the Trustee whose signature is set forth below (the "Initial Trustee"),
W I T N E S S E T H T H A T:
WHEREAS, Virginia Spencer, an individual residing in Boston, Massachusetts (the "Settlor"), proposes to deliver to the Initial Trustee the sum of one hundred dollars ($100.00) lawful money of the United States of America in trust hereunder and to authorize the Initial Trustee and all other Persons acting as Trustees hereunder to employ such funds, and any other funds coming into their hands or the hands of their successor or successors as such Trustees, to carry on the business of an investment company, and as such of buying, selling, investing in or otherwise dealing in and with stocks, bonds, debentures, warrants, options, futures contracts and other securities and interests therein, or calls or puts with respect to any of the same, or such other and further investment media and other property as the Trustees may deem advisable, which are not prohibited by law or the terms of this Declaration;
WHEREAS, the Initial Trustee is willing to accept such sum, together with any and all additions thereto and the income or increments thereof, upon the terms, conditions and trusts hereinafter set forth; and
WHEREAS, it is proposed that the assets held by the Trustees be divided into separate portfolios, each with its own separate assets, investment objectives, policies and purposes, and that the beneficial interest in each such portfolio shall be divided into transferable Shares of Beneficial Interest, a separate Series of Shares for each portfolio, all in accordance with the provisions hereinafter set forth; and
WHEREAS, it is desired that the trust established hereby (the "Trust") be managed and operated as a trust with transferable shares under the laws of Massachusetts, of the type commonly known as and referred to as a Massachusetts business trust, in accordance with the provisions hereinafter
NOW, THEREFORE, the Initial Trustee, for himself and his successors as Trustees, hereby declares, and agrees with the
Settlor, for himself and for all Persons who shall hereafter become holders of Shares of Beneficial Interest of the Trust, of any Series, that the Trustees will hold the sum delivered to them upon the execution hereof, and all other and further cash, securities and other property of every type and description which they may in any way acquire in their capacity as such Trustees, together with the income therefrom and the proceeds thereof, IN TRUST NEVERTHELESS, to manage and dispose of the same for the benefit of the holders from time to time of the Shares of Beneficial Interest of the several Series being issued and to be issued hereunder and in the manner and subject to the provisions hereof, to wit:
SECTION 1.1. Name. The name of the Trust shall be
and so far as may be practicable the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" wherever used in this Agreement and Declaration of Trust, except where the context otherwise requires) shall refer to the Trustees in their capacity as Trustees, and not individually or personally, and shall not refer to the officers, agents or employees of the Trust or of such Trustees, or to the holders of the Shares of Beneficial Interest of the Trust, of any Series. If the Trustees determine that the use of such name is not practicable, legal or convenient at any time or in any jurisdiction, or if the Trust is required to discontinue the use of such name pursuant to Section 10.5 hereof, then subject to that Section, the Trustees may use such other designation, or they may adopt such other name for the Trust as they deem proper, and the Trust may hold property and conduct its activities under such designation or name.
SECTION 1.2. Location. The Trust shall have an office in Boston, Massachusetts, unless changed by the Trustees to another location in Massachusetts or elsewhere, but such office need not be the sole or principal office of the Trust. The Trust may have such other offices or places of business as the Trustees may from time to time determine to be necessary or expedient.
SECTION 1.3. Nature of Trust. The Trust shall be a trust with transferable shares under the laws of The Commonwealth of Massachusetts, of the type referred to in Section 1 of Chapter 182 of the Massachusetts General Laws and commonly termed a Mas sachusetts business trust. The Trust is not intended to be, shall not be deemed to be, and shall not be treated as, a general partnership, limited partnership, joint venture, corporation or joint stock company. The Shareholders shall be beneficiaries and their relationship to the Trustees shall be solely in that capacity in accordance with the rights conferred upon them hereunder.
SECTION 1.4. Definitions. As used in this Agreement and Declaration of Trust, the following terms shall have the meanings set forth below unless the context thereof otherwise requires:
"Accounting Agent" shall have the meaning designated in Section 5.2(g) hereof.
"Administrator" shall have the meaning designated in Section 5.2(b) hereof.
"Affiliated Person" shall have the meaning assigned to it in the 1940 Act.
"By-Laws" shall mean the By-Laws of the Trust, as amended from time to time.
"Certificate of Designation" shall have the meaning designated in Section 6.1 hereof.
"Certificate of Termination" shall have the meaning designated in Section 6.1 hereof.
"Commission" shall have the same meaning as in the 1940 Act.
"Contracting Party" shall have the meaning designated in the preamble to Section 5.2 hereof.
"Covered Person" shall have the meaning designated in Section 8.4 hereof.
"Custodian" shall have the meaning designated in Section 5.2(d) hereof.
"Declaration" and "Declaration of Trust" shall mean this Agreement and Declaration of Trust and all amendments or modifications thereof as from time to time in effect. References in this Agreement and Declaration of Trust to "hereof", "herein" and "hereunder" shall be deemed to refer to the Declaration of Trust generally, and shall not be limited to the particular text, Article or Section in which such words appear.
"Disabling Conduct" shall have the meaning designated in Section 8.4 hereof.
"Distributor" shall have the meaning designated in Section 5.2(c) hereof.
"Dividend Disbursing Agent" shall have the meaning designated in Section 5.2(e) hereof.
"General Items" shall have the meaning defined in Section 6.2(a) hereof.
"Initial Trustee" shall have the meaning defined in the preamble hereto.
"Investment Advisor" shall have the meaning stated in Section 5.2(a) hereof.
"Majority of the Trustees" shall mean a majority of the Trustees in office at the time in question. At any time at which there shall be only one (1) Trustee in office, such term shall mean such Trustee.
"Majority Shareholder Vote," as used with respect to the election of any Trustee at a meeting of Shareholders, shall mean the vote for the election of such Trustee of a plurality of all outstanding Shares of the Trust, without regard to Series, represented in person or by proxy and entitled to vote thereon, provided that a quorum (as determined in accordance with the ByLaws) is present, and as used with respect to any other action required or permitted to be taken by Shareholders, shall mean the vote for such action of the holders of that majority of all outstanding Shares (or, where a separate vote of Shares of any particular Series is to be taken, the affirmative vote of that majority of the outstanding Shares of that Series) of the Trust which consists of: (i) a majority of all Shares (or of Shares of the particular Series) represented in person or by proxy and entitled to vote on such action at the meeting of Shareholders at which such action is to be taken, provided that a quorum (as determined in accordance with the By-Laws) is present; or (ii) if such action is to be taken by written consent of Shareholders, a majority of all Shares (or of Shares of the particular Series) issued and outstanding and entitled to vote on such action; provided, that (iii) as used with respect to any action requiring the affirmative vote of "a majority of the outstanding voting securities", as the quoted phrase is defined in the 1940 Act, of the Trust or of any Portfolio, "Majority Shareholder Vote" means the vote for such action at a meeting of Shareholders of the smallest majority of all outstanding Shares of the Trust (or of Shares of the particular Portfolio) entitled to vote on such action which satisfies such 1940 Act voting requirement.
"1940 Act" shall mean the provisions of the Investment Company Act of 1940 and the rules and regulations thereunder, both as amended from time to time, and any order or orders thereunder which may from time to time be applicable to the Trust.
"Person" shall mean and include individuals, as well as corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, banks, trust companies, land trusts, business trusts or other organizations established under the laws of any jurisdiction, whether or not considered to be legal entities, and governments and agencies and political subdivisions thereof.
"Portfolio" or "Portfolios" shall mean one or more of the separate components of the assets of the Trust which are now or hereafter established and designated under or in accordance with the provisions of Article 6 hereof.
"Portfolio Assets" shall have the meaning defined in Section 6.2(a) hereof.
"Principal Underwriter" shall have the meaning designated in Section 5.2(c) hereof.
"Prospectus," as used with respect to any Portfolio or Series of Shares, shall mean the prospectus relating to such Portfolio or Series which constitutes part of the currently effective Registration Statement of the Trust under the Securities Act of 1933, as such prospectus may be amended or supplemented from time to time.
"Securities" shall mean any and all bills, notes, bonds, debentures or other obligations or evidences of indebtedness, certificates of deposit, bankers' acceptances, commercial paper, repurchase agreements or other money market instruments; stocks, shares or other equity ownership interests; and warrants, options or other instruments representing rights to subscribe for, purchase, receive or otherwise acquire or to sell, transfer, assign or otherwise dispose of, and scrip, certificates, receipts or other instruments evidencing any ownership rights or interests in, any of the foregoing and "when issued" and "delayed delivery" contracts for securities, issued, guaranteed or sponsored by any governments, political subdivisions or governmental authorities, agencies or instrumentalities, by any individuals, firms, companies, corporations, syndicates, associations or trusts, or by any other organizations or entities whatsoever, irrespective of their forms or the names by which they may be described, whether or not they be organized and whether they be domestic or foreign with respect to The Commonwealth of Mas- sachusetts or the United States of America.
"Securities of the Trust" shall mean any Securities issued by the Trust.
"Series" shall mean one or more of the series of Shares authorized by the Trustees to represent the beneficial interest in one or more of the Portfolios.
"Settlor" shall have the meaning stated in the first "Whereas" clause set forth above.
"Shareholder" shall mean as of any particular time any Person shown of record at such time on the books of the Trust as a holder of outstanding Shares of any Series, and shall include a pledgee into whose name any such Shares are transferred in pledge.
"Shareholder Servicing Agent" shall have the meaning designated in Section 5.2(f) hereof.
"Shares" shall mean the transferable units into which the beneficial interest in the Trust and each Portfolio of the Trust (as the context may require) shall be divided from time to time, and includes fractions of Shares as well as whole Shares. All references herein to "Shares" which are not accompanied by a reference to any particular Series or Portfolio shall be deemed to apply to outstanding Shares without regard to Series.
"Single Class Voting," as used with respect to any matter to be acted upon at a meeting or by written consent of Shareholders, shall mean a style of voting in which each holder of one or more Shares shall be entitled to one vote on the matter in question for each Share standing in his name on the records of the Trust, irrespective of Series, and all outstanding Shares of all Series vote as a single class.
"Statement of Additional Information," as used with respect to any Portfolio or Series of Shares, shall mean the statement of additional information relating to such Portfolio or Series, which constitutes part of the currently effective Registration Statement of the Trust under the Securities Act of 1933, as such statement of additional information may be amended or supplemented from time to time.
"Transfer Agent" shall have the meaning defined in Section 5.2(e) hereof.
"Trust" shall have the meaning stated in the fourth "Whereas" clause set forth above.
"Trust Property" shall mean, as of any particular time, any and all property which shall have been transferred, conveyed or paid to the Trust or the Trustees, and all interest, dividends, income, earnings, profits and gains therefrom, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation thereof, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, and which at such time is owned or held by, or for the account of, the Trust or the Trustees, without regard to the Portfolio to which such property is allocated.
"Trustees" shall mean, collectively, the Initial Trustee, so long as he shall continue in office, and all other individuals who at the time in question have been duly elected or appointed as Trustees of the Trust in accordance with the provisions hereof and who have qualified and are then in office. At any time at which there shall be only one (1) Trustee in office, such term shall mean such single Trustee.
SECTION 1.5. Real Property to be Converted into Personal Property. Notwithstanding any other provision hereof, any real property at any time forming part of the Trust Property shall be held in trust for sale and conversion into personal property at such time or times and in such manner and upon such terms as the Trustees shall approve, but the Trustees shall have power until the termination of this Trust to postpone such conversion as long as they in their uncontrolled discretion shall think fit, and for the purpose of determining the nature of the interest of the Shareholders therein, all such real property shall at all times be considered as personal property.
The purpose of the Trust shall be to engage in the business of being an investment company, and as such of subscribing for, purchasing or otherwise acquiring, holding for investment or trading in, borrowing, lending and selling short, selling, assigning, negotiating or exchanging and otherwise disposing of, and turning to account, realizing upon and generally dealing in and with, in any manner, (a) Securities of all kinds, (b) precious metals and other minerals, contracts to purchase and sell, and other interests of every nature and kind in, such metals or minerals, and (c) rare coins and other numismatic items, and all as the Trustees in their discretion shall determine to be necessary, desirable or appropriate, and to exercise and perform any and every act, thing or power necessary, suitable or desirable for the accomplishment of such purpose, the attainment of any of the objects or the furtherance of any of the powers given hereby which are lawful purposes, objects or powers of a trust with transferable shares of the type commonly termed a Massachusetts business trust; and to do every other act or acts or thing or things incidental or appurtenant to or growing out of or in connection with the aforesaid objects, purposes or powers, or any of them, which a trust of the type commonly termed a Massachusetts business trust is not now or hereafter prohibited from doing, exercising or performing.
SECTION 3.1. Powers in General. The Trustees shall have, without other or further authorization, full, entire, exclusive and absolute power, control and authority over, and management of, the business of the Trust and over the Trust Property, to the same extent as if the Trustees were the sole owners of the business and property of the Trust in their own right, and with such powers of delegation as may be permitted by this Declaration, subject only to such limitations as may be expressly imposed by this Declaration of Trust or by applicable law. The enumeration of any specific power or authority herein shall not be construed as limiting the aforesaid power or authority or any specific power or authority. Without limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with this Declaration of Trust providing for the conduct of the business and affairs of the Trust and may amend and repeal them to the extent that such By-Laws do not reserve that right to the Shareholders; they may select, and from time to time change, the fiscal year of the Trust; they may adopt and use a seal for the Trust, provided, that unless otherwise required by the Trustees, it shall not be necessary to place the seal upon, and its absence shall not impair the validity of, any document, instrument or other paper executed and delivered by or on behalf of the Trust; they may from time to time in accordance with the provisions of Section 6.1 hereof establish one or more Portfolios to which they may allocate such of the Trust Property, subject to such liabilities, as they shall deem appropriate, each such Portfolio to be operated by the Trustees as a separate and distinct investment medium and with separately defined investment objectives and policies and distinct investment purposes, all as established by the Trustees, or from time to time changed by them; they may as they consider appropriate elect and remove officers and appoint and terminate agents and consultants and employees, any one or more of the foregoing of whom may be a Trustee; they may appoint from their own number, and terminate, any one or more committees consisting of one or more Trustees, including without implied limitation an Executive Committee, which may, when the Trustees are not in session and subject to the 1940 Act, exercise some or all of the power and authority of the Trustees as the Trustees may determine; in accordance with Section 5.2 they may employ one or more Investment Advisors, Administrators and Custodians and may authorize any Custodian to employ subcustodians or agents and to deposit all or any part of such assets in a system or systems for the central handling of Securities, retain Transfer, Dividend Disbursing, Accounting or Shareholder Servicing Agents or any of the foregoing, provide for the distribution of Shares by the Trust through one or more Distributors, Principal Underwriters or otherwise, set record dates or times for the determination of Shareholders entitled to participate in, benefit from or act with respect to various matters; and in general they may delegate to any officer of the Trust, to any Committee of the Trustees and to any employee, Investment Advisor, Administrator, Distributor, Custodian, Transfer Agent, Dividend Disbursing Agent, or any other agent or consultant of the Trust, such authority, powers, functions and duties as they consider desirable or appropriate for the conduct of the business and affairs of the Trust, including without implied limitation the power and authority to act in the name of the Trust and of the Trustees, to sign documents and to act as attorney-in-fact for the Trustees. Without limiting the foregoing and to the extent not inconsistent with the 1940 Act or other applicable law, the Trustees shall have power and authority:
(a) Investments. To invest and reinvest cash and other property; to buy, for cash or on margin, and otherwise acquire and hold, Securities created or issued by any Persons, including Securities maturing after the possible termination of the Trust; to make payment therefor in any lawful manner in exchange for any of the Trust Property; and to hold cash or other property uninvested without in any event being bound or limited by any present or future law or custom in regard to investments by trustees;
(b) Disposition of Assets. Upon such terms and conditions as they deem best, to lend, sell, exchange, mortgage, pledge, hypothecate, grant security interests in, encumber, negotiate, convey, transfer or otherwise dispose of, and to trade in, any and all of the Trust Property, free and clear of all trusts, for cash or on terms, with or without advertisement, and on such terms as to payment, security or otherwise, all as they shall
(c) Ownership Powers. To vote or give assent, or exercise any and all other rights, powers and privileges of ownership with respect to, and to perform any and all duties and obligations as owners of, any Securities or other property forming part of the Trust Property, the same as any individual might do; to exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of Securities, and to receive powers of attorney from, and to execute and deliver proxies or powers of attorney to, such Person or Persons as the Trustees shall deem proper, receiving from or granting to such Person or Persons such power and discretion with relation to Securities or other property of the Trust, all as the Trustees shall deem proper;
(d) Form of Holding. To hold any Security or other property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form, or in the name of the Trustees or of the Trust, or of the Portfolio to which such Securities or property belong, or in the name of a Custodian, subcustodian or other nominee or nominees, or otherwise, upon such terms, in such manner or with such powers, as the Trustees may determine, and with or without indicating any trust or the interest of
(e) Reorganization, etc. To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or issuer, any Security of which is or was held in the Trust or any Portfolio; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer, and to pay calls or subscrip- tions with respect to any Security forming part of the Trust Property;
(f) Voting Trusts, etc. To join with other holders of any Securities in acting through a committee, depository, voting trustee or otherwise, and in that connection to deposit any Security with, or transfer any Security to, any such committee, depository or trustee, and to delegate to them such power and authority with relation to any Security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depository or trustee as the
(g) Contracts, etc. To enter into, make and perform all such obligations, contracts, agreements and undertakings of every kind and description, with any Person or Persons, as the Trustees shall in their the conduct of the business of the Trust, for such terms as they shall see fit, whether or not extending beyond the term of office of the Trustees, or beyond the possible expiration of the Trust; to amend, extend, release or cancel any such obligations, contracts, agreements or understandings; and to execute, acknowledge, deliver and record all written instruments which they may deem necessary or expedient in the exercise of their powers;
(h) Guarantees, etc. To endorse or guarantee the payment of any notes or other obligations of any Person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; and to mortgage and pledge the Trust Property or any part thereof to secure any of or all such obligations;
(i) Partnerships, etc. To enter into joint ventures, general or limited partnerships and any other combinations or associations;
(j) Insurance. To purchase and pay for entirely out of Trust Property such insurance as they may deem necessary or appropriate for the conduct of the business, including, without limitation, insurance policies insuring the assets of the Trust and payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, consultants, Investment Advisors, managers, Administrators, Distributors, Principal Underwriters, or other independent contractors, or any thereof (or any Person connected therewith), of the Trust, individually, against all claims and liabilities of every nature arising by reason of holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such Person in any such capacity, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such Person against such liability;
(k) Pensions, etc. To pay pensions for faithful service, as deemed appropriate by the Trustees, and to adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust;
(l) Power of Collection and Litigation. To collect, sue for and receive all sums of money coming due to the Trust, to employ counsel, and to commence, engage in, prosecute, intervene in, join, defend, compound, compromise, adjust or abandon, in the name of the Trust, any and all ac- tions, suits, proceedings, disputes, claims, controversies, demands or other litigation or legal proceedings relating to the Trust, the business of the Trust, the Trust Property, or the Trustees, officers, employees, agents and other independent contractors of the Trust, in their capacity as such, at law or in equity, or before any other bodies or tribunals, and to compromise, arbitrate or otherwise adjust any dispute to which the Trust may be a party, whether or not any suit is commenced or any claim shall have been made or asserted;
(m) Issuance and Repurchase of Shares. To issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares of any Series, and, subject to Article 6 hereof, to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares of any Series, any of the Portfolio Assets belonging to the Portfolio to which such Series relates, whether constituting capital or surplus or otherwise, to the full extent now or hereafter permitted by applicable law; provided, that any Shares belonging to the Trust shall not be voted, directly or
(n) Offices. To have one or more offices, and to carry on all or any of the operations and business of the Trust, in any of the States, Districts or Territories of the United States, and in any and all foreign countries, subject to the laws of such State, District, Territory or
(o) Expenses. To incur and pay any and all such expenses and charges as they may deem advisable (including without limitation appropriate fees to themselves as Trustees), and to pay all such sums of money for which they may be held liable by way of damages, penalty, fine
(p) Agents, etc. To retain and employ any and all such servants, agents, employees, attorneys, brokers, investment advisers, accountants, architects, engineers, builders, escrow agents, depositories, consultants, ancillary trustees, custodians, agents for collection, insurers, banks and officers, as they think best for the business of the Trust or any Portfolio, to supervise and direct the acts of any of the same, and to fix and pay their compensation and define their duties;
(q) Accounts. To determine, and from time to time change, the method or form in which the accounts of the Trust shall be kept;
(r) Valuation. Subject to the requirements of the 1940 Act, to determine from time to time the value of all or any part of the Trust Property and of any services, Securities, property or other consideration to be furnished to or acquired by the Trust, and from time to time to revalue all or any part of the Trust Property in accordance with such appraisals or other information as is, in the Trustees' sole judgment,
(s) Indemnification. In addition to the mandatory indemnification provided for in Article 8 hereof and to the extent permitted by law, to indemnify or enter into agreements with respect to indemnification with any Person with whom this Trust has dealings, including, without limitation, any independent contractor, to such extent as the Trustees
(t) General. To do all such other acts and things and to conduct, operate, carry on and engage in such other lawful businesses or business activities as they shall in their sole and absolute discretion consider to be incidental to the business of the Trust or any Portfolio as an investment company, and to exercise all powers which they shall in their discretion consider necessary, useful or appropriate to carry on the business of the Trust or any Portfolio, to promote any of the purposes for which the Trust is formed, whether or not such things are specifically mentioned herein, in order,to protect or promote the interests of the Trust or any Portfolio, or otherwise to carry out the provisions of this Declaration.
SECTION 3.2. Borrowings; Financings; Issuance of Securities. The Trustees have power to borrow or in any other manner raise such sum or sums of money, and to incur such other indebtedness for goods or services, or for or in connection with the purchase or other acquisition of property, as they shall deem advisable for the purposes of the Trust, in any manner and on any terms, and to evidence the same by negotiable or non-negotiable Securities which may mature at any time or times, even beyond the possible date of termination of the Trust; to issue Securities of any type for such cash, property, services or other considerations, and at such time or times and upon such terms, as they may deem advisable; and to reacquire any such Securities. Any such Securities of the Trust may, at the discretion of the Trustees, be made convertible into Shares of any Series, or may evidence the right to purchase, subscribe for or otherwise acquire Shares of any Series, at such times and on such terms as the Trustees may prescribe.
SECTION 3.3. Deposits. Subject to the requirements of the 1940 Act, the Trustees shall have power to deposit any moneys or Securities included in the Trust Property with any one or more banks, trust companies or other banking institutions, whether or not such deposits will draw interest. Such deposits are to be subject to withdrawal in such manner as the Trustees may determine, and the Trustees shall have no responsibility for any loss which may occur by reason of the failure of the bank, trust company or other banking institution with which any such moneys or Securities have been deposited, other than liability based on their gross negligence or willful fault.
SECTION 3.4. Allocations. The Trustees shall have power to determine whether moneys or other assets received by the Trust shall be charged or credited to income or capital, or allocated between income and capital, including the power to amortize or fail to amortize any part or all of any premium or discount, to treat any part or all of the profit resulting from the maturity or sale of any asset, whether purchased at a premium or at a discount, as income or capital, or to apportion the same between income and capital, to apportion the sale price of any asset between income and capital, and to determine in what manner any expenses or disbursements are to be borne as between income and capital, whether or not in the absence of the power and authority conferred by this Section 3.4 such assets would be regarded as income or as capital or such expense or disbursement would be charged to income or to capital; to treat any dividend or other distribution on any investment as income or capital, or to apportion the same between income and capital; to provide or fail to provide reserves, including reserves for depreciation, amortization or obsolescence in respect of any Trust Property in such amounts and by such methods as they shall determine; to allocate less than all of the consideration paid for Shares of any Series to the shares of beneficial interest account of the Portfolio to which such Shares relate and to allocate the balance thereof to paid-in capital of that Portfolio, and to reallocate such amounts from time to time; all as the Trustees may reasonably deem proper.
SECTION 3.5. Further Powers; Limitations. The Trustees shall have power to do all such other matters and things, and to execute all such instruments, as they deem necessary, proper or desirable in order to carry out, promote or advance the interests of the Trust, although such matters or things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Trustees. The Trustees shall not be required to obtain any court order to deal with the Trust Property. The Trustees may limit their right to exercise any of their powers through express restrictive provisions in the instruments evidencing or providing the terms for any Securities of the Trust or in other contractual instruments adopted on behalf of the Trust.
SECTION 4.1. Number, Designation, Election, Term, etc.
(a) Initial Trustee. Upon his execution of this Declaration of Trust or a counterpart hereof or some other writing in which he accepts such Trusteeship and agrees to the provisions hereof, the individual whose signature is affixed hereto as Initial Trustee shall become the Initial Trustee hereof.
(b) Number. The Trustees serving as such, whether named above or hereafter becoming Trustees, may increase (to not more than twenty (20)) or decrease the number of Trustees to a number other than the number theretofore determined by a written instrument signed by a Majority of the Trustees (or by an officer of the Trust pursuant to the vote of a Majority of the Trustees). No decrease in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his term, but the number of Trustees may be decreased in conjunction with the removal of a Trustee pursuant to subsection (e) of this Section 4.1.
(c) Election and Term. The Trustees shall be elected by the Shareholders of the Trust at the first meeting of Shareholders immediately prior to the initial public offering of Shares of the Trust, and the term of office of any Trustees in office before such election shall terminate at the time of such election. Subject to Section 16(a) of the 1940 Act and to the preceding sentence of this subsection (c), the Trustees shall have the power to set and alter the terms of office of the Trustees, and at any time to lengthen or shorten their own terms or make their terms of unlimited duration, to elect their own successors and, pursuant to subsection (f) of this Section 4.1, to appoint Trustees to fill vacancies; provided, that Trustees shall be elected by a Majority Shareholder Vote at any such time or times as the Trustees shall determine that such action is required under Section 16(a) of the 1940 Act or, if not so required, that such action is advisable; and further provided, that, after the initial election of Trustees by the Shareholders, the term of office of any incumbent Trustee shall continue until the termination of this Trust or his earlier death, resignation, retirement, bankruptcy, adjudicated incompetency or other incapacity or removal, or if not so terminated, until the election of such Trustee's successor in office has become effective in accordance with this subsection (c).
(d) Resignation and Retirement. Any Trustee may resign his trust or retire as a Trustee, by a written instrument signed by him and delivered to the other Trustees or to any officer of the Trust, and such resignation or retirement shall take effect upon such delivery or upon such later date as is specified in such instrument.
(e) Removal. Any Trustee may be removed with or without cause at any time: (i) by written instrument, signed by at least two-thirds (2/3) of the number of Trustees prior to such removal, specifying the date upon which such removal shall become effective; or (ii) by vote of Shareholders holding not less than two-thirds (2/3) of the Shares of each Series then outstanding, cast in person or by proxy at any meeting called for the purpose; or (iii) by a written declaration signed by Shareholders holding not less than two-thirds (2/3) of the Shares of each Series then outstanding and filed with the Trust's Custodian.
(f) Vacancies. Any vacancy or anticipated vacancy resulting from any reason, including an increase in the number of Trustees, may (but need not unless required by the 1940 Act) be filled by a Majority of the Trustees, subject to the provisions of Section 16(a) of the 1940 Act, through the appointment in writing of such other individual as such remaining Trustees in their discretion shall determine; provided, that if there shall be no Trustees in office, such vacancy or vacancies shall be filled by vote of the Shareholders. Any such appointment or election shall be effective upon such individual's written acceptance of his appointment as a Trustee and his agreement to be bound by the provisions of this Declaration of Trust, except that any such appointment in anticipation of a vacancy to occur by reason of retirement, resignation or increase in the number of Trustees to be effective at a later date shall become effective only at or after the effective date of said retirement, resignation or increase in the number of Trustees.
(g) Acceptance of Trusts. Any individual appointed as a Trustee under subsection (f), and any individual elected as a Trustee under subsection (c), of this Section 4.1 who was not, immediately prior to such election, acting as a Trustee, shall accept such appointment or election in writing and agree in such writing to be bound by the provisions hereof, and whenever such individual shall have executed such writing and any conditions to such appointment or election shall have been satisfied, such individual shall become a Trustee and the Trust Property shall vest in the new Trustee, together with the continuing Trustees, without any further act or conveyance.
(h) Effect of Death, Resignation, etc. No vacancy, whether resulting from the death, resignation, retirement, removal or incapacity of any Trustee, an increase in the number of Trustees or otherwise, shall operate to annul or terminate the Trust hereunder or to revoke or terminate any existing agency or contract created or entered into pursuant to the terms of this Declaration of Trust. Until such vacancy is filled as provided in this Section 4.1, the Trustees in office (if any), regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. A written instrument certifying the existence of such vacancy signed by a Majority of the Trustees shall be conclusive evidence of the existence of such vacancy.
(i) Conveyance. In the event of the resignation or removal of a Trustee or his otherwise ceasing to be a Trustee, such former Trustee or his legal representative shall, upon request of the continuing Trustees, execute and deliver such documents as may be required for the purpose of consummating or evidencing the conveyance to the Trust or the remaining Trustees of any Trust Property held in such former Trustee's name, but the execution and delivery of such documents shall not be requisite to the vesting of title to the Trust Property in the remaining Trustees, as provided in subsection (g) of this Section 4.1 and in Section 4.13 hereof.
(j) No Accounting. Except to the extent required by the 1940 Act or under circumstances which would justify his removal for cause, no Person ceasing to be a Trustee (nor the estate of any such Person) shall be required to make an accounting to the Shareholders or remaining Trustees upon such cessation.
(k) Filings. Whenever there shall be a change in the composition of the Trustees, the Trust shall cause to be filed in the office of the Secretary of State of The Commonwealth of Massachusetts and in each other place where the Trust is required to file amendments to this Declaration a copy of (i) the instrument by which (in the case of the appointment of a new Trustee, or the election of an individual who was not theretofore a Trustee) the new Trustee accepted his appointment or election and agreed to be bound by the terms of this Declaration, or (in the case of a resignation) by which the former Trustee resigned as such, together in either case with a certificate of one of the other Trustees as to the circumstances of such election, appointment or resignation, or (ii) in the case of the removal or death of a Trustee, a certificate of one of the Trustees as to the circumstances of such removal or resignation.
SECTION 4.2. Trustees' Meetings; Participation by Telephone, etc. An annual meeting of Trustees shall be held not later than the last day of the fourth month after the end of each fiscal year of the Trust and special meetings may be held from time to time, in each case, upon the call of such officers as may be thereunto authorized by the By-Laws or vote of the Trustees, or by any two (2) Trustees, or pursuant to a vote of the Trustees adopted at a duly constituted meeting of the Trustees, and upon such notice as shall be provided in the By-Laws. The Trustees may act with or without a meeting, and a written consent to any matter, signed by a Majority of the Trustees, shall be equivalent to action duly taken at a meeting of the Trustees, duly called and held. Except as otherwise provided by the 1940 Act or other applicable law, or by this Declaration of Trust or the By-Laws, any action to be taken by the Trustees may be taken by a majority of the Trustees present at a meeting of Trustees (a quorum, consisting of at least a Majority of the Trustees, being present), within or without Massachusetts. If authorized by the By-Laws, all or any one or more Trustees may participate in a meeting of the Trustees or any Committee thereof by means of conference telephone or similar means of communication by means of which all Persons participating in the meeting can hear each other, and participation in a meeting pursuant to such means of communication shall constitute presence in person at such meeting. The minutes of any meeting thus held shall be prepared in the same manner as a meeting at which all participants were present in person.
SECTION 4.3. Committees; Delegation. The Trustees shall have power, consistent with their ultimate responsibility to supervise the affairs of the Trust, to delegate from time to time to an Executive Committee, and to one or more other Committees, or to any single Trustee, the doing of such things and the execution of such deeds or other instruments, either in the name of the Trust or the names of the Trustees or as their attorney or attorneys in fact, or otherwise as the Trustees may from time to time deem expedient, and any agreement, deed, mortgage, lease or other instrument or writing executed by the Trustee or Trustees or other Person to whom such delegation was made shall be valid and binding upon the Trustees and upon the Trust.
SECTION 4.4. Officers. The Trustees shall annually elect such officers or agents, who shall have such powers, duties and responsibilities as the Trustees may deem to be advisable, and as they shall specify by resolution or in the By-Laws. Except as may be provided in the By-Laws, any officer elected by the Trustees may be removed at any time with or without cause. Any two (2) or more offices may be held by the same individual.
SECTION 4.5. Compensation of Trustees and Officers. The Trustees shall fix the compensation of all officers and Trustees. Without limiting the generality of any of the provisions hereof, the Trustees shall be entitled to receive reasonable compensation for their general services as such, and to fix the amount of such compensation, and to pay themselves or any one or more of themselves such compensation for special services, including legal, accounting, or other professional services, as they in good faith may deem reasonable. No Trustee or officer resigning and (except where a right to receive compensation for a definite future period shall be expressly provided in a written agreement with the Trust, duly approved by the Trustees) no Trustee or officer removed shall have any right to any compensation as such Trustee or officer for any period following his resignation or removal, or any right to damages on account of his removal, whether his compensation be by the month, by the year or otherwise.
SECTION 4.6. Ownership of Shares and Securities of the Trust. Any Trustee, and any officer, employee or agent of the Trust, and any organization in which any such Person is interested, may acquire, own, hold and dispose of Shares of any Series and other Securities of the Trust for his or its individual account, and may exercise all rights of a holder of such Shares or Securities to the same extent and in the same manner as if such Person were not such a Trustee, officer, employee or agent of the Trust; subject, in the case of Trustees and officers, to the same limitations as directors or officers (as the case may be) of a Massachusetts business corporation; and the Trust may issue and sell or cause to be issued and sold and may purchase any such Shares or other Securities from any such Person or any such organization, subject only to the general limitations, restrictions or other provisions applicable to the sale or purchase of Shares of such Series or other Securities of the Trust generally.
SECTION 4.7. Right of Trustees and Officers to Own Property or to Engage in Business; Authority of Trustees to Permit Others to Do Likewise. The Trustees, in their capacity as Trustees, and (unless otherwise specifically directed by vote of the Trustees) the officers of the Trust in their capacity as such, shall not be required to devote their entire time to the business and affairs of the Trust. Except as otherwise specifically provided by vote of the Trustees, or by agreement in any particular case, any Trustee or officer of the Trust may acquire, own, hold and dispose of, for his own individual account, any property, and acquire, own, hold, carry on and dispose of, for his own individual account, any business entity or business activity, whether similar or dissimilar to any property or business entity or business activity invested in or carried on by the Trust, and without first offering the same as an investment opportunity to the Trust, and may exercise all rights in respect thereof as if he were not a Trustee or officer of the Trust. The Trustees shall also have power, generally or in specific cases, to permit employees or agents of the Trust to have the same rights (or lesser rights) to acquire, hold, own and dispose of property and businesses, to carry on businesses, and to accept investment opportunities without offering them to the Trust, as the Trustees have by virtue of this Section 4.7.
SECTION 4.8. Reliance on Experts. The Trustees and officers may consult with counsel, engineers, brokers, appraisers, auctioneers, accountants, investment bankers, securities analysts or other Persons (any of which may be a firm in which one or more of the Trustees or officers is or are members or otherwise interested) whose profession gives authority to a statement made by them on the subject in question, and who are reasonably deemed by the Trustees or officers in question to be competent, and the advice or opinion of such Persons shall be full and complete personal protection to all of the Trustees and officers in respect of any action taken or suffered by them in good faith and in reliance on or in accordance with such advice or opinion. In discharg- ing their duties, Trustees and officers, when acting in good faith, may rely upon financial statements of the Trust represented to them to be correct by any officer of the Trust having charge of its books of account, or stated in a written report by an independent certified public accountant fairly to present the financial position of the Trust. The Trustees and officers may rely, and shall be personally protected in acting, upon any instrument or other document believed by them to be genuine.
SECTION 4.9. Surety Bonds. No Trustee, officer, employee or agent of the Trust shall, as such, be obligated to give any bond or surety or other security for the performance of any of his duties, unless required by applicable law or regulation, or unless the Trustees shall otherwise determine in any particular case.
SECTION 4.10. Apparent Authority of Trustees and Officers. No purchaser, lender, transfer agent or other Person dealing with the Trustees or any officer of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by such officer, or to make inquiry concerning or be liable for the application of money or property paid, loaned or delivered to or on the order of the Trustees or of such officer.
SECTION 4.11. Other Relationships Not Prohibited. The fact that:
(a) any of the Shareholders, Trustees or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, manager, adviser, principal underwriter or distributor or agent of or for any Contracting Party (as defined in Section 5.2 hereof), or of or for any parent or Affiliated Person of any Contracting Party, or that the Contracting Party or any parent or Affiliated Person thereof is a Shareholder or has an interest in the Trust or any Portfolio, or that
(b) any Contracting Party may have a contract providing for the rendering of any similar services to one or more other corporations, trusts, associations, partnerships, limited partnerships or other organizations, or have other business or interests,
shall not affect the validity of any contract for the performance and assumption of services, duties and responsibilities to, for or of the Trust and/or the Trustees or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same or create any liability or accountability to the Trust or to the holders of Shares of any Series; provided that, in the case of any relationship or interest referred to in the preceding clause (a) on the part of any Trustee or officer of the Trust, either (x) the material facts as to such relationship or interest have been disclosed to or are known by the Trustees not having any such relationship or interest and the contract involved is approved in good faith by a majority of such Trustees not having any such relationship or interest (even though such unrelated or disinterested Trustees are less than a quorum of all of the Trustees), (y) the material facts as to such relationship or interest and as to the contract have been disclosed to or are known by the Shareholders entitled to vote thereon and the contract involved is specifically approved in good faith by vote of the Shareholders, or (z) the specific contract involved fair to the Trust as of the time it is authorized, approved or ratified by the Trustees or by the Shareholders.
SECTION 4.12. Payment of Trust Expenses. The Trustees are authorized to pay or to cause to be paid out of the principal or income of the Trust, or partly out of principal and partly out of income, and according to any allocation to particular Portfolios made by them pursuant to Section 6.2(b) hereof, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the business and affairs of the Trust or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's officers, employees, Investment Advisor, Administrator, Distributor, Principal Underwriter, auditor, counsel, Custodian, Transfer Agent, Dividend Disbursing Agent, Accounting Agent, Shareholder Servicing Agent, and such other agents, consultants, and independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur.
SECTION 4.13. Ownership of the Trust Property. Legal title to all the Trust Property shall be vested in the Trustees as joint tenants, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or of any particular Portfolio, or in the name of any other Person as nominee, on such terms as the Trustees may determine; provided that the interest of the Trust and of the respective Portfolio therein is appropriately protected. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each Person who may hereafter become a Trustee. Upon the termination of the term of office of a Trustee as provided in Section 4.1(c), (d) or (e) hereof, such Trustee shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to Section 4.1(i) hereof.
SECTION 5.1. Appointment; Action by Less than All Trustees. The Trustees shall be responsible for the general operating policy of the Trust and for the general supervision of the business of the Trust conducted by officers, agents, employees or advisers of the Trust or by independent
Trustees shall not be required personally to conduct all the business of the Trust and, consistent with their ultimate responsibility as stated herein, the Trustees may appoint, employ or contract with one or more officers, employees and agents to conduct, manage and/or supervise the operations of the Trust, and may grant or delegate such authority to such officers, employees and/or agents as the Trustees may, in their sole discretion, deem to be necessary or desirable, without regard to whether such authority is normally granted or delegated by trustees. With respect to those matters of the operation and business of the Trust which they shall elect to conduct themselves, except as otherwise provided by this Declaration or the By-Laws, if any, the Trustees may authorize any single Trustee or defined group of Trustees, or any committee consisting of a number of Trustees less than the whole number of Trustees then in office without specification of the particular Trustees required to be included therein, to act for and to bind the Trust, to the same extent as the whole number of Trustees could do, either with respect to one or more particular matters or classes of matters, or generally.
SECTION 5.2. Certain Contracts. Subject to compliance with the provisions of the 1940 Act, but notwithstanding any limitations of present and future law or custom in regard to delegation of powers by trustees generally, the Trustees may, at any time and from time to time in their discretion and without limiting the generality of their powers and authority otherwise set forth herein, enter into one or more contracts with any one or more corporations, trusts, associations, partnerships, limited partnerships or other types of organizations, or individuals ("Contracting Party"), to provide for the performance and assumption of some or all of the following services, duties and responsibilities to, for or on behalf of the Trust and/or any Portfolio, and/or the Trustees, and to provide for the performance and assumption of such other services, duties and responsibilities in addition to those set forth below, as the Trustees may deem appropriate:
(a) Advisory. An investment advisory or management agreement whereby the Investment Advisor shall undertake to furnish the Trust such management, investment advisory or supervisory, administrative, accounting, legal, statistical and research facilities and services, and such other facilities and services, if any, as the Trustees shall from time to time consider desirable, all upon such terms and conditions as the Trustees may in their discretion determine to be not inconsistent with this Declaration, the applicable provisions of the 1940 Act or any applicable provisions of the By-Laws. Any such advisory or management agreement and any amendment thereto shall be subject to approval by a Majority Shareholder Vote at a meeting of the Shareholders of the Trust. Notwithstanding any provisions of this Declaration, the Trustees may authorize the Investment Advisor (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales, loans or exchanges of portfolio securities of the Trust on behalf of the Trustees or may authorize any officer or employee of the Trust or any Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of the Investment Advisor (and all without further action by the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees. The Trustees may, in their sole discretion, call a meeting of Shareholders in order to submit to a vote of Shareholders at such meeting the approval of continuance of any such investment advisory or management agreement. If the Shareholders of any Portfolio should fail to approve any such investment advisory or management agreement, the Investment Advisor may nonetheless serve as Investment Advisor with respect to any other Portfolio whose Shareholders shall have approved such contract.
(b) Administration. An agreement whereby the agent, subject to the general supervision of the Trustees and in conformity with any policies of the Trustees with respect to the operations of the Trust and each Portfolio, will supervise all or any part of the operations of the Trust and each Portfolio, and will provide all or any part of the administrative and clerical personnel, office space and office equipment and services appropriate for the efficient administration and operations of the Trust and each Portfolio (any such agent being herein referred to as an "Administrator").
(c) Distribution. An agreement providing for the sale of Shares of any one or more Series to net the Trust not less than the net asset value per Share (as described in Section 6.2(h) hereof) and pursuant to which the Trust may appoint the other party to such agreement as its principal underwriter or sales agent for the distribution of such Shares. The agreement shall contain such terms and conditions as the Trustees may in their discretion determine to be not inconsistent with this Declaration, the applicable provisions of the 1940 Act and any applicable provisions of the By-Laws (any such agent being herein referred to as a "Distributor" or a "Principal Underwriter", as the case may be).
(d) Custodian. The appointment of a bank or trust company having an aggregate capital, surplus and undivided profits (as shown in its last published report) of at least two million dollars ($2,000,000) as custodian of the Securities and cash of the Trust and of each Portfolio and of the accounting records in connection therewith (any such agent being herein referred to as a "Custodian").
(e) Transfer and Dividend Disbursing Agency. An agreement with an agent to maintain records of the ownership of outstanding Shares, the issuance and redemption and the transfer thereof (any such agent being herein referred to as a "Transfer Agent"), and to disburse any dividends declared by the Trustees and in accordance with the policies of the Trustees and/or the instructions of any particular Shareholder to reinvest any such dividends (any such agent being herein referred to as a "Dividend Disbursing Agent").
(f) Shareholder Servicing. An agreement with an agent to provide service with respect to the relationship of the Trust and its Shareholders, records with respect to Shareholders and their Shares, and similar matters (any such agent being herein referred to as a "Shareholder Servicing Agent").
(g) Accounting. An agreement with an agent to handle all or any part of the accounting responsibilities, whether with respect to the Trust's properties, Shareholders or otherwise (any such agent being herein referred to as an "Accounting Agent").
The same Person may be the Contracting Party for some or all of the services, duties and responsibilities to, for and of the Trust and/or the Trustees, and the contracts with respect thereto may contain such terms interpretive of or in addition to the delineation of the services, duties and responsibilities provided for, including provisions that are not inconsistent with the 1940 Act relating to the standard of duty of and the rights to indemnification of the Contracting Party and others, as the Trustees may determine. Nothing herein shall preclude, prevent or limit the Trust or a Contracting Party from entering into sub- contractual arrangements relative to any of the matters referred to in subsections (a) through (g) of this Section 5.2.
SECTION 6.1. Description of Portfolios and Shares.
(a) Shares; Portfolios; Series of Shares. The beneficial interest in the Trust shall be divided into Shares having a nominal or par value of one mill ($.001) per Share, and all of one class, of which an unlimited number may be issued. The Trustees shall have the authority from time to time to establish and designate one or more separate, distinct and independent Portfolios into which the assets of the Trust shall be divided, and to authorize a separate Series of Shares for each such Portfolio (each of which Series, including without limitation each Series authorized in Section 6.2 hereof, shall represent interests only in the Portfolio with respect to which such Series was authorized), as they deem necessary or desirable. Except as otherwise provided as to a particular Portfolio herein, or in the Certificate of Designation therefor, the Trustees shall have all the rights and powers, and be subject to all the duties and obligations, with respect to each such Portfolio and the assets and affairs thereof as they have under this Declaration with respect to the Trust and the Trust Property in general.
(b) Establishment, etc. of Portfolios; Authorization of Shares. The establishment and designation of any Portfolio in addition to the Portfolios established and designated in Section 6.2 hereof and the authorization of the Shares thereof shall be effective upon the execution by a Majority of the Trustees (or by an officer of the Trust pursuant to the vote of a Majority of the Trustees) of an instrument setting forth such establishment and designation and the relative rights and preferences of the Shares of such Portfolio and the manner in which the same may be amended (a "Certificate of Designation"), and may provide that the number of Shares of such Series which may be issued is un- limited, or may limit the number issuable. At any time that there are no Shares outstanding of any particular Portfolio previously established and designated, including any Portfolio established and designated in Section 6.2 hereof, the Trustees may by an instrument executed by a Majority of the Trustees (or by an officer of the Trust pursuant to the vote of a Majority of the Trustees) terminate such Portfolio and the establishment and designation thereof and the authorization of its Shares (a "Certificate of Termination"). Each Certificate of Designation, Certificate of Termination and any instrument amending a Certificate of Designation shall have the status of an amendment to this Declaration of Trust, and shall be filed and become effective as provided in Section 9.4 hereof.
(c) Character of Separate Portfolios and Shares Thereof. Each Portfolio established hereunder shall be a separate component of the assets of the Trust, and the holders of Shares of the Series representing the beneficial interest in the assets of that Portfolio shall be considered Shareholders of such Portfolio, but such Shareholders shall also be considered Shareholders of the Trust for purposes of receiving reports and notices and, except as otherwise provided herein or in the Certificate of Designation of a particular Portfolio as to such Portfolio, or as required by the 1940 Act or other applicable law, the right to vote, all without distinction by Series. The Trustees shall have exclusive power without the requirement of Shareholder approval to establish and designate such separate and distinct Portfolios, and to fix and determine the relative rights and preferences as between the shares of the respective Portfolios as to rights of redemption and the price, terms and manner of redemption, special and relative rights as to dividends and other distributions and on liquidation, sinking or purchase fund provisions, conversion rights, and conditions under which the Shareholders of the several Portfolios shall have separate voting rights or no voting rights.
(d) Consideration for Shares. The Trustees may issue Shares of any Series for such consideration (which may include property subject to, or acquired in connection with the assumption of, liabilities) and on such terms as they may determine (or for no consideration if pursuant to a Share dividend or split up), all without action or approval of the Shareholders. All Shares when so issued on the terms determined by the Trustees shall be fully paid and nonassessable (but may be subject to mandatory contribution back to the Trust as provided in Section 6.2(h) hereof). The Trustees may classify or reclassify any unissued Shares, or any Shares of any Series previously issued and reacquired by the Trust, into Shares of one or more other Portfolios that may be established and designated from time to time.
SECTION 6.2. Establishment and Designation of Counsellors Fixed Income Portfolio; General Provisions for All Portfolios. Without limiting the authority of the Trustees set forth in Section 6.1(a) hereof to establish and designate further Portfolios, there is hereby established and designated Counsellors Fixed Income Portfolio. The Shares of such
Portfolio, and the Shares of any further Portfolios that may from time to time be established and designated by the Trustees shall (unless the Trustees otherwise determine with respect to some further Portfolio at the time of establishing and designating the same) have the following relative rights and preferences:
(a) Assets Belonging to Portfolios. Any portion of the Trust Property allocated to a particular Portfolio, and all consideration received by the Trust for the issue or sale of Shares of such Portfolio, together with all assets in which such consideration is invested or reinvested, all interest, dividends, income, earnings, profits and gains therefrom, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall be held by the Trustees in trust for the benefit of the holders of Shares of that Portfolio and shall irrevocably belong to that Portfolio for all purposes, and shall be so recorded upon the books of account of the Trust, and the Shareholders of such Portfolio shall not have, and shall be conclusively deemed to have waived, any claims to the assets of any Portfolio of which they are not Shareholders. Such consideration, assets, interest, dividends, income, earnings, profits, gains and proceeds, together with any General Items allocated to that Portfolio as provided in the following sentence, are herein referred to collectively as "Portfolio Assets" of such Portfolio, and as assets "belonging to" that Portfolio. In the event that there are any assets, income, earnings, profits, and proceeds thereof, funds, or payments which are not readily identifiable as belonging to any particular Portfolio (collectively "General Items"), the Trustees shall allocate such General Items to and among any one or more of the Portfolios established and designated from time to time in such manner and on such basis as they, in their sole discretion, deem fair and equitable; and any General Items so allocated to a particular Portfolio shall belong to and be part of the Portfolio Assets of that Portfolio. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Portfolios for all purposes.
(b) Liabilities of Portfolios. The assets belonging to each particular Portfolio shall be charged with the liabilities in respect of that Portfolio and all expenses, costs, charges and reserves attributable to that Portfolio, and any general liabilities, expenses, costs, charges or reserves of the Trust which are not readily identifiable as pertaining to any particular Portfolio shall be allocated and charged by the Trustees to and among any one or more of the Portfolios established and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. The indebtedness, expenses, costs, charges and reserves allocated and so charged to a particular Portfolio are herein referred to as "liabilities of" that Portfolio. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the Shareholders of all Portfolios for all purposes. Any creditor of any Portfolio may look only to the assets of that Portfolio to satisfy such creditor's debt.
(c) Dividends. Dividends and distributions on Shares of a particular Portfolio may be paid with such frequency as the Trustees may determine, which may be daily or otherwise pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may determine, to the Shareholders of that Portfolio, from such of the income, accrued or realized, and capital gains, realized or unrealized, and out of the assets belonging to that Portfolio, as the Trustees may determine, after providing for actual and accrued liabilities of that Portfolio. All dividends and distributions on Shares of a particular Portfolio shall be distributed pro rata to the Shareholders of that Portfolio in proportion to the number of such Shares held by such holders at the date and time of record established for the payment of such dividends or distributions, except that in connection with any dividend or distribution program or procedure the Trustees may determine that no dividend or distribution shall be payable on Shares as to which the Shareholder's purchase order and/or payment have not been received by the time or times established by the Trustees under such program or procedure, or that dividends or distributions shall be payable on Shares which have been tendered by the holder thereof for redemption or repurchase, but the redemption or repurchase proceeds of which have not yet been paid to such Shareholder. Such dividends and distributions may be made in cash or Shares of that Portfolio or a combination thereof as determined by the Trustees, or pursuant to any program that the Trustees may have in effect at the time for the election by each Shareholder of the mode of the making of such dividend or distribution to that Shareholder. Any such dividend or distribution paid in Shares will be paid at the net asset value thereof as determined in accordance with subsection (h) of this Section 6.2.
(d) Liquidation. In the event of the liquidation or dissolution of the Trust, the Shareholders of each Portfolio of which Shares are outstanding shall be entitled to receive, when and as declared by the Trustees, the excess of the Portfolio Assets over the liabilities of such Portfolio. The assets so distributable to the Shareholders of any particular Portfolio shall be distributed among such Shareholders in proportion to the number of Shares of that Portfolio held by them and recorded on the books of the Trust. The liquidation of any particular Portfolio may be authorized by vote of a Majority of the Trustees, subject to the affirmative vote of "a majority of the outstanding voting securities" of that Portfolio, as the quoted phrase is defined in the 1940 Act, determined in accordance with clause (iii) of the definition of "Majority Shareholder Vote" in Section 1.4 hereof.
(e) Voting. The Shareholders shall have the voting rights set forth in or determined under Article VII hereof.
(f) Redemption by Shareholder. Each holder of Shares of a particular Portfolio shall have the right at such times as may be permitted by the Trust, but no less frequently than once each week, to require the Trust to redeem all or any part of his Shares of that Portfolio at a redemption price equal to the net asset value per Share of that Portfolio next determined in accordance with subsection (h) of this Section 6.2 after the Shares are properly tendered for redemption; provided that the Trustees may from time to time, in their discretion, determine and impose a fee for such redemption. Payment of the redemption price shall be in cash; provided, however, that if the Trustees determine, which determination shall be conclusive, that conditions exist which make payment wholly in cash unwise or undesirable, the Trust may make payment wholly or partly in Securities or other assets belonging to such Portfolio at the value of such Securities or assets used in such determination of net asset value. Notwithstanding the foregoing, the Trust may postpone payment of the redemption price and may suspend the right of the holders of Shares of any Portfolio to require the Trust to redeem Shares of that Portfolio during any period or at any time when and to the extent permissible under the 1940 Act.
(g) Redemption at the Option of the Trust. Each Share of any Portfolio shall be subject to redemption at the option of the Trust at the redemption price which would be applicable if such Share were then being redeemed by the Shareholder pursuant to subsection (f) of this Section 6.2: (i) at any time, if the Trustees determine in their sole discretion that failure to so redeem may have materially adverse consequences to the holders of the Shares of the
Trust or of any Portfolio, or (ii) upon such other conditions with respect to maintenance of Shareholder accounts of a minimum amount as may from time to time be determined by the Trustees and set forth in the then current Prospectus or Statement of Additional Information of such Portfolio. Upon such redemption the holders of the Shares so redeemed shall have no further right with respect thereto other than to receive payment of such redemption price.
(h) Net Asset Value. The net asset value per Share of any Portfolio at any time shall be the quotient obtained by dividing the value of the net assets of such Portfolio at such time (being the current value of the assets belonging to such Portfolio, less its then existing liabilities) by the total number of Shares of that Portfolio then outstanding, all determined in accordance with the methods and procedures, including without limitation those with respect to rounding, established by the Trustees from time to time. The Trustees may determine to maintain the net asset value per Share of any Portfolio at a designated constant dollar amount and in connection therewith may adopt procedures not inconsistent with the 1940 Act for the continuing declaration of income attributable to that Portfolio as dividends payable in additional Shares of that Portfolio at the designated constant dollar amount and for the handling of any losses attributable to that Portfolio. Such procedures may provide that in the event of any loss each Shareholder shall be deemed to have contributed to the shares of beneficial interest account of that Portfolio his pro rata portion of the total number of Shares required to be canceled in order to permit the net asset value per Share of that Portfolio to be maintained, after reflecting such loss, at the designated constant dollar amount. Each Shareholder of the Trust shall be deemed to have expressly agreed, by his investment in any Portfolio with respect to which the Trustees shall have adopted any such procedure, to make the contribution referred to in the preceding sentence in the event of any such loss.
(i) Transfer. All Shares of each particular Portfolio shall be transferable, but transfers of Shares of a particular Portfolio will be recorded on the Share transfer records of the Trust applicable to that Portfolio only at such times as Shareholders shall have the right to require the Trust to redeem Shares of that Portfolio and at such other times as may be permitted by the Trustees.
(j) Equality. All Shares of each particular Portfolio shall represent an equal proportionate interest in the assets belonging to that liabilities of that Portfolio), and each Share of any particular Portfolio shall be equal to each other Share thereof; but the provisions of this sentence shall not restrict any distinctions permissible under subsection (c) of this Section 6.2 that may exist with respect to dividends and distributions on Shares of the same Portfolio. The Trustees may from time to time divide or combine the Shares of any particular Portfolio into a greater or lesser number of Shares of that Portfolio without thereby changing the proportionate beneficial interest in the assets belonging to that Portfolio or in any way affecting the rights of the holders of Shares of any other Portfolio.
(k) Rights of Fractional Shares. Any fractional Share of any Series shall carry proportionately all the rights and obligations of a whole Share of that Series, including rights and obligations with respect to voting, receipt of dividends and distributions, redemption of Shares, and liquidation of the Trust or of the Portfolio to which they pertain.
(l) Conversion Rights. Subject to compliance with the requirements of the 1940 Act, the Trustees shall have the authority to provide that holders of Shares of any Portfolio shall have the right to convert said Shares into Shares of one or more other Portfolios in accordance with such requirements and procedures as the Trustees may establish.
SECTION 6.3. Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or of a Transfer Agent or similar agent for the Trust, which books shall be maintained separately for the Shares of each Series that has been authorized. Certificates evidencing the ownership of Shares need not be issued except as the Trustees may otherwise determine from time to time, and the Trustees shall have power to call outstanding Share certificates and to replace them with book entries. The Trustees may make such rules as they consider appropriate for the issuance of Share certificates, the use of facsimile signatures, the transfer of Shares and similar matters. The record books of the Trust as kept by the Trust or any Transfer Agent or similar agent, as the case may be, shall be conclusive as to who are the Shareholders and as to the number of Shares of each Portfolio held from time to time by each such Shareholder.
The holders of Shares of each Portfolio shall upon demand disclose to the Trustees in writing such information with respect to their direct and indirect ownership of Shares of such Portfolio as the Trustees deem necessary to comply provisions of the Internal Revenue Code, or to comply with the requirements of any other authority.
SECTION 6.4. Investments in the Trust. The Trustees may accept investments in any Portfolio of the Trust from such Persons and on such terms and for such consideration, not inconsistent with the provisions of the 1940 Act, as they from time to time authorize. The Trustees may authorize any Distributor, Principal Underwriter, Custodian, Transfer Agent or other Person to accept orders for the purchase of Shares that conform to such authorized terms and to reject any purchase orders for Shares, whether or not conforming to such authorized terms.
SECTION 6.5. No Pre-emptive Rights. No Shareholder, by virtue of holding Shares of any Portfolio, shall have any preemptive or other right to subscribe to any additional Shares of that Portfolio, or to any shares of any other Portfolio, or any other Securities issued by the Trust.
SECTION 6.6. Status of Shares. Every Shareholder, by virtue of having become a Shareholder, shall be held to have expressly assented and agreed to the terms hereof and to have become a party hereto. Shares shall be deemed to be personal property, giving only the rights provided herein. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders partners. The death of a Shareholder during the continuance of the Trust shall not operate to terminate the Trust or any Portfolio, nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but only to the rights of said decedent under this Declaration of Trust.
SHAREHOLDERS' VOTING POWERS AND MEETINGS
SECTION 7.1. Voting Powers. The Shareholders shall have power to vote only (i) for the election or removal of Trustees as provided in Sections 4.1(c) and (e) hereof, (ii) with respect to the approval or termination in accordance with the 1940 Act of any contract with a Contracting Party as provided in Section 5.2 hereof as to which Shareholder approval is required by the 1940 Act, (iii) with respect to any termination or reorganization of the Trust or any Portfolio to the extent and as provided in Sections 9.1 and 9.2 hereof, (iv) with respect to any amendment of this Declaration of Trust to the extent and as provided in Section 9.3 hereof, (v) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or any Portfolio, or the Shareholders of any of them (provided, however, that a Shareholder of a particular Portfolio shall not in any event be entitled to maintain a derivative or class action on behalf of any other Portfolio or the Shareholders thereof), and (vi) with respect to such additional matters relating to the Trust as may be required by the 1940 Act, this Declaration of Trust, the By-Laws or any registration of the Trust with the Commission (or any successor agency) or any State, or as the Trustees may consider necessary or desirable. If and to the extent that the Trustees shall determine that such action is required by law, they shall cause each matter required or permitted to be voted upon at a meeting or by written consent of Shareholders to be submitted to a separate vote of the outstanding Shares of each Portfolio entitled to vote thereon; provided that (i) when expressly required by this Declaration or by the 1940 Act, actions of Shareholders shall be taken by Single Class Voting of all outstanding Shares of each Series whose holders are entitled to vote thereon; and (ii) when the Trustees determine that any matter to be submitted to a vote of Shareholders affects only the rights or interests of Shareholders of one or more but not all Portfolios, then only the Shareholders of the Portfolios so affected shall be entitled to vote thereon.
SECTION 7.2. Number of Votes and Manner of Voting; Proxies. On each matter submitted to a vote of the Shareholders, each holder of Shares of any Series shall be entitled to a number of votes equal to the number of Shares of such Series standing in his name on the books of the Trust. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy. A proxy with respect to Shares held in the name of two (2) or more Persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, this Declaration of Trust or the By-Laws to be taken by Shareholders.
SECTION 7.3. Meetings. Meetings of Shareholders may be called by the Trustees from time to time for the purpose of taking action upon any matter requiring the vote or authority of the Shareholders as herein provided, or deemed by the Trustees to be necessary or desirable. Written notice of any meeting of Shareholders shall be given or caused to be given by the Trustees by mailing such notice at least seven (7) days before such meeting, postage prepaid, stating the time, place and purpose of the meeting, to each Shareholder at the Shareholder's address as it appears on the records of the Trust. The Trustees shall promptly call and give notice of a meeting of Shareholders for the purpose of voting upon removal of any Trustee of the Trust when requested to do so in writing by Shareholders holding not less than ten percent (10%) of the Shares then outstanding. If the Trustees shall fail to call or give notice of any meeting of Shareholders for a period of thirty (30) days after written application by Shareholders holding at least ten percent (10%) of the Shares then outstanding requesting that a meeting be called for any other purpose requiring action by the Shareholders as provided herein or in the By-Laws, then Shareholders holding at least ten percent (10%) of the Shares then outstanding may call and give notice of such meeting, and thereupon the meeting shall be held in the manner provided for herein in case of call thereof by the Trustees.
SECTION 7.4. Record Dates. For the purpose of determining the Shareholders who are entitled to vote or act at any meeting or any adjournment thereof, or who are entitled to participate in any dividend or distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding thirty (30) days (except at or in connection with the termination of the Trust), as the Trustees may determine; or without closing the transfer books the Trustees may fix a date and time not more than sixty (60) days prior to the date of any meeting of Shareholders or other action as the date and time of record for the determination of Shareholders entitled to vote at such meeting or any adjournment thereof or to be treated as Shareholders of record for purposes of such other action, and any Shareholder who was a Shareholder at the date and time so fixed shall be entitled to vote at such meeting or any adjournment thereof or to be treated as a Shareholder of record for purposes of such other action, even though he has since that date and time disposed of his Shares, and no Shareholder becoming such after that date and time shall be so entitled to vote at such meeting or any adjournment thereof or to be treated as a Shareholder of record for purposes of such other action.
SECTION 7.5. Quorum and Required Vote. A majority of the Shares entitled to vote shall be a quorum for the transaction of business at a Shareholders' meeting, but any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held within a reasonable time after the date set for the original meeting without the necessity of further notice.
A Majority Shareholder Vote at a meeting of which a quorum is present shall decide any question, except when a different vote is required or permitted by any provision of the 1940 Act or other applicable law or by this Declaration of Trust or the By-Laws, or when the Trustees shall in their discretion require a larger vote or the vote of a majority or larger fraction of the Shares of one or more particular Series.
SECTION 7.6. Action by Written Consent. Subject to the provisions of the 1940 Act and other applicable law, any action taken by Shareholders may be taken without a meeting if a majority of Shareholders entitled to vote on the matter (or such larger proportion thereof or of the Shares of any particular Series as shall be required by the 1940 Act or by any express provision of this Declaration of Trust or the By-Laws or as shall be permitted by the Trustees) consent to the action in writing and if the writings in which such consent is given are filed with the records of the meetings of Shareholders, to the same extent and for the same period as proxies given in connection with a Shareholders' meeting. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.
SECTION 7.7. Inspection of Records. The records of the Trust shall be open to inspection by Shareholders to the same extent as is permitted stockholders of a Massachusetts business corporation under the Massachusetts Business Corporation Law.
SECTION 7.8. Additional Provisions. The By-Laws may include further provisions for Shareholders' votes and meetings and related matters not inconsistent with the provisions hereof.
SECTION 8.1. Trustees, Shareholders, etc. Not Personally Liable; Notice. The Trustees and officers of the Trust, in incurring any debts, liabilities or obligations, or in limiting or omitting any other actions for or in connection with the Trust, are or shall be deemed to be acting as Trustees or officers of the Trust and not in their own capacities. No Shareholder shall be subject to any personal liability whatsoever in tort, contract or otherwise to any other Person or Persons in connection with the assets or the affairs of the Trust or of any Portfolio, and subject to Section 8.4 hereof, no Trustee, officer, employee or agent of the Trust shall be subject to any personal liability whatsoever in tort, contract, or otherwise, to any other Person or Persons in connection with the assets or affairs of the Trust or of any Portfolio, save only that arising from his own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or the discharge of his functions. The Trust (or if the matter relates only to a particular Portfolio, that Portfolio) shall be solely liable for any and all debts, claims, demands, judgments, decrees, liabilities or obligations of any and every kind, against or with respect to the Trust or such Portfolio in tort, contract or otherwise in connection with the assets or the affairs of the Trust or such Portfolio, and all Persons dealing with the Trust or any Portfolio shall be deemed to have agreed that resort shall be had solely to the Trust Property of the Trust or the Portfolio Assets of such Portfolio, as the case may be, for the payment or performance thereof.
The Trustees shall use their best efforts to ensure that every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officers or officer shall give notice that this Declaration of Trust is on file with the Secretary of State of The Commonwealth of Massachusetts and shall recite to the effect that the same was executed or made by or on behalf of the Trust or by them as Trustees or Trustee or as officers or officer, and not individually, and that the obligations of such instrument are not binding upon any of them or the Shareholders individually but are binding only upon the assets and property of the Trust, or the particular Portfolio in question, as the case may be, but the omission thereof shall not operate to bind any Trustees or Trustee or officers or officer or Shareholders or Shareholder individually, or to subject the Portfolio Assets of any Portfolio to the obligations of any other Portfolio.
SECTION 8.2. Trustees' Good Faith Action; Expert Advice; No Bond or Surety. The exercise by the Trustees of their powers and discretions hereunder shall be binding upon everyone interested. Subject to Section 8.4 hereof, a Trustee shall be liable for his own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. Subject to the foregoing, (i) the Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee, consultant, Investment Advisor, Administrator, Distributor or Principal Underwriter, Custodian or Transfer Agent, Dividend Disbursing Agent, Shareholder Servicing Agent or Accounting Agent of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee; (ii) the Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust and their duties as Trustees, and shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice; and (iii) in discharging their duties, the Trustees, when acting in good faith, shall be entitled to rely upon the books of account of the Trust and upon written reports made to the Trustees by any officer appointed by them, any independent public accountant, and (with respect to the subject matter of the contract involved) any officer, partner or responsible employee of a Contracting Party appointed by the Trustees pursuant to Section 5.2 hereof. The Trustees as such shall not be required to give any bond or surety or any other security for the performance of their duties.
SECTION 8.3. Indemnification of Shareholders. If any Shareholder (or former Shareholder) of the Trust shall be charged or held to be personally liable for any obligation or liability of the Trust solely by reason of being or having been a Shareholder and not because of such Shareholder's acts or omissions or for some other reason, the Trust (upon proper and timely request by the Shareholder) shall assume the defense against such charge and satisfy any judgment thereon, and the Shareholder or former Shareholder (or the heirs, executors, administrators or other legal representatives thereof, or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled (but solely out of the assets of the Portfolio of which such Shareholder or former Shareholder is or was the holder of Shares) to be held harmless from and indemnified against all loss and expense arising from such liability.
SECTION 8.4. Indemnification of Trustees, Officers, etc. Subject to the limitations set forth hereinafter in this Section 8.4, the Trust shall indemnify (from the assets of the Portfolio or Portfolios to which the conduct in question relates) each of its Trustees and officers (including Persons who serve at the Trust's request as directors, officers or trustees of another organization in which the Trust has any interest as a shareholder, creditor or otherwise [hereinafter, together with such Person's heirs, executors, administrators or personal representative, referred to as a "Covered Person"]) against all liabilities, including but not limited to amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and expenses, including reasonable accountants' and counsel fees, incurred by any Covered Person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise or with which such Covered Person may be or may have been threatened, while in office or thereafter, by reason of being or having been such a Trustee or officer, director or trustee, except with respect to any matter as to which it has been determined that such Covered Person (i) did not act in good faith in the reasonable belief that such Covered Person's action was in or not opposed to the best interests of the Trust or (ii) had acted with willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office (either and both of the conduct described in (i) and (ii) being referred to hereafter as "Disabling Conduct"). A determination that the Covered Person is entitled to indemnification may be made by (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the Covered Person to be indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a court action or an administrative proceeding against a Covered Person for insufficiency of evidence of Disabling Conduct, or (iii) a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of Trustees who are neither "interested persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an independent legal counsel in a written opinion. Expenses, including accountants' and counsel fees so incurred by any such Covered Person (but excluding amounts paid in satisfaction of judgments, in compromise or as fines or penalties), may be paid from time to time by the Portfolio or Portfolios to which the conduct in question related in advance of the final disposition of any such action, suit or proceeding; provided that the Covered Person shall have undertaken to repay the amounts so paid to such Portfolio or Portfolios if it is ultimately determined that indemnification of such expenses is not authorized under this Article 8 and (i) the Covered Person shall have provided security for such undertaking, (ii) the Trust shall be insured against losses arising by reason of any lawful advances, or (iii) a majority of a quorum of the disinterested Trustees, or an independent legal counsel in a written opinion, shall have determined, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Covered Person ultimately will be found entitled to indemnification.
SECTION 8.5. Compromise Payment. As to any matter disposed of by a compromise payment by any such Covered Person referred to in Section 8.4 hereof, pursuant to a consent decree or otherwise, no such indemnification either for said payment or for any other expenses shall be provided unless such indemnification shall be approved (i) by a majority of a quorum of the disinterested Trustees or (ii) by an independent legal counsel in a written opinion. Approval by the Trustees pursuant to clause (i) or by independent legal counsel pursuant to clause (ii) shall not prevent the recovery from any Covered Person of any amount paid to such Covered Person in accordance with as indemnification if such Covered Person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that such Covered Person's action was in or not opposed to the best interests of the Trust or to have been liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office.
SECTION 8.6. Indemnification Not Exclusive, etc. The right of indemnification provided by this Article 1 shall not be exclusive of or affect any other rights to which any such Covered Person may be entitled. As used in this Article 8, a "disinterested" Person is one against whom none of the actions, suits or other proceedings in question, and no other action, suit or other proceeding on the same or similar grounds is then or has been pending or threatened. Nothing contained in this Article 8 shall affect any rights to indemnification to which personnel of the Trust, other than Trustees and officers, and other Persons may be entitled by contract or otherwise under law, nor the power of the Trust to purchase and maintain liability insurance on behalf of any such Person.
SECTION 8.7. Liability of Third Persons Dealing with Trustees. No person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order.
SECTION 9.1. Duration and Termination of Trust. Unless terminated as provided herein, the Trust shall continue without limitation of time and, without limiting the generality of the foregoing, no change, alteration or modification with respect to any Portfolio or Series of Shares shall operate to terminate the Trust. The Trust may be terminated at any time by a Majority of the Trustees, subject to the favorable vote of the holders of not less than a majority of the Shares outstanding and entitled to vote of each Portfolio of the Trust, or by an instrument or instruments in writing without a meeting, consented to by the holders of not less than a majority of such Shares, or by such greater or different vote of Shareholders of any Series as may be established by the Certificate of Designation by which such Series was authorized. Upon termination, after paying or otherwise providing for all liabilities, whether due or accrued or anticipated as may be determined by the Trustees, the Trust shall in accordance with such procedures as the Trustees consider appropriate reduce the remaining assets to distributable form in cash, Securities or other property, or any combination thereof, and distribute the proceeds to the Shareholders, in conformity with the provisions of Section 6.2(d) hereof.
SECTION 9.2. Reorganization. The Trustees may sell, convey and transfer all or substantially all of the assets of the Trust, or the assets belonging to any one or more Portfolios, to another trust, partnership, association or corporation organized under the laws of any state of the United States, or may transfer such assets to another Portfolio of the Trust, in exchange for cash, Shares or other Securities (including, in the case of a transfer to another Portfolio of the Trust, Shares of such other Portfolio), or to the extent permitted by law then in effect may merge or consolidate the Trust or any Portfolio with any other Trust or any corporation, partnership, or association organized under the laws of any state of the United States, all upon such terms and conditions and for such consideration when and as authorized by vote or written consent of a Majority of the Trustees and approved by the affirmative vote of the holders of not less than a majority of the Shares outstanding and entitled to vote of each Portfolio whose assets are affected by such transaction, or by an instrument or instruments in writing without a meeting, consented to by the holders of not less than a majority of such Shares, and/or by such other vote of any Series as may be established by the Certificate of Designation with respect to such Series. Following such transfer, the Trustees shall distribute the cash, Shares or other Securities or other consideration received in such transaction (giving due effect to the assets belonging to and indebtedness of, and any other differences among, the various Portfolios of which the assets have so been transferred) among the Shareholders of the Portfolio of which the assets have been so transferred; and if all of the assets of the Trust have been so transferred, the Trust shall be terminated. Nothing in this Section 9.2 shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations, and to sell, convey or transfer less than substantially all of the Trust Property or the assets belonging to any Portfolio to such organizations or entities.
SECTION 9.3. Amendments; etc. All rights granted to the Shareholders under this Declaration of Trust are granted subject to the reservation of the right to amend this Declaration of Trust as herein provided, except that no amendment shall repeal the limitations on personal liability of any
Trustee or the prohibition of assessment upon the Shareholders (otherwise than as permitted under Section 6.2(h)) without the express consent of each Shareholder or Trustee involved. Subject to the foregoing, the provisions of this Declaration of Trust (whether or not related to the rights of Shareholders) may be amended at any time, so long as such amendment does not adversely affect the rights of any Shareholder with respect to which such amendment is or purports to be applicable and so long as such amendment is not in contravention of applicable law, including the 1940 Act, by an instrument in writing signed by a Majority of the Trustees (or by an officer of the Trust pursuant to the vote of a Majority of the Trustees). Any amendment to this Declaration of Trust that adversely affects the rights of all Shareholders may be adopted at any time by an instrument in writing signed by a Majority of the Trustees (or by an officer of the Trust pursuant to a vote of a Majority of the Trustees) when authorized to do so by the vote in accordance with Section 7.1 hereof of Shareholders holding a majority of all the Shares outstanding and entitled to vote, without regard to Series, or if said amendment adversely affects the rights of the Shareholders of less than all of the Portfolios, by the vote of the holders of a majority of all the Shares entitled to vote of each Portfolio so affected. Subject to the foregoing, any such amendment shall be effective when the instrument containing the terms thereof and a certificate (which may be a part of such instrument) to the effect that such amendment has been duly adopted, and setting forth the circumstances thereof, shall have been executed and acknowledged by a Trustee or officer of the Trust and filed as provided in Section 9.4 hereof.
SECTION 9.4. Filing of Copies of Declaration and Amendments. The original or a copy of this Declaration and of each amendment hereto (including each Certificate of Designation and Certificate of Termination), as well as the certificates called for by Section 4.1(k) hereof as to changes in the Trustees, shall be kept at the office of the Trust where it may be inspected by any Shareholder, and one copy of each such instrument shall be filed with the Secretary of State of The Commonwealth of Massachusetts, as well as with any other governmental office where such filing may from time to time be required by the laws of Massachusetts. A restated Declaration, integrating into a single instrument all of the provisions of this Declaration which are then in effect and operative, may be executed from time to time by a Majority of the Trustees and shall, upon filing with the Secretary of State of The Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto.
SECTION 10.1. Governing Law. This Declaration of Trust is executed and delivered in The Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the construction and effect of every provision hereof shall be subject to and construed according to the laws of said Commonwealth.
SECTION 10.2. Counterparts. This Declaration of Trust and any amendment thereto may be simultaneously executed in several counterparts, each of which so executed shall be deemed to be an original, and such counterparts, together, shall constitute but one and the same instrument, which shall be sufficiently evidenced by any such original counterpart.
SECTION 10.3. Reliance by Third Parties. Any certificate executed by an individual who, according to the records in the office of the Secretary of State of The Commonwealth of Massachusetts appears to be a Trustee hereunder, certifying to: (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed as a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration of Trust, (e) the form of any By-Law adopted, or the identity of any officers elected, by the Trustees, or (f) the existence or non-existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any Person dealing with the Trustees, or any of them, and the successors of such Person.
SECTION 10.4. References; Headings. The masculine gender shall include the feminine and neuter genders. Headings are placed herein for convenience of reference only and shall not be taken as a part of this Declaration or control or affect the meaning, construction or effect hereof.
SECTION 10.5. Use of the Name "Counsellors". Warburg, Pincus Counsellors, Inc. ("Warburg") has consented to the use by the Trust of the name "Counsellors", which is a property right of Warburg. The Trust will only use the name "Counsellors" and will not purport to grant to any third party the right to use such name for any purpose. Warburg or any corporate affiliate of Warburg may use or grant to others the right to use the name "Counsellors", as all or a portion of a corporate or business name or for any commercial purpose, including a grant of such right to any other investment company. At the request of Warburg, the Trust will take such action as may be required to provide its consent to the use of such name by Warburg, or any corporate affiliate of Warburg, or by any Person to whom Warburg or an affiliate of Warburg shall have granted the right to the use of the name "Counsellors". Upon the termination of any investment advisory or management agreement into which Warburg and the Trust may enter, the Trust shall, upon request by Warburg, cease to use the name "Counsellors" as its name, and shall not use such name or initials as a part of its name or for any other commercial purpose, and shall cause its officers and Trustees to take any and all actions which Warburg may request to effect the foregoing and to reconvey to Warburg or such corporate affiliate any and all rights to such name.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal, for himself and his assigns, and has thereby accepted the Trusteeship as the Initial Trustee of Counsellors Fixed Income Fund hereby granted and agreed to the provisions hereof, all as of the day and year first above written.
The undersigned Settlor of Counsellors Fixed Income Fund, hereby accepts, approves and authorizes the foregoing Agreement and Declaration of Trust of Counsellors Fixed Income Fund.
M A S S A C H U S E T T S
Suffolk, ss.: January 20, 1987
Then personally appeared the above named Bryan G. Tyson and acknowledged the foregoing instrument to be his free act and deed.
M A S S A C H U S E T T S
Suffolk, ss.: January 20, 1987
Then personally appeared the above named Virginia Spencer and acknowledged the foregoing instrument to be her free act and deed. | 485APOS | EX-99.B1 | 1996-01-16T00:00:00 | 1996-01-16T12:46:06 |
0000950152-96-000105 | 0000950152-96-000105_0002.txt | We have reviewed the condensed consolidated balance sheet of The Tranzonic Companies as of November 30, 1995, and the related condensed consolidated statements of earnings for the nine- and three-month periods ended November 30, 1995 and 1994, and cash flows for the nine-month periods ended November 30, 1995 and 1994. These condensed consolidated financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Tranzonic Companies as of February 28, 1995, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 31, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 28, 1995, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP | 10-Q | EX-99 | 1996-01-16T00:00:00 | 1996-01-16T10:58:14 |
0000950168-96-000050 | 0000950168-96-000050_0001.txt | Dated as of November 7, 1995
STOCK PURCHASE AGREEMENT, dated as of November 7, 1995 (the "Agreement"), between LADD Furniture, Inc., a North Carolina corporation ("LADD") and BJCL, Inc., a Delaware corporation (the "Purchaser").
W I T N E S S E T H
WHEREAS, LADD owns all of the issued and outstanding capital stock of Brown Jordan Company, a North Carolina corporation and a wholly owned subsidiary of LADD (together with its Subsidiaries unless the context requires in Section 2.1.1 and 2.1.2, the "Company"), consisting of 10,000 shares of Common Stock, par value $1.00 per share (the "Shares");
WHEREAS, LADD wishes to sell the Shares to the Purchaser, and the Purchaser wishes to purchase the Shares from LADD, on the terms and conditions and for the consideration set forth herein.
NOW, THEREFORE, in consideration of the mutual promises made herein and of the mutual benefits to be derived herefrom, the parties hereto agree as follows:
SALE AND PURCHASE OF SHARES
1.1 Sale and Purchase of Shares. Subject to all of the terms and conditions of this Agreement and in reliance upon the representations and warranties contained herein, at the Closing provided for in Section 1.2, (a) LADD will sell to the Purchaser the Shares, and (b) the Purchaser will purchase from LADD the Shares for the Purchase Price, free and clear of all Liens (as defined in Section 7.17). The Shares shall be delivered by LADD as provided in Section 1.3, and such Purchase Price shall be paid by the Purchaser as provided in Section 1.4.
1.2 Closing. The closing of the purchase and sale of the Shares contemplated hereby (the "Closing") will take place at the offices of Petree Stockton, L.L.P., Winston-Salem, North Carolina at 9:00 a.m., on December 15, 1995 or at such other place, time or date as the parties hereto may agree in writing (the "Closing Date"), subject to Section 5.1.
1.3 Delivery of Shares. At the Closing, LADD will transfer to the Purchaser, against payment of the Purchase Price therefor as provided in Section 1.4, good, marketable and valid title to the Shares, free and clear of any Liens, by delivering to the Purchaser certificate(s) for such Shares, duly endorsed in blank or accompanied by a stock power or other proper instrument of assignment duly executed in blank, and having all requisite stock transfer stamps attached.
1.4 Payment of Purchase Price.
(a) Estimated Purchase Price. At the Closing, Purchaser shall pay $16,600,000 (the "Estimated Purchase Price") to LADD in cash or other immediately available funds.
(b) Purchase Price Adjustment. (x) Delivery and Review of Effective Date Balance Sheet. As promptly as practicable, but not later than 10 days after the Effective Date, the Company will cause to be prepared and delivered to LADD and the Purchaser (i) the Effective Date Balance Sheet and (ii) a certificate of the vice president/controller of the Company, setting forth the Effective Date Working Capital, together with supporting calculations in reasonable detail (the "Adjustment Certificate"). The Purchaser and LADD shall be given an opportunity to discuss with the Company matters relating to the determination of Effective Date Working Capital. LADD and Purchaser shall have 30 days from the date on which the Effective Date Balance Sheet and the Adjustment Certificate are delivered to review such documents (the "Review Period"). LADD and Purchaser shall be provided with full access to the work papers of the Company in connection with such review. If LADD or the Purchaser asserts that the Effective Date Balance Sheet or the Adjustment Certificate are correct or that the determination of Effective Date Working Capital was arrived at other than in accordance with GAAP applied on a basis consistent with accounting principles used in the preparation of the Audited Balance Sheet, the objecting party may, on or prior to the last day of the Review Period, deliver a notice to the other party setting forth, in reasonable detail, the basis for the disagreement therewith, together with supporting calculations (the "Dispute Notice"). If no Dispute Notice is received by either party on or prior to the last day of the Review Period, the Effective Date Balance Sheet and the Adjustment Certificate shall be deemed accepted by both parties.
(y) Disputes. Within 30 days after delivery of the Dispute Notice, if the Purchaser and LADD shall be unable, despite their reasonable efforts to resolve the dispute set forth in the Dispute Notice, the Purchaser and LADD shall jointly retain a nationally recognized firm of independent public accountants mutually acceptable to them. Such independent firm shall review the Effective Date Balance Sheet (and, if necessary or appropriate in their judgment, any related Company work papers), the Adjustment Certificate and the Dispute Notice, and shall, as promptly as practicable and in no event later than 45 days following the date of their engagement, deliver to LADD and the Purchaser a report (the "Adjustment Report") setting forth, in reasonable detail, their determination with respect to the issues specified in the Dispute Notice, and the revisions, if any, to be made to the Effective Date Balance Sheet, the Adjustment Certificate and the calculation of Effective Date Working Capital to reflect such determination, together with supporting calculations. The Adjustment Report shall be final and binding upon the Purchaser and LADD. LADD shall pay one-half, and the Purchaser shall pay one-half, of the fees and expenses of such independent firm incurred in preparing and delivering such Adjustment Report.
(z) Adjustment and Payment. To the extent Effective Date Working Capital is less than Audited Working Capital minus $100,000, LADD shall pay to Purchaser such deficit amount as a reduction in Purchase Price. To the extent Effective Date Working Capital is greater than Audited Working Capital plus $100,000, Purchaser shall pay such excess to LADD as additional Purchase Price. Any adjustment to the Purchase Price pursuant to this Section 1.4 shall be paid two business days after the date on which the Adjustment Report is
LADD and the Purchaser or, if no Dispute Notice is received by either party on or prior to the last day of the Review Period, then on the business day following the last day of the Review Period. Any such payment shall be made in cash or by wire transfer of immediately available funds to an account designated by the party to receive such payment. The Estimated Purchase Price as reduced or increased, if at all, pursuant to this Section 1.4(b) shall be deemed to be the Purchase Price of the Shares (the "Purchase Price").
2.1 Representations and Warranties as to the Company. LADD represents and warrants to the Purchaser as of the date hereof as follows:
2.1.1 Corporate Status. (a) Corporate existence. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as presently conducted. The Company is duly qualified and in good standing as a foreign corporation duly authorized to do business in all jurisdictions in which the failure to be so qualified would have a Material Adverse Effect (as defined in Section 7.17 hereof, along with other capitalized terms not otherwise defined herein).
(b) Each of the subsidiaries of the Company listed on Schedule 2.1.1 (the "Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization set forth on Schedule 2.1.1 with the corporate power and authority to own, lease and operate its properties and conduct its business as now being conducted. Except as set forth on Schedule 2.1.1, the Company has no subsidiaries and owns no interest in any other entities for purposes of consolidated financial reporting. Each of the Subsidiaries is duly qualified and in goodstanding as a foreign corporation duly authorized to do business in all jurisdictions in which the failure to be so qualified would have a Material Adverse Effect. The mergers of BJ Mexico I, Inc., BJ Mexico II, Inc. and BJ Mexico III, Inc. into BJ
Mexico V, Inc. effective May 25, 1993 were accomplished in compliance with all applicable laws and resulted in BJ Mexico V, Inc. assuming all of the rights and liabilities of BJ Mexico I, Inc., BJ Mexico II, Inc. and BJ Mexico III, Inc.
(c) Corporate Records. LADD has delivered to the Purchaser complete and correct copies, as in effect on the date hereof, of the Articles of Incorporation and Bylaws of the Company and the Subsidiaries and all amendments to each thereof. The Purchaser has been given the opportunity to inspect the corporate minute and stock transfer books of the Company.
2.1.2 Capitalization. (a) Capital Stock. The authorized capital stock of the Company consists of 100,000 shares of Common Stock, par value $1.00 per share (the "Common Stock"), of which 10,000 shares are issued and outstanding, and the Company has no authority to issue any other capital stock. The authorized capital stock of each of the Subsidiaries, the number of shares issued and outstanding, and the beneficial owner of such shares are listed on Schedule 2.1.2 hereto. The Shares, constituting all of the issued and outstanding capital stock of the Company, have been duly authorized and validly issued, and are fully paid and nonassessable, are held of record by LADD, have not been issued in violation of any preemptive rights, rights of first refusal or similar rights, and were offered and sold in compliance with all applicable securities laws.
(b) Agreements with Respect to Common Stock. There are no preemptive or similar rights on the part of any holder of any Shares. No options, warrants, conversion or other rights, agreements, commitments, arrangements or understandings of any kind obligating the Company, contingently or otherwise, to issue or sell any shares of its Common Stock or any securities convertible into or exchangeable for any such shares or any other securities, are outstanding, and no authorization therefor has been given.
2.1.3 Conflicts, Consents. (a) Conflicts. Except as set forth on Schedule 2.1.3, the execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby in the manner contemplated hereby, will not (x) result in the creation of any Lien upon any assets or properties of the Company; or (y) conflict with or result in any violation of or default under (or any event that, with notice or lapse of time or both, would constitute a default under), require any consent, notice or other action under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any provision of (i) the Articles of Incorporation or Bylaws of the Company (ii) any mortgage, indenture, loan agreement, note, bond, deed of trust, other agreement, commitment or obligation for the borrowing of money or the obtaining of credit, material lease or other material agreement, contract, license, franchise, permit or instrument to which the Company is a party or by which the Company or its properties may be bound, or (iii) any judgment, order, decree, law, statute, rule or regulation applicable to the Company, which failure to receive such consent would have a Material Adverse Effect on the Company.
(b) Consents. Other than filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and except as set forth in Schedule 2.1.3, no material consent, approval, authorization, permit, order, filing, registration or qualification of or with any court, governmental authority or third person is required to be obtained by the Company or LADD (whether under applicable law, pursuant to agreements to which the Company is a party, or otherwise) in connection with the execution and delivery of this Agreement or the consummation by LADD of the transactions contemplated hereby in the manner contemplated hereby.
2.1.4 Financial Information, Material Adverse Change, Undisclosed Liabilities. (a) Financial Statements. LADD has delivered to the Purchaser unaudited statements of operations, retained earnings (deficit) and cash flows of the Company for the fiscal years ended January 1, 1994 and December 31, 1994 and unaudited balance sheets of the Company as of such dates (the "Annual Financials") in each case prepared from and in accordance with the books and records of the Company as of, and for the period ended on, such date and representing only bona fide transactions. LADD also has delivered to the Purchaser an unaudited statement of operations for the nine (9) month period ended September 30, 1995 and an unaudited balance sheet of the Company as of September 30, 1995 (the "Interim Financials"), prepared from and in accordance with the books and records of the Company as of, and for the period ended on, such date and representing only bona fide transactions. The Annual Financials and Interim Financials are set forth in Schedule 2.1.4. The Annual Financials and the Interim Financials have been prepared in accordance with generally accepted accounting principles ("GAAP") and accounting practices utilized by subsidiaries and divisions of LADD disclosed in the footnotes to the Annual Financials and the Interim Financials, consistently applied throughout the periods indicated and present fairly the financial condition of the Company at the respective dates indicated and the results of operations and (in the case of the Annual Financials) cash flows of the Company for the respective periods indicated, except that the Interim Financials are subject to year-end audit adjustments.
(b) Material Adverse Effect. Except as disclosed on Schedule 2.1.4, since September 30, 1995, there has been no change in the business, financial condition, properties, liabilities, operations or prospects of the Company that has had or could reasonably be expected to have a Material Adverse Effect on the Company.
(c) Undisclosed Liabilities. Except (i) as and to the extent reflected in the unaudited balance sheet of the Company as of December 31, 1994 included in the Annual Financials or in the notes to the Annual Financials for the year then ended, and (ii) as disclosed in Schedule 2.1.4, as of December 31, 1994, there were no other liabilities or obligations, secured or unsecured (whether absolute, accrued, known or unknown, contingent or otherwise, and whether due or to become due) that has had or could reasonably be expected to have a Material Adverse Effect on the Company. Since December 31, 1994, the Company has not incurred any liabilities or obligations of any nature (whether accrued, absolute, known or unknown, contingent or otherwise, and whether due or to become due) except (x) as and to the extent reflected in the Interim Financials, (y) as disclosed in Schedule 2.1.4, or (z) nonmaterial current liabilities incurred in the ordinary course of business consistent with past practice.
2.1.5 No Liens. The Company has good and marketable title to, and owns free and clear of any Liens, except for Permitted Liens, all of the personal property reflected in the
Annual Financials and the Interim Financials, and all personal property acquired by the Company since September 30, 1995, except such personal property as has been disposed of between such date and the date hereof in the ordinary course of business, it being understood that a disposition of any asset, other than inventory or marketable products, carried on the books of the Company at more than $37,500 shall not be deemed to be a disposition in the ordinary course of business.
2.1.6 Accounts Receivable. The accounts receivable of the Company reflected on the Annual Financials and the Interim Financials, and those that have arisen since September 30, 1995, have arisen from bona fide sales transactions in the ordinary course of business, and are valid claims enforceable against the account debtor. Schedule 2.1.6 contains a true and complete aging of the Company's accounts receivable as of September 30, 1995.
2.1.7 Inventories. The inventories of the Company are fit and sufficient in all material respects for the purposes for which they were purchased or manufactured, except for inventories for which adequate reserves have been provided and reflected in the Annual Financials and the Interim Financials. The amounts shown for inventories on the Annual Financials and the Interim Financials reflect valuations at the lower of cost or market and are not in excess of the value of such inventories computed in accordance with GAAP and accounting practices utilized by subsidiaries and divisions of LADD disclosed in the footnotes to the Annual Financials and the Interim Financials applied on a consistent basis. The Company owns its inventories free and clear of any Liens. LADD has no reason to believe that the Company will experience in the foreseeable future any material difficulties in obtaining, in the desired quantity and quality, the inventory necessary to conduct its business as it is currently being conducted.
2.1.8 Real Property. (a) The Company has good and marketable title in fee simple to the real property, including the plants, buildings and other improvements thereon, set forth and described in Schedule 2.1.8 hereto (the "Owned Real Property"), free and clear of any Liens, except for Permitted Liens.The Owned Real Property constitutes all of the real property reflected in the Annual Financials and the Interim Financials and all real property acquired by the Company since September 30, 1995. LADD has heretofore furnished Purchaser with true and complete copies of all deeds, other instruments of title and policies of insurance describing the Company's ownership of the Owned Real Property, and copies of environmental reports relating to any real property owned or operated by the Company. Schedule 2.1.8 sets forth all leasehold interests in real property held by the Company at the Closing Date. The Owned Real Property, including the buildings and operations of the Company conducted thereon, are in substantial compliance with all applicable ordinances, regulations and zoning laws and do not encroach on property of others.
(b) Except as set forth in Schedule 2.1.8:
(i) The Company is not in violation of, or default under, any legal requirement pertaining to any of the Owned Real Property or leased real property. No notice of violation of any legal requirement, or of any covenant, condition, restriction or easement affecting any Owned Real Property or leased real property or with respect to the use or occupancy thereof, has been given by any Person;
(ii) All of the structures located on Owned Real Property and leased real property are supplied with utilities and other services necessary for the operation of such structures, and the business conducted by the Company therein, including gas, electricity, water, telephone, sanitary
(iii) No condemnation proceeding is pending or, to the knowledge of LADD, threatened which would impair the occupancy, use or value of any Owned Real Property or leased real property; and
(iv) There are no (a) leases, subleases, licenses, concessions or other agreements, written or oral, granting to any other Person the right to acquire, use or occupy any portion of, any Owned Real Property or leased real property, (b) outstanding options or rights of first refusal to purchase all or any portion of Owned Real Property or interest therein, and (c) persons (other than the Company) in possession of any Owned Real Property or leased real property;
2.1.9 Insurance. The assets, properties and business of the Company are insured under the various policies of general liability and other forms of insurance, as set forth on Schedule 2.1.9 hereof. No notice of cancellation or non-renewal with respect to, or disallowance of any claim under, any such policies has been received by the Company. To the best knowledge of LADD, such insurance policies provide such coverage against risk of loss in such amounts as are customary for corporations of established reputation engaged in similar business as the Company and similarly situated.
2.1.10 Litigation. Except as set forth in Schedule 2.1.10, there are no actions, suits or proceedings pending or, to the knowledge of LADD, threatened or any basis for any such actions, suits or proceedings against or affecting the Company or its respective properties, assets or business.
2.1.11 Compliance with Laws, Permits. (a) Compliance with Laws. Except as set forth on Schedule 2.1.11, the Company is not, nor previously has it been, in violation of any applicable laws or regulations or any applicable orders, rules, writs, judgments, injunctions, decrees or ordinances applicable to the business or operations of the Company, the violation of which would have a Material Adverse Effect on the Company.
(b) Permits. All necessary material licenses, permits or orders with respect to the conduct of the business of the Company have been obtained by the Company and are in effect as of the date hereof. All material permits, licenses, orders, registrations, or other approvals of all federal, state, local or foreign governmental or regulatory bodies, have been obtained, are set forth on Schedule 2.1.11 hereto, are in full force and effect, and, there has been neither any violation, suspension or cancellation thereof nor any basis for any such claim. The consummation of the transactions contemplated by this Agreement will not result in the revocation, suspension or limitation of any material license or permit, nor will there be required any consent of its respective issuing authority as a result of the consummation of the transactions contemplated hereby.
2.1.12 Tax Matters. The Company or LADD has timely filed, on behalf of the Company, all federal, foreign, state and local tax returns and other tax reports required to be filed by the Company and has paid, or, with respect to current taxes not yet due and payable, set up an adequate reserve on the books of the Company for the payment of, all federal, foreign, state and local income taxes and all other taxes (including, without limitation, all franchise, gross receipts, license, property, sales, use, excise, intangible, severance, stamp, occupation, environmental, social security, withholding, employment, unemployment or payroll taxes, and interest or penalties thereon, and all such other taxes along with all federal, foreign, state and local income taxes being defined collectively as "Taxes") required to be paid in respect of the periods covered by such returns, and has set up an adequate reserve on the books of the Company for the payment of all Taxes payable by the Company in respect of the period subsequent to the last of such periods. As of the Closing Date, such reserve as reflected on the balance sheet included as part of the Interim Financials will be sufficient for the then-unpaid Taxes of or with respect to the Company through and including the Closing Date, except as increased or decreased for normal operational Tax liabilities and consistent with prior practices for the period between September 30, 1995 and the Closing Date. All such returns are true, complete and correct. The Company or LADD is not delinquent in the payment of any Taxes, has not waived any statute of limitations in respect of Taxes, and has not requested or agreed to any extension of time within which to file any tax return or report or with respect to a tax assessment or deficiency. No deficiencies for Taxes have been assessed or asserted, and except as set forth on Schedule 2.1.12, the Company and LADD know of no unresolved questions or claims concerning the Tax liability of the Company. LADD has delivered to Purchaser a true and correct copy of all foreign, state (except California) and local Tax returns (including amended returns) and tax audit reports (if any). No transfer taxes will be payable by the Company as a result of the transactions contemplated hereby other than New York realty transfer gains tax attributable to the Company's New York showroom lease. Except
Schedule 2.1.12, there is no pending or, to the knowledge of LADD, threatened examination or audit by the Internal Revenue Service or any state taxing authorities of such returns. All proper amounts have been collected or withheld by the Company for all Taxes payable or anticipated to be payable. Except as set forth on Schedule 2.1.12, (i) the Company has not been audited by any taxing authority, (ii) the Company is not and has not previously been a party to a tax allocation or sharing agreement and has not otherwise assumed any liability for Taxes of any third party, including as a transferee or successor, whether under section 1.1502-6 of the Treasury regulations or otherwise, or (iii) the Company has never been (nor does it have any liability for unpaid taxes because it was) a member of an affiliated group within the meaning of Internal Revenue Code Section 1504(a) or any unitary, affiliated or similar group for state, local or foreign tax purposes.
2.1.13 Brokers, Finders. The Company and LADD have not retained any broker or finder in connection with the transactions contemplated hereby so as to give rise to any claim against the Purchaser or the Company for any brokerage or finder's commission, fee or similar compensation, except that Dillon, Read & Co. Inc. has acted as financial advisor to LADD and its fees and expenses will be paid by LADD.
2.1.14 Absence of Certain Changes. Except as set forth in Schedule 2.1.14, since September 30, 1995, the Company has not:
(a) issued, sold or delivered or agreed to issue, sell or deliver any additional shares of its capital stock or any options, warrants or rights to acquire any such capital stock, or securities convertible into or exchangeable for such capital stock;
(b) mortgaged, pledged or subjected to any lien, lease, security interest or other charge or encumbrance any of its assets, tangible or intangible, except in the ordinary course of business;
(c) acquired or disposed of any material assets or properties, or entered into any agreement or other arrangements for any such acquisition or disposition, or entered into or amended or terminated any Material Agreement, except inventory in the ordinary course of business consistent with past
(d) declared, made, paid or set apart any sum for any dividend or other distribution to its shareholders or purchased or redeemed any shares of its capital stock or any option, warrant or right to purchase any of its capital stock, or reclassified its capital stock;
(e) increased the wages, salaries, compensation, pension or other benefits payable to any employee other than in accordance with the normal compensation and benefits policies of the Company consistent with past practice, or granted any severance or termination pay, or entered into any employment, severance or consulting agreement or arrangement with any officer or salaried employee that is not terminable by the employer without cause and without penalty or changed any benefit plan or labor agreement except to comply with
(f) forgiven or cancelled any material debts or claims or waived any material rights of value other than intercompany debts, claims or rights and other than in the ordinary course of business consistent with past
(g) suffered any damage, destruction or loss (whether or not covered by insurance) affecting its properties or assets that could reasonably be expected to have a Material Adverse Effect on the Company;
(h) suffered any strike or other labor trouble materially affecting its business or operations;
(i) suffered or experienced any change in relations with or loss of any employees or customers that could reasonably be expected to have a Material Adverse Effect on the Company;
(j) incurred any indebtedness for borrowed money other than trade indebtedness incurred in the ordinary course of business consistent with
(k) changed any pricing practices (other than in the ordinary course consistent with past practices) or any method of accounting or accounting practice or policy of the Company;
(l) conducted its business other than in the ordinary course consistent with past practice, except as required by this Agreement;
(m) settled or compromised any claim, suit or cause of action
(n) materially altered its collection practices with respect
(o) materially altered its payment practices with respect to
(p) made any capital expenditures or commitments therefor outside the ordinary course of business in excess of $37,500 or
(q) agreed to do any of the foregoing.
2.1.15 Material Agreements. Except for the contracts, franchises, agreements, plans, leases and licenses described in Schedule 2.1.15 hereto, the Company is not a party to or subject to:
(a) any written employment contract or any other agreement or arrangement relating to compensation or severance payments with any officer,
(b) any plan or contract or arrangement providing for bonuses, pensions, options, deferred compensation, retirement payments, profit sharing or
(c) any contract or agreement with any labor union;
(d) any lease (other than leases of real property described in Schedule 2.1.8 hereto) involving payment of annual rentals in excess of $37,500;
(e) any contract or agreement for the purchase of any materials, services, or supplies involving annual payments in excess of $37,500 and of more than one year in duration;
(f) any contract or agreement for the purchase of equipment or any construction or other contract or agreement, not otherwise covered by this Section 2.1.15, involving annual payments in excess of $37,500 and of more than
(g) any contract or agreement for the sale of its products, exceeding $37,500 on an annual basis and of more than one year in duration;
(h) any contract or agreement with an agent, sales representative, dealer or other distributor of products of the Company;
(i) any instrument evidencing or related to indebtedness for money loaned or borrowed by the Company or indebtedness guaranteed by the Company, in any case in excess of $37,500;
(j) any contract or agreement, not otherwise covered by this Section 2.1.15, containing covenants materially limiting the freedom of the Company (or, to the knowledge of LADD, any key employee of the Company) to compete in any line of business or with any person;
(k) any license or franchise agreement in which the Company is the licensor, licensee or franchisor;
(l) any license or franchise agreement in which the Company is
(m) any contract or agreement, not of the type covered by any of the other items of this Section 2.1.15, which involves the payment or receipt by the Company of $37,500 or more in any one year and which by its terms is either (i) not to be performed by the Company prior to one year from the date hereof, or (ii) does not terminate, or is not terminable, by and without penalty to the Company prior to one year from the date hereof.
LADD has delivered to Purchaser correct and complete copies of all contracts, franchises, agreements, plans, leases and licenses described in Schedules 2.1.8 and 2.1.15 (the "Material Agreements"), and all such Material Agreements are valid and in full force and effect and the Company (or, to the knowledge of LADD, any other party to such Material Agreements) has not breached any material provision of, and is not in default in any material respect under the terms of, any such Material Agreement. Schedules 2.1.8 and 2.1.15 correctly identifies each Material Agreement which is or might be terminable by any other party upon the change of control of the Company.
2.1.16 Compliance with ERISA. (a) The term "Plan" shall include each bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance or termination pay, hospitalization or other medical, life or other insurance pension or retirement, profit sharing, stock appreciation rights, supplemental unemployment, layoff, consulting, fringe benefit (including, but not limited to, vacation, paid holidays, personal leave, or any similar plan, program, agreement, arrangement, policy or understanding (other than arrangements involving the payment of wages) sponsored, maintained or contributed to by the Company or by any trade or business, whether or not incorporated, that together with the Company or LADD would be deemed a "single employer" within the meaning of section 4001(a)(14) of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder ("ERISA") (an "ERISA Affiliate"), whether or not subject to the laws of a country or jurisdiction other than the United States, for the benefit of any current or former employee, director, or independent contractor of the Company, whether foreign or domestic and whether formal or informal and whether legally binding or not with respect to which the Company, LADD or any ERISA Affiliate has or may in the future have any liability or obligation to contribute or make payments of any kind.
(b) Schedule 2.1.16 contains a true and complete list of each Plan.
(c) Neither the Company nor any ERISA Affiliate has any formal plan or commitment, whether legally binding or not, to create any additional Plan or modify or change any existing Plan that would affect any current or former employee, director or independent contractor of the Company.
(d) With respect to each of the Plans, the Company has heretofore delivered to the Purchaser (or will deliver to the Purchaser no later than 30 days prior to the Closing) true, correct and complete copies of each of the following documents: (i) the Plans (including all amendments thereto) or, in the case of unwritten Plans, descriptions thereof, (ii) the three most recent Form 5500 annual reports, if required under ERISA, including all attachments thereto, filed with the Internal Revenue Service with respect to each such Plan, (iii) if the Plan is funded through a trust or any third party funding vehicle, such as an insurance contract, a copy of the trust or other funding agreement (including all amendments thereto) and the latest financial statements and trust reports thereof, (iv) the most recent determination letter received from the Internal Revenue Service with respect to each such Plan that is intended to be section 401 of the Internal Revenue Code of 1986, as amended (the "Code") as well as any pending application for a determination letter,(v) the most recent summary plan descriptions, together with each summary of material modifications, required under ERISA with respect to such Plan or as otherwise provided to Plan participants or beneficiaries, and all material employee communications relating to each Plan, (vi) a copy of the actuarial report, if required under ERISA, with respect to each such Plan for the last three years, (vii) all contracts relating to the Plans with respect to which the Company or any ERISA Affiliate may have any liability, including, without limitation, insurance contracts, investment management agreements, subscription and participation agreements and record keeping agreements, and (viii) a copy of all material documents and correspondence relating to the Plans received from or provided to the Department of Labor ("DOL"), the IRS, and the Pension Benefit Guaranty Corporation (the "PBGC") during the past three years.
(e) Each Plan has been administered and operated in all material respects in accordance with its terms and all applicable laws, including but not limited to ERISA and the Code.
(f) All reports, returns and similar documents with respect to the Plans required to be filed with any governmental agency or distributed to any Plan participant have been duly and timely filed or distributed and, to the knowledge of LADD, all reports, returns and similar documents actually filed or distributed were true, complete and correct in all material respects.
(g) No liability under Title IV of ERISA has been incurred by the Company or any ERISA Affiliate since the effective date of ERISA that has not been satisfied in full, and no condition exists that presents a material risk to the Company of incurring a liability under such Title, other than liability for premiums due the PBGC, which payments have been or will be made when due. To the extent this representation applies to sections 4064, 4069 or 4204 of Title IV of ERISA, it is made not only with respect to the Plans but also with respect to any employee benefit plan, program, agreement or arrangement subject to Title IV of ERISA to which the Company or an ERISA Affiliate made, or was required to make, contributions during the six year period ending on the Closing Date.
(h) Neither the Company, any ERISA Affiliate, Plan, trust thereunder, nor any trustee or administrator thereof has engaged in any transaction in connection with which the Company or any ERISA Affiliate, any of the Plans, any such trust, or any trustee or administrator thereof, or any party dealing with the Plans or any such trust could be subject to either civil liability or a penalty pursuant to section 409, 502(i) or 502(1) of ERISA or a tax imposed pursuant to Chapter 43 of the Code.
(i) The PBGC has not instituted proceedings to terminate any of the Plans, no condition exists that presents a material risk that such proceedings will be instituted and no reportable event (within the meaning of Section 4043 of ERISA) has occurred or will occur as a result of the transactions contemplated by this Agreement with respect to any Plan.
(j) No Plan is a "multi-employer plan" (within the meaning of Section 3(37) of ERISA) or a "multiple employer" plan (within the meaning of Section 4063 or 4064 of ERISA) and the Company has not and will not incur any withdrawal liability on account of any ERISA Affiliate. Each Plan that is intended to be qualified under Section 401(a) of the Code is so qualified, has received a favorable determination letter from the Internal Revenue Service to that effect or has a timely application pending for such a determination letter with the Internal Revenue Service, no such determination letter has been revoked, and, to the knowledge of LADD, revocation has not been threatened, no event has occurred and no circumstances exist that would adversely affect the tax-qualification of such Plan; and such Plan has not been amended since the effective date of its most recent determination letter in any respect that might adversely affect its qualification, materially increase its cost or require security under section 307 of ERISA. The Company has also provided to Purchaser a list of all amendments to each Plan which is intended to be qualified as to which a favorable determination letter has not yet been received.
(k) Except as set forth on Schedule 2.1.10, there are no pending or, to the knowledge of LADD, threatened claims, investigations by any governmental agency or other claims against any Plan, the Company, LADD, any ERISA Affiliate, trustee of any Plan, or administrator of any Plan or otherwise involving any of the Plans (other than routine claims for benefits) or asserting any rights to or claims for benefits under any Plan that could give rise to any material liability and there are not any facts that could give rise to any material liability in the event of any such investigation, claim, suit or proceeding.
(l) All contributions required to have been made by the Company, LADD or any ERISA Affiliate to any Plan pursuant to the terms of each of the Plans, any applicable collective bargaining agreement, and when applicable, Section 412 of the Code or Section 302 of ERISA, have been made within the time prescribed by such terms or provisions. All such amounts properly accrued through the Closing Date with respect to the current plan year thereof will be paid by the Company on or prior to the Closing Date or will be properly recorded on the balance sheet. None of the Plans or any trust established thereunder had an "accumulated funding deficiency" (as defined in section 412 of the Code), whether or not waived, as of the last day of its most recent fiscal year ended prior to the date of this Agreement.
(m) No employee of the Company will be entitled to any additional benefits or any acceleration of the time of payment or vesting of any benefits under any Plan as a result of the transactions contemplated by this Agreement, except as provided below in Section 3.4 of this Agreement.
(n) Any amount that could be received (whether in cash or property or the vesting of property) as a result of any of the transactions contemplated by this Agreement by any employee, officer or director of Company or any of its affiliates who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation section 1.280G-1) under any employment severance or termination agreement, other compensation arrangement or Plan currently in effect would not be characterized as an "excess parachute payment" as such term is defined in section 280G(b)(1) of the Code.
(o) No compensation payable by the Company to any of their employees under any existing contract, Plan or other employment arrangement (including by reason of the transactions contemplated hereby) will be subject to disallowance under section 162(m) of the Code.
(p) No Plan provides benefits, including, without limitation, death or medical benefits (whether or not insured), with respect to current or former employees of the Company upon retirement or other termination of service (other than (i) coverage mandated by applicable law, (ii) death benefits or retirement benefits under any "employee pension plan," as that term is defined in section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of the Company or the ERISA Affiliates or (iv) benefits the full cost of which is borne by the current or former employee (or his beneficiary)). The Accumulated Post-Retirement Benefit Obligation (as defined in Statement of Financial Accounting Standards No. 106) as of December 31, 1994 in respect of post-retirement health and life benefits for the Company's employees is estimated by the Company's independent actuary to be $0 calculated using the actuarial assumptions used for the Company's last available annual report.
(q) Schedule 2.1.16 lists each Plan that is subject to laws of a country or jurisdiction other than the United States (the "Foreign Plans"). Except as provided in Schedule 2.1.16, all contributions required to be made to each Foreign Plan for all prior plan years in order for each of the Foreign Plans which are pension plans (the "Foreign Pension Plans") to comply with the minimum funding standards imposed by applicable law have been made or properly accrued. All employee contributions to the Foreign Plans for all prior plan years have been properly withheld by the Company and have been fully paid into the applicable funding arrangements. There has been no withdrawal by the Company of assets from the Foreign Pension Plans and no application for approval of a withdrawal of assets has been made to any regulatory authority. Each of the Foreign Pension Plans is registered or qualified within the meaning of applicable law and nothing has occurred which would result in the revocation of the registration or qualification of such Foreign Pension Plans. The contained in this Section 2.1.16(q) are in addition to each of the other representations and warranties contained in Section 2.1.16 that are applicable to the Foreign Plans.
(r) Other than current or contingent liabilities previously disclosed on Schedule 2.1.4, the Company, LADD and each ERISA Affiliate has, and will have, no material current or contingent liability with respect to any Plan.
2.1.17 Intellectual Property. Schedule 2.1.17 contains a list of all trademarks, patents and patent applications, trade names and copyrights, whether registered or not, owned or used by the Company or in which it has an interest by license, agreement, shop right, common law, or otherwise and which are material to the conduct of its business (the "Intellectual Property"). To the knowledge of LADD, no third party is engaged in any activity not duly authorized by the Company or LADD which would constitute an infringement of the Intellectual Property of the Company. There are no claims or proceedings pending or, to the knowledge of LADD, threatened against the Company asserting that the Company has or is infringing the valid patents, copyrights, trademarks or trade names of any third party. LADD is unaware of any claim by any third party that the Company does now own or have the right to use all patents (including patents pending), trademarks, trade names, copyrighted material, processes, designs, formulas, inventions, trade secrets, know-how, ideas, concepts or other proprietary or confidential information which are presently used in and are material to the operation of the Company's business. Except as set forth in Schedules 2.1.3 and 2.1.17, all of the Intellectual Property listed in Schedule 2.1.17 are fully assignable to the extent permitted by applicable law and, to the knowledge of LADD, are free and clear of any attachments or Liens.
2.1.18 Labor Matters. Except as set forth on Schedule 2.1.18, there has been no material work stoppage or slowdown or other material labor difficulties relating to the Company. Except as set forth on Schedule 2.1.18, the Company is not a party to any collective bargaining agreement with any labor union or similar organization, nor does LADD know of any such organization which represents or claims to represent any of the Company's employees or is currently seeking to represent or organize the employees at any of the principal facilities of the Company.
2.1.19 No Material Liabilities. There are no liabilities of the Company, other than:
(a) liabilities disclosed or provided for in the Annual Financials or the Interim Financials;
(b) liabilities incurred or recorded in the ordinary course of business since September 30, 1995, none of which has been materially adverse to the business, assets or operations of the Company.
2.1.20 No Judgments or Orders. The Company is not a party to or subject to any judgment, order or decree entered in any action or proceeding brought by any governmental agency or any other party either enjoining it in respect of any business practice or the conduct of business in any area or the acquisition of any property or which otherwise materially adversely affects the Company.
2.1.21 Bank Accounts. Schedule 2.1.21 sets forth a list of all bank accounts, petty cash or imprest funds maintained by the Company, with the persons authorized to sign thereon. Also included on Schedule 2.1.21 is a list of safe deposit boxes in the Company's name and the persons authorized to enter such boxes.
2.1.22 Affiliate Transactions. Except as reflected in the Annual Financials, the Interim Financials or otherwise set forth in Schedule 2.1.22, there are no transactions involving the Company or LADD or any of their respective affiliates (which includes officers, directors and key employees) arising out of any transaction with the Company (other than for services as employees, officers and directors), and the Company is not subject to any liability that will survive Closing with respect to any transactions involving LADD or any of its affiliates including, without limitation, any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from LADD or any affiliate of LADD.
2.1.23 Disclosure. To LADD's knowledge, this Agreement, the Schedules hereto and the certificates and other documents furnished by the Company or LADD to the Purchaser pursuant hereto, taken as a whole, do not as of their respective dates contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein and therein not misleading.
2.1.24 Assets Necessary for Operations/Condition of Properties. The real and personal properties of the Company described in Sections 2.1.6, 2.1.7, 2.1.8 and 2.1.17 and the real property and personal property held by the Company pursuant to the leases and licenses described in Schedules 2.1.8, 2.1.17 and 2.1.24 hereto constitute all of the material assets and properties utilized by the Company in connection with its business and operations as presently conducted. All material facilities, machinery, equipment, fixtures, vehicles and other tangible property owned, leased or utilized by the Company are in good operating condition and repair, normal wear and tear excepted, are reasonably fit and useable for the purposes for which they are being used, and, to the knowledge of LADD, will not likely require a major overhaul or repair in the foreseeable future except in the ordinary course of business; provided, however, Purchaser acknowledges that the Company's Newport, Arkansas leased warehouse facility may require repairs.
2.1.25 Questionable Payments. Neither the Company nor, to LADD's knowledge, any of its directors, officers, agents, employees or other person associated with or acting on behalf of the Company has (a) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (b) made any direct or indirect unlawful payments to government officials or employees, or foreign government officials or employees, from corporate funds, (c) established or maintained any unlawful or unrecorded fund of corporate monies or other assets, (d) made any false or fictitious entries on the books of account of the Company, (e) made or received any bribe, rebate, payoff, influence payment, kickback or other unlawful payment, or (f) made any other material payment, favor or gift not fully deductible for federal income tax purposes.
2.1.26 Principal Customers and Suppliers.
(a) Schedule 2.1.26 contains a true and complete list of the ten largest customers of the Company during each of fiscal 1994 and during the nine months ended September 30, 1995, indicating the amount of revenues attributable to each such customer, and since that date no such customer listed for 1995 has terminated its relationship with or adversely curtailed its purchases from the Company or indicated (for any reason) its intention so to terminate its relationship or curtail its purchases.
(b) Schedule 2.1.26 also contains a true and complete list of the ten largest suppliers from whom the Company purchased goods or services during fiscal 1994 and during the nine months ended on September 30, 1995, indicating the amount purchased from such supplier, and since that date no such supplier listed for 1995 has terminated its relationship with or adversely curtailed its accommodations, sales or services to the Company or indicated (for any reason) its intention to terminate such relationship or curtail its accommodations, sales or services.
2.1.27 Product Returns. Schedule 2.1.27 contains a true summary of the product return experience of the Company for the fiscal years 1993 and 1994 and the nine month period ended September 30, 1995. The Company has not experienced any product returns which have had or may have a Material Adverse Effect.
2.1.28 Product Warranty. Schedule 2.1.28 contains a true and complete description of all warranties granted or made with respect to products sold, or services rendered, by the Company. The Company has not suffered any product liability or product warranty claims which have had or may have a Material Adverse Effect.
2.2 Representations and Warranties of LADD. LADD represents and warrants to the Purchaser as follows:
2.2.1 Authorization, etc. LADD is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. LADD has all requisite corporate power and authority to execute and deliver this Agreement and each of the other agreements, instruments and documents required to be executed, delivered and performed by LADD hereunder and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and each such other agreement, instrument and document and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of LADD. This Agreement has been duly executed and delivered by LADD and constitutes the legal, valid and binding obligation of LADD enforceable against LADD in accordance with its terms.
2.2.2 Conflicts and Consents. (a) Conflicts. Except as set forth in Schedule 2.1.3, the execution, delivery and performance by LADD of this Agreement and each other agreement, instrument or document required to be executed and delivered by LADD hereunder, and the consummation by LADD of the transactions contemplated hereby and thereby, in the manner contemplated hereby and thereby, do not and will not conflict with or result in the breach of any of the terms or provisions of, or constitute a default under (or an event that, with notice or lapse of time or both, would constitute a default under), require any consent under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any provision of (i) the Articles of Incorporation or Bylaws of LADD, (ii) any material mortgage, indenture, loan agreement, note, other agreement for the borrowing of money or the obtaining of credit, deed of trust, will, lease or other material agreement or instrument to which LADD is a party or by which LADD or the Shares owned by LADD may be bound, or (iii) any judgment, order, decree, law, statute, rule or regulation applicable to LADD or to the Shares to be sold by LADD.
(b) Consents. Other than filings required under the HSR Act and except as set forth in Schedule 2.1.3, no consent, approval, authorization, order, filing, registration or qualification of or with any court, governmental authority or third person is required to be obtained by LADD in connection with the execution, delivery and performance by LADD of this Agreement or any other agreement, instrument or document required to be executed and delivered by LADD hereunder or consummation by LADD of the transactions contemplated herein or therein in the manner contemplated hereby or thereby.
2.2.3 Title to Shares, etc. LADD is the record and beneficial owner of and has good, valid and marketable title to the Shares, free and clear of any Lien. Upon the delivery of and payment for the Shares at Closing, as provided for in this Agreement, LADD will transfer to the Purchaser good, marketable and valid title to the Shares, free and clear of any Lien.
2.2.4 Litigation. There is no action, claim, suit or proceeding pending or, to the knowledge of LADD, threatened by or against or affecting LADD and, to the knowledge of LADD, there is no investigation pending or threatened against or affecting LADD, in each case before any court or governmental or regulatory authority or body, that could reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated by this Agreement or on the ability of LADD to perform its obligations under this Agreement and each of the other agreements, instruments and documents required to be executed and delivered by LADD hereunder.
2.2.5 Brokers, Finders. LADD has not retained any broker or finder in connection with the transactions contemplated hereby so as to give rise to any claim against the Purchaser or the Company for any brokerage or finder's commission, fee or similar compensation, except that Dillon, Read & Co. Inc. has acted as financial advisor to LADD and its fees and expenses will be paid by LADD at the Closing.
2.3 Representations and Warranties of Purchaser. The Purchaser represents and warrants to LADD as of the date hereof as follows:
2.3.1 Purchaser's Corporate Status. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware.
2.3.2 Authorization, etc. The Purchaser has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby and to perform its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of the Purchaser. This Agreement has been duly executed and delivered by the Purchaser and constitutes the legal, valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms.
2.3.3 Conflicts, Consents. (a) Conflicts. The execution and delivery of this Agreement by the Purchaser, and the consummation by the Purchaser of the transactions contemplated hereby in the manner contemplated hereby, do not and will not conflict with or result in any violation of, or default under (or any event that, with notice or lapse of time or both, would constitute a default under), any provision of (i) the Certificate of Incorporation or Bylaws of the Purchaser, (ii) any mortgage, indenture, loan agreement, note, bond, deed of trust, other agreement, commitment or obligation for the borrowing of money or the obtaining of credit, material lease or other material agreement, contract, license, franchise, permit or instrument to which the Purchaser is a party or by which it may be bound, or (iii) any judgment, order, decree, law, statute, rule or regulation applicable to the Purchaser.
(b) Consents. Other than filings required under the HSR Act, no consent, approval, authorization, permit, order, filing, registration or qualification of or with any court, governmental authority or third person is required to be obtained by the Purchaser in connection with the execution and delivery by the Purchaser of this Agreement or the consummation by the Purchaser of the transactions contemplated hereby in the manner contemplated hereby.
2.3.4 Brokers, Finders. The Purchaser has not retained any broker or finder in connection with the transactions contemplated hereby so as to give rise to any valid claim against LADD or the Company for any brokerage or finder's commission, fee or similar compensation.
2.3.5 Purchase for Investment. The Purchaser is acquiring the Shares for its own account for investment and not with a view to any distribution thereof. The Purchaser acknowledges receipt of advice from the Company to the effect that the Shares have not been registered under the Securities Act of 1933 or any state securities laws.
2.3.6 Financing. Purchaser has furnished or will furnish to LADD within one business day of receipt true and complete copies of all commitment or proposal letters received from the lending and equity sources setting forth the amount of funds necessary for Purchaser to purchase the Shares and the Cherry Grove Assets as provided in this Agreement. All fees required to be paid by Purchaser to such financing sources as of the date hereof have been paid by Purchaser and such commitment letters are subject only to normal conditions. Purchaser is not in default with respect to any requirements or conditions contained in such commitment or proposal letters and knows of no conditions, events or circumstances that would cause such financing sources not to fund such commitments in connection with the transactions contemplated hereby.
3.1 Access and Information. Prior to the Closing, LADD will cause the Company (a) to give to the Purchaser and its representatives full and free access to the Company's properties, books, records, contracts and commitments upon reasonable notice during normal business hours, (b) to furnish all such information and documents relating to its properties and business as the Purchaser may reasonably request, and (c) to allow the Purchaser to discuss matters relating to the Company with the outside auditors, attorneys and such other representatives for the Company as are reasonably requested by the Purchaser.
3.2 Conduct of Business of the Company. (A) Except as set forth in Schedule 3.2 and in Section 3.2(B) below, from the date hereof to the Closing, LADD will cause the Company (a) to conduct its business only in the ordinary course in substantially the same manner as heretofore conducted, (b) to maintain and keep its properties and equipment in such repair, working order and condition as is sufficient for the operation of its business in the ordinary course, (c) to keep in full force and effect insurance comparable in amount and scope of coverage to that now maintained by it (to the extent available on commercially reasonable terms in the case of any renewal or replacement policies), (d) to perform in all material respects all of its obligations under all contracts and commitments applicable to its business or properties, (e) to use its best efforts to maintain and preserve the Company's business organization intact, and maintain satisfactory relationships with officers, employees, suppliers, distributors and customers so that they will be preserved after the Closing, (f) to maintain its books of account and records in the usual and regular manner, (g) to comply in all material respects with all laws and regulations applicable to it and to the conduct of its business, (h) not to amend its Articles of Incorporation or Bylaws, (i) not to merge or consolidate with, or agree to merge or consolidate with, or to purchase substantially all of the assets of, or otherwise acquire, any business or any business organization or division thereof, (j) not to make any material commitments or expenditures, other than those previously disclosed to Purchaser, and not to enter into any transaction with LADD or any affiliate of LADD or the Company not consistent with past practice, (k) promptly to advise the Purchaser in writing of any emergency or other change in the normal course of business or in the operations of its properties and of any governmental or any other third party complaints, investigations or hearings (or communications indicating that the same may be contemplated), (l) promptly advise the Purchaser of any material adverse change in its business, operations or financial condition, (m) to collect its accounts receivable in the ordinary course of business consistent with past practice, (n) to pay its accounts payable in the ordinary course of business consistent with past practice, (o) to use its best efforts to insure that the representations and warranties contained in Section 2 hereof or elsewhere in this Agreement shall be true and correct as of the Closing Date and (p) not to take any action described in section 2.1.14 hereof.
(B) Notwithstanding the foregoing provisions of Section 3.2(A), following the Effective Date, LADD will cease withdrawing all cash balances from the Company and the Company shall retain for its own account all cash from collections, including, without limitation, the collection of accounts receivable and customer deposits, and shall utilize such cash proceeds to fund the working capital needs of the Company from the Effective Date until the Closing Date. To the extent that LADD is required to contribute additional cash to the Company on or after the Effective Date, such amount shall not be treated as an intercompany account, and Purchaser shall, or shall cause the Company, to reimburse LADD for all amounts so advanced on or after the Effective Date. Further, from the Effective Date until the Closing Date, all intercompany accounts, including, without limitation, interest payable to LFI Capital Management, Inc. and royalties payable to Cherry Grove, Inc., shall be treated as third party accounts and all amounts owing to LADD pursuant to such accounts shall be paid to LADD. Such reimbursement and payment shall occur within two business days of the Closing Date and shall be made in cash or other immediately available funds. Purchaser shall be responsible for and agrees to protect, save and hold LADD harmless from and against any and all Taxes attributable to the ordinary course operations of the Company after the Effective Date (specifically excluding therefrom those matters for which LADD indemnifies Purchaser Indemnified Parties pursuant to Sections 3.7(b) and 3.13).
3.3 Efforts to Consummate Transaction. Subject to the terms and conditions herein provided, each of the parties agrees to use its best efforts to take, or cause to be taken, all action and 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 hereby in accordance with the terms of this Agreement.
3.4 Employee Matters. (a) Purchaser shall use its reasonable best efforts to, or shall cause the Company to use its reasonable best efforts to, maintain employee benefit plans, programs, policies and arrangements for employees of the Company who are employees of the Company as of the Closing Date ("Affected Employees") which provide benefits that are of substantially similar value in the aggregate as those provided under the employee benefit plans, programs, policies and arrangements of the Company in effect as of the date of this Agreement. To the extent Purchaser establishes comparable plans, programs or policies, Affected Employees shall be given credit for all service with the Company, LADD, any ERISA Affiliates and predecessor employers to the same extent as such service was credited for such purpose by the Company, LADD or any ERISA Affiliates under each employee benefit plan, program, policy or arrangement of the Company, LADD, or any ERISA Affiliates in which the employees are eligible to participate for purposes of eligibility and vesting.
(b) LADD's Obligations. LADD shall retain, and neither Purchaser nor the Company shall assume, any liabilities or obligations of LADD or the Company or any of their affiliates relating to the Plans or current or former employees of the Company with respect to claims incurred and employment prior to the Closing Date. As of the Closing Date, the Company shall cease to be a participating employer under the Plans maintained by LADD and LADD shall take all action as may be necessary to effect such cessation of participation. LADD shall indemnify and hold Purchaser harmless for any liabilities or obligations of the Company or LADD relating to employees, employee benefit plans or Plans arising at or before, or by reason of, the Closing Date, or otherwise in respect of any period at or before the Closing Date.
(c) Purchaser's Obligations. Except as provided in Section 3.4(n), nothing in this Agreement shall be construed to obligate Purchaser to offer any particular benefit at any particular level with respect to any Affected Employee, and nothing in this Agreement shall be construed to entitle any Affected Employee to any specific compensation.
(d) Savings Plans. As soon as practicable after the Closing, the Choice Plus Plan of Pennsylvania House, Inc. and any other savings plan sponsored or maintained by LADD or any of its ERISA Affiliates for the benefit of Affected Employees (hereinafter referred to collectively as the "Savings Plans"), shall be amended to provide that (i) all account balances of Affected Employees shall become fully vested as of the Closing and (ii) all Affected Employees who are participants in the Savings Plans shall have the right to elect to receive a distribution or direct rollover of their respective account balances, subject to, and in accordance with, the provisions of applicable law. Purchaser shall establish or maintain, or cause the Company to establish or maintain, a defined contribution plan for the benefit of some or all of the Affected Employees, which shall permit Affected Employees to roll their benefits under the Savings Plans over into Purchaser's defined contribution plan.
(e) Welfare Plans. Effective as of the Closing Date, all Affected Employees shall cease to be covered by all employee welfare benefit plans (as such term is defined in Section 3(i) of ERISA) sponsored or maintained by LADD or its ERISA Affiliates on behalf of the Affected Employers and their dependents (the "Welfare Plans"), other than those Welfare Plans maintained exclusively by the Company. LADD shall retain liability for all claims for benefits under the Welfare Plans, in accordance with the terms of the Welfare Plans, incurred by employees or former employees of the Company (and their dependents) under LADD's employee welfare benefit plans prior to the Closing Date. Purchaser shall, or shall cause the Company to, be liable for all Welfare Plan claims incurred by Affected Employees (and their dependents) to the extent covered under any employee welfare benefit plans of Purchaser or its affiliates after the Closing. For purposes of this paragraph, a claim shall be deemed to have been incurred on the date on which each medical or other treatment or service was rendered and not the date of the inception of the related illness or injury or the date of submission of a claim related thereto.
(f) Medical and Dental Plans. If Affected Employees become eligible to participate in 1995 in a medical and dental plan of Purchaser or its affiliates, Purchaser shall use its reasonable best efforts to, or shall cause the Company to use its reasonable best efforts to cause such plan to (i) waive any preexisting condition limitations for conditions covered under the applicable medical or dental plans of the Company (the "Company Medical Plans") and (ii) honor any deductible and out of pocket expenses incurred by the employees and their beneficiaries under the Company Medical Plans during the portion of 1995 preceding the Closing. If Affected Employees become eligible to participate in 1995 in a group term life insurance plan maintained by Purchaser or its affiliates, Purchaser shall use its reasonable best efforts to cause such plan to waive any medical certification for such employees up to the amount of coverage the employees had under the life insurance plan of the Company (but subject to any limits on the maximum amount of coverage under Purchaser's life insurance plan).
(g) Disability Benefits. LADD shall be responsible, or cause its insurance carriers to be responsible, for payment of any and all short and long-term disability benefits, regardless of whether payment is required to be made after the Closing for: (i) any individual who is currently receiving such benefits as of the Closing; (ii) any individual who becomes disabled prior to the Closing and who remains disabled for the length of any qualifying disability period; and (iii) any individual described in (i) and (ii) above whose disability ceases and who returns to active employment immediately after the Closing and who subsequently becomes disabled prior to the expiration of ninety (90) days of active employment with the Company where such subsequent disability is a continuation of such prior disability for which benefits were due under any of LADD's or its ERISA Affiliates' disability plans.
(h) COBRA. LADD shall be responsible for complying with the continuation coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") under Section 4980B(f) of the Code with respect to any individual who incurs a "qualifying event" prior to the Closing Date; provided, however, that Purchaser shall assume such responsibility with respect to all individuals covered under insured medical plans maintained by the Company, regardless of when a "qualifying event" occurs, for so long as it is able to provide COBRA coverage under such insured plans or successor insured plans established by the Purchaser. Purchaser shall be responsible for complying with the continuation health care coverage requirements of COBRA with respect to any Affected Employee (or eligible dependent of such Affected Employee) whose employment is terminated on or after the Closing Date.
(i) Severance. LADD shall pay any severance costs payable pursuant to any severance policies that are incurred with respect to any Affected Employee due solely to the change of control of the Company resulting from the sale of the Shares contemplated by this Agreement.
(j) Incentive and Supplemental Retirement Plans. Neither Purchaser nor the Company shall assume or have any liability under any bonus, incentive, or supplemental retirement plans maintained by LADD, including, without limitation, phantom stock plans, long term cash and incentive compensation plans, covering any Affected Employee or persons employed by or who at any time prior to the Closing were employed by LADD. LADD shall take such actions as are necessary to insure the preservation and delivery of all benefits accrued through the Closing, whether payable presently or at some future date, to such employees in respect of any such bonus, incentive, or supplemental retirement plans. If such benefits do not accrue ratably, this provision shall apply to a pro rata portion of the benefits, calculated as of the Closing Date, that would have been earned had the Affected Employee remained employed through the applicable accrual date.
(k) Workers' Compensation. LADD shall retain liability for all workers' compensation claims made by employees or former employees of the Company filed on or before the Closing Date. LADD shall also retain liability for all workers' compensation claims filed by such employees within 30 days after the Closing Date to the extent that such claims relate in any manner to any events occurring prior to the Closing Date or events otherwise occurring while such employees were employed by LADD or any of its affiliates.
(l) Vacation Pay. Accrual for vacation pay as of September 30, 1995 attributable to the Affected Employees is accurately reflected as a liability in the Interim Financials.
(m) Pension Plans. As of the Closing, the Company shall cease to be a participating employer under the Retirement Plan for Employees of Pennsylvania House, Inc., the Retirement Plan for Hourly Employees of the Divisions and Subsidiaries of LADD Furniture, Inc., and any other defined benefit pension plan sponsored or maintained by LADD or its ERISA Affiliates for the benefit of the Affected Employees (hereinafter referred to collectively as the "Pension Plans"), and LADD shall take all such action as may be necessary to effect such cessation of participation. As of the Closing, LADD shall cause the of the Pension Plans to assume or retain all liabilities under the Pension Plans for benefits accrued by the Affected Employees under the Pension Plans, through the Closing Date. LADD shall cause the Pension Plans to be amended to provide that the accrued benefits of all Affected Employees shall be nonforfeitable. Purchaser shall establish or maintain, or cause the Company to establish or maintain, a defined benefit pension plan for the benefit of some or all of the Affected Employees. Purchaser shall not be obligated to cause its defined benefit pension plan to provide past service credits for benefit accrual purposes, but past service credit shall be given for vesting purposes. There shall be no transfer of assets or liabilities of the Pension Plans to the Purchaser's retirement plan.
(n) Notwithstanding anything in this Section 3.4 to the contrary, following the Closing Date, Purchaser shall cause the Company to comply with the requirements of the labor union contracts with the Aluminum, Brick and Glass Works International Union AFL-CIO, Local 231 and United Paperworkers International Union, Local 7600 set forth on Schedule 2.1.18 hereto.
3.5 Consents and Approvals; Releases. LADD shall use its best efforts (without the obligation to make any payment or concession to any third party) promptly to obtain all consents and amendments from parties to the Material Agreements and from governmental authorities, which are required by the terms thereof, this Agreement or otherwise for the due and punctual consummation of the transactions contemplated by this Agreement. Purchaser will cooperate (without the obligation to make any payment or concession to any third party) with LADD in obtaining such consents and approvals. Purchaser and LADD shall use their best efforts to cause Purchaser to be substituted in all respects for LADD or any of its affiliates, effective as of the Closing, in respect of all obligations of LADD under each of the guaranties, severance agreements and letters of credit set forth in Schedule 3.5 (the "Guaranty" or "Guaranties"). If Purchaser and LADD are unable to effect such a substitution with respect to any Guaranty after using their best efforts to do so, Purchaser shall fully indemnify LADD and its affiliates with respect to the obligations covered by each of the Guaranties for which
Purchaser does not effect such substitution, with such indemnification secured by a letter of credit acceptable to LADD. LADD shall also cooperate with and assist Purchaser and its authorized representatives in order to provide an efficient transfer of the control and management of the Company and to avoid any undue interruption in the activities and operations of the Company following the Closing Date.
3.6 Purchase of Intellectual Property. Cherry Grove, Inc. has agreed to sell and otherwise transfer to Purchaser or an affiliate of Purchaser the intellectual property listed on Schedule 3.6 hereto, being all of the intellectual property owned or licensed by Cherry Grove, Inc. ("Cherry Grove") and licensed or sublicensed to the Company (the "Cherry Grove Intellectual Property"), for a purchase price of $12,000,000, less the purchase price of that portion of the Cherry Grove Intellectual Property currently owned by Meridian Leasing, Inc. ("Meridian") and listed on Exhibit C to Schedule 2.1.17 (the "Meridian Intellectual Property") in the event Cherry Grove does not purchase the Meridian Intellectual Property, pursuant to the terms and conditions of the Cherry Grove Agreement of Sale in substantially the form attached hereto as Exhibit C; provided, however if Cherry Grove does purchase the Meridian Intellectual Property, the purchase price for the Cherry Grove Intellectual Property shall be $12,000,000. Such transfer shall occur on the Closing Date simultaneously with the closing of the sale of the Shares. The purchase price for the Cherry Grove Intellectual Property shall be in addition to the Purchase Price for the Shares.
3.7 Tax Matters. (a) Purchaser agrees that following the Closing Date it will permit and cooperate fully with LADD regarding any assistance needed in LADD's determination of any Federal income tax refund claims for the years 1992 through 1995 and the carry back of any net operating losses, capital losses or tax credits that have arisen prior to the Closing Date to be applied to reduce LADD's federal or California tax liability or the Company's other state tax liabilities attributable to earnings prior to Closing in all situations where such carrybacks are allowed by law.
(b) LADD and Purchaser shall jointly make an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations promulgated thereunder and under any similar state tax law (collectively, a "Section 338(h)(10) Election") with respect to the purchase and sale of the Shares hereunder. LADD and the Purchaser covenant and agree that they will join in the filing of Internal Revenue Service Form 8023, and such other forms or schedules as are necessary or required to make the Section 338(h)(10) Election and any similar state forms and shall perform all such other acts as are necessary to timely make or perfect such election. LADD and Purchaser agree to negotiate in good faith on an allocation of the Purchase Price among the assets of the Company that are deemed to have been acquired pursuant to Section 338(h)(10) of the Code or any similar state law. If LADD and Purchaser have not agreed to such allocation within sixty (60) days after the Closing Date, the matter shall be submitted to a nationally recognized accounting firm for its binding decision. LADD and Purchaser shall use the asset values determined from such agreed allocation for purposes of filing all reports and returns with respect to federal and state income taxes, including Internal Revenue Service Form 8594 or any equivalent statement. LADD shall indemnify any Purchaser Indemnified Party (as defined herein) and agrees to protect, save and hold harmless each Purchaser Indemnified Party from and against any increase in Taxes resulting from the sale of the Shares by LADD to Purchaser that is attributable to the making of the Section 338(h)(10) Election or any similar state election or any election under section 338(g) of the Code or any similar state election made by LADD in connection therewith; provided, however, that no amount shall be payable under this Section 3.7(b) by LADD to any Purchaser Indemnified Party with respect to any additional Taxes resulting from a decrease in the historic tax basis of the assets of the Company.
(c) After the Closing Date, each of LADD and Purchaser shall cooperate (and shall cause their respective affiliates to cooperate) with each other and with each other's respective agents, including accounting firms and legal counsel, in connection with the preparation or audit of any Tax return, amended return or report, claim for refund and any tax claim or litigation in respect of the Company or its activities, which cooperation shall include, but not be limited to making available to the other all information, records and their possession relating to the liabilities for Taxes associated with the Company. LADD and Purchaser shall also make available to the other, as reasonably requested and available, personnel responsible for preparing, maintaining and interpreting information, records and documents in connection with Taxes as well as related litigation. Any information provided or obtained under this Section 3.7 shall be kept confidential, except as may be otherwise necessary in connection with the filing of returns or reports, refund claims, audits, tax claims and litigation.
3.8 Intercompany Debt. All forms of intercompany obligations of or to the Company with respect to LADD or any LADD affiliate shall be extinguished on or before the Effective Date.
3.9 Non-Solicitation. LADD covenants that from the date hereof through the Closing Date, it shall not, directly or indirectly, and will not permit any employee, representative, financial or legal advisor or agent of the Company or LADD to, make, solicit, assist or encourage the initiation of any inquiries or proposals or participate in any negotiations with any party or furnish any confidential information to any party (other than the Purchaser and its employees, representatives, advisors and agents) concerning the acquisition of the Shares or all or any portion of the assets, properties or business of the Company, other than dispositions of inventories and other assets in the ordinary course of business consistent with past practice and in accordance with Section 3.2.
3.10 Evidence of Insurance. Purchaser shall deliver to LADD at least five business days prior to the Closing Date evidence of insurance coverage in amounts and coverage sufficient to satisfy the requirements of Purchaser's lenders contained in Purchaser's financing commitment letters and loan documentation.
3.11 Noncompetition. For a period of two years following the Closing (the "Noncompetition Period"), LADD will not (i) (a) in any county or subdivision of the United States (including the 58 counties of the State of California); or (b) in any foreign country where the Company or any of its subsidiaries conducts business during the Noncompetition Period, in either case engage or participate in directly or indirectly (whether as holder of an equity or debt investment, lender or in any other manner or capacity, including through a subsidiary), or lend its name (or any part or variant thereof) to, any business which is, or as a result of LADD's engagement or participation would be, a business which derives a substantial portion of its revenues from the patio furniture (whether indoor or outdoor) segment of the furniture industry ("Patio Furniture Products"); (ii) deal, directly or indirectly, in a competitive manner with respect to Patio Furniture Products with any customers doing business with the Company or any of its subsidiaries during the Noncompetition Period; (iii) solicit any officer, director, employee, or agent of the Company or any of its subsidiaries to become an officer, director, employee, or agent of LADD, its affiliates or anyone else; and (iv) engage in or participate in, directly or indirectly, any business conducted under any name that shall be the same as or similar to the name of the Company or any of its subsidiaries or any trade name used by them; provided, however, neither (a) ownership by LADD for investment of less than five percent of the outstanding shares of capital stock of any corporation listed on a national securities exchange or actively traded in the over-the-counter market nor (b) the manufacture, marketing and sale of lines of Patio Furniture Products currently manufactured, marketed and sold by LADD or any of its affiliates (other than the Company) or lines of Patio Furniture Products reasonably similar to such current lines of Patio Furniture Products, whether or not such lines of Patio Furniture Products compete directly or indirectly with the Company or are sold to any of the Company's current or future customers, shall not constitute a breach of the foregoing covenant.
3.12 Nondisclosure. LADD will not at any time after the date of this Agreement divulge, furnish to or make accessible to any nonaffiliate of LADD any knowledge or information with respect to confidential or secret processes, inventions, discoveries, improvements, formulae, plans, material, devices or ideas or know-how, whether patentable or not, with respect to any confidential or secret aspects of the business of the Company or its Subsidiaries (including without limitation, customer lists, supplier lists and pricing arrangements with customers or suppliers); provided, however, that nothing herein shall prohibit LADD from complying with any order or decree of any court of competent jurisdiction or governmental authority, but LADD will give Purchaser timely notice of the receipt of any such order or decree, and the foregoing provision shall not apply to any information which is or becomes generally available to the public through no breach of this Agreement.
3.13 Liquidation. On November 3, 1995, the Company's Board of Directors and LADD, as the Company's sole shareholder, adopted a Plan of Liquidation and Dissolution of the Company. Pursuant to this Plan of Liquidation and Dissolution, and simultaneously with the sale of the Shares to the Purchaser, effective the Effective Date, the Company will distribute all of the stock of Cherry Grove, Inc., which it owns, to LADD as a liquidating distribution. The parties hereto agree that for tax purposes, the distribution of the stock of Cherry Grove, Inc., pursuant to the Plan of Liquidation and Dissolution is being made pursuant to Section 332 of the Code. Pursuant to the Section 338(h)(10) Election as provided by Section 3.7(b) and the related Treasury Regulations, the Company will be deemed to have sold all of its remaining assets to the Purchaser and distributed the proceeds of the sale to LADD pursuant to Section 332 of the Code. The adoption of the Plan of Liquidation and Dissolution is not intended by the parties to affect the continued existence of the Company. LADD shall indemnify any Purchaser Indemnified Party and agrees to protect, save and hold harmless each Purchaser Indemnified Party from and against any Taxes that are attributable to, or arise from, the distribution of the stock of Cherry Grove, Inc., contemplated by this Section 3.13.
4.1 Conditions to Obligations of Purchaser. The obligations of the Purchaser under this Agreement are subject to the fulfillment, at or prior to the Closing, of the following conditions, any one or more of which may be waived by the Purchaser at its sole discretion:
4.1.1 Representations, Performance, etc. The representations and warranties of LADD contained in this Agreement or in any certificate or document delivered in connection herewith that are not conditioned as to materiality shall be true and correct when made and true and correct in all material respects at and as of the Closing Date with the same effect as though made at and as of the Closing Date, except as modified by transactions permitted by this Agreement, and all representations and warranties of the Company and LADD that are so qualified as to materiality shall be true and correct when made and at and as of the Closing Date with the same effect as though made at and as of the Closing Date. The Company and LADD shall have duly performed and complied with all agreements, covenants and conditions required by this Agreement or in any other agreement, instrument or document contemplated hereby to be performed or complied with by them prior to or at the Closing Date. LADD shall have delivered to the Purchaser a certificate of LADD signed by an officer of LADD familiar with the transactions contemplated by this Agreement, to the effect set forth above in this Section 4.1.1.
4.1.2 Opinion of Counsel. The Purchaser shall have received a favorable opinion, addressed to the Purchaser and dated the Closing Date, of Petree Stockton, L.L.P., counsel to the Company and LADD, in substantially the form attached hereto as Exhibit A.
4.1.3 Resignation of Directors and Officers. Each Director and officer of the Company and the Subsidiaries shall have submitted his resignation effective as of the Closing.
4.1.4 Certain Approvals, etc. All material consents and approvals from governmental authorities, including under the HSR Act, and third parties required to be obtained by the Company and LADD to consummate the transactions contemplated hereby shall have been obtained, including all such consents set forth on Schedule 2.1.3.
4.1.5 No Injunction. No injunction or other order issued by a court of competent jurisdiction restraining or prohibiting the consummation of the transactions contemplated by this Agreement shall be in effect.
4.1.6 No Liens. The Shares shall be free and clear of all Liens. The Purchaser shall receive the stock certificates representing the Shares duly endorsed for transfer and the stock certificates in the name of the Company representing the outstanding capital stock of each Subsidiary. All contingent security interests of NationsBank, N.A. (Carolinas) with respect to the assets of the Company and the Shares and the guarantee of the Company of LADD's obligations to NationsBank, N.A. (Carolinas) shall have been cancelled in writing.
4.1.7 No Material Adverse Changes. From the date hereof to the Closing Date, there shall have been no material adverse change in the business, assets, prospects, operations, or financial condition of the Company; provided, however, that an event, change or effect that arises from general economic conditions or that otherwise affects the furniture industry generally shall not be considered a material adverse change with respect to the Company.
4.1.8 Transfer of Cherry Grove Intellectual Property. The transfer of the Cherry Grove Intellectual Property to Purchaser shall have been completed, all as more specifically provided in Section 3.6.
4.1.9 Intercompany Debt. All forms of intercompany obligations owed by or to the Company shall have been extinguished as provided in Section 3.8 in a manner that will not result in a Tax to the Company.
4.1.10 Notification of Maytag Corporation. LADD shall have given written notification to Maytag Corporation of the sale of the Shares and the assignment of all indemnification rights under the Maytag Agreement to Purchaser.
4.1.11 Corporate Action. Each of LADD and the Company shall have taken all corporate action necessary to approve the transactions contemplated by this Agreement and shall have furnished Purchaser with certified copies of the resolutions adopted by their respective boards of directors.
4.1.12 Delivery of Audit Opinion. Purchaser shall have received from KPMG Peat Marwick LLP the audit opinion with respect to the sheet of the Company stating that the September 30, 1995 balance sheet included in the Interim Financials presents fairly, in all material respects, the financial condition of the Company as of September 30, 1995, in conformity with GAAP consistently applied and Purchaser shall be satisfied with the results thereof. Such audit opinion shall be deemed satisfactory to Purchaser if the net adjustments to the audited balance sheet prepared in accordance with the foregoing standards do not have a negative pretax impact to the income statement contained in the Interim Financials in excess of $250,000 in the aggregate.
4.1.13 Title Policies. Purchaser shall have received the preliminary title reports and owners title policies with respect to the Owned Real Property containing only those exceptions reasonably acceptable to Purchaser set forth on the preliminary title reports and Permitted Liens.
4.2 Conditions to Obligations of Sellers. The obligations of LADD under this Agreement are subject to the fulfillment, at or prior to the Closing, of the following conditions, any one or more of which may be waived by LADD in its sole discretion:
4.2.1 Representations, Performance, etc. The representations and warranties of the Purchaser contained in Section 2.3 that are not conditioned as to materiality shall be true and correct when made and true and correct in all material respects at and as of the Closing Date with the same effect as though made at and as of the Closing Date, except as modified by transactions permitted by this Agreement, and all representations and warranties of the Purchaser that are so qualified as to materiality shall be true and correct when made and at and as of the Closing Date with the same effect as though made at and as of the Closing Date. The Purchaser shall have duly performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date. The Purchaser shall have delivered to LADD a certificate of the Purchaser signed by an officer of the Purchaser familiar with the transactions contemplated by this Agreement, dated the Closing Date, to the effect set forth above in this Section 4.2.1.
4.2.2 Opinion of Counsel. LADD shall have received a favorable opinion, addressed to it and dated the Closing Date, of Paul, Hastings, Janofsky & Walker, counsel for the Purchaser, in substantially the form attached hereto as Exhibit B.
4.2.3 Certain Approvals, etc. All consents and approvals from governmental authorities and third parties required to be obtained by the Purchaser to consummate the transactions contemplated hereby shall have been obtained, other than any consents and approvals of third parties in respect of any contract or agreement of the Purchaser (not involving the borrowing of money) in respect of which the failure to obtain such consent or approval, either in any case or in the aggregate, could not reasonably be expected to have a material adverse effect on the transactions contemplated hereby.
4.2.4 No Injunction. No injunction or other order issued by a court of competent jurisdiction restraining or prohibiting the consummation of the transactions contemplated by this Agreement shall be in effect.
4.2.5 Purchase Price. LADD shall have received from Purchaser the Purchase Price.
4.2.6 Guaranties. Purchaser shall have been substituted in all respects for LADD and its respective affiliates in respect of each of the Guaranties, or Purchaser shall have entered into indemnification agreements satisfactory to LADD with respect to such Guaranties, all as more specifically provided in Section 3.5.
4.2.7 Transfer of Cherry Grove Intellectual Property. The transfer of the Cherry Grove Intellectual Property to Purchaser shall have been completed, all as more specifically provided in Section 3.6.
4.2.8 Notification of Maytag Corporation. LADD shall give written notification to Maytag Corporation of the sale of the Shares and the assignment of all indemnification rights under the Maytag Agreement to Purchaser.
4.2.9 Intercompany Debt. All forms of intercompany obligations owed by or to the Company with respect to LADD or any LADD affiliate shall have been extinguished as provided in Section 3.8 in a manner that will not result in a Tax to the Company.
4.2.10 Corporate Action. Purchaser shall have taken all corporate action necessary to approve the transactions contemplated by this Agreement and shall have furnished LADD with certified copies of the resolutions adopted by its Board of Directors.
5.1 Grounds for Termination. This Agreement may be terminated at any time prior to the Closing Date in the circumstances set forth in this Section 5.1, by delivery of written notice of such termination by the terminating party to the other party hereto.
5.1.1 Termination by LADD. This Agreement may be terminated by LADD upon the happening of an occurrence or circumstance which will result in a failure to satisfy any of the conditions set forth in Section 4.2 and the Purchaser shall have failed to satisfy such a condition within 20 days after notice by LADD.
5.1.2 Termination by Purchaser. This Agreement may be terminated by the Purchaser upon the happening of an occurrence or circumstance which will result in the failure to satisfy any of the conditions set forth in Section 4.1 and LADD shall have failed to satisfy such a condition within 20 days after notice by the Purchaser.
5.1.3 Termination by Either Party. This Agreement may be terminated by either the Purchaser or LADD if (i) the representations and warranties of the other party shall prove not to have been true in all material respects as of the date when made or if any representation or warranty qualified as to materiality shall prove not to be true and correct as of the date when made, (ii) events shall have occurred subsequent to the date hereof as a result of which the representations and warranties of the other party could not be true in all material respects as of the Closing Date or if any representation or warranty qualified as to materiality shall prove not to be true and correct as of the date when made, unless the occurrence of such events shall be due to the failure of the party seeking to terminate this Agreement to perform or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by such party prior to the Closing, or (iii) the Closing shall not have occurred prior to December 15, 1995 (or such other date as may be mutually agreed to by the parties) through no fault of the terminating party.
5.2 Effect of Termination. If this Agreement is terminated as permitted under Section 5.1, such termination shall be without liability of or to any party to this Agreement or any shareholder, partner, director, officer, employee or agent of such party, except that the provisions of Sections 5.2, 7.2 and 7.15 shall survive any such termination.
6.1 Indemnification by LADD. LADD agrees to indemnify and hold harmless Purchaser and its affiliates (including the Company) and its and their respective officers, directors, shareholders, agents, employees and other representatives and their respective, successors and assigns (collectively, the "Purchaser Indemnified Parties") from and against any and all (a) liabilities, losses, claims, costs or damages ("Loss") and (b) reasonable attorneys' and accountants' fees and expenses, court costs and all other reasonable out-of-pocket expenses ("Expense") suffered or incurred by any PurchaserIndemnified Parties in connection with or arising from:
(i) any breach by LADD of any warranty or the inaccuracy of any representation of LADD contained in this Agreement or in any agreement or instrument contemplated hereby;
(ii) any breach by the LADD of any of its covenants in this Agreement or in any agreement or instrument contemplated hereby;
(iii) any failure of LADD to perform any of its obligations in this Agreement or any agreement or instrument contemplated
(iv) any breach by Cherry Grove, Inc. of any of its representations, warranties or covenants contained in the Cherry Grove
provided, however, that LADD shall be required to indemnify and hold harmless under this Section 6.1 with respect to Loss and Expense suffered or incurred by the Purchaser Indemnified Parties only to the extent that the aggregate amount of such Loss and Expense, together with the aggregate amount of Loss and Expense indemnifiable pursuant to Section 6.5(b), exceeds $400,000, at which time claims hereunder may be asserted for all such claims in excess of the initial $400,000; provided, however, if the Closing does not occur on or before December 30, 1995 for any reason other than the fault of LADD, the $400,000 threshold amount shall increase to $1,000,000. The indemnification provided for in this Section 6.1 shall terminate 18 months after the Closing Date (and no claims shall be made by any party indemnified under this Section 6.1 thereafter), except that the indemnification by LADD shall continue as to:
(a) the obligations, covenants, representations and warranties of LADD under Sections 2.1.1, 2.1.2, 2.2.1, 2.2.3 and 2.2.5 of this Agreement and the instruments delivered pursuant thereto, as to all of which no time
(b) the obligations, covenants, representations and warrants of LADD set forth in Sections 2.1.12, 2.1.16, 3.7 and 3.13 shall survive for 30 days following the expiration of the applicable statutes of limitation; and
(c) any Loss or Expense of which any Purchaser Indemnified Party has notified LADD in accordance with the requirements of Section 6.3 on or prior to the date such indemnification would otherwise terminate in accordance with this Section 6.1, as to which the obligation of LADD shall continue until the liability of LADD shall have been determined pursuant to this Article 6, and LADD shall have reimbursed, indemnified and held harmless such Purchaser Indemnified Parties for the full amount of such Loss and Expense in accordance with this Article 6.
6.2 Indemnification by Purchaser. Purchaser agrees to indemnify and hold harmless LADD and its affiliates and its and their respective officers, directors, shareholders, agents, employees and other representatives and their respective successors and assigns (collectively, "LADD Indemnified Parties") from and against any and all Loss and Expense suffered or incurred by any LADD Indemnified Party in connection with or arising from:
(i) any breach by Purchaser of any warranty or the inaccuracy of any representation of Purchaser contained in this Agreement or in any agreement or instrument contemplated hereby;
(ii) any breach by Purchaser of any of its covenants or agreements in this Agreement or any agreement or instrument contemplated
(iii) any failure by the Company to perform any of its obligations pursuant to Sections 3 and 4 of the Assignment and
(iv) any liability, Loss or Expense associated with the conduct of the business and operations of the Company arising after
Loss or Expense is not a liability, Loss or Expense for which a Purchaser Indemnified Party may be indemnified under this Agreement (without regard to any limitations or restrictions on a Purchaser Indemnified Party's right to such
The foregoing indemnification shall terminate 18 months after the Closing Date (and no claims shall be made by any party indemnified under this Section 6.2 thereafter) except that (w) the foregoing indemnification contained in Section 6.2(iii) shall survive until the termination of the obligation to which it relates in accordance with its terms, (x) the foregoing indemnification contained in Section 6.2(iv) shall survive without termination, (y) the obligations, covenants and representations of Purchaser set forth in Section 3.2(B) shall survive for 30 days following the expiration of the applicable statutes of limitation, and (z) the indemnification by Purchaser shall continue as to any Loss or Expense of which a party indemnified pursuant to this Section 6.2 has notified Purchaser in accordance with the requirements of Section 6.3 on or prior to the date such indemnification would otherwise terminate in accordance with this Section 6.2, as to which the obligation of Purchaser shall continue until the liability of Purchaser shall have been determined pursuant to this Article 6, and Purchaser shall have reimbursed such party for the full amount of such Loss and Expense in accordance with this Article 6.
6.3 Notice of Claims. (a) If Purchaser or LADD believes that any of the persons indemnified under this Article 6 has suffered or incurred any Loss or incurred any Expense, Purchaser or LADD shall so notify the other promptly in writing describing such Loss or Expense, the amount thereof, if known, and the method of computation of such Loss or Expense, all with reasonable particularity and containing a reference to the provisions of this Agreement or other agreement, instrument or certificate delivered pursuant hereto in respect of which such Loss or Expense shall have occurred, except that the failure to so notify shall not relieve a party of its obligations to indemnify, except to the extent its rights are thereby materially prejudiced. If any action at law or suit in equity is instituted by or against a third party with respect to which any of the indemnified persons intends to claim any expense as Loss or Expense under this Article 6, any such indemnified person shall promptly notify the indemnifying party of such action or suit.
(b) In calculating any Loss or Expense there shall be deducted any insurance recovery in respect thereof to the extent such insurance recovery was not taken into account in assessing the amount of liability, Loss or Expense suffered or incurred by any person indemnified under this Article 6.
(c) The amount to which an indemnified person shall be entitled under this Article 6 shall be determined by the written agreement between the indemnified person and the indemnifying party. If the parties are unable to agree upon such amount within 30 days of the claim for indemnification hereunder, the indemnifying party shall pay that amount agreed upon between the parties and the remainder shall be determined as provided in Section 7.14 hereto.
6.4 Third Party Claims. (a) Subject to Section 6.4(b), the persons indemnified under Sections 6.1 and 6.2 shall have the right to conduct and control, through counsel of their choosing, any third party claim, action or suit at the expense of the indemnifying party. The persons indemnified may compromise or settle the same, provided that any of the indemnified persons shall give the indemnifying party advance notice of any proposed compromise or settlement. The indemnified persons shall permit the indemnifying party to participate in the defense of any such action or suit through counsel chosen by it, provided that the fees and expenses of such counsel shall be borne by the indemnifying party. Subject to Section 6.4(b), any compromise or settlement with respect to a claim for money damages proposed by the indemnifying party which is disapproved in writing by the indemnified party shall discharge the indemnifying party from liability with respect to the subject matter thereof, and no amount in respect thereof shall be claimed as Loss or Expense under this Article 6.
(b) If the remedy sought in any action or suit referred to in Section 6.4(a) is solely money damages and will have no continuing effect on the business of any indemnified person, the indemnifying party shall have 30 days after receipt of the notice referred to in the first sentence of Section 6.4(a) to notify the indemnified persons that it elects to conduct and control such action or suit. If the indemnifying party does not give the foregoing notice, or, following the giving of such notice, one of the following occurs: (i) the indemnifying party authorizes the indemnified party in writing to employ its own counsel in such defense or (ii) the indemnified party shall have reasonably and in good faith concluded that there may be defenses available to it that are different from or additional to defenses available to the indemnifying party, then the indemnified persons shall have the right to defend, contest, settle or compromise such action or suit in the exercise of their exclusive discretion and through counsel of their own choosing, and the indemnifying party shall, upon request from any of the indemnified persons, promptly pay to such indemnified persons in accordance with the other terms of this Article 6 the amount of any Loss resulting from its liability to the third party claimant and all related Expense. If the indemnifying party gives the foregoing notice, the indemnifying party shall have the right, subject to the preceding sentence, to undertake, conduct and control, through counsel of its own choosing and at the sole expense of the indemnifying party, the conduct and settlement of such action or suit, and the indemnified persons shall cooperate with the indemnifying party in connection therewith; provided that (w) the indemnifying party shall not settle or compromise any such action or suit without the indemnified party's prior written consent, unless the terms of such settlement or compromise release the indemnified party from any and all liability with respect to such action or suit, (x) the indemnifying party shall not thereby permit to exist any Lien upon any asset of any indemnified person; (y) the indemnifying party shall permit the indemnified persons to participate in such conduct or settlement through counsel chosen by the indemnified persons, but the fees and expenses of such counsel shall be borne by the indemnified persons except as provided in clause (z) below and in the immediately preceding sentence; and (z) the indemnifying party shall agree promptly to reimburse to the extent required under this Article 6 the indemnified persons for the full amount of any Loss resulting from such action or suit and all related Expense incurred by the indemnified persons, except fees and expenses of counsel for the indemnified persons incurred after the assumption of the conduct and control of such action or suit by the indemnifying party (subject, however, to the preceding sentence). So long as the indemnifying party is contesting any such action or suit in good faith, the indemnified persons shall not pay or settle any such action or suit.
Notwithstanding the foregoing, the indemnified persons shall have the right to pay or settle any such action or suit, provided that in such event the indemnified persons shall waive the right to indemnity therefor by the indemnifying party, and no amount in respect thereof shall be claimed as Loss or Expense under this Article 6.
6.5 Environmental Matters. (a) Pursuant to the provisions of the Assignment and Assumption Agreement and the Maytag Agreement, the Company obtained certain rights to indemnification by Maytag with respect to environmental matters under Section 8.5 and other related sections of Article VIII of the Maytag Agreement (the "Maytag Indemnification") and the Company assumed certain obligations thereunder. The parties to this Agreement have agreed that the following provisions set forth in this Section 6.5 are the exclusive provisions of this Agreement applicable to the liabilities of the parties with respect to Environmental Laws and to any claim for indemnification in respect thereof (such claim being referred to herein as an "Environmental Claim"). To the extent any of the provisions of this Section 6.5 conflict with any other provisions of this Agreement, this Section 6.5 shall govern.
(b) Subject to the provisions of this Section 6.5, LADD agrees to hold harmless and indemnify the Purchaser Indemnified Parties from and against any and all Loss and Expense arising from:
(i) the breach of any of LADD's representations and warranties contained in this Section 6.5;
(ii) Off-site Liabilities or On-site Liabilities, as those terms are defined in Section 7.17 herein; or
(iii) the violation of any Environmental Law by the Company or the Company's predecessors prior to the Closing provided, however, the indemnifications set forth above in Section 6.5(b) shall be subject to the following conditions and limitations:
(x) With respect to any claim pursuant to Section 6.5(b), LADD shall be required to indemnify and hold harmless with respect to Loss and Expense incurred by the Purchaser Indemnified Parties only to the extent that the aggregate amount of such Loss and Expense so incurred, together with other Loss and Expense similarly incurred but not subject to indemnification due to the $400,000 (or $1,000,000 as the case may be) threshold amount set forth in Section 6.1, exceeds $400,000 (or $1,000,000 as the case may be) at which time claims hereunder may be asserted for all claims in excess of such initial $400,000 (or $1,000,000 as the case may be);
(y) With respect to claims brought pursuant to Section 6.5(b)(ii) or (iii) that are or may be covered by Section 8.5 of the Maytag Agreement, Purchaser shall look first to Maytag (with contemporaneous written notice to LADD) to be held harmless and to be indemnified under the Maytag Agreement. However, in the event that Maytag denies or disputes any obligation to indemnify or hold harmless the Purchaser Indemnified Parties under such Section 8.5 of the Maytag Agreement, or is unable or unwilling to hold harmless and indemnify the Purchaser Indemnified Parties under Section 8.5 of the Maytag Agreement (including, without limitation, because the applicable indemnification deductible amounts contained in the Maytag Agreement have not been met, which shall remain the obligation of LADD after the $400,000 (or $1,000,000 as the case may be) referenced in Section 6.5(b)(x) above has been met), LADD shall hold harmless and indemnify the Purchaser Indemnified Parties for any claims made by Purchaser against Maytag, and Purchaser shall then have no further obligations to pursue or negotiate with Maytag on that issue. LADD shall not be required to indemnify and hold the Purchaser Indemnified Parties harmless if it is determined that Maytag is contractually required to do so pursuant to the Maytag Indemnification but for post-Closing Date conduct of the Purchaser Indemnified Parties, including, but not limited to failure to give proper or timely notice to Maytag regarding the existence of a claim (including the giving prior to the expiration of any limitations period of the existence of claim of which Purchaser or the Company has notice).
(z) The indemnifications provided by this Section 6.5 shall terminate upon the 30 days following the expiration of the applicable statute of limitations (and no claims shall be made by any party indemnified under this Section 6.5 thereafter), except that the indemnification shall continue as to any Loss or Expense of which the Purchaser Indemnified Parties have notified LADD in accordance with the provisions of Section 6.5(e) on or prior to the date such indemnification would otherwise terminate in accordance with this Section 6.5, as to which obligation of LADD shall continue until the liability of LADD shall have been determined pursuant to this Section 6.5, and LADD shall have reimbursed the Purchaser Indemnified Parties for the full amount of such Loss or Expense in accordance with this Section 6.5.
(c) LADD represents and warrants that:
(i) the Facilities as operated prior to the Closing Date complied in all material respects with all Environmental Laws, except as disclosed in Schedule 6.5;
(ii) there are not and will not be any Hazardous Substances present or located on, or migrating from, or generated at or by any of the Facilities prior to and on the Closing Date with respect to which any past or present owner, operator or occupant may be required by any applicable Environmental Law to take, cause to take or pay for any investigative response, cleanup or remedial action or with respect to which any investigation by any government agency would reasonably be expected, based on the Environmental Laws in effect, applicable and enforceable prior to the Closing Date, except as disclosed in Schedule 6.5;
(iii) The Company has not received in respect of the Company any notice from any person alleging noncompliance with any Environmental Law or alleging discharges or releases of Hazardous Substances into the environment for which LADD or Purchaser may be liable, and as of the date of this Agreement there are no lawsuits, claims, suits, proceedings or investigations pending or, to the knowledge of LADD, threatened against the Company or LADD in respect thereof, except as disclosed in Schedule 6.5; and
(iv) The Company has given proper and timely notice to Maytag of any and all claims of which the Company or LADD has knowledge arising prior to or on the Closing Date that are or may be covered by Section 8.5 of the Maytag Agreement, including any such claims relating to those matters disclosed in Schedule 6.5, thereby perfecting all such claims, and Maytag is not in breach as of the Closing Date of any of its obligations under Section 8.5 of the Maytag Agreement.
(d) Purchaser and the Company shall be solely and wholly responsible for, and shall indemnify and hold harmless the LADD Indemnified Parties from and against any and all Loss and Expense to the extent directly caused by Purchaser's or the Company's post-Closing Date conduct with respect to Hazardous Substances on the Facilities on or after the Closing Date.
(e) If Purchaser or LADD believes that any of the persons indemnified under this Section 6.5 has suffered or incurred any Loss or incurred any Expense, the party claiming a right to indemnification hereunder (the "Indemnified Party") shall provide the party against whom such claim is asserted, including without limitation Maytag (the "Indemnifying Party"), prompt written notice of any claim or facts that have given or may give rise to a claim, including any inquiry or investigation by a governmental agency or any investigation undertaken voluntarily by the Indemnified Party and which the Indemnified Party believes may give rise to a claim, and the Indemnified Party shall provide supplemental written notice as may be necessary to keep the Indemnifying Party fully informed, provided that reasonable delays in providing notice shall not invalidate the rights of the Indemnified Party hereunder by the extent that such delay does not materially prejudice any rights of the Indemnifying Party hereunder. As between Purchaser and LADD, the provisions of Sections 6.3(b) and 6.3(c) shall apply to all Environmental Claims.
(f) After reasonable notice to Purchaser, Purchaser, as the Indemnified Party shall provide reasonable access to the premises of such of the Facilities as may be necessary or appropriate to enable the Indemnified Party and its employees, agents, attorneys, consultants and contractors to evaluate the claim and take remedial or other appropriate action;
(g) The Indemnified Party shall make available to the Indemnifying Party or its representatives all information, records and other materials in the possession or control of the Indemnified Party which are reasonably required by the Indemnifying Party for its use in connection with any claim, investigation or remedial action (it being understood that any such materials that constitute confidential information will be subject to the same confidentiality provisions of Section 7.15) and shall otherwise cooperate and assist the Indemnifying Party in connection with such claim, investigation or remedial action (including, where appropriate, providing testimony in connection
(h) Purchaser or LADD, as the Indemnifying Party, shall have the right and responsibility of defending, remedying, compromising and settling any Environmental Claim and shall have the right to employ and control its own counsel, consultants and contractors in connection therewith. As between LADD and Purchaser, the Indemnifying Party shall have full control over any actions (including, without limitation, any remedial action, negotiation or litigation) in connection with any such Environmental Claim; provided, that (i) if a remedial or other action proposed to be taken by the Indemnifying Party in settlement of the Environmental Claim could materially and adversely affect the Indemnified Party's operations at a facility, such action shall not be taken without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld); (ii) the Indemnifying Party shall not compromise or settle any Environmental Claim without the consent of the Indemnified Party (which consent shall not unreasonably be withheld); and (iii) in the event the Indemnified Party shall refuse to consent to the taking of any remedial or other action approved by applicable regulatory agencies in respect of, or the compromise or settlement of, any Environmental Claim, the Indemnified Party may elect to take over the defense of such Environmental Claim, and in any case, the liability of the Indemnifying Party shall not exceed the amount for which the Environmental Claim could have been settled plus the amount of Expense incurred by the Indemnified Party prior to the time of the proposed settlement to which it is entitled to indemnification;
(i) The obligations of LADD or Purchaser as the Indemnifying Party in respect of an Environmental Claim shall be limited to the taking of such reasonable actions as are necessary under the circumstances giving rise to such Environmental Claim, and LADD (i) shall not be liable for any unavoidable effect upon the business operations of any of the Facilities (including, without limitation, business interruption or loss of profits) caused by or resulting from remedial or other action taken by LADD in furtherance of its obligations hereunder, unless resulting from LADD's willful misconduct or gross negligence; and (ii) shall not be liable for any Loss or Expense resulting from actions taken or omitted by Purchaser or the Company on or after the Closing Date. Any Loss and Expense in respect of a violation of Environmental Law occurring both before and after the Closing Date shall be allocated between LADD and Purchaser on a fair and equitable basis;
(j) Effective upon being indemnified as provided in Section 6.5, the Indemnified Party hereunder agrees to (A) transfer and assign to the Indemnifying Party all rights and claims the Indemnified Party has or may have against third parties for reimbursement or contribution; (B) execute such instruments and take such other actions as may be necessary or appropriate to transfer and assign the foregoing rights or claims to the Indemnifying Party; and (C) take such reasonable actions when and as necessary or appropriate to assist the Indemnifying Party to obtain reimbursement or contribution from third
(k) The parties to this Agreement shall use reasonable efforts and shall cooperate with each other to obtain any necessary consent, transfer or reissuance of any governmentally issued environmental permits, licenses and registrations necessary to operate the Company as it was operated as of the Closing Date. LADD makes no representations or warranties with respect to whether or when such consent, transfer or reissuance will occur or whether such consent, transfer or reissuance will be conditioned upon new or additional requirements. LADD shall not be required to incur any liability or make any payment or concession to any third party in order to obtain such consent, transfer or reissuance.
7.1 Survival. Notwithstanding any otherwise applicable statute of limitations, all agreements, covenants, representations and warranties of Purchaser and LADD in this Agreement and in any other agreement, instrument or document delivered in connection herewith shall survive the Closing in accordance with their terms. LADD and Purchaser agree that the indemnification provisions set forth in Article 6 are the exclusive post closing remedies with respect to the liability of LADD or the Purchaser for the breach or inaccuracy of a representation or warranty or the breach of any covenant in this Agreement or in any agreement or instrument contemplated hereby; provided, that nothing herein shall preclude either party from seeking an equitable remedy, to which the parties hereto agree each other is entitled (including, without limitation, under Section 3.11 hereof) for any such breach or the bringing of an action for fraud.
7.2 Expenses. Each of LADD and the Purchaser shall assume and bear their own expenses, costs and fees incurred in the preparation and execution of this Agreement and compliance herewith, including attorneys' and accountants' fees, whether or not the purchase and sale provided for herein shall be consummated; provided, however, the fees and expenses relating to the HSR filing, the audit performed by KPMG Peat Marwick LLP required by Section 4.1.12, the cost of title opinions and premiums for title policies required by
4.1.13, and the New York transfer gains tax attributable to the Company's New York showroom lease shall be borne by Purchaser. LADD shall pay the fees and expenses of Dillon, Read & Co. Inc.
7.3 Assignment; Successors; Parties in Interest. This Agreement shall not be assignable by any party hereto without the prior written consent of all of the other parties (which consent shall not be unreasonably withheld) and any attempt to assign this Agreement without such consent shall be void and of no effect. This Agreement shall inure to the benefit of, and be binding on and enforceable against, each party hereto and such permitted successors and assigns of the respective parties 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.
7.4 Amendment and Modification. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally, but only with the written consent signed by the party against which such change, waiver, discharge or termination is sought to be enforced. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent or other breach, whether similar or not.
7.5 Access After Closing. Each party shall retain for a period of six years following Closing all books and records within its possession or control which relate to the operation and conduct of the business of the Company prior to Closing. Each party shall provide to the other party and its representatives reasonable access during normal business hours to copies of all such books and records upon request by the other party hereto. LADD will cooperate with Purchaser and the Company with respect to continuation or transfer of payroll, telephone and fixed asset systems upon mutually agreeable terms at market rates.
7.6 Best Efforts. Each party agrees to use its best efforts to satisfy the conditions to the Closing set forth in this Agreement and otherwise to consummate the transactions contemplated by this Agreement.
7.7 Knowledge. For the purposes of the representations and warranties of LADD contained in this Agreement which are qualified to knowledge, the knowledge of LADD in such instances shall be deemed to consist solely of the actual knowledge of those individuals listed on Schedule 7.7 after such persons have conducted an inquiry sufficient to express an informed view. LADD represents to Purchaser that those individuals listed on Schedule 7.7 have reviewed this Agreement, are familiar with the terms of the Company's Material Contracts and the matters set forth herein, and either have personal knowledge or have obtained information from officers or employees of LADD or the Company in whom they have confidence and whose duties require them to have personal knowledge thereof.
7.8 Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein and all legal processes in regard hereto shall be validly given, made or served, if in writing and delivered personally or sent by registered or certified mail, postage prepaid, or by commercial courier or by telecopy (promptly confirmed in writing) to the following addresses (or at such other addresses for such party as shall be specified by like notice):
One Plaza Center, Box HP-3
Chairman and Chief Executive Officer
(which copy shall not constitute notice)
Attention: Robert E. Esleeck, Esq.
(which copy shall not constitute notice)
Paul, Hastings, Janofsky & Walker 555 South Flower Street, 23rd Floor Attention: Robert A. Miller, Jr., Esq.
7.9 Public Announcement. During the period through the Closing Date, neither LADD, the Company nor Purchaser will make, directly or indirectly, any public announcement with respect to this transaction without the prior written approval of the other party, except as required by law.
7.10 Captions. 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.
7.11 Entire Agreement. This Agreement (including the Schedules and Exhibits) and any further agreements entered into by Purchaser, LADD and/or
Closing constitute the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof.
7.12 Counterparts. This Agreement may be executed in several counterparts, each of which shall constitute one and the same instrument.
7.13 Severability. If any term or provision of this Agreement (including Section 3.11) is held by a court or other authority of competent jurisdiction to be invalid, void or unenforceable, the remaining terms and provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
7.14 Arbitration. Except for (i) matters relating to specific performance, injunctive relief or other equitable remedies, (ii) indemnifiable third party claims pursuant to Article 6 hereof or (iii) disputes relating to the determination of Effective Date Working Capital as provided in Section 1.4 hereof, the parties hereto agree to submit to arbitration any and all matters in dispute or in controversy among them concerning the terms and provisions of this Agreement. All such disputes and controversies shall be determined and adjudged by the arbitrators, and the hearing shall be held in Greensboro, North Carolina. The selection of arbitrators and the procedure shall be in accordance with the commercial arbitration rules then in effect of the American Arbitration Association. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in the highest court of the forum, state or federal, having jurisdiction. The expenses of the arbitration shall be borne equally by the parties to the arbitration, provided that each party shall pay for and bear the costs of their own experts, evidence and counsel's fees, except that in the discretion of the arbitrator, any award may include the costs of a party's counsel if the arbitrator expressly determines that the party against whom such award is entered has caused the dispute, controversy or claim to be submitted to arbitration as a dilatory tactic.
7.15 Confidential Nature of Information. Each party agrees that it will treat in confidence all documents, materials and other information which it shall have obtained regarding the other party during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the date of this Agreement), the investigation provided for herein and the preparation of this Agreement and other related documents, and, in the event the transactions contemplated hereby shall not be consummated, each party will return to the other party all copies of nonpublic documents and materials which have been furnished in connection therewith. The obligation of each party to treat such documents, materials and other information in confidence shall not apply to any information which (i) such party can demonstrate was already lawfully in its possession prior to the disclosure thereof by the other party, (ii) is known to the public and did not become so known through any violation of a legal obligation, (iii) became known to the public through no fault of such party or (iv) is later lawfully acquired by such party from other sources, and following the Closing, Purchaser shall have no obligation to treat documents, materials and other information concerning the Company in confidence.
7.16 Schedules and Exhibits. The Schedules and Exhibits are a part of this Agreement as if fully set forth herein. All references to Sections, subsections, Schedules and Exhibits shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. Disclosure of any fact in any Schedule hereto referenced by a particular section in this Agreement shall, should the existence of the fact be relevant to any other section, be deemed to be disclosed with respect to that other section whether or not an explicit cross-reference appears.
7.17 Definitions. Used in this Agreement, the following terms have the meanings specified or referred to in this Section 7.17:
(a) "Affected Employees" shall have the meaning set forth in Section 3.4(a).
(b) "Agreement" shall have the meaning set forth on Page 1 of this Agreement.
(c) "Annual Financials" shall have the meaning set forth in Section 2.1.4(a).
(d) "Assignment and Assumption Agreement" shall mean that Assignment and Assumption Agreement dated on or before the Closing between LADD and the Company in the form attached as Exhibit E hereto.
(e) "Audited Balance Sheet" shall mean the audited balance sheet of the Company as of September 30, 1995 prepared as provided in Section 4.1.12.
(f) "Audited Working Capital" shall mean the excess of current assets over current liabilities (exclusive of cash, the current portion of long-term indebtedness, current deferred tax assets or liabilities, and intercompany indebtedness or receivables) of the Company as shown on the Audited Balance Sheet.
(g) "Cherry Grove Agreement of Sale" shall be that Agreement of Sale between Cherry Grove, Inc. and Purchaser substantially in the form of Exhibit C hereto.
(h) "Closing" shall have the meaning set forth in Section 1.2.
(i) "Closing Date" shall have the meaning set forth in Section 1.2.
(j) "COBRA" shall have the meaning set forth in Section 3.4(h).
(k) "Code" shall have the meaning set forth in Section 2.1.16(d).
(l) "Common Stock" shall have the meaning set forth in Section 2.1.2(a).
(m) "Company" shall have the meaning set forth on Page 1 of this Agreement.
(n) "Company Medical Plans" shall have the meaning set forth in Section 3.4(f).
(o) "Effective Date Balance Sheet:" the balance sheet of the Company as of the Effective Date, which shall be prepared in accordance with generally accepted accounting principles applied on a basis consistent with those used in the preparation of the Audited Balance Sheet.
(p) "Effective Date Working Capital:" the excess of current assets over current liabilities (exclusive of cash, the current portion of long-term indebtedness, current deferred tax assets or liabilities, and intercompany indebtedness or receivables) of the Company as shown on the Effective Date Balance Sheet.
(q) "Effective Date" shall mean the end of business on November 25, 1995.
(r) "Effective Date Balance Sheet" shall mean the balance sheet of the Company as of November 25, 1995 prepared as provided in Section 1.4.
(s) "Environmental Claim" shall mean any claim with respect to indemnification or being held harmless relating to any toxic or environmental matters.
(t) "Environmental Laws" means all federal, state or local laws, rules, regulations, governmental permits or other binding determinations of any governmental authority relating to or addressing the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act, and the Resource Conservation and Recovery Act.
(u) "ERISA" shall have the meaning set forth in Section 2.1.16(a).
(v) "ERISA Affiliate" shall have the meaning set forth in Section 2.1.16(a).
(w) "Facilities" shall mean the Company's El Monte, California facility, the Company's Newport Arkansas facility, and the Company's Juarez, Mexico facility.
(x) "GAAP" shall have the meaning set forth in Section 2.1.4(a).
(y) "Guaranties" shall have the meaning set forth in Section 3.5.
(z) "Hazardous Substances" means any hazardous substance, hazardous wastes, pollutants or contaminants as such terms are defined and used in Environmental Laws.
(aa) "HSR Act" shall have the meaning set forth in Section 2.1.3(b).
(ab) "Intellectual Property" shall have the meaning set forth in Section 2.1.17.
(ac) "Interim Financials" shall have the meaning set forth in Section 2.1.4(a).
(ad) "LADD" shall have the meaning set forth on Page 1 of this Agreement.
(ae) "LADD Indemnified Parties" shall have the meaning set forth in Section 6.2.
(af) "Liens" means, with respect to any assets or properties (whether real, personal or mixed or tangible or intangible), any mortgage, pledge, option, escrow, hypothecation, lien, security interest, financing statement, lease, charge, preemptive subscription, encumbrance, easement, conditional sale or other title retention or security agreement or any other similar restriction, claim or right of others, on, in, or with respect to such assets or properties, whether arising by contract, operation of law or otherwise.
(ag) "Loss and Expense" shall have the meaning set forth in Section 6.1.
(ah) "Material Adverse Effect" shall mean a material adverse effect on the business, properties, assets (tangible and intangible), prospects, liabilities or financial condition or results of operations of the Company; provided that an event, change or effect that arises from general economic conditions or that otherwise affects the furniture industry generally shall not be considered material or to have a material adverse effect on the Company.
(ai) "Material Agreements" shall have the meaning set forth in Section 2.1.15.
(aj) "Maytag" shall mean Maytag Corporation, a Delaware corporation.
(ak) "Maytag Agreement" shall mean the Asset Purchase Agreement dated as of June 1, 1989 among LADD, Maytag Corporation, the BJC Company and The Gunlocke Company, as amended by the First Amendment and Waiver to Asset Purchase Agreement dated as of July 7, 1989 by and among LADD, Maytag Corporation, The BJC Company, The Gunlocke Company (a Delaware corporation), Pennsylvania House, Inc., The McGuire Furniture Company, The Kittinger Company, Charter Furniture, Inc., Brown Jordan Company and The Gunlocke Company (a North Carolina corporation), as further amended by the Amendment to First Amendment and Waiver to Asset Purchase Agreement dated as of August 1, 1989, as further amended by the Agreement and Release between LADD and Maytag dated August 6, 1992, as further amended by the Agreement and Release as to Environmental Claims dated as of March 31, 1994 between LADD and Maytag.
(al) "Meridian Intellectual Property" shall have the meaning set forth in Section 3.6.
(am) "Off-site Liabilities" shall mean any and all liabilities associated with the alleged and actual disposal or release of Hazardous Substances by the Company (or its predecessors in interest) in respect of the business of the Company prior to the Closing Date off-site from the Facilities.
(an) "On-site Liabilities" shall mean any and all liabilities associated with the alleged and actual presence or location of any Hazardous Substances prior to the Closing Date at the Facilities.
(ao) "Owned Real Property" shall have the meaning set forth in Section 2.1.8.
(ap) "Patio Furniture Products" shall have the meaning set forth in Section 3.11.
(aq) "PBGC" shall have the meaning set forth in Section 2.1.16(d).
(ar) "Pension Plans" shall have the meaning set forth in Section 3.4(m).
(as) "Permitted Liens" means (i) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company in accordance with generally accepted accounting principles; (ii) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of the business of the Company which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the Company in accordance with generally accepted accounting principles; (iii) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (iv) deposits, which in the aggregate are not material, to secure the performance of any or all of the following: bids, trade contracts (other than for borrowed money), leases (other than financing leases), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of the business of the Company consistent with past practice; (v) with respect to real property easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of the business of the Company consistent with past practice which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company; (vi) such imperfections or irregularities of title and encumbrances, if any, as are not substantial in character, amount or extent so as to materially detract from the value or interfere with the present use of the properties affected thereby or otherwise materially impair present business operations, and (vii) those liens or encumbrances described on Schedule 7.17 attached hereto.
(at) "Plans" shall have the meaning set forth in Section 2.1.16(a).
(au) "Purchase Price" shall have the meaning set forth in Section 1.4.
(av) "Purchaser" shall have the meaning set forth on Page 1 of this Agreement.
(aw) "Purchaser Indemnified Parties" shall have the meaning set forth in Section 6.1.
(ax) "Savings Plans" shall have the meaning set forth in Section 3.4(d).
(ay) "Shares" shall have the meaning set forth in the recitals to this Agreement.
(az) "Subsidiaries" shall have the meaning set forth in Section 2.1.1(b).
(ba) "Taxes" shall have the meaning set forth in Section 2.1.12.
7.18 Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of North Carolina, without giving effect to the conflict of laws rules thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.
By: (Signature of Richard R. Allen)
By: (Signature of M. Fourtieq) Title: | 8-K | EX-2 | 1996-01-16T00:00:00 | 1996-01-16T15:57:56 |
0000811030-96-000002 | 0000811030-96-000002_0001.txt | AGREEMENT made this day of , 1996 by and between PROFESSIONALLY MANAGED PORTFOLIOS (the "Trust"), a Massachusetts business trust and [ ], a [ ] corporation (the "Advisor").
WHEREAS, a series of the Trust having separate assets and liabilities has been created entitled the [ ] Fund (the "Fund"); and
WHEREAS, it is therefore desirable to have an investment advisory agreement (i.e., this Agreement) relating to the Fund, which agreement will apply only to this Fund;
NOW THEREFORE, in consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed by and among the parties hereto as follows:
The Advisor agrees, all as more fully set forth herein, to act as investment adviser to the Trust with respect to the investment of the assets of the Fund and to supervise and arrange the purchase and sale of securities held in the portfolio of the Fund.
2. Duties and Obligations of the Advisor with respect to Investment of Assets of the Fund.
(a) Subject to the succeeding provisions of this section and subject to the direction and control of the Board of Trustees of the Trust, the Advisor shall:
(I) Decide what securities shall be purchased or sold by the Trust with respect to the Fund and when; and
(ii) Arrange for the purchase and the sale of securities held in the portfolio of the Fund by placing purchase and sale orders for the Trust with respect to the Fund.
(b) Any investment purchases or sales made by the Advisor shall at all times conform to, and be in accordance with, any requirements imposed by: (l) the provisions of the 1940 Act and of any rules or regulations in force thereunder; (2) any other applicable provisions of law; (3) the provisions of the Declaration of Trust and By-Laws of the Trust as amended from time to time; (4) any policies and determinations of the Board of Trustees of the Trust; and (5) the fundamental policies of the Trust relating to the Fund, as reflected in the Trust's registration statement under the 1940 Act (including by reference the Statement of Additional Information) as such registration statement is amended from time to time, or as amended by the shareholders of the Fund.
(c) The Advisor shall give the Trust the benefit of its best judgment and effort in rendering services hereunder, but the Advisor shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security whether or not such purchase, sale or retention shall have been based on its own investigation and research or upon investigation and research made by any other individual, firm or corporation, if such purchase, sale or retention shall have been made and such other individual, firm or corporation shall have been selected in good faith. Nothing herein contained shall, however, be construed to protect the Advisor against any liability to the Trust or its security holders by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties, or by reason of its reckless disregard of obligations and duties under this Agreement.
(d) Nothing in this Agreement shall prevent the Advisor or any affiliated person (as defined in the 1940 Act) of the Advisor from acting as investment adviser or manager and/or principal underwriter for any other person, firm or corporation and shall not in any way limit or restrict the Advisor or any such affiliated person from buying, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Advisor expressly represents that it will undertake no activities which, in its judgment, will adversely affect the performance of its obligations to the Trust under this Agreement.
(e) It is agreed that the Advisor shall have no responsibility or liability for the accuracy or completeness of the Trust's Registration Statement under the 1940 Act or the Securities Act of 1933 except for information supplied by the Advisor for inclusion therein. The Trust may indemnify the Advisor to the full extent permitted by the Trust's Declaration of Trust.
(f) The Fund may use the name [ ] Fund or any name derived from or using the name [ ] only for so long as this Agreement or any extension, renewal or amendment hereof remains in effect. At such time as such an agreement shall no longer be in effect, the Fund shall cease to use such a name or any other name connected with the Advisor.
The Advisor is responsible for decisions to buy and sell securities for the Fund, broker-dealer selection, and negotiation of brokerage commission rates. The Advisor's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Advisor will take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Fund on a continuing basis. Accordingly, the price to the Fund in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees of the Trust may determine, the Advisor 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 or dealer that provides brokerage or research services to the Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Advisor determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Advisor's overall responsibilities with respect to the Trust. The Advisor is further authorized to allocate the orders placed by it on behalf of the Fund to such brokers or dealers who also provide research or statistical material, or other services, to the Trust, the Advisor, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Advisor shall determine, and the Advisor shall report on such allocations regularly to the Trust, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Advisor is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, i.e., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price.
The Advisor agrees that it will furnish the Trust, at the Advisor's expense, with office space and facilities, equipment and clerical personnel necessary for carrying out its duties under this Agreement. The Advisor will also pay all compensation of any Trustees, officers and employees of the Trust who are affiliated persons of the Advisor. All operating costs and expenses relating to the Fund not expressly assumed by the Advisor under this Agreement shall be paid by the Trust from the assets of the Fund, including, but not limited to (I) interest and taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv) compensation and expenses of the Trust's Trustees other than those affiliated with the Advisor or the Manager; (v) legal and audit expenses; (vi) fees and expenses of the Trust's custodian, shareholder servicing or transfer agent and accounting services agent; (vii) expenses incident to the issuance of the Fund's shares, including issuance on the payment of, or reinvestment of, dividends; (viii) fees and expenses incident to the registration under Federal or state securities laws of the Trust or the shares of the Fund; (ix) expenses of preparing, printing and mailing reports and notices and proxy material to shareholders of the Trust; (x) all other expenses incidental to holding meetings of the Trust's shareholders; (xi) dues or assessments of or contributions to the Investment Company Institute or any successor; (xii) such non-recurring expenses as may arise, including litigation affecting the Trust and the legal obligations which the Trust may have to indemnify its officers and Trustees with respect thereto; and (xiii) all expenses which the Trust or the Fund agrees to bear in any distribution agreement or in any plan adopted by the Trust and/or a Fund pursuant to Rule 12b-1 under the Act.
5. Compensation of the Advisor
(a) The Trust agrees to pay the Advisor and the Advisor agrees to accept as full compensation for all services rendered by the Advisor hereunder, an annual management fee, payable monthly and computed on the value of the net assets of the Fund as of the close of business each business day at the annual rate of [ ]% of such net assets.
(b) In the event the expenses of the Fund (including the fees of the Advisor and amortization of organization expenses but excluding interest, taxes, brokerage commissions, extraordinary expenses and sales charges and any distribution fees) for any fiscal year exceed the limits set by applicable regulations of state securities commissions where the Fund is registered or qualified for sale, the Advisor will reduce its fees by the amount of such excess. Any such reductions are subject to readjustment during the year. The payment of the advisory fee at the end of any month will be reduced or postponed or, if necessary, a refund will be made to the Fund so that at no time will there be any accrued but unpaid liability under this expense limitation. The Advisor may reduce any portion of the compensation or reimbursement of expenses due to it under this agreement, or may agree to make payments to limit the expenses which are the responsibility of the Fund. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Advisor hereunder or to continue future payments. Any fee withheld from the Advisor under this paragraph shall be reimbursed by the Fund to the Advisor to the extent permitted by the applicable state law if the aggregate expenses for the next succeeding fiscal year do not exceed the applicable state limitation or any more restrictive limitation to which the Advisor has agreed.
(a) This Agreement shall go into effect on the effective date of the Post-Effective Amendment of the Registration Statement of the Trust covering the shares of the Fund and shall, unless terminated as hereinafter provided, continue in effect for a period of two years from that date, and thereafter from year to year, but only so long as such continuance is specifically approved at least annually by the Trust's Board of Trustees, including the vote of a majority of the Trustees who are not parties to this Agreement or "interested persons" (as defined in the 1940 Act) of any such party cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a "majority" (as so defined) of the outstanding voting securities of the Fund and by such a vote of the Trustees.
(b) This Agreement may be terminated by the Advisor at any time without penalty upon giving the Trust sixty (60) days' written notice (which notice may be waived by the Trust) and may be terminated by the Trust at any time without penalty upon giving the Advisor sixty (60) days' written notice (which notice may be waived by the Advisor), provided that such termination by the Trust shall be directed or approved by the vote of a majority of all of its Trustees in office at the time or by the vote of the holders of a majority (as defined in the 1940 Act) of the voting securities of the Trust at the time outstanding and entitled to vote. This Agreement shall automatically terminate in the event of its assignment (as so defined).
7. Agreement Binding Only on Fund Property
The Advisor understands that the obligations of this Agreement are not binding upon any shareholder of the Trust personally, but bind only the Trust's property; the Advisor represents that it has notice of the provisions of the Trust's Declaration of Trust disclaiming shareholder liability for acts or obligations of the Trust. This agreement has been executed by or with reference to any Trustee in such person's capacity as a Trustee, and the Trustees shall not be personally liable hereon.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by duly authorized persons and their seals to be hereunto affixed, all as of the day and year first above written. | 485APOS | EX-99 | 1996-01-16T00:00:00 | 1996-01-16T11:02:20 |
0000898077-96-000003 | 0000898077-96-000003_0000.txt | UNDER THE SECURITIES EXCHANGE ACT OF 1934
NAME OF ISSUER: FIND/SVP, Inc.
TITLE OF CLASS OF SECURITIES: Common Stock
NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS:
Natalie I. Koether, Esq., Rosenman & Colin 211 Pennbrook Road, P. O. Box 97 Far Hills, New Jersey 07931 (908) 766-4101
DATE OF EVENT WHICH REQUIRES FILING: January 12, 1996
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: ________
Check the following 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.)
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 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).
1. NAME OF REPORTING PERSON: Asset Value Fund Limited Partnership
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP:
4. SOURCE OF FUNDS: WC
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e): YES NO XX
6. CITIZENSHIP OR PLACE OF ORGANIZATION: New Jersey
7. SOLE VOTING POWER: 843,490
9. SOLE DISPOSITIVE POWER: 843,490
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES: YES NO XX
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 13.56%
14. TYPE OF REPORTING PERSON: PN
Item 1. SECURITY AND ISSUER
This Amendment No. 1 relates to the Schedule 13D filed on September 15, 1995 in connection with the ownership by Asset Value Fund Limited Partnership ("Asset Value") of shares of common stock, par value $.0001 per share ("Shares") of FIND/SVP, Inc., a New York corporation ("FIND"). The capitalized terms used in the Amendment, unless otherwise defined, shall have the same meaning as in the original Schedule 13D.
Item 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
Item 3 is hereby amended by the addition of the following:
Since the date of the last filing, Asset Value has acquired an additional 76,000 Shares at an aggregate purchase price of $149,780.00, including any brokerage commissions. Asset Value purchased the Shares with its cash reserves.
Item 5. INTEREST IN SECURITIES OF THE ISSUER.
Item 5 is hereby amended to add the following:
(a) As of the close of business on January 12, 1996, Asset Value beneficially owned 843,490 Shares, representing 13.56% of the 6,222,048 Shares reported as outstanding in the FIND's Form 10-QSB for the quarter ended September 30, 1995.
(b) The information presented in Items 7 through 10 of the cover sheet to this Schedule 13D is incorporated herein by reference.
(c) Exhibit C annexed hereto sets forth all transactions in Shares effected by Asset Value in the sixty days preceding the date of this Statement and not previously reported, the dates of such transactions, and the per Share purchase price. The transactions reported herein, unless otherwise indicated, were open market transactions effected in the over-the-counter market.
Item 7. MATERIAL TO BE FILED AS EXHIBITS.
Item 7 is hereby amended to update the information provided as follows:
Exhibit C - Transactions in Shares effected in the past 60 days and not previously reported.
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.
ASSET VALUE FUND LIMITED PARTNERSHIP
By: Asset Value Management, Inc.
By: /s/ JOHN W. GALUCHIE, JR. John W. Galuchie, Jr. | SC 13D/A | SC 13D/A | 1996-01-16T00:00:00 | 1996-01-16T15:54:58 |
0000892569-96-000032 | 0000892569-96-000032_0000.txt | <DESCRIPTION>FORM 10-Q PERIOD ENDING NOVEMBER 30, 1995
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
For the 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 its charter)
(State or other jurisdiction of (I.R.S. Employer Identification No.)
350 West Bay Street, Costa Mesa, California 92627 (Address of principal executive offices and zip code)
4350 Von Karman Avenue, Suite 280, Newport Beach, California 92660 (Former address of the principal executive offices and zip code)
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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:
The number of shares outstanding includes an aggregate of 442,433 shares previously sold by the Registrant and which the Registrant is obligated to issue. Issuance of which is pending the completion of administerial acts.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Part I - Financial Information
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES (Dollars in thousands, except per share amounts)
Note: The balance sheet at May 31, 1995 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of November 30, 1995, and the related condensed consolidated statements of operations and cash flows for the three and six month periods ended November 30, 1995 and 1994 are unaudited and have been prepared in accordance with generally accepted accounting principals for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The results of operations for the three and six months ended November 30, 1995 are not necessarily indicative of the results to be expected during the balance of the fiscal year.
The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Notes to consolidated financial statements included in Form 10-K for the year ended May 31, 1995, on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies.
The Company's financial statements are presented on the basis that it is a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred significant losses from operations in fiscal 1995 and continues to report losses for fiscal 1996. The continuation of the Company's business is dependent upon the resolution of operating and short-term liquidity problems and the realization of the Company's plan of operations and the consolidated financial statements do not include any adjustments that might result from an unfavorable outcome of this uncertainty (see Note 2-- "Operating Losses and Liquidity").
The weighted average number of shares outstanding used to compute loss per share were 2,628,000 and 2,097,000 for the three months ended November 30, 1995 and 1994, respectively; and 2,628,000 and 2,176,000 for the six months ended November 30, 1995 and 1994, respectively. All share and per share amounts contained in the Condensed Consolidated Financial Statements retroactively reflect the effect of the reverse stock split for all periods presented, which effect is to reduce the number of shares set forth by a factor of ten, with each stockholder's proportionate ownership interest remaining constant, except for payment in lieu of fractional shares.
NOTE 2 - OPERATING LOSSES AND LIQUIDITY
The Company reported net income of $0.7 million for the quarter ended November 30, 1995, versus a net loss of $2.5 million for the quarter ended November 30, 1994. As a result, the Company has an accumulated deficit of $47.1 million and a total stockholders' deficiency of $4.6 million as of November 30, 1995. Additionally, the Company's current assets at November 30, 1995 amounted to approximately $13.1 million and current liabilities were approximately $22.2 million, resulting in working capital deficiency of approximately $9.1 million and a current ratio of 1:1.7. The Company's primary use of available cash resources is to fund operations while it seeks to restore profitability to certain of its freestanding facilities and expand its behavioral medicine managed care business.
Included in current and non-current assets are four hospital facilities designated as property and equipment held for sale with a total carrying value of $6.2 million. In October 1995, the Company sold one of its operating facilities and in November 1995, closed another due to poor performance. In December 1995, the Company entered into escrow for the sale of this facility. Accordingly, the closed property was classified as property held for sale as of November 30, 1995.
Included in current liabilities are $9.5 million of Debentures in default as a result of the Company's failure to make scheduled payments of interest on the Debentures commencing in October 1994. The Company has agreed to use its best efforts to provide an opportunity for Debenture holders to tender their Debentures pursuant to an exchange offer to be made by the Company. This proposed transaction requires the holders of a majority of the Debentures to give their approval to rescind the acceleration and the Company to obtain and expend up to $5.5 million of cash during fiscal 1996, over and above cash required to fund other financing, operating and investing needs. Additionally, the Debenture exchange provides for the Company to issue $120 worth of its common stock at a defined value for each $1,000 of
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Debentures, which may be contingent upon the Company's ability to effect certain filings with the Securities and Exchange Commission. The ability to timely proceed with any such proposed filings will, in part, depend upon the ability of the Company to obtain a consent from its prior auditors for the use of their report on the Company's consolidated financial statements in such registration statements. Failure to obtain Debenture holder approval or to accomplish the Debenture exchange, or, in the alternative, a failure of the Company and the Debenture holders to otherwise reach a settlement, may cause the Debenture holders to pursue the involuntary bankruptcy of the Company and/or the Company to take alternative actions that may include filing for voluntary protection from creditors. Alternatively, if the Debenture exchange is accomplished, the elimination of the Debenture's debt service requirement would decrease the Company's future cash flow requirements. (The foregoing summary does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.)
These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.
In fiscal 1993, the Company established a restructuring reserve to address the Company's operational issues. One purpose of such reserve was for the realignment of the Company's focus and business and the settlement and disposition of certain non-performing and under-utilized assets. Many of the Company's inpatient freestanding facilities have been sold or are in the process of being closed or sold and management has begun to implement plans for expanding the Company's contract management and managed care operations.
In previous years, the Company was obligated to support and fund certain poor performing freestanding facilities that now have been closed, including two such facilities closed in fiscal 1996 (see Note 3-- "Property and Equipment Held for Sale"). As a result, the Company will no longer be burdened with the negative cash flow requirements associated with such facilities. Based upon a projection of actual performance during fiscal 1995 with adjustments for reduced cash flow requirements associated with facilities closed and/or sold in fiscal 1995, known contract and cyclical changes, and also giving consideration to cash on hand at November 30, 1995 of $5.9 million, management expects the Company to be able to meet its cash obligations required by operations during fiscal 1996, including the Company's obligations under the Debentures. However, the cash needs of the Company may vary from month to month depending upon the actual level of business activity, and through the second quarter of fiscal 1996 the Company continues to incur losses from ongoing operations. Therefore, no assurance can be given that the Company will generate adequate cash flows to meet cash obligations required by operations.
In October 1995, the Company received a $9.4 million refund related to its fiscal 1995 Federal tax return. The Company will utilize such proceeds to provide funds for the Debenture exchange, payoff the outstanding liabilities to the IRS, and/or additional operating needs. The statement of operations reflects the recognition of $2.6 million in tax benefits for this refund. In addition, in November 1995, the Company entered into a Secured Conditional Exchangeable Note Purchase Agreement for $1.0 million. The Company also anticipates utilizing one or more of the following potential sources of cash to provide funds for additional operating needs:
- Included in current and non-current assets are four hospital facilities designated as property and equipment held for sale with a total carrying value of $6.2 million. The Company expects to sell three of these facilities during the current fiscal year and has entered into a lease agreement on the fourth facility to an unrelated entity. However, some contracts have not been fully negotiated and proceeds from the sales or lease of such assets are not expected to be available by the time the Debenture exchange is expected to occur. Accordingly, management expects to use such cash proceeds, if received during fiscal 1996, to fund and expand the Company's operations and implement the Company's restructuring plans.
- In March 1995, a jury awarded the Company approximately $2.7 million, plus interest, in damages in its lawsuit against RehabCare Corporation. The defendant has posted a bond for the amount of the award and has filed an appeal of the judgment. Management is unable
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
proceeds from this judgment will be received in fiscal 1996 (see Note 5-- "Commitments and Contingencies").
- The Company has received a firm commitment from a mutual fund to purchase in a private placement at least $5.0 million of 15% fully secured Company notes due no earlier than December 1996 if offered by the Company.
All of these potential sources of additional cash in fiscal 1996 are subject to variation due to business and economic influences outside the Company's control. There can be no assurance that during fiscal 1996 the Company will complete the transactions required to fund its working capital deficit.
During the first quarter of fiscal 1996, the Company paid the IRS approximately $2.3 million pursuant to its settlement agreement (see Note 5-- "Commitments and Contingencies"). In addition, during the second quarter of fiscal 1996, the Company paid the IRS the remaining balance, including accrued interest, due on the settlement agreement of approximately $2.5 million.
NOTE 3 - PROPERTY AND EQUIPMENT HELD FOR SALE
The Company recorded no additional asset write-downs during the first two quarters of fiscal 1996 and fiscal 1995 in connection with the recognition of losses and revaluation of facilities closed, sold or designated for disposition. Future operating losses and carrying costs of such facilities will be charged directly to the carrying value of the respective property and equipment held for sale. Chemical dependency treatment facilities are special purpose structures. Their resale value is negatively affected by the oversupply of beds resulting from the diminished demand for inpatient treatment being experienced throughout the industry. In October 1995, the Company sold one of its operating facilities and in November 1995, the Company closed another due to poor performance. The Company will continue to evaluate the performance of its operating facilities in their respective markets, and, if circumstances warrant, modify the number of facilities designated for disposition.
Property and equipment held for sale, which are expected to be sold within the next twelve month period, are shown as current assets on the consolidated balance sheets. Gains and losses on facilities have been reflected in the statement of operations. Any impairments to the net realizable value of property and equipment held for sale have also been recorded in the statement of operations. Three of the four closed freestanding facilities included in property and equipment held for sale are currently under sales contracts.
A summary of the transactions affecting the carrying value of current and non-curent property and equipment held for sale for the six months ended November 30, 1995, is as follows (in thousands):
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The loss on sale/write-down of peroperty held for sale and the gain on the sale of its operating properties are reflected on the Company's consolidated statement of operations and consists of the following for the six months ended November 30, 1995 (in thousands):
NOTE 4 - INCOME TAXES
On July 20,1995, the Company filed its Federal tax return for fiscal 1995. On August 4, 1995, the Company filed Form 1139 "Corporate Application for Tentative Refund" to carry back losses described in Section 172(f) requesting a refund in the amount of $9.4 million. On August 30, 1995, the Company also filed amended Federal tax returns for several prior years to carry back losses under Section 172(f). The refunds claimed on the amended returns are approximately $11.7 million for 1986; $0.4 million for 1985; $0.7 million for 1983 and $0.4 million for 1982. The total refunds applied for are $22.6 million, $13.2 million for amended prior years' returns and $9.4 million for fiscal year 1995. Section 172(f) is an area of the tax law without substantial legal precedent. There may be opposition by the IRS as to the Company's ability to carry back such a major portion of losses. Therefore, assurances cannot be made to the Company's entitlement to all of these claims. Consequently, a valuation allowance has been established against $20.0 million of this potential tax benefit. In October 1995, the Company received a $9.4 million refund for fiscal 1995. Of this refund, $2.4 million has been reflected as a tax benefit as of November 30, 1995. In addition, as of November 30, 1995 the Company has reflected a tax benefit of $0.2 million, which is related to prior years' returns.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. RehabCare filed a counterclaim in the case seeking a declaratory judgement with respect to the rights of both parties under the Stock Redemption Agreement, an injunction enjoining the Company from taking certain action under the Stock Redemption or Restated Shareholders Agreements and damages in the form of attorneys' fees and costs allegedly incurred by RehabCare with respect to its issuance of certain preferred stock and with respect to prior litigation between the parties. The case was tried before a jury commencing on February 21, 1995. Prior to the presentation of evidence to the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8, 1995, the jury returned its verdict awarding the Company $2,681,250 in damages, plus interest and the costs of the action against RehabCare for securities fraud and for breach of contract. RehabCare has posted a bond in the amount of $3.0 million and filed a motion for new trial or in the alternative, for judgement as a matter of law, which the court denied in its entirety on August 4, 1995. On September 1, 1995, RehabCare filed a notice of appeal with the District Court indicating its intent to appeal the matter to the United States Court of Appeals. Although the Company feels that RehabCare will not prevail in its appeal, the Company has not recognized any gain with relation to the judgement.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the proposed sale and lease-back of hospitals to CMP Properties, Inc., a real estate investment trust, the Company advanced $1.1 million to its financial advisor in fiscal 1992. The financial advisor was affiliated with several members of the Company's Board of Directors at that time. The advances, which were to be repaid if the transaction was not completed, were to be secured by a pledge of common stock in an unrelated company. The pledged shares of common stock were in the possession of the Company's primary legal counsel at that time, as collateral for the advances. After the transaction was terminated, the financial advisor refused to repay the advances and the Company's legal counsel refused to turn over the collateral to the Company. The Company has filed an action in the United States District Court for the District of Oregon (Civil Case No. 94-384 FR) against its former financial advisor and former legal counsel to recover the advances. The former financial advisor has counterclaimed against the Company for $1,688,000 for breach of contract and unjust enrichment. The Company's former law firm has filed a counterclaim for $193,000 for unpaid legal fees. Management believes that the counterclaims are without merit and intends to vigorously defend against them and to pursue the Company's claims.
On June 8, 1994, RehabCare filed a lawsuit against the Company in the Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement entered into between the Company and RehabCare in May 1991 (Case No. 663957). An amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges that it has incurred attorneys fees in connection with the settlement of certain tax issues with the IRS and has paid the IRS a settlement amount with respect to the years 1987 and 1988. RehabCare seeks the recovery from the Company of $588,000, plus interest, which RehabCare alleges is the amount it incurred for payments to the IRS in settlement of taxes and attorneys fees it incurred in dealing with the IRS. The Company has filed its answer and affirmative defenses contesting the right of RehabCare to obtain the relief it seeks. Discovery is ongoing. Until such discovery is complete, it is not possible to predict the likely outcome of the lawsuit. The Company intends to continue to vigorously defend this matter which is scheduled for trial in February 1996.
In December 1994, the Company reached a settlement with the Appeals Office of the Internal Revenue Service ("IRS") on a payroll tax audit for the calendar years 1983 through 1991. Pursuant to this settlement the Company agreed to pay the IRS $5.0 million with the Company having no obligation to pay any penalties or accrued interest. The IRS agent conducting the audit asserted that certain physicians, psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. The settlement was reviewed and accepted on behalf of the IRS by its district counsel. Payment terms have been accepted at 50% within 90 days of finalization with the remainder financed over the next five years. The unpaid balance bears interest at 9% per annum due and payable after the $5.0 million is paid. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. In return, the IRS granted the Company an additional 120 days to pay the remaining balance of $2,150,000. In July 1995, the Company paid the remaining balance of the initial payment, and continued to make the monthly installment payments pursuant to the terms of the settlement through September 1995. In October 1995, the Company paid the remaining balance outstanding, including accrued interest, of $2.5 million. The Company utilized the proceeds from the 1995 Federal income tax refund to make such payment (see Note 4-- "Income Taxes").
An involuntary bankruptcy petition was dismissed on March 6, 1995 pursuant to an agreement dated March 3, 1995 between the Company and a representative of the petitioners. Under such agreement the Company has agreed, subject to the conditions therein, to offer to exchange for its outstanding 7 1/2% Convertible Subordinated Debentures a combination of cash and shares. See Note 2-- "Operating Losses and Liquidity" for a discussion of the Company's default in the payment of interest on its 7 1/2 % Convertible Subordinated Debentures and the consequent acceleration of the full principal amount thereof. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criteria in regard to net tangible assets available to common stock and three year average net income among other items. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards. Management anticipates success in "global restructuring" (see Note 2-- "Operating Losses and Liquidity") will be necessary in order to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and during the first quarter of fiscal 1996, to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financially distressed companies.
From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements.
NOTE 6 - SUBSEQUENT EVENTS
On December 4, 1995, the Company relocated its corporate headquarters from Newport Beach to Costa Mesa, California.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
In early fiscal 1995, Management developed a "global restructuring" plan intended to address the Company's immediate challenges and to return to a base of profitability for future success. Management intended that this "global restructuring" include as many of the following steps as possible: (i) effect a reverse stock split to improve the Company's image; (ii) negotiate settlement of the Company's payroll tax audit with the IRS; (iii) restructure the Company's financial obligations represented by the Company's 7 1/2% Convertible Subordinated Debentures (the "Debentures"); and (iv) raise capital to finance the restructuring costs.
During fiscal 1995 and 1996 management accomplished its objectives, described above, except item (iii), restructuring of the Company's financial obligations represented by the Company's Debentures.
During the first quarter of fiscal 1996, the Company sold an aggregate of 155,000 shares of common stock to four accredited investors in private offerings for an aggregate of $930,000 paid in cash. The proceeds of such sales were used for working capital and other general corporate purposes. During the second quarter of fiscal 1996, the Company received a $9.4 million refund from its fiscal 1995 Federal tax return and entered into a Secured Conditional Exchangeable Note for $1.0 million. The proceeds of these items will be used to fund the exchange offer to the holders of Debentures and for working capital purposes.
Although the Company is seeking to restructure its obligations under the Debentures, the Company is currently in default as a result of the Company's failure to make scheduled payments of interest (see Note 2 to the Company's Condensed Consolidated Financial Statements included herein).
During the fourth quarter of fiscal 1995, the Company entered into a letter of agreement with a representative of holders of the Debentures. The agreement provides, among other things, that the Company provide an opportunity to holders of the Debentures to tender their Debentures to the Company pursuant to an exchange offer to be made by the Company to the holders of the Debentures. Although the Company has filed an exchange offer with the Securities and Exchange Commission, there can be no assurance that the exchange offer will be successfully completed. Failure to consummate the Debenture exchange offer may result in the Company considering alternative actions including filing for voluntary protection from creditors. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Debentures.
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
As of November 30, 1995, the Company had a stockholders' deficiency of $4.6 million, a working capital deficiency of approximately $9.1 million and a current ratio of 1:1.7. The loss from operations for the three months ended August 31, 1995 was $1.3 million and the net income for the three months ended November 30, 1995 was $0.7 million.
There can be no assurance that the Company will be able to achieve profitability and positive cash flows from operations or that profitability and positive cash flow from operations, if achieved, can be sustained on an ongoing basis. Moreover, if achieved, the level of that profitability or that positive cash flow cannot accurately be predicted.
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
The Company's negative cash flow from operations has consumed substantial amounts of cash. Also, the eminent retiring of 7 1/2% Convertible Subordinated Debentures, which the Company has agreed to use its best efforts to do before approximately July 31, 1995, will require substantial amounts of cash. Issuance of additional equity securities by the Company could result in substantial dilution to then-existing stockholders. In the event of a failure to meet these obligations on a timely basis, the Company may become liable for the entire $9,538,000 principal amount plus accrued interest from April 15, 1994, estimated at approximately $1,116,000 to October 15, 1995.
During fiscal 1995 and 1996, a principal source of liquidity has been the private sale of debt securities convertible into equity. Under the shareholder policies of the NYSE, the Company may not be able to effect further sales of equity without shareholder approval; which if not obtained may adversely affect the Company with respect to future capital formation.
The Company has been required to dispose of various properties in order to raise working capital, and no assurance can be made that such dispositions will not have adverse effects on the Company's financial condition or that the Company has additional assets that could be disposed of in order to fund its capital requirements.
In connection with a March 3, 1995 letter agreement with a representative of the debentureholders, the Company has agreed to pledge all of the shares of its CareUnit, Inc. subsidiary. The agreement provides that "At 150 days after the date of this Agreement, provided that the Participating Securityholders have in each material respect performed (with opportunity to cure if a cure is possible) their obligations required to be performed hereunder on or prior to such date, and if the Offer has not then been consummated, the Company shall pledge (with the Trustee, or an alternate acceptable to the Company, to act as pledgeholder on terms of a written agreement containing standard terms reasonably acceptable to the Participating Securityholders) all of the Shares as collateral for its obligation to purchase the Securities pursuant to the Offer or otherwise. Such pledge may only be foreclosed upon following 180 days after the date thereof at the request of any Securityholder or the Trustee if the Offer is not consummated on or prior to such date, provided that the Participating Securityholders have in each material respect performed (with opportunity to cure if a cure is possible) their obligations required to be performed hereunder on or prior to such date. ... Upon consummation of the Offer, the said pledges shall be released." No assurances can be made that the Participating Securityholders will not demand or obtain a pledge of such shares or that any such pledged shares will be returned to the Company or that the Company will not be required to perform such agreement, or otherwise satisfy its obligations to debentureholders.
ENGAGEMENT OF ERNST & YOUNG LLP; DELAYS IN SEC FILINGS
The Company engaged Ernst & Young LLP ("EY") to audit the Company's financial statements for the year ended May 31, 1995 on or about July 5, 1995. In addition, the Company may request Arthur Andersen LLP ("Andersen"), the Company's former auditors, to consent to the inclusion of its audit reports for the 1993 and 1994 fiscal years in various SEC reports or registration statements. As indicated by Andersen in its letter addressed to the SEC, Andersen intends to conduct a due diligence review in order to ascertain whether it believes that its report could be reissued without modifications, or what modifications of its report and qualifications or uncertainties therein would be necessary. The consent of Andersen to use such reports, or in lieu thereof reports of another auditor (requiring another complete audit of such periods) will be necessary in order to file registration statements to register shares of Common Stock under the Securities Act. In addition, the Company will solicit shareholder approval for the issuance of Common Stock pursuant to the Note, and such solicitation may require a proxy statement that includes financial statements and auditors' consents.
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS
Despite the dismissal in March 1995 of the involuntary bankruptcy petition filed against the Company by three purported creditors, no assurance may be made that such or other persons whom the Company owes any debt could not file another involuntary petition in bankruptcy court. The Company's 7 1/2% Convertible Subordinated Debentures continue to be in default, including the payment default involving interest accruing from April 1994 on approximately $9.5 million of outstanding face amount, and interest on default interest, and continue to be purportedly accelerated, and immediately payable in full. To rescind the acceleration of the Debentures would require written consent of a majority of the Debentures and the cure of all existing defaults. The Company has filed and received SEC comments concerning a Schedule 13E-4 and a Schedule 14A for distribution to the debentureholders. No assurances can be made that the holders of Debentures will consent to rescission of the acceleration or that the defaults can be cured. The Company's ability to solicit consent of Debentureholders may be subject to Rule 14a under the Exchange Act, which may require that the Company provide audited and unaudited financial information to holders. In the event that the Company does not retire the Debentures as and when contemplated in the March 3, 1995 letter agreement, Debentureholders who filed the earlier involuntary petition may file another such petition. Other creditors may also file such a petition, or institute other actions against the Company, in order to prevent the Debentureholders from collecting on their debts in advance of payment to themselves.
The Company has received a tax refund of approximately $9.4 million from the carry back of fiscal 1995 specified losses defined in Section 172(f). This refund was reduced by a $2.5 million offset for the Company's outstanding obligation to the Internal Revenue Service ("IRS"), including interest, pursuant to a settlement agreement relating to tax years 1983 through 1991. Also, a $1.9 million commission was paid to Deloitte & Touche from the refund proceeds. Section 172(f) is an area of the tax law without substantial legal precedent. There may be substantial opposition by the IRS to a substantial portion of such claims, and no assurances can be made as to the ability to retain all tax refunds based on such deductions. Neither the Company nor the IRS will be precluded in any resultant tax audit from raising these and additional issues.
The Company's ability to use any Net Operating Losses may be subject to limitation in the event that the Company issues or agrees to issue substantial amounts of additional equity. The Company monitors the potential for "change of ownership" and believes that the exchange of the Note as contemplated will not cause a "change of ownership;" however, no assurances can be made that future events will not act to limit the Company's tax benefits.
The Company may be unable to utilize some or all of its allowable tax deductions or losses, which depends upon factors including the availability of sufficient net income from which to deduct such losses during limited carryback and carryover periods.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company's ability to succeed in increasing revenues may depend in part on the extent to which reimbursement of the cost of such treatment will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and services. As a result of reimbursement changes and competitive pressures, the contractual obligations of the Company have been subject to intense evaluation.
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
The levels of revenues and profitability of healthcare companies may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of healthcare through various means. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement governmental controls on the price of healthcare. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for healthcare goods and services may take in response to any healthcare reform proposals or legislation. The Company cannot predict the effect healthcare reforms may have on its business, and no assurance can be given that any such reforms will not have a material adverse effect on the Company.
The Company's anticipated growth and expansion into areas and activities requiring additional expertise, such as managed care, are expected to place increased demands on the Company's resources. These demands are expected to require the retention of current management, the addition of new management personnel and the development of additional expertise by existing management personnel. The failure to retain or acquire such services or to develop such expertise could have a material adverse effect on the prospects for the Company's success.
The Company's prospects for success depend, to a degree, on its ability to successfully implement its current restructuring plans. The failure of the Company to successfully transition, or any unanticipated or significant delays in such transition, could have a material adverse effect on the Company's business. There can be no assurance that the Company will be able to achieve its planned transition without disruption to its business or that the new facilities or management information system will be adequate to sustain future growth.
SHARES ELIGIBLE FOR FUTURE SALE
The Company contemplates issuing substantial amounts of equity. Issuance of these shares, registration thereof pursuant to registration rights or otherwise, and additional sales of these shares could adversely affect the trading prices of the Common Stock.
PRICE VOLATILITY IN PUBLIC MARKET
The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. Trading prices of securities of companies in the managed care sector have experienced significant volatility.
The Company's Restated Certificate of Incorporation provides for 60,000 authorized shares of Preferred Stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any further vote or action by the stockholders, which could have the effect of diluting the Common Stock or reducing working capital that would otherwise be available to the Company. The Company's Restated Certificate of Incorporation also provides for a classified board of directors, with directors divided into three classes serving staggered terms. In addition, the Company's stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions which result in a change of control of the Company. In addition, Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. In addition each share of the Company's Common Stock includes one right on the terms, and subject to the conditions, of the Rights Agreement between the Company and Continental Stock Transfer & Trust Company. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders, and therefore could adversely affect the price of the Company's Common Stock.
The Common Stock of the Company is a class of equity securities that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act"). Therefore, an person's direct or indirect beneficial ownership of more than five percent of the outstanding Common Stock of the Company will result in the applicability of filing requirements pursuant to Regulation 13D-G. Reports of holdings on Schedule 13D or short form Schedule 13G, and amendments thereto, must be delivered by the investor to the Company, the principal exchange on which the Common Stock is traded, and the SEC at times required by such regulation. Additional requirements apply to ten-percent-beneficial holders under Rule 16 under the Exchange Act relating to short-swing profits. All filing and other requirements, whether or not stated above, are solely the responsibility of the investor. The Company requests that the investor consult legal counsel concerning any requirements that may apply.
ACCREDITED INVESTORS; MANNER OF SALE
The Company's sale of the Note and Common Stock is intended to be made only to accredited investors and without any general solicitation or advertising. Failure of the Company to comply with requirements of Section 4(2) or 4(6) under the Act or Regulation D under the Act may have material adverse effects on the Company's financial condition and prospects. The investors' representations to the Company are material inducements to the Company. If the investors are aware of any reason that any of such exemptions under the Act is or may be unavailable, such investor should promptly inform the Company and not purchase the Note and Common Stock.
The following utilization statistics include data from all operations including closures during the periods, joint ventures and closed facilities:
Three Months Ended November 30, 1995 Compared to Three Months Ended August 31,
The Company reported net income of approximately $0.7 million or $0.27 per share for the quarter ended November 30, 1995, an improvement of approximately $2.0 million or $0.77 per share from the loss reported for the quarter ended August 31, 1995. Included in the three months ended November 30, 1995 is a gain of $1.0 million related to the sale of an operating facility in October 1995, and an income tax benefit of $2.6 million related to the carryback of fiscal 1995 losses defined under Section 172(f).
Operating revenues decreased to $7.7 million in the second quarter of fiscal 1996 from $8.8 million in the first quarter or by 13%. This decrease is predominately related to a decline in revenues for freestanding facilities due to the sale of operations of one facility in October 1995 and the closure of another in November 1995. In addition, revenues for behavioral medicine contract operations declined by 10% during the second quarter. Operating expenses also declined in the second quarter of fiscal 1996 by 8% or $0.6 million. This decline was from freestanding operations and behavioral medicine contracts, which was offset by a slight increase in operating expenses for managed care operations.
General and administrative expenses increased by $1.2 million during the second quarter of fiscal 1996 compared to the first quarter. The first quarter of fiscal 1996 includes a credit of $425,000 related to a settlement. The increase in general and administrative expenses during the second quarter of fiscal 1996 is attributable to an increase in behavioral medicine contracts and corporate expenses. Corporate general and administrative expenses for the quarter ended November 30, 1995 include $0.5 million for the fees paid related to the Company's fiscal 1995 Federal tax refund. The provision for doubtful accounts increased by $0.1 million for the second quarter of 1996 versus the first quarter as a result of an increase in bad debt related to contract operations.
The Company recorded $1.0 million for the gain on the sale of assets during the second quarter of fiscal 1996. This gain is attributable to the sale of an operating facility in October 1995 and is included on the statement of operations.
Current assets as of November 30, 1995 increased by $7.8 million as compared to August 31, 1995. This increase is predominately related to the receipt of the Company's fiscal 1995 Federal tax refund which increased cash and cash equivalents, and the reclassification of assets held for sale to current from property and equipment and non-current property and equipment held for sale. These increases were offset by a decline in accounts and notes receivable at November 30, 1995 of $1.3 million from the prior quarter. This decline is a result of the sale and closure of two freestanding facilities during the second quarter of fiscal 1996.
Other assets increased at November 30, 1995 by $1.6 million from August 31, 1995. This increase predominantly represents the amount paid by the Company as a fee related to its fiscal 1995 Federal tax refund. Such fee is reimbursable if the IRS should disallow the deductions claimed under Section 172(f) (see Note 4 to the Company's Condensed Consolidated Financial Statements included herein).
Current liabilities at November 30, 1995 increased $0.8 million as compared to August 31, 1995. This increase is primarily a result of an increase in accrued claims liabilities for managed care operations as a result of the increase in business experienced during fiscal 1996.
Long-term debt declined by $2.5 million as of November 30, 1995 when compared to August 31, 1995 as a result of the payment of the settlement agreement with the IRS (see Note 5 to the Company's Condensed Consolidated Financial Statements included herein). Other non-current liabilities increased by $6.7 million at November 30, 1995. This increase is a result of the tax refund received by the Company for carryback of fiscal 1995 losses defined under Section 172(f). A tax benefit has been recognized for $2.4 million of the refund and the remaining $7.0 million is included in non-current liabilities.
During the second quarter of fiscal 1996, the number of covered lives increased to 693,220. This increase is primarily attributable to new members under existing contracts. Comprehensive Behavioral Care, Inc. ("Comprehensive Behavioral") distinguishes itself from its competition by being the "science-based" provider of care and manages all clinical programs based upon proven treatment technologies.
In the second quarter of fiscal 1996, operating revenues increased slightly to $3.5 million compared to the first quarter of $3.4 million. Operating expenses also increased slightly by $0.2 million or 7% in the second quarter of fiscal 1996. In addition, general and administrative expenses decreased to $0.4 million in the second quarter of fiscal 1996 as compared to the first quarter. As a result, the net operating loss for Comprehensive Behavioral for the second quarter of fiscal 1996 was $0.3 million, a increase of $0.1 million from the prior quarter.
In the second quarter of fiscal 1996, CareUnit, Inc. ("CareUnit") operating revenues decreased $0.2 million or by 10% from the first quarter of fiscal 1996 and operating expenses declined by 4%. The decrease in operating revenues during the second quarter of fiscal 1996 combined with the slight decrease in operating expenses resulted in an increase in CareUnit's net operating loss by $0.3 million from the first quarter to $0.6 million.
During the second quarter of fiscal 1996, patient days of service at behavioral medicine contracts declined by approximately 21% from 5,534 patient days to 4,383 patient days. Units which were operational for both the first and second quarters of fiscal 1996 experienced a 15% decrease in utilization to 4,383 patient days. Average net revenue per patient day at these units declined by 27% from the previous quarter resulting in a decline in an overall net inpatient operating revenues of 17% to $0.5 million. Net outpatient revenues for programs operational for both quarters at these units increased 18% from approximately $635,000 in the first quarter of 1996 to approximately $747,000 in the second quarter of fiscal 1996.
The following table sets forth quarterly utilization data on a "same store" basis:
For units operational for both quarters, operating expenses increased 9%, when combined with the slight increase in operating revenues resulted in operating income at the unit level decreasing by 33% from the first quarter of fiscal 1996.
Operating revenues for freestanding operations decreased by $1.1 million or by 29% during the second quarter of fiscal 1996 compared to the prior quarter. During the second quarter of fiscal 1996, the Company sold one operating facility and closed another due to poor performance. In addition, operating expenses declined 20% or $0.7 million in the second quarter of fiscal 1996.
Admissions in the second quarter of fiscal 1996 decreased to 353 from 573 in the first quarter, an overall decline of 38%. The following table sets forth selected quarterly utilization data on a "same store" basis:
Net revenue per patient day for "same store" facilities increased to $1,150 for the second quarter of fiscal 1996 from $1,130 for the first quarter of fiscal 1996. Admissions increased for the quarter from 278 in the first quarter to 282 in the second quarter of fiscal 1996. The slight increase in admissions combined with the decline in length of stay resulted in a decrease in net operating revenues for the second quarter of fiscal 1996 of $0.1 million. The Company believes that the increasing role of HMO's, reduced benefits from employers and indemnity companies, and a shifting to outpatient programs continue to impact utilization. The Company continues to focus its efforts toward providing effective, lower cost outpatient, partial hospitalization and daycare programs, obtaining psychiatric treatment licenses for its freestanding facilities, and toward establishing and maintaining relationships and contracts with managed care and other organizations which pay for or broker such services.
The following table illustrates revenues in outpatient and daycare programs offered by the "same store" facilities:
Operating expenses at the Company's freestanding facilities on a "same store" basis increased $0.2 million and bad debt expense increased $0.1 million in the second quarter from the first quarter of fiscal 1996. As a result, net operating income decreased $0.4 million in the second quarter from the first quarter of fiscal 1996.
The Company is taking steps to increase revenues, primarily through relicensing facilities to provide psychiatric treatment, and the continued development of its behavioral medicine managed care business. The Company is also implementing cost reduction measures, including the closure of selected facilities. In October 1995, the Company sold one operating facility and closed another in November 1995 due to poor performance. The Company owns six freestanding facilities. Two of the six owned facilities are currently operating. The Company will continue to evaluate the performance of these facilities in their respective markets and, if circumstances warrant, may increase or reduce the number of facilities designated for disposition.
Three Months Ended November 30, 1995 Compared to Three Months Ended November 30,
The Company reported a pretax loss of approximately $1.8 million for the second quarter of fiscal 1996, an improvement of approximately $0.6 million or 25% from the pretax loss of approximately $2.4 million reported for the second quarter of fiscal 1995. Included in revenues for the second quarter of fiscal 1996 is a gain of $1.0 million related to the sale of an operating facility in October 1995.
Operating revenues for the second quarter of fiscal 1996 increased by $0.3 million or 4% from the second quarter of fiscal 1995. The second quarter of fiscal 1996 reflects an increase in managed care operating revenues of $2.4 million as compared to the second quarter of fiscal 1995. This increase in managed care operating revenues was offset by the decline in operating revenues from freestanding facilities due to the sale and closure of two facilities during the second quarter of fiscal 1996.
Operating expenses decreased by approximately $0.6 million or 8% from the second quarter of fiscal 1995 compared to the first quarter of fiscal 1996. The decrease in operating expenses is primarily attributable to a decline in operating expenses for freestanding operations which was partially offset by a 100% increase in operating expenses related to managed care operations and 40% increase related to contract operations. General and administrative expenses increased by approximately $1.6 million from the second quarter of fiscal 1995 as a result of managed care operations expansion and development and $0.5 million in fees paid in the second quarter of fiscal 1996 related to the Company's fiscal 1995 Federal tax refund. The provision for doubtful accounts decreased by 10% during the second quarter of fiscal 1996 compared to the same period for fiscal 1995. This decrease is related to the decreased freestanding operations.
Six Months Ended November 30, 1995 Compared to Six Months Ended November 30,
The Company reported a pretax loss of approximately $3.1 million for the six months ended November 30, 1995 from the pretax loss of $4.9 million reported for the same period for fiscal 1995, an improvement of $1.8 million. Included in the results for fiscal 1996 is a gain of $1.0 million related to the sale of an operating facility in October 1995.
Operating revenues increased by 7% or $1.0 million for the six months ended November 30, 1995 compared to the six months ended November 30, 1994. The increase in operating revenues is primarily attributable to an increase in managed care operations of $4.8 million which was offset by a decline of $4.1 million related to hospital operations. Operating expenses declined by 6% or $0.9 million for the six months ended November 30, 1995 as compared to the same period for fiscal 1995. This decline is attributable to a decrease in operating expenses for hospital operations of 40% or $4.3 million offset by an increase in operating expenses for managed care and contract operations of $2.8 million and $0.7 million, respectively. General and administrative expenses for the six months ended November 30, 1995 increased $1.8 million from the six months ended November 30, 1994. The increase in general and administrative expenses for the six months ended November 30, 1995 is attributable to managed care operations which reported no general and administrative expenses for the six months ended November 30, 1994, an increase of $0.2 million in contract operations general and administrative expenses and an increase in corporate general and administrative expenses which included $0.5 million for fees paid related to the Company's fiscal 1995 Federal tax refund. Bad debt expense declined $0.5 million or 43% for the six months ended November 30, 1995 as compared to the same period a year ago and is attributable to hospital operations. In addition, interest expense increased by $0.2 million or 42% for the six months ended November 30, 1995 compared to the six months ended November 30, 1994, as a result of the additional debt related to the Secured Conditional Exchangeable Note and IRS settlement agreement which were entered into during the third quarter of fiscal 1995.
The Company reported net income of $0.7 million for the quarter ended November 30, 1995, versus a net loss of $2.5 million for the quarter ended November 30, 1994. As a result, the Company has an accumulated deficit of $47.1 million and a total stockholders' deficiency of $4.6 million as of November 30, 1995. Additionally, the Company's current assets at November 30, 1995 amounted to approximately $13.1 million and current liabilities were approximately $22.2 million, resulting in working capital deficiency of approximately $9.1 million and a current ratio of 1:1.7. The Company's primary use of available cash resources is to fund operations while it seeks to restore profitability to certain of its freestanding facilities and expand its behavioral medicine managed care business.
Included in current and non-current assets are four hospital facilities designated as property and equipment held for sale with a total carrying value of $6.2 million. In October 1995, the Company sold one of its operating facilities and in November 1995, closed another due to poor performance. In December 1995, the Company entered into escrow for the sale of this facility. Accordingly, the closed property was classified as property held for sale as of November 30, 1995.
Included in current liabilities are $9.5 million of Debentures in default as a result of the Company's failure to make scheduled payments of interest on the Debentures commencing in October 1994. The Company has agreed to use its best efforts to provide an opportunity for Debenture holders to tender their Debentures pursuant to an exchange offer to be made by the Company. This proposed transaction requires the holders of a majority of the Debentures to give their approval to rescind the acceleration and the Company to obtain and expend up to $5.5 million of cash during fiscal 1996, over and above cash required to fund other financing, operating and investing needs. Additionally, the Debenture exchange provides for the Company to issue $120 worth of its common stock at a defined value for each $1,000 of Debentures, which may be contingent upon the Company's ability to effect certain filings with the Securities and Exchange Commission. The ability to timely proceed with any such proposed filings will, in part, depend upon the ability of the Company to obtain a consent from its prior auditors for the use of their report on the Company's consolidated financial statements in such registration statements. Failure to obtain Debenture holder approval or to accomplish the Debenture exchange, or, in the alternative, a failure of the Company and the Debenture holders to otherwise reach a settlement, may cause the Debenture holders to pursue the involuntary bankruptcy of the Company and/or the Company to take alternative actions that may include filing for voluntary protection from creditors. Alternatively, if the Debenture exchange is accomplished, the elimination of the Debenture's debt service requirement would decrease the Company's future cash flow requirements. (The foregoing summary does not constitute an offer to the holders of the Company's Debentures.
Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.)
These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.
In fiscal 1993, the Company established a restructuring reserve to address the Company's operational issues. One purpose of such reserve was for the realignment of the Company's focus and business and the settlement and disposition of certain non-performing and under-utilized assets. Many of the Company's inpatient freestanding facilities have been sold or are in the process of being closed or sold and management has begun to implement plans for expanding the Company's contract management and managed care operations.
In previous years, the Company was obligated to support and fund certain poor performing freestanding facilities that now have been closed, including two such facilities closed in fiscal 1996 (see Note 3-- "Property and Equipment Held for Sale"). As a result, the Company will no longer be burdened with the negative cash flow requirements associated with such facilities. Based upon a projection of actual performance during fiscal 1995 with adjustments for reduced cash flow requirements associated with facilities closed and/or sold in fiscal 1995, known contract and cyclical changes, and also giving consideration to cash on hand at November 30, 1995 of $5.9 million, management expects the Company to be able to meet its cash obligations required by operations during fiscal 1996, including the Company's obligations under the Debentures. However, the cash needs of the Company may vary from month to month depending upon the actual level of business activity, and through the second quarter of fiscal 1996 the Company continues to incur losses from ongoing operations. Therefore, no assurance can be given that the Company will generate adequate cash flows to meet cash obligations required by operations.
In October 1995, the Company received a $9.4 million refund related to its fiscal 1995 Federal tax return. The Company will utilize such proceeds to provide funds for the Debenture exchange, payoff the outstanding liabilities to the IRS, and/or additional operating needs. The statement of operations reflects the recognition of $2.6 million in tax benefits for this refund. In addition, in November 1995, the Company entered into a Secured Conditional Exchangeable Note Purchase Agreement for $1.0 million. The Company also anticipates utilizing one or more of the following potential sources of cash to provide funds for additional operating needs:
- Included in current and non-current assets are four hospital facilities designated as property and equipment held for sale with a total carrying value of $6.2 million. The Company expects to sell three of these facilities during the current fiscal year. However, some contracts have not been fully negotiated and proceeds from the sales or lease of such assets are not expected to be available by the time the Debenture exchange is expected to occur. Accordingly, management expects to use such cash proceeds, if received during fiscal 1996, to fund and expand the Company's operations and implement the Company's restructuring plans.
- In March 1995, a jury awarded the Company approximately $2.7 million, plus interest, in damages in its lawsuit against RehabCare Corporation. The defendant has posted a bond for the amount of the award and has filed an appeal of the judgment. Management is unable to predict whether any proceeds from this judgment will be received in fiscal 1996 (see Note 5 to the Company's Condensed Consolidated Financial Statements included herein).
- The Company has received a firm commitment from a mutual fund to purchase in a private placement at least $5.0 million of 15% fully secured Company notes due no earlier than December 1996 if offered by the Company.
All of these potential sources of additional cash in fiscal 1996 are subject to variation due to business and economic influences outside the Company's control. There can be no assurance that during fiscal 1996 the Company will complete the transactions required to fund its working capital deficit.
During the first quarter of fiscal 1996, the Company paid the IRS approximately $2.3 million pursuant to its settlement agreement (see Note 5 to the Company's Condensed Consolidated Financial Statements included herein). In addition, during the second quarter of fiscal 1996, the Company paid the IRS the remaining balance, including accrued interest, due on the settlement agreement of approximately $2.5 million.
PART II. - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. RehabCare filed a counterclaim in the case seeking a declaratory judgement with respect to the rights of both parties under the Stock Redemption Agreement, an injunction enjoining the Company from taking certain action under the Stock Redemption or Restated Shareholders Agreements and damages in the form of attorneys' fees and costs allegedly incurred by RehabCare with respect to its issuance of certain preferred stock and with respect to prior litigation between the parties. The case was tried before a jury commencing on February 21, 1995. Prior to the presentation of evidence to the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8, 1995, the jury returned its verdict awarding the Company $2,681,250 in damages, plus interest and the costs of the action against RehabCare for securities fraud and for breach of contract. RehabCare has posted a bond in the amount of $3.0 million and filed a motion for new trial or in the alternative, for judgement as a matter of law, which the court denied in its entirety on August 4, 1995. On September 1, 1995, RehabCare filed a notice of appeal with the District Court indicating its intent to appeal the matter to the United States Court of Appeals. Although the Company feels that RehabCare will not prevail in its appeal, the Company has not recognized any gain with relation to the judgement.
In connection with the proposed sale and lease-back of hospitals to CMP Properties, Inc., a real estate investment trust, the Company advanced $1.1 million to its financial advisor in fiscal 1992. The financial advisor was affiliated with several members of the Company's Board of Directors at that time. The advances, which were to be repaid if the transaction was not completed, were to be secured by a pledge of common stock in an unrelated company. The pledged shares of common stock were in the possession of the Company's primary legal counsel at that time, as collateral for the advances. After the transaction was terminated, the financial advisor refused to repay the advances and the Company's legal counsel refused to turn over the collateral to the Company. The Company has filed an action in the United States District Court for the District of Oregon (Civil Case No. 94-384 FR) against its former financial advisor and former legal counsel to recover the advances. The former financial advisor has counterclaimed against the Company for $1,688,000 for breach of contract and unjust enrichment. The Company's former law firm has filed a counterclaim for $193,000 for unpaid legal fees. Management believes that the counterclaims are without merit and intends to vigorously defend against them and to pursue the Company's claims.
On June 8, 1994, RehabCare filed a lawsuit against the Company in the Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement entered into between the Company and RehabCare in May 1991 (Case No. 663957). An amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges that it has incurred attorneys fees in connection with the settlement of certain tax issues with the IRS and has paid the IRS a settlement amount with respect to the years 1987 and 1988. RehabCare seeks the recovery from the Company of $588,000, plus interest, which RehabCare alleges is the amount it incurred for payments to the IRS in settlement of taxes and attorneys fees it incurred in dealing with the IRS. The Company has filed its answer and affirmative defenses contesting the right of RehabCare to obtain the relief it seeks. Discovery is ongoing. Until such discovery is complete, it is not possible to predict the likely outcome of the lawsuit. The Company intends to continue to vigorously defend this matter which is scheduled for trial in February 1996.
In December 1994, the Company reached a settlement with the Appeals Office of the Internal Revenue Service ("IRS") on a payroll tax audit for the calendar years 1983 through 1991. Pursuant to this settlement the Company agreed to pay the IRS $5.0 million with the Company having no obligation to pay any penalties or accrued interest. The IRS agent conducting the audit asserted that certain physicians, psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. The settlement was reviewed and accepted on behalf of the IRS by its district counsel. Payment terms have been accepted at 50% within 90 days of finalization with the remainder financed over the next five years. The unpaid balance bears interest at 9% per annum due and payable after the $5.0 million is paid. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. In return, the IRS granted the Company an additional 120 days to pay the remaining balance of $2,150,000.
In July 1995, the Company paid the remaining balance of the initial payment, and continued to make the monthly installment payments pursuant to the terms of the settlement through September 1995. In October 1995, the Company paid the remaining balance outstanding, including accrued interest, of $2.5 million. The Company utilized the proceeds from the 1995 Federal income tax refund to make such payment (see Note 4 to the Company's Condensed Consolidated Financial Statements included herein).
An involuntary bankruptcy petition was dismissed on March 6, 1995 pursuant to an agreement dated March 3, 1995 between the Company and a representative of the petitioners. Under such agreement the Company has agreed, subject to the conditions therein, to offer to exchange for its outstanding 7 1/2% Convertible Subordinated Debentures a combination of cash and shares. See Note 2 to the Company's Condensed Consolidated Financial Statements for a discussion of the Company's default in the payment of interest on its 7 1/2% Convertible Subordinated Debentures and the consequent acceleration of the full principal amount thereof. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criteria in regard to net tangible assets available to common stock and three year average net income among other items. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards. Management anticipates success in "global restructuring" (see Note 2 to the Company's Condensed Consoldidated Financial Statement included herein) will be necessary in order to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and during the first quarter of fiscal 1996, to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financially distressed companies.
From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
See the discussion contained in the third paragraph under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a discussion of the Company's default in the payment of interest on its 7 1/2% Convertible Subordinated Debentures, and the acceleration thereof.
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criterion in regard to net tangible assets available to common stock and three year average net income among other items. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to original listing standards. Management anticipates that the "global restructuring" (see Note 2 to the Company Condensed Consolidated Financial Statements included herein) will be necessary to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and the first quarter of fiscal 1996 to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financialy distressed companies.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of the Company's Annual Shareholders' Meeting were reported in the Company's Report on Form 8-K dated November 9, 1995.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedules (filed herewith).
(b) Reports on Form 8-K
1) The Company filed a current report on Form 8-K dated November 9, 1995, under Item 5, to report: a) results of the Annual Shareholders' Meeting which included the election of a Class III Director; b) adoption of the Comprehensive Care Corporation 1995 Incentive Plan; and c) adoption of the Amended and Restated Non-Employee Directiors' Stock Option Plan.
2) The Company filed a current report on Form 8-K dated November 15, 1995 on Form 8-K, under Item 5, to report the resignation of Mr. Rudy R. Miller from the Board of Directors.
3) The Company filed a current report on Form 8-K, dated November 30, 1995, under Item 5, to report that the Company had entered into a Secured Conditional Exchangeable Note Purchase Agreement for $1.0 million.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
January 12, 1995 By /s/ DREW Q. MILLER
January 12, 1995 By /s/ KERRI RUPPERT
SECOND QUARTER ENDED NOVEMBER 30, 1995
27 Financial Data Schedules (filed herewith). | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T16:48:51 |
0000784056-96-000002 | 0000784056-96-000002_0002.txt | Aquila Distributors, Inc. (the "Distributor")
TAX-FREE TRUST OF ARIZONA (the "Trust") confirms its agreement with Aquila Distributors, Inc. (the "Distributor") with respect to the servicing of shareholder accounts representing shares of the Level-Payment Class of the Trust. This Agreement is entered into pursuant to the Trust's Shareholder Services Plan dated ________, 199__ (the "Plan").
Section 1. Compensation and Services to be Rendered
(a) The Trust will pay the Distributor an annual fee (the "Service Fee") in compensation for its services in connection with the servicing of shareholder accounts. The Service Fee paid will be calculated daily and paid monthly by the Trust at the annual rate of .25% of the average annual net assets of the Trust represented by the Level-Payment ("Class C") Shares.
(b) The Service Fee will be used by the Distributor to provide compensation for ongoing servicing and/or maintenance of shareholder accounts and to cover an allocable portion of overhead and other office expenses of the Distributor and/or selected dealers related to the servicing and/or maintenance of shareholder accounts. It is understood that compensation may be paid by the Distributor to persons, including employees of the Distributor, who respond to inquiries of Level-Payment Shareholders of the Trust regarding their ownership of shares or their accounts with the Trust or who provide other similar services not otherwise required to be provided by the Trust's investment manager, transfer agent or other agent of the Trust.
While this Agreeement is in effect, the Distributor shall provide the reports called for in Section 4 of the Plan.
Section 3. Approval of Trustees
This agreement has been approved by a majority vote of both (a) the full Board of Trustees of the Trust and (b) those Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Plan or this Agreement (the "Independent Trustees"), cast in person at a meeting called for the purpose of voting on this Agreement.
Section 4. Continuance of Agreement
This Agreement will continue in effect for a period of more than one year from the date of its effectiveness only so long as its continuance is specifically approved annually by vote of the Trust's Board of Trustees in the manner described in Section 3 above.
(a) This agreement may be terminated at any time, without the payment of any penalty, by vote of a majority of the Independent Trustees or by a vote of a majority of the outstanding Level-Payment Shares on not more than 60 days' written notice to the Distributor.
(b) This Agreement will terminate automatically in the event of its assignment.
Section 6. Selection of Certain Trustees
While this Agreement is in effect, the selection and nomination of the Trust's Trustees who are not interested persons of the Trust will be committed to the discretion of the Trustees then in office who are not interested persons of the Trust.
No material amendment to this Agreement may be made unless approved by the Trust's Board of Trustees in the manner described in Section 3 above.
Section 8. Meaning of Certain Terms
As used in this Agreement, the terms "assignment," "interested person" and "majority of this outstanding voting securities" will be deemed to have the same meaning that those terms have under the Investment Company Act of 1940, as amended (the "Act") and the rules and regulations under the Act, subject to any exemption that may be granted to the Trust under the Act by the Securities and Exchange Commission.
This Agreement has been executed by the parties as of ________, 1995 and will become effective on _______, 1996.
If the terms and conditions described above are in accordance with your understanding, kindly indicate your acceptance of this Agreement by signing and returning to us the enclosed copy of this Agreement. | 485APOS | EX-99 | 1996-01-16T00:00:00 | 1996-01-12T17:54:29 |
0000784056-96-000002 | 0000784056-96-000002_0005.txt | 1. The Plan. This Shareholder Services Plan (the "Plan") is the written plan of TAX-FREE TRUST OF ARIZONA (the "Trust") adopted to provide for the payment by the Level-Payment Class of shares of the Trust of ""service fees" within the meaning of Article III, Section 26(b)(9) of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. This Plan applies only to the Level-Payment Class ("Class C") of shares of the Trust (regardless of whether such class is so designated or is redesignated by some other name).
2. Definitions. As used in this Plan, "Qualified Recipients" shall mean broker-dealers or others selected by Aquila Distributors, Inc. (the "Distributor"), including but not limited to the Distributor and any other principal underwriter of the Trust, who have, pursuant to written agreements with the Trust or the Distributor, agreed to provide personal services to Level- Payment shareholders and/or maintenance of Level-Payment shareholder accounts. "Qualified Holdings" shall mean, as to any Qualified Recipient, all Level-Payment Shares beneficially owned by such Qualified Recipient's customers, clients or other contacts. "Administrator" shall mean Aquila Management Corporation or any successor serving as sub-adviser or administrator of the Trust.
3. Certain Payments Permitted. Subject to the direction and control of the Board of Trustees of the Trust, the Trust may make payments ("Service Fees") to Qualified Recipients, which Service Fees (i) may be paid directly or through the Distributor or shareholder servicing agent as disbursing agent and (ii) may not exceed, for any fiscal year of the Trust (as adjusted for any part or parts of a fiscal year during which payments under the Plan are not accruable or for any fiscal year which is not a full fiscal year) 0.25 of 1% of the average annual net assets of the Trust represented by the Level-Payment Class of shares. Such payments shall be made only out of the Trust assets allocable to the Level-Payment Shares. The Distributor shall have sole authority with respect to the selection of any Qualified Recipient or Recipients and the amount of Service Fees, if any, paid to each Qualified Recipient, provided that the total Service Fees paid to all Qualified Recipients may not exceed the amount set forth above and provided, further, that no Qualified Recipient may receive more than 0.25 of 1% of the average annual net asset value of shares sold by such Recipient. The Distributor is authorized, but not directed, to take into account, in addition to any other factors deemed relevant by it, the following: (a) the amount of the Qualified Holdings of the Qualified Recipient and (b) the extent to which the Qualified Recipient has, at its expense, taken steps in the shareholder servicing area with respect to holders of Level-Payment Shares, including without limitation, any or all of the following activities: answering customer inquiries regarding account status and history, and the manner in which purchases and redemptions of shares of the Trust may be effected; assisting shareholders in designating and changing dividend options, account designations and addresses; providing necessary personnel and facilities to establish and maintain shareholder accounts and records; assisting in processing purchase and redemption transactions; arranging for the wiring of funds; transmitting and receiving funds in connection with customer orders to purchase or redeem shares; verifying and guaranteeing shareholder signatures in connection with redemption orders and transfers and changes in shareholder designated accounts; and providing such other related services as the Distributor or a shareholder may request from time to time. Notwithstanding the foregoing two sentences, a majority of the Independent Trustees (as defined below) may remove any person as a Qualified Recipient. Amounts within the above limits accrued to a Qualified Recipient but not paid during a fiscal year may be paid thereafter; if less than the full amount is accrued to all Qualified Recipients, the difference will not be carried over to subsequent years.
4. Reports. While this Plan is in effect, the Trust's Distributor shall report at least quarterly to the Trust's Trustees in writing for their review on the following matters: (i) all Service Fees paid under the Plan, the identity of the Qualified Recipient of each payment, and the purposes for which the amounts were expended; and (ii) all fees of the Trust to the Distributor paid or accrued during such quarter. In addition, if any Qualified Recipient is an "affiliated person," as that term is defined in the Investment Company Act of 1940, as amended (the "1940 Act"), of the Trust, the Adviser, the Administrator or the Distributor, such person shall agree to furnish to the Distributor for transmission to the Board of Trustees of the Trust an accounting, in form and detail satisfactory to the Board of Trustees, to enable the Board of Trustees to make the determinations of the fairness of the compensation paid to such affiliated person, not less often than annually.
5. Effectiveness, Continuation, Termination and Amendment. This Plan has been approved by a vote of the Trustees, including those Trustees who, at the time of such vote, were not "interested persons" (as defined in the 1940 Act) of the Trust and had no direct or indirect financial interest in the operation of this Plan or in any agreements related to this Plan (the "Independent Trustees"), with votes cast in person at a meeting called for the purpose of voting on this Plan. It is effective as of the date first above written and will continue in effect for a period of more than one year from such date only so long as such continuance is specifically approved at least annually as set forth in the preceding sentence. It may be amended in like manner and may be terminated at any time by vote of the Independent Trustees.
6. Additional Terms and Conditions. (a) This Plan shall also be subject to all applicable terms and conditions of Rule 18f-3 under the Act as now in force or hereafter amended.
(b) While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not "interested persons" of the Trust, as that term is defined in the 1940 Act, shall be committed to the discretion of such disinterested Trustees. Nothing herein shall prevent the involvement of others in such selection and nomination if the final decision on any such selection and nomination is approved by a majority of such disinterested Trustees. | 485APOS | EX-99 | 1996-01-16T00:00:00 | 1996-01-12T17:54:29 |
0000225323-96-000015 | 0000225323-96-000015_0000.txt | PRESIDENT'S MESSAGE 3 Ned Johnson on investing strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 6 The manager's review of fund performance, strategy and outlook.
INVESTMENT CHANGES 9 A summary of major shifts in the fund's investments over the past six months.
INVESTMENTS 10 A complete list of the fund's values.
FINANCIAL STATEMENTS 19 Statements of assets and liabilities, operations, and changes in net assets, as well as financial highlights.
NOTES 23 Notes to the financial statements.
REPORT OF INDEPENDENT 27 The auditors' opinion.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
Although the markets were fairly positive in 1995, no one can predict what lies ahead for investors. The previous year, stocks posted below-average returns and bonds had one of the worst years in history. This downturn followed a period in which the investing environment was generally very positive. These market ups and downs are a normal part of investing, and there are some basic principles that are helpful for investors to remember in different types of markets. If you can leave your money invested over the long term, you can avoid the results of the volatility that generally accompanies the stock market in the short term, as we witnessed last year. You also can help to manage some of the risks of investing through diversification. A stock fund is already diversified because it invests in many issues. You can diversify even further by placing some of your money in several different types of stock funds or in other investment categories, such as bonds. If you have a short investment time horizon, you might want to consider moving some of your investment into a money market fund, which seeks income and a stable share price by investing in high-quality, short-term investments. Of course, there is no assurance that a money market fund will achieve its goal, and it is important to remember that money market funds are not insured or guaranteed by any agency of the U.S. government. Finally, no matter what your investment horizon or portfolio diversity, it makes good sense to follow a regular investment plan - investing a certain amount of money at the same time each month or quarter - and to review your portfolio periodically. A periodic investment plan will not, of course, assure a profit or protect against a loss. If you have any questions, please call us at 1-800-544-8888. We stand ready to provide the information you need to make the investments that are right for you.
There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change, or the growth of a hypothetical $10,000 investment. A fund's total return includes changes in a fund's share price, plus reinvestment of any dividends (or income) and capital gains (the profits the fund earns when it sells securities that have grown in value). PERIODS ENDED NOVEMBER 30, 1995 PAST 1 LIFE OF
Emerging Growth (including 3% sales charge) 43.16% 203.76%
Russell 2000(registered trademark) 28.49% 155.57%
Average Mid-Cap Fund 33.69% n/a
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case one year, or since the fund started on December 28, 1990. For example, if you invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. Total return figures do not include the effect of the 0.75% redemption fee on shares held less than 90 days. You can compare the fund's returns to the performance of the Russell 2000 Index - a broad measure of the performance of small company stocks. To measure how the fund's performance stacked up against its peers, you can compare it to the average mid-cap fund, which reflects the performance of 98 mid-cap funds with similar objectives tracked by Lipper Analytical Services over the past 12 months. (Lipper recently changed the fund's peer group from small company growth funds to mid-cap funds. This change allows the fund's performance to be compared with other funds that more closely mirror its investment objectives.) Both benchmarks include reinvested dividends and capital gains, if any, and exclude the effects of sales charges. PERIODS ENDED NOVEMBER 30, 1995 PAST 1 LIFE OF
Emerging Growth (including 3% sales 43.16% 25.28%
Russell 2000(registered trademark) 28.49% 20.97%
Average Mid-Cap Fund 33.69% n/a
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return and show you what would have happened if the fund had performed at a constant rate each year. $10,000 OVER LIFE OF FUND
$10,000 OVER LIFE OF FUND: Let's say you invested $10,000 in Fidelity Emerging Growth Fund on December 28, 1990, when the fund started, and paid a 3% sales charge. As the chart shows, by November 30, 1995, the value of your investment would have grown to $30,376 - a 203.76% increase on your initial investment. For comparison, look at how the Russell 2000 Index did over the same period. With dividends reinvested, the same $10,000 investment would have grown to $25,557 - a 155.57% increase. How a fund did yesterday is no guarantee of how it will do for example, has a history of growth in the long run and volatility in the short run. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a lose money. But if you can ride out the market's ups and downs, you may have a gain. FUND TALK: THE MANAGER'S OVERVIEW
Strong corporate earnings and a environment helped the U.S. stock market post robust returns for the 12 months ended Index of 500 Stocks finished the 12-month period with a total reinvested dividends ) - well average of roughly 12%. With interest rates fell during the first half of 1995. The Federal Reserve Board cut the fed funds rate - the rate banks charge each other for overnight loans - by 0.25% on July 6 to 5.75%. the rally, with the weak dollar growth and stock price gain, in October and November. Lower helped financial stocks perform well. In November, the Dow Jones 5000 for the first time. Returns from investors brought capital back to the was down 16.52% for the 12 months ended November 30. The Australia, Far East) Index was up 7.57% for the year ended have fared well through the first 11 months of 1995, while the shown signs of recovery. An interview with Lawrence Greenberg, Portfolio Manager of Fidelity Q. HOW HAS THE FUND PERFORMED, LARRY? A. Pretty well. For the 12-month period ended November 30, 1995, the fund returned 47.59%. For the same period, the average mid-cap stock fund, as tracked by Lipper Analytical Services, returned 33.69%. Q. WHAT DO YOU THINK WAS BEHIND THE OUTSTANDING PERFORMANCE OF EQUITIES THIS YEAR? A. In my opinion, two things really drive the equity market: strong earnings and declining interest rates. Over the past 12 months, we've had both. This really played into the hands of the kinds of aggressive growth stocks the fund owns. Most of these stocks represent small, fast-growing companies which are able to grow faster than other companies in a slow but expanding economic environment. They also can benefit more from a declining interest rate environment. Q. THE FUND'S TECHNOLOGY WEIGHTING HAS BEEN REDUCED, BUT, AT APPROXIMATELY 57%, IT REMAINED THE LARGEST SECTOR AT THE END OF THE PERIOD. DO YOU THINK THIS AREA OF THE MARKET CAN KEEP UP THE TORRID PACE OF GROWTH WE HAVE SEEN OVER THE PAST YEAR? A. Probably not. What we saw this past year was strength across the board. For the most part, earnings grew as fast as the stock prices went up. Therefore, despite good appreciation, multiples (e.g. price to earnings)didn't go up that much. I don't think investors can expect the same level of growth in 1996 as they did in 1995. I think investors can expect to see more of an environment of the haves and have-nots, with specific companies leaving others behind. Q. SO HOW WILL YOU MANAGE THE FUND'S TECHNOLOGY HOLDINGS GOING FORWARD? A. I intend to approach the technology sector on a more selective basis, looking at individual areas showing strength. For example, corporate America's move from mainframe computing to client-server computing, along with the rise of the Internet, may continue to benefit networking and database companies. These companies provide the hardware and software for the newly downsized corporate networks. Q. WHY DOES THE FUND HAVE AN APPROXIMATELY 8% STAKE IN UTILITIES WHEN THERE IS SO MUCH UNCERTAINTY BECAUSE OF POSSIBLE DEREGULATION? A. The fund's utility holdings are in the cellular phone industry and not electric utilities. I believe the cellular industry is one of the best global emerging growth industries in the market. The fund's assets are spread between cellular service providers and equipment manufacturers. Q. IN THE FUND'S SEMIANNUAL REPORT, YOU DISCUSSED THAT YOU HAD CUT BACK ON THE FUND'S HEALTH CARE EXPOSURE BECAUSE OF CONCERNS SURROUNDING FEDERAL HEALTH CARE REFORM. WHAT'S HAPPENED SINCE THEN? A. I slowly raised the fund's position in health care stocks as values presented themselves. Congress and the president continue to haggle over the future of Medicare and Medicaid, but I anticipate that government cutbacks in spending could force more Medicare users toward HMOs. Therefore, I've added more HMOs to the portfolio. Q. WERE THERE ANY DISAPPOINTMENTS? A. Sure, disappointments came on two fronts. First, in September, the technology sector slowed somewhat as several corporate earnings disappointments fueled investors' concerns that the sector had become overvalued. As this occurred, investors moved to more defensive, consumer-oriented stocks such as Coca-Cola, PepsiCo, Merck and Pfizer. In hindsight, I wish I had been able to make this shift earlier. Secondly, the underperformance of several of the fund's retail stocks hindered performance. Building-supply companies Home Depot and Lowe's, for example, were hurt by falling lumber prices and a drop in demand with the slowdown in the housing market. Q. HOW WOULD YOU DESCRIBE THE FUND'S FOREIGN EXPOSURE? A. I prefer to own some of the larger, multinational foreign companies. Aside from currency and political risks, it's hard to keep up with the changes of some of the more fast-growing foreign companies. I favor organizations that offer accessible managements and a constant flow of reliable information. Q. SO WHAT'S YOUR OUTLOOK? A. As I discussed before, the real fuel for a strong market - good corporate earnings and declining interest rates - will probably not be as strong in 1996 as they were in 1995. Given what we know now, though, I believe, barring any unforeseen changes, the market environment may still be constructive for stocks next year. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER, ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS.
GOAL: to increase the value of the fund's shares by investing mainly in the stocks believes are in the developing stage of their life cycle and SIZE: as of November 30, 1995, more than $1.3 billion 1993; manager, Fidelity VIP: 1986 - April 1991; Fidelity Portfolio July 1989 - April 1991; joined Fidelity in 1986 SPECIALTY RETAILERS: "Much has been written in the media about the bad run the retail sector has had this year. I have concentrated most of the fund's retail holdings in retailers or "category killers." These companies are able to and a unique product that spurs demand in an anemic retail market. In my opinion, this better than any other was money. It is this type of company that, in my view, has been able to overcome macro kinds of retailers can't."
TOP TEN STOCKS AS OF NOVEMBER 30, 1995 % OF FUND'S % OF FUND'S
Oracle Systems Corp. 4.2 5.0
Cisco Systems, Inc. 4.1 2.6
AirTouch Communications, Inc. 3.0 2.8
DSC Communications Corp. 2.7 3.4
Compaq Computer Corp. 2.5 2.7
Nokia Corp. AB 2.5 2.4
Silicon Graphics, Inc. 2.0 1.8
TOP FIVE MARKET SECTORS AS OF NOVEMBER 30, 1995 % OF FUND'S % OF FUND'S
Retail & Wholesale 9.5 11.6
Media & Leisure 3.2 4.5
AS OF NOVEMBER 30, 1995* AS OF MAY 31, 1995** Row: 1, Col: 1, Value: 10.1 Row: 1, Col: 2, Value: 0.0 Row: 1, Col: 3, Value: 44.0 Row: 1, Col: 4, Value: 45.9 Row: 1, Col: 1, Value: 3.0 Row: 1, Col: 2, Value: 0.0 Row: 1, Col: 3, Value: 49.0 Row: 1, Col: 4, Value: 47.0
Showing Percentage of Total Value of Investment in Securities
AEROSPACE & DEFENSE - 0.1% Special Devices, Inc. (a) 123,500 $ 1,868 METALS & MINING - 0.2% IMCO Recycling, Inc. 110,000 2,489 CONSTRUCTION & REAL ESTATE - 0.0% Thermo Power Corp. (a) 40,000 550 AUTOS, TIRES, & ACCESSORIES - 0.1% Safety Components International, Inc. (a) 75,000 1,162 TEXTILES & APPAREL - 0.6% Adidas AG (a)(b) 6,000 320 NIKE, Inc. Class B 70,000 4,060 Tommy Hilfiger (a) 85,000 3,751 Thermo Electron Corp. (a) 75,000 3,713 CREDIT & OTHER FINANCE - 0.2% Green Tree Acceptance, Inc. 70,000 1,977 Mercury Finance Co. 65,050 927 Alliance Entertainment Corp. (a) 290,000 2,755 DRUGS & PHARMACEUTICALS - 1.6% Amgen, Inc. (a) 85,000 $ 4,218 Biogen, Inc. (a) 50,000 2,725 Cephalon, Inc. (a) 40,000 1,110 Dura Pharmaceuticals, Inc. (a) 50,000 1,463 Genentech, Inc. (special) 40,000 2,045 Merck & Co., Inc. 80,000 4,950 Nature's Sunshine Products, Inc. 50,000 1,125 MEDICAL EQUIPMENT & SUPPLIES - 1.5% Cardinal Health, Inc. 76,400 4,126 Oakley, Inc. (a) 45,000 1,440 Physician Sales & Service, Inc. (a) 125,000 2,375 St. Jude Medical, Inc. (a) 50,000 1,975 Thermo Cardiosystems, Inc. (a) 40,000 2,335 Thermedics, Inc. (a) 95,000 2,078 MEDICAL FACILITIES MANAGEMENT - 3.6% Advantage Health Corp. (a) 29,100 960 American Medical Response (a) 160,000 4,580 Columbia/HCA Healthcare Corp. 115,000 5,937 Compdent Corp. (a) 40,000 1,390 Foundation Health Corp. (a) 30,000 1,372 HEALTHSOUTH Rehabilitation Corp. (a) 410,000 12,403 Healthsource, Inc. (a) 30,000 1,875 Multicare Companies, Inc. (a) 80,000 1,670 Oxford Health Plans, Inc. (a) 25,000 1,875 Physician Reliance Network, Inc. (a) 40,000 1,420 Sterling Healthcare Group, Inc. (a) 75,000 938 United HealthCare Corp. 100,000 6,287 U.S. Healthcare, Inc. 74,000 3,367 Vencor, Inc. (a) 160,075 4,962 INDUSTRIAL MACHINERY & EQUIPMENT - 1.6% Avid Technology, Inc. (a) 100,050 $ 3,964 Glenayre Technologies, Inc. 165,075 9,451 Lifeline Systems, Inc. (a) 65,000 780 Pinnacle Systems (a) 99,200 3,224 United Communication Industry PCL (For. Reg.) 70,200 842 INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% Brooks Automation, Inc. (a) 7,000 119 Semitool, Inc. (a) 55,300 885 TETRA Technologies, Inc. (a) 80,000 1,330 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 21,106 MEDIA & LEISURE - 3.2% Clear Channel Communications, Inc. (a) 1,800 71 EZ Communications, Inc. Class A (a) 69,500 1,129 Emmis Broadcasting Corp. Class A (a) 50,000 1,350 Evergreen Media Corp. Class A (a) 35,000 849 LODGING & GAMING - 1.4% Doubletree Corp. (a) 100,000 2,125 HFS, Inc. (a) 230,000 15,927 Harrah's Entertainment, Inc. 41,200 1,025 Apple South, Inc. 255,500 5,366 Applebee's International, Inc. 113,500 3,150 Lone Star Steakhouse Saloon (a) 130,000 5,102 Outback Steakhouse, Inc. (a) 160,000 5,840 Starbucks Corp. (a) 20,000 845 TOTAL MEDIA & LEISURE 42,779 RETAIL & WHOLESALE - 9.5% Baby Superstore, Inc. (a) 40,000 $ 2,250 Claire's Stores, Inc. 9,400 183 Just For Feet, Inc. (a) 300,000 10,238 Cellstar Corp. (a) 327,100 8,586 General Nutrition Companies, Inc. (a) 325,000 7,191 GENERAL MERCHANDISE STORES - 0.2% Dollar General Corp. 110,050 2,985 RETAIL & WHOLESALE, MISCELLANEOUS - 7.1% Barnes & Noble, Inc. (a) 50,000 1,837 Bed Bath & Beyond, Inc. (a) 122,100 4,014 Books-A-Million, Inc. (a) 75,000 1,078 Corporate Express (a) 170,000 4,548 Home Depot, Inc. (The) 150,000 6,656 Lowe's Companies, Inc. 622,800 19,618 Micro Warehouse, Inc. (a) 30,000 1,410 Officemax, Inc. (a) 430,000 9,782 Office Depot, Inc. (a) 135,075 3,309 Petco Animal Supplies, Inc. (a) 188,400 5,181 Petsmart, Inc. (a) 274,000 8,837 Staples, Inc. (a) 291,600 7,436 Sunglass Hut International, Inc. (a) 759,700 15,954 U.S. Office Products Co. (a) 120,000 2,010 Viking Office Products, Inc. (a) 86,800 3,993 TOTAL RETAIL & WHOLESALE 127,096 LEASING & RENTAL - 1.8% Hollywood Entertainment Corp. (a) 900,000 14,513 Movie Gallery, Inc. (a) 300,000 10,275 Medaphis Corp. (a) 286,400 $ 9,308 Zebra Technologies Corp. Class A (a) 38,600 2,577 ADC Telecommunications, Inc. 24,100 1,097 Aspect Telecommunications Corp. (a) 55,000 1,870 Cisco Systems, Inc. (a) 660,000 55,523 DSC Communications Corp. (a) 900,000 35,663 Ericsson (L.M.) Telephone Co. ADR Class B 375,000 8,906 Global Village Communication (a) 327,600 7,453 Inter-Tel, Inc. (a) 215,000 3,601 InterVoice, Inc. (a) 165,000 3,609 Jabil Circuit, Inc. (a) 125,000 2,594 Microtest, Inc. (a) 48,400 750 Microdyne Corp. (a) 38,600 801 Microwave Power Devices, Inc. (a) 95,000 962 Nokia Corp. AB: 3Com Corp. (a) 765,058 35,001 U.S. Robotics Corp. 203,300 22,312 Westell Technologies, Inc. Class A 800 10 Zoom Telephonics, Inc. (a) 40,000 740 COMPUTER SERVICES & SOFTWARE - 19.8% America Online, Inc. (a) 545,000 22,277 American Management Systems, Inc. (a) 100,000 2,975 Ascend Communications, Inc. (a) 175,000 12,513 Automatic Data Processing, Inc. 40,000 3,185 Broderbund Software, Inc. (a) 60,000 3,885 Business Objects SA sponsored ADR (a) 62,000 3,023 CUC International, Inc. (a) 250,000 9,500 COMPUTER SERVICES & SOFTWARE - CONTINUED Ciber, Inc. (a) 41,700 $ 1,272 CompUSA, Inc. (a) 159,600 5,925 Computer Sciences Corp. (a) 96,000 6,984 DST Systems, Inc. (a) 20,000 578 Datastream Systems, Inc. (a) 30,000 548 Davidson & Associates, Inc. (a) 28,100 695 Electronic Arts, Inc. (a) 115,000 3,924 FTP Software, Inc. (a) 100,000 3,038 Firefox Communications, Inc. (a) 30,000 652 General Motors Corp. Class E 150,000 7,575 HBO & Co. 80,000 5,980 Hummingbird Communications Ltd. (a) 60,000 3,020 Informix Corp. (a) 150,000 4,153 Inso Corp. (a) 101,200 4,099 McAfee Associates, Inc. (a) 100,000 4,775 Medic Computer Systems, Inc. (a) 37,600 2,406 Mercury Interactive Group Corp. (a) 130,900 3,011 Microsoft Corp. (a) 560,000 48,790 NETCOM On-Line Communication Services, Inc. (a) 90,000 6,570 Netscape Communications Corp. 5,000 691 Novell, Inc. (a) 140,000 2,362 Objective Systems Integrators, Inc. 900 17 Oracle Systems Corp. (a) 1,250,000 56,719 Parametric Technology Corp. (a) 75,000 5,306 Peoplesoft, Inc. (a) 340,000 14,280 Progress Software Corp. (a) 43,200 1,372 Project Software & Development, Inc. (a) 2,200 72 Sierra On-Line, Inc. (a) 50,000 1,700 Softkey International, Inc. (a) 39,800 1,343 Stratacom, Inc. (a) 50,000 3,750 UUNET Technologies, Inc. 9,800 779 Western Digital Corp. 1,000 15 Wonderware Corp. (a) 43,100 1,153 COMPUTERS & OFFICE EQUIPMENT - 11.0% Adaptec, Inc. (a) 266,000 $ 12,469 Bay Networks, Inc. (a) 530,000 23,850 Boca Research, Inc. (a) 54,700 1,573 Compaq Computer Corp. (a) 685,000 33,908 Dell Computer Corp. (a) 150,000 6,638 Discreet Logic, Inc. (a) 75,000 2,287 Fore Systems, Inc. 30,000 1,747 Gateway 2000, Inc. (a) 75,000 2,072 International Business Machines Corp. 185,000 17,876 Madge NV (a) 82,761 3,729 Read Rite Corp. (a) 105,083 2,850 Safeguard Scientifics, Inc. (a) 40,050 1,982 Seagate Technology (a) 85,400 4,505 Silicon Graphics, Inc. (a) 725,000 26,462 Sun Microsystems, Inc. (a) 70,000 5,889 Tech Data Corp. (a) 24,600 415 Applied Materials, Inc. (a) 140,000 6,807 Altera Corp. (a) 300,000 17,400 Analog Devices, Inc. (a) 246,800 9,132 Atmel Corp. (a) 239,500 7,185 Burr-Brown Corp. (a) 23,700 681 Cascade Communications Corp. 10,000 873 Dovatron International, Inc. (a) 40,000 1,310 Electroglas, Inc. (a) 131,200 3,903 International Rectifier Corp. 35,000 1,737 LSI Logic Corp. (a) 350,000 14,656 Linear Technology Corp. 230,000 10,408 MRV Communications, Inc. (a) 60,000 1,568 Maxim Integrated Products, Inc. (a) 129,800 9,735 Microchip Technology, Inc. (a) 180,000 7,290 SGS Thomson Microelectronics NV (a) 84,600 $ 3,151 Sanmina Corp. (a) 107,500 5,550 Xilinx, Inc. (a) 235,000 7,549 3D Systems Corp. (a) 96,700 1,970 AirTouch Communications, Inc. (a) 1,400,000 40,775 Arch Communications Group, Inc. (a) 125,013 3,141 BCE Mobile Communications, Inc. (a) 36,900 1,180 Metrocall, Inc. (a) 114,300 2,757 Mobile Telecommunications Technologies, Inc. (a) 125,000 2,875 Mobilemedia Corp. (a) 121,000 3,131 Palmer Wireless, Inc. (a) 425,000 9,031 United States Cellular Corp. (a) 200,000 7,000 Vanguard Cellular Systems, Inc. Class A (a) 1,150,000 26,019 Vodafone Group PLC sponsored ADR 200,000 7,225 LCI International, Inc. (a) 60,000 1,110 NONCONVERTIBLE PREFERRED STOCKS - 0.2% COMPUTERS & OFFICE EQUIPMENT - 0.2% Silicon Graphics CDA Ltd. exchangeable (non-vtg.) (a) (Cost $3,392) 85,590 3,124 MATURITY AMOUNT VALUE (NOTE 1) (U.S. Treasury obligations) in a joint trading account at 5.90%, dated 11/30/95 due 12/1/95 $ 135,115 $ 135,093 TOTAL INVESTMENT IN SECURITIES - 100% 2. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $320,000 or 0.0% of net assets. At November 30,1995, the aggregate cost of investment securities for income tax purposes was $1,047,134,000. Net unrealized appreciation aggregated $296,136,000, of which $319,550,000 related to appreciated investment securities and $23,414,000 related to depreciated investment securities. The fund hereby designates $3,056,000 as a capital gain dividend for the purpose of the dividend paid deduction.
STATEMENT OF ASSETS AND LIABILITIES
YEARS ENDED NOVEMBER 30, DECEMBER 28,
B TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE DECEMBER 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. For the period ended November 30, 1995
Fidelity Emerging Growth Fund (the fund) is a fund of Fidelity Mt. Vernon Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities for which exchange quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Securities (including restricted securities) for which exchange quotations are not readily available (and in certain cases debt securities which trade on an exchange) are valued primarily using dealer-supplied valuations or at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities maturing within sixty days of their purchase date are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts, and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Interest income is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned between the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for litigation proceeds, net operating losses, capital loss carryforwards and losses deferred due to wash sales and excise tax regulations. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital and may affect the per-share allocation between net investment income and realized and unrealized gain (loss). Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. REDEMPTION FEES. Shares held in the fund less than 90 days are subject to a redemption fee equal to .75% of the proceeds of the redeemed shares. A portion of the fee is accounted for as a reduction of transfer agent expenses. This portion of the redemption fee is used to offset the transaction costs and other expenses that short- term trading imposes on the fund and its shareholders. The remainder of the redemption fee is accounted for as an addition to paid in capital. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FORWARD FOREIGN CURRENCY CONTRACTS. The fund may use foreign currency contracts to facilitate transactions in foreign securities and to manage the fund's currency exposure. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the fund's investments against currency fluctuations. Also, a contract to buy or sell can offset a previous contract. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of forward foreign currency contracts is determined using forward currency exchange rates supplied by a quotation service. Purchases and sales of forward foreign currency contracts having the same settlement date and broker are offset and any realized gain (loss) is recognized on the date of offset; otherwise, gain (loss) is recognized on settlement date. 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements that mature in 60 days or less from the date of purchase, and are collateralized by U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery of the underlying U.S. Treasury or Federal Agency Securities, the market value of which is required to be at least equal to the repurchase price. For term repurchase agreement transactions, the underlying securities are marked-to-market daily and maintained at a value at least equal to the repurchase price. FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $1,203,746,000 and $884,817,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly basic fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .2700% to .5200% for the period. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. The annual individual fund fee rate is .35%. The basic fee is subject to a performance adjustment (up to a maximum of (plus/minus) .20%) based on the fund's investment performance as compared to the appropriate index over a specified period of time. For the period, the management fee was equivalent to an annual rate of .76% of average net assets. The Board of Trustees has approved a new group fee rate schedule with rates ranging from .2500% to .5200%. Effective January 1, 1996, FMR voluntarily agreed to implement this new group fee rate schedule as it results in the same or a lower management fee. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED SALES LOAD. For the period, Fidelity Distributors Corporation, an affiliate of FMR and the general distributor of the fund, received sales charges of $2,470,000 on sales of shares of the fund. TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. During the period December 1, 1994 to December 31, 1994, FSC received fees based on the type, size, number of accounts and the number of transactions made by shareholders. Effective January 1, 1995, the Board of Trustees approved a revised transfer agent contract pursuant to which FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC pays for typesetting, printing and mailing of all shareholder reports, except proxy statements. For the period, the transfer agent fees were equivalent to an annual rate of .25% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $240,000 for the period. 5. EXPENSE REDUCTIONS. FMR has directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $95,000 under this arrangement.
To the Trustees of Fidelity Mt. Vernon Street Trust and the Shareholders of Fidelity Emerging Growth Fund: We have audited the accompanying statement of assets and liabilities of Fidelity Mt. Vernon Street Trust: Fidelity Emerging Growth Fund, including the schedule of portfolio investments, as of November 30, 1995, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the four years in the period then ended and for the period December 28, 1990 (commencement of operations) to November 30, 1991. These financial statements and financial highlights are the responsibility of the fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our 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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 1995 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Fidelity Mt. Vernon Street Trust: Fidelity Emerging Growth Fund as of November 30, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended and for the period December 28, 1990 (commencement of operations) to November 30, 1991, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P.
The Board of Trustees of Fidelity Emerging Growth Fund voted to pay to shareholders of record at the opening of business on record date, the following distributions derived from capital gains realized from sales of portfolio securities, and dividends derived from net investment income: PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS A total of 17% of the dividends distributed during the fiscal year qualifies for the dividends-received deductions for corporate shareholders. The fund will notify shareholders in January 1996 of the applicable percentage for use in preparing 1995 income tax returns.
FOR FUND INFORMATION AND QUOTES The Fidelity Telephone Connection offers you special automated telephone services for quotes and balances. The services are easy to use, confidential and quick. All you need is a Touch Tone telephone. The first time you call one of our automated telephone services, we'll ask to set up your Personal Identification Number (PIN). The PIN assures that only you have automated telephone access to your account information. Please have your Customer Number (T-account #) handy when you call - you'll need it to establish your PIN. If you would ever like to change your PIN, just choose the "Change your you call. If you forget your PIN, please call a Fidelity representative at 1-800- 544-6666 for assistance.
Just make a selection from this record-ed menu: For quotes on funds you own. 1. For an individual fund quote. 2. For the ten most frequently requested Fidelity fund quotes. 3. For quotes on Fidelity Select Portfolios(registered trademark). 4. Identification Number (PIN). 5. To speak with a Fidelity representative. 6. Just make a selection from this record- ed menu: For balances on funds you own. 1. For your most recent fund activity dividends). 2. Identification Number (PIN). 3. To speak with a Fidelity representative. 4. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES.
1907 West State Road 434 3525 Piedmont Road, N.E. 1 West Pennsylvania Ave. 280 North Woodward Ave. 29155 Northwestern Hwy. 400 East Las Colinas Blvd. 411 108th Avenue, N.E. 1775 K Street, N.W.
Edward C. Johnson 3d, President J. Gary Burkhead, Senior Vice President William J. Hayes, Vice President John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer Fidelity Service Co. Brown Brothers Harriman & Co. (8 a.m. - 9 p.m.) for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) AUTOMATED LINES FOR QUICKEST SERVICE
PRESIDENT'S MESSAGE 3 Ned Johnson on investing strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 6 The manager's review of fund performance, strategy and outlook.
INVESTMENT CHANGES 9 A summary of major shifts in the fund's investments over the past six months.
INVESTMENTS 10 A complete list of the fund's values.
FINANCIAL STATEMENTS 22 Statements of assets and liabilities, operations, and changes in net as well as financial highlights.
NOTES 26 Notes to the financial statements.
REPORT OF INDEPENDENT 30 The auditors' opinion.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
Although the markets were fairly positive in 1995, no one can predict what lies ahead for investors. The previous year, stocks posted below-average returns and bonds had one of the worst years in history. This downturn followed a period in which the investing environment was generally very positive. These market ups and downs are a normal part of investing, and there are some basic principles that are helpful for investors to remember in different types of markets. If you can leave your money invested over the long term, you can avoid the results of the volatility that generally accompanies the stock market in the short term, as we witnessed last year. You also can help to manage some of the risks of investing through diversification. A stock fund is already diversified because it invests in many issues. You can diversify even further by placing some of your money in several different types of stock funds or in other investment categories, such as bonds. If you have a short investment time horizon, you might want to consider moving some of your investment into a money market fund, which seeks income and a stable share price by investing in high-quality, short-term investments. Of course, there is no assurance that a money market fund will achieve its goal, and it is important to remember that money market funds are not insured or guaranteed by any agency of the U.S. government. Finally, no matter what your investment horizon or portfolio diversity, it makes good sense to follow a regular investment plan - investing a certain amount of money at the same time each month or quarter - and to review your portfolio periodically. A periodic investment plan will not, of course, assure a profit or protect against a loss. If you have any questions, please call us at 1-800-544-8888. We stand ready to provide the information you need to make the investments that are right for you.
There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change, or the growth of a hypothetical $10,000 investment. A fund's total return includes changes in a fund's share price, plus reinvestment of any dividends (or income) and capital gains (the profits the fund earns when it sells securities that have grown in value). PERIODS ENDED NOVEMBER 30, 1995 PAST 1 LIFE OF
New Millennium (incl. 3% sales charge) 46.39% 84.57%
S&P 500(registered trademark) 36.98% 49.19%
Average Capital Appreciation Fund 30.28% n/a
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case one year, or since the fund began on December 28, 1992. For example, if you invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Standard & Poor's Composite Index of 500 Stocks - a common proxy for the U.S. stock market. To measure how the fund's performance stacked up against its peers, you can compare it to the average capital appreciation fund, which reflects the performance of 152 capital appreciation funds with similar objectives tracked by Lipper Analytical Services over the past 12 months. Both benchmarks include reinvested dividends and capital gains, if any, and exclude the effects of sales charges. PERIODS ENDED NOVEMBER 30, 1995 PAST 1 LIFE OF
New Millennium (incl. 3% sales charge) 46.39% 23.30%
S&P 500(registered trademark) 36.98% 14.65%
Average Capital Appreciation Fund 30.28% n/a
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return and show you what would have happened if the fund had performed at a constant rate each year. $10,000 OVER LIFE OF FUND
$10,000 OVER LIFE OF FUND: Let's say you invested $10,000 in Fidelity New Millennium Fund on December 28, 1992, when the fund started and paid a 3% sales charge. As the chart shows, by November 30, 1995, the value of your investment would have grown to $18,457 - a 84.57% increase on your initial investment. For comparison, look at how the S&P 500 did over the same period. With dividends reinvested, the same $10,000 investment would have grown to $14,919 - a 49.19% increase. How a fund did yesterday is no guarantee of how it will do for example, has a history of growth in the long run and volatility in the short run. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a lose money. But if you can ride out the market's ups and downs, you may have a gain. FUND TALK: THE MANAGER'S OVERVIEW
Strong corporate earnings and a environment helped the U.S. stock market post robust returns for the 12 months ended Index of 500 Stocks finished the 12-month period with a total reinvested dividends ) - well average of roughly 12%. With interest rates fell during the first half of 1995. The Federal Reserve Board cut the fed funds rate - the rate banks charge each other for overnight loans - by 0.25% on July 6 to 5.75%. the rally, with the weak dollar growth and stock price gain, in October and November. Lower helped financial stocks perform well. In November, the Dow Jones 5000 for the first time. Returns from investors brought capital back to the U.S. The MS Emerging Markets Free Index was down 16.52% for the 12 months ended November 30. The MS EAFE Index was up 7.57% for the year markets have fared well through the first 11 months of 1995, while has shown signs of recovery. An interview with Neal Miller, Portfolio Manager of Fidelity New Millennium Q. HOW HAS THE FUND PERFORMED, NEAL? A. For 12 months ended November 30, 1995, New Millennium returned 50.92%. That beat the average capital appreciation fund, which returned 30.28% for the same time period, according to Lipper Analytical Services. Q. THE FUND DID WELL. WHAT WAS THE MARKET LIKE? A. Many factors came together to produce the good results the fund experienced during the period. In looking at the past history of the presidential election cycles, I've found that the period before the election - which includes this reporting period - is usually a strong time for the market. Incumbent politicians often err on the side of fiscal and monetary easing when necessary. Although there's no guarantee that will happen, the stage is set and, if economic conditions begin to decline, I believe it is likely that some kind of economic stimulus could be applied. In addition, I thought the outlook for earnings was strong and that the outlook for stocks was favorable compared to other investment alternatives during the period. Q. WHERE DID YOU FIND INVESTMENT OPPORTUNITIES DURING THE PERIOD? A. Investing in the Internet-related stocks was the fund's major theme. There's an increasing realization in society about the profound implications of the Internet. The commercial areas of application for this communications "utility" are growing every day. Web sites are being added at a rate of 20% per month. While some critics cite the Internet as being some kind of fad, I disagree. The closest parallel I can draw is the advent of xerography and how the copier transformed business in the 1960s. The acceleration of the transfer of information throughout organizations became a very important - and permanent - change in the corporate environment. Q. HOW LONG CAN THE INTERNET LAST AS AN INVESTMENT IDEA? A. There's no way of knowing how long it could last, but I'm not anxious to move out of it yet. Xerography was strong from 1958 to 1966 and I look at the Internet in the same way. Though hardware will be in place in the near future, I believe that peripheral equipment, service technology and creative ways of organizing and displaying data for the Internet will continue to evolve and provide opportunity. Q. WHAT OTHER INVESTMENT THEMES DID YOU EMPLOY DURING THE PERIOD? A. I'm interested in the "de-conglomeratization" of corporate America. It used to be that companies with lower cost of capital and excess cash would acquire other companies. Companies that were highly valued acquired companies that were lower valued and, as a result, many "conglomerates" were born. Today, the trend of de-conglomeratization is highlighted by the activities of some insurance companies, manufacturers and large utilities. I've seen it happening and I looked for managements that would want to break up their companies. My strategy was to look for companies with assets that were worth more than the market price of their stock. During the period, many of these companies performed well and I'll look for the trend to continue. Q. WHY DID FIDELITY ELIMINATE THE LIMIT ON NEW MILLENNIUM'S ASSET SIZE? A. It has not been difficult identifying investment opportunities that comply with the fund's strategy, which is to search for companies that benefit from social and economic changes in the marketplace. Our goal has always been to manage the fund in the best interests of the shareholders and we can continue to do that given the many opportunities in available securities. Q. WHAT INVESTMENTS DIDN'T WORK OUT AS YOU WOULD HAVE LIKED? A. I'd hoped that the prices of oil and natural gas would have been higher than they were during the period. I thought that the broader-based service companies in this industry would perform well. Prices didn't increase because overall industry activity hasn't been very strong. I was also disappointed by the performance of some computer retailers. My feeling is that consumers are confused about what kind of computer to buy and that those sentiments were reflected in the stock prices of some computer retailers. Q. WHAT'S YOUR OUTLOOK GOING FORWARD? A. I continue to remain optimistic about the immediate outlook for stocks. I think stocks will continue to be an attractive investment option for the next six months, especially with the presidential election backdrop. GOAL: to increase the value of the fund's shares over the long term by focusing on due to social and economic 30, 1995, more than $543 NEAL MILLER ON THE THREE INTERNET: "Early on, I saw the Internet as a would save time and money for its users. The stream of Internet has increased and I see the commercial stages of the Internet as being broken down into three distinct steps: 2) the development of useful dispersion of information. I think about these stages of investment decisions." THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER, ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS.
TOP TEN STOCKS AS OF NOVEMBER 30, 1995 % OF FUND'S % OF FUND'S
U.S. Robotics Corp. 6.4 3.7
Ascend Communications, Inc. 2.6 0.0
Cisco Systems, Inc. 2.6 2.3
Adobe Systems, Inc. 2.0 2.0
CMG Information Services, Inc. 1.4 0.0
TOP FIVE MARKET SECTORS AS OF NOVEMBER 30, 1995 % OF FUND'S % OF FUND'S
Media & Leisure 3.9 5.5
AS OF NOVEMBER 30, 1995 * AS OF MAY 31, 1995 ** Row: 1, Col: 1, Value: 0.0 Row: 1, Col: 2, Value: 10.5 Row: 1, Col: 3, Value: 49.5 Row: 1, Col: 4, Value: 40.0 Row: 1, Col: 1, Value: 0.0 Row: 1, Col: 2, Value: 4.1 Row: 1, Col: 3, Value: 40.0 Row: 1, Col: 4, Value: 45.9
Showing Percentage of Total Value of Investment in Securities
AEROSPACE & DEFENSE - 3.9% AEROSPACE & DEFENSE - 2.9% Boeing Co. 103,300 $ 7,527,966 McDonnell Douglas Corp. 33,300 2,967,863 Precision Castparts Corp. 87,300 3,142,800 Rockwell International Corp. 8,400 411,600 Alpha Industries, Inc. (a) 45,000 663,750 Litton Industries, Inc. (a) 43,600 1,956,550 SHIP BUILDING & REPAIR - 0.5% General Dynamics Corp. 43,200 2,575,800 TOTAL AEROSPACE & DEFENSE 20,839,179 CHEMICALS & PLASTICS - 2.1% IMC Fertilizer Group, Inc. 119,800 4,634,763 NL Industries, Inc. (a) 15,500 189,875 Potash Corp. of Saskatchewan 28,400 1,964,468 Schulman (A.), Inc. 39,000 736,125 METALS & MINING - 0.7% Brush Wellman, Inc. 50,500 883,750 United Technologies Corp. 17,300 1,621,875
CONSTRUCTION & REAL ESTATE - 1.2% Butler Manufacturing Co. 142,250 $ 4,907,625 NCI Building Systems, Inc. (a) 77,000 1,771,000 TOTAL CONSTRUCTION & REAL ESTATE 6,678,625 AUTOS, TIRES, & ACCESSORIES - 0.2% Shuffle Master, Inc. 4,800 65,400 Sony Corp. ADR 30,600 1,648,575 Interco, Inc. (a) 2,900 24,288 TEXTILES & APPAREL - 2.5% Hartmarx Corp. (a) 91,700 412,650 Jones Apparel Group, Inc. (a) 12,500 451,563 Nautica Enterprises, Inc. (a) 12,600 447,300 NIKE, Inc. Class B 40,100 2,325,800 Nine West Group, Inc. (a) 76,800 3,408,000 St. John Knits 15,800 740,625 Tultex Corp. (a) 13,700 65,075 Wolverine World Wide, Inc. 149,100 4,697,175 Arethusa Offshore Ltd. 157,000 3,571,750 Atwood Oceanics, Inc. (a) 7,500 140,625 BJ Services Co. (a) 27,000 664,875 Baker Hughes, Inc. 98,700 2,011,013 Daniel Industries, Inc. 61,000 808,250 ENSCO International, Inc. (a) 59,700 1,007,438 Global Marine, Inc. (a) 378,100 2,552,175
Input/Output, Inc. (a) 8,600 $ 396,675 Nabors Industries, Inc. (a) 84,600 835,425 Offshore Logistics, Inc. (a) 107,800 1,293,600 Reading & Bates Corp. (a) 164,300 2,156,438 Smith International, Inc. (a) 270,400 4,563,000 Sonat Offshore Drilling, Inc. 69,800 2,408,100 Varco International, Inc. (a) 111,500 1,017,438 Weatherford Enterra, Inc. (a) 204,150 5,180,306 OIL & GAS - 0.4% Camco International, Inc. 79,900 1,877,650 Santa Fe Energy Resources, Inc. (a) 46,700 431,975 Bangkok Bank Ltd. 33,000 351,371 Bank of Boston Corp. 13,000 602,875 Bank of New Hampshire Corp. 8,600 342,925 Silicon Valley Bancshares (a) 23,800 529,550 CREDIT & OTHER FINANCE - 0.1% American Express Co. 13,200 561,000 FEDERAL SPONSORED CREDIT - 0.7% Student Loan Marketing Association 53,500 3,751,688 CNA Financial Corp. (a) 5,100 592,238 Liberty Corp. (The) 12,000 397,500 SAVINGS & LOANS - 0.2% Golden West Financial Corp. 15,500 792,438
Daiwa Securities Co. Ltd. 46,000 $ 635,415 Nikko Securities Co. Ltd. 22,000 241,391 Nomura Securities Co. Ltd. 27,000 529,023 Provida SA sponsored ADR 13,300 307,563 DRUGS & PHARMACEUTICALS - 2.2% Amgen, Inc. (a) 132,100 6,555,463 Hauser Chemical Research, Inc. (a) 214,000 1,016,500 Merck & Co., Inc. 33,300 2,060,438 Regeneron Pharmaceuticals, Inc. (a) 169,500 1,885,688 Rexall Sundown, Inc. (a) 10,200 198,900 MEDICAL EQUIPMENT & SUPPLIES - 1.5% Advanced Technology Laboratories, Inc. (a) 44,500 956,750 Ballard Medical Products 53,200 911,050 Beckman Instruments, Inc. 6,800 237,150 Datascope Corp. (a) 9,900 252,450 Dentsply International, Inc. 40,300 1,445,763 EMPI, Inc. (a) 30,900 571,650 Hologic, Inc. (a) 23,600 997,100 Oakley, Inc. (a) 13,200 422,400 Physician Sales & Service, Inc. (a) 17,400 330,600 Zoll Medical Corp. (a) 47,000 417,125 MEDICAL FACILITIES MANAGEMENT - 1.5% Advantage Health Corp. (a) 10,100 333,300 Medpartners, Inc. (a) 37,600 1,066,900 Phycor, Inc. (a) 42,700 1,910,825 Physician Reliance Network, Inc. (a) 113,300 4,022,150 Physicians Resource Group, Inc. (a) 35,400 769,950
Gray Communications Systems, Inc. 7,350 $ 141,488 INDUSTRIAL MACHINERY & EQUIPMENT - 2.8% C-COR Electronics, Inc. (a) 163,600 4,212,700 Hughes Supply, Inc. 5,100 133,875 Information Resources Engineering, Inc. 3,600 85,950 LSI Lighting Systems, Inc. 21,900 320,288 TSX Corp. (a) 82,200 1,705,650 INDUSTRIAL MACHINERY & EQUIPMENT - 1.4% Duriron Co., Inc. 94,700 2,722,625 Gardner Denver Machinery, Inc. (a) 14,100 236,175 Keystone International, Inc. 72,200 1,480,100 Robotic Vision Systems, Inc. (a) 17,800 465,025 Twin Disc, Inc. 38,400 878,400 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 15,228,032 MEDIA & LEISURE - 3.9% American Radio Systems Corp. Class A (a) 8,100 184,275 Clear Channel Communications, Inc. (a) 40,600 1,601,163 Evergreen Media Corp. Class A (a) 22,900 555,325 Gaylord Entertainment Co. Class A 33,800 853,450 Hungarian Telephone & Cable Corp. (a) 5,000 54,063 Jacor Communications, Inc. Class A (a) 10,900 188,025 Liberty Media Group, Series A 5,375 150,500 Lin Television Corp. (a) 38,500 1,106,875 Metromedia International Group, Inc. (a) 37,671 678,078 New World Communications Group, Inc. Class A (a) 17,500 306,250 Young Broadcasting, Inc. Class A (a) 15,100 377,500
MEDIA & LEISURE - CONTINUED LEISURE DURABLES & TOYS - 0.2% Anthony Industries, Inc. 7,800 $ 174,525 West Marine, Inc. (a) 35,100 1,180,238 LODGING & GAMING - 1.2% Circus Circus Enterprises, Inc. (a) 14,800 410,700 Grand Casinos, Inc. (a) 29,000 1,065,750 International Speedway Corp. 3,400 822,800 Speedway Motorsports (a) 128,000 3,696,000 Stratosphere Corp. (a) 28,000 308,000 CCH, Inc. Class A 31,200 1,700,400 Times Mirror Co. Class A 14,400 468,000 Wiley (John) & Sons, Inc. Class A 18,000 585,000 Wolters Kluwer NV 17,200 1,451,575 Cooker Restaurant Corp. 79,400 843,625 Rainforest Cafe, Inc. (a) 45,800 1,104,925 TOTAL MEDIA & LEISURE 21,260,917 DEKALB Genetics Corp. Class B 5,300 239,825 Molinos Rio de La Plata SA Class B (Reg.) 78,100 605,275 Seagram Co. Ltd. 98,900 3,615,855 Zaklady Piwowarskie W Zywcu SA 11,400 793,456 Chiquita Brands International, Inc. 127,400 1,703,975 Ralston Purina Co. 26,800 1,715,200
Rubbermaid, Inc. 39,800 $ 1,094,500 Culbro Corp. (a) 1,600 80,400 Souza Cruz Industria Comerico 50,000 297,604 RETAIL & WHOLESALE - 3.5% Claire's Stores, Inc. 96,700 1,885,650 Genesco, Inc. (a) 51,400 218,450 Just For Feet, Inc. 8,400 286,650 Norton McNaughton, Inc. (a) 22,500 303,750 GENERAL MERCHANDISE STORES - 0.7% Casey's General Stores, Inc. 11,100 258,075 Matahari Putra Prima PT (For. Reg.) 1,037,500 1,919,612 Circle K Corp. 6,500 154,375 Richfood Holdings, Inc. Class A 16,200 455,625 Safeway, Inc. (a) 22,700 1,055,550 RETAIL & WHOLESALE, MISCELLANEOUS - 0.7% Books-A-Million, Inc. (a) 18,800 270,250 Borders Group, Inc. (a) 34,400 606,300 Brookstone, Inc. (a) 33,200 290,500 Fabri-Centers of America, Inc. Class A (a) 30,200 441,675 Henry Schein, Inc. (a) 26,900 679,225 Moovies, Inc. (a) 18,100 289,600 Orchard Supply Hardware Corp. (a) 8,000 174,000 Staples, Inc. (a) 18,700 476,850 U.S. Office Products Co. (a) 22,600 378,550 Williams-Sonoma, Inc. (a) 3,900 78,000 TOTAL RETAIL & WHOLESALE 19,024,291
CMG Information Services, Inc. (a) 100,100 $ 7,507,500 Apollo Group, Inc. Class A (a) 161,199 4,956,869 LEASING & RENTAL - 0.2% Aaron Rents, Inc. Class A 4,700 83,425 Hollywood Entertainment Corp. (a) 54,800 883,650 Cadmus Communications Corp. 30,200 860,700 Graphic Industries, Inc. 76,300 791,613 United Stationers, Inc. 21,200 471,700 ABR Information Services, Inc. (a) 28,050 953,700 Comdata Holdings Corp. (a) 38,700 928,800 Gartner Group, Inc. Class A (a) 36,000 1,566,000 Seattle FilmWorks, Inc. (a) 31,200 585,000 Service Corp. International 73,400 2,981,875 Sotheby's Holdings, Inc. Class A 9,700 134,588 Thomas Group (a) 2,300 35,075 U.S. Delivery Systems, Inc. (a) 41,900 984,650 Veterinary Centers of America, Inc. (a) 100,100 1,539,038 Western Atlas, Inc. (a) 25,200 1,206,450 Zebra Technologies Corp. Class A (a) 27,100 1,808,925 Cabletron Systems, Inc. (a) 4,400 365,200 Cisco Systems, Inc. (a) 165,700 13,939,513 Ericsson (L.M.) Telephone Co. Class B ADR 58,800 1,396,500 ITI Technologies (a) 4,700 118,675 Octel Communications Corp. (a) 4,700 154,513 Symmetricom, Inc. (a) 89,200 1,349,150 U.S. Robotics Corp. 318,800 34,988,300
COMPUTER SERVICES & SOFTWARE - 20.7% Adobe Systems, Inc. 158,200 $ 10,698,275 America Online, Inc. (a) 118,000 4,823,250 Ascend Communications, Inc. (a) 197,000 14,085,500 Aspen Technology, Inc. (a) 54,700 1,641,000 BBN Corp. (a) 411,200 15,420,000 Broderbund Software, Inc. (a) 9,100 589,225 CACI International, Inc. Class A (a) 123,900 1,486,800 Camelot Corp. (a) 14,100 70,941 Casino Data Systems (a) 21,600 372,600 Computer Sciences Corp. (a) 9,300 676,575 CUC International, Inc. (a) 173,800 6,604,400 CyCare Systems, Inc. (a) 29,400 823,200 Data Transmission Network Corp. (a) 800 35,600 Datastream Systems, Inc. (a) 25,500 465,375 Davidson & Associates, Inc. (a) 71,800 1,777,050 Desktop Data, Inc. (a) 13,900 371,825 Edmark Corp. (a) 22,650 934,313 Epic Design Technology (a) 210,000 4,462,500 HBO & Co. 33,900 2,534,025 Henry (Jack) & Associates, Inc. 59,933 1,445,884 Hogan Systems, Inc. (a) 5,500 50,875 Informix Corp. (a) 50,900 1,409,294 Legato Systems, Inc. (a) 26,400 1,049,400 Macromedia, Inc. (a) 81,400 3,785,100 McAfee Associates, Inc. (a) 6,450 307,988 Netscape Communications Corp. (a) 7,000 967,750 Objective Systems Integrato 400 7,600 Parametric Technology Corp. (a) 17,500 1,238,125 Primark Corp. (a) 268,700 7,422,838 Project Software & Development, Inc. (a) 29,900 979,225 Quality Systems, Inc. (a) 20,600 517,575 Quarterdeck Office Systems (a) 39,000 1,248,000 Rational Software Corp. (a) 215,500 3,798,188 Security Dynamics Technologies, Inc. (a) 18,200 900,900 Sierra On-Line, Inc. (a) 31,500 1,071,000 Softdesk, Inc. (a) 31,700 729,100 Softkey International, Inc. (a) 11,800 398,250
COMPUTER SERVICES & SOFTWARE - CONTINUED Stratacom, Inc. (a) 31,300 $ 2,347,500 Summit Medical Systems (a) 2,300 51,175 Systems Software Associates, Inc. 40,400 1,454,400 UUNET Technologies, Inc. (a) 41,700 3,315,150 Verity, Inc. (a) 30,100 1,497,475 Wonderware Corp. (a) 28,200 754,350 COMPUTERS & OFFICE EQUIPMENT - 7.4% Adaptec, Inc. (a) 140,900 6,604,688 Bay Networks, Inc. (a) 135,000 6,075,000 Boca Research, Inc. (a) 128,700 3,700,125 Checkmate Electronics, Inc. (a) 52,400 799,100 Compaq Computer Corp. (a) 24,000 1,188,000 Filenet Corp. (a) 77,200 3,300,300 Intergraph Corp. (a) 152,000 2,612,500 International Business Machines Corp. 26,500 2,560,563 Key Tronic Corp. (a) 76,600 852,175 National Computer System, Inc. 47,400 995,400 Sun Microsystems, Inc. (a) 31,000 2,607,875 Cognex Corp. (a) 40,500 2,460,375 Credence Systems Corp. (a) 40,600 1,207,850 II-VI, Inc. (a) 27,700 335,863 Altera Corp. (a) 30,400 1,763,200 Atmel Corp. (a) 33,500 1,005,000 Data I/O Corp. (a) 58,700 462,263 Micron Technology, Inc. 1,500 82,125 Richardson Electronics Ltd. 10,600 98,050 Supertex, Inc. (a) 80,700 847,350
Alaska Air Group, Inc. (a) 67,100 $ 1,216,188 America West Airlines, Inc. Class B (a) 115,500 2,064,563 Continental Airlines, Inc. (a) 29,000 1,134,625 Delta Air Lines, Inc. 7,200 558,900 Southwest Airlines Co. 182,000 4,550,000 Trans World Airlines, Inc. (a) 212,700 2,552,400 UAL Corp. (a) 11,800 2,469,150 TRUCKING & FREIGHT - 0.5% Expeditors International of Washington, Inc. 110,100 2,807,550 Arch Communications Group, Inc. (a) 20,548 516,269 Vodafone Group PLC sponsored ADR 21,700 783,913 Mosenergo AO sponsored ADR (b) 31,000 232,500 Utilicorp United, Inc. 23,200 646,700 LCI International, Inc. (a) 56,000 1,036,000 Telebras sponsored ADR 69,200 3,321,600 Telecom Argentina Class B sponsored ADR 12,100 529,375 Telefonica de Argentina SA sponsored ADR 26,700 654,150 Telefonos de Mexico SA sponsored ADR representing shares Ord. Class L 24,000 792,000 (U.S. Treasury obligations) in a joint trading account at 5.90%, dated 11/30/95 due 12/1/95 $ 57,119,360 $ 57,110,000 TOTAL INVESTMENT IN SECURITIES - 100% 2. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $232,500 or 0% of net assets. At November 30, 1995 the aggregate cost of investment securities for income tax purposes was $443,980,151. Net unrealized appreciation aggregated $98,717,953, of which $121,868,370 related to appreciated investment securities and $23,150,417 related to depreciated investment securities. The fund hereby designates $22,720,964 as a capital gain dividend for the purpose of the dividend paid deduction.
STATEMENT OF ASSETS AND LIABILITIES
STATEMENT OF CHANGES IN NET ASSETS
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE DECEMBER 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F INVESTMENT INCOME PER SHARE REFLECTS A SPECIAL DIVIDEND FROM ARETHUSA OFFSHORE LTD. WHICH AMOUNTED TO .01 PER SHARE. For the period ended November 30, 1995
Fidelity New Millennium Fund (the fund) is a fund of Fidelity Mt. Vernon Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities for which exchange quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Securities for which exchange quotations are not readily available (and in certain cases debt securities which trade on an exchange) are valued primarily using dealer-supplied valuations or at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities maturing within sixty days of their purchase date are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts, and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Interest income is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned between the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for foreign currency transactions and losses deferred due to wash sales. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital and may affect the per-share allocation between net investment income and realized and unrealized gain (loss). Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FORWARD FOREIGN CURRENCY CONTRACTS. The fund may use foreign currency contracts to facilitate transactions in foreign securities and to manage the fund's currency exposure. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the fund's investments against currency fluctuations. Also, a contract to buy or sell can offset a previous contract. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of forward foreign currency contracts is determined using forward currency exchange rates supplied by a quotation service. Purchases and sales of forward foreign currency contracts having the same settlement date and broker are offset and any realized gain (loss) is recognized on the date of offset; otherwise, gain (loss) is recognized on settlement date. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission(the SEC), the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT - CONTINUED uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements that mature in 60 days or less from the date of purchase, and are collateralized by U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery of the underlying U.S. Treasury or Federal Agency Securities, the market value of which is required to be at least equal to the repurchase price. For term repurchase agreement transactions, the underlying securities are marked-to-market daily and maintained at a value at least equal to the repurchase price. FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $630,915,091 and $583,383,888, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly basic fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .2700% to .5200% for the period. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. The annual individual fund fee rate is .35%. The basic fee is subject to a performance adjustment (up to a maximum of (plus/minus) .20%) based on the fund's investment performance as compared to the appropriate index over a specified period of time. For the period, the management fee was equivalent to an annual rate of .82% of average net assets after the performance adjustment. The Board of Trustees has approved a new group fee rate schedule with rates ranging from .2500% to .5200%. Effective January 1, 1996, FMR voluntarily agreed to implement this new group fee rate schedule as it results in the same or lower management fee. SALES LOAD. For the period, Fidelity Distributors Corporation (FDC), an affiliate of FMR and the general distributor of the fund, received sales charges of $1,037,781 on sales of shares of the fund. TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED TRANSFER AGENT FEES - CONTINUED period December 1, 1994 to December 31, 1994, FSC received fees based on the type, size, number of accounts and the number of transactions made by shareholders. Effective January 1, 1995, the Board of Trustees approved a revised transfer agent contract pursuant to which FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC pays for typesetting, printing and mailing of all shareholder reports, except proxy statements. For the period, the transfer agent fees were equivalent to an annual rate of .29% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $78,032 for the period. 5. BANK BORROWINGS. The fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The fund has established borrowing arrangements with certain banks. Under the most restrictive arrangement, the fund must pledge to the bank securities having a market value in excess of 220% of the total bank borrowings. The interest rate on the borrowings is the bank's base rate, as revised from time to time. The maximum loan and the average daily loan balance during the period for which the loan was outstanding amounted to $6,298,000. The weighted average interest rate was 6.5625%. 6. EXPENSE REDUCTIONS. FMR has directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $70,409 under this arrangement.
To the Trustees of Fidelity Mt. Vernon Street Trust and the Shareholders of Fidelity New Millennium Fund: We have audited the accompanying statement of assets and liabilities of Fidelity Mt. Vernon Street Trust: Fidelity New Millennium Fund, including the schedule of portfolio investments, as of November 30, 1995, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the two years in the period then ended and for the period December 28, 1992 (commencement of operations) to November 30, 1993. These financial statements and financial highlights are the responsibility of the fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our 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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 1995 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Fidelity Mt. Vernon Street Trust: Fidelity New Millennium Fund as of November 30, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the two years in the period then ended and for the period December 28, 1992 (commencement of operations) to November 30, 1993 in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P.
The Board of Trustees of Fidelity New Millennium Fund voted to pay to shareholders of record at the opening of business on record date, the following distributions derived from capital gains realized from sales of portfolio securities: PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS A total of 69% of the dividends distributed during the fiscal year qualifies for the dividends-received deductions for corporate shareholders. The fund will notify shareholders in January 1996 of the applicable percentage for use in preparing 1995 income tax returns.
Edward C. Johnson 3d, President J. Gary Burkhead, Senior Vice President William J. Hayes, Vice President John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer Fidelity Service Co. Chase Manhattan Bank, N.A. (8 a.m. - 9 p.m.) for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) AUTOMATED LINES FOR QUICKEST SERVICE
PRESIDENT'S MESSAGE 3 Ned Johnson on investing strategies.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 6 The manager's review of fund performance, strategy and outlook.
INVESTMENT CHANGES 9 A summary of major shifts in the fund's investments over the past six months.
INVESTMENTS 10 A complete list of the fund's values.
FINANCIAL STATEMENTS 24 Statements of assets and liabilities, operations, and changes in net as well as financial highlights.
NOTES 28 Notes to the financial statements.
REPORT OF INDEPENDENT 32 The auditors' opinion.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
Although the markets were fairly positive in 1995, no one can predict what lies ahead for investors. The previous year, stocks posted below-average returns and bonds had one of the worst years in history. This downturn followed a period in which the investing environment was generally very positive. These market ups and downs are a normal part of investing, and there are some basic principles that are helpful for investors to remember in different types of markets. If you can leave your money invested over the long term, you can avoid the results of the volatility that generally accompanies the stock market in the short term, as we witnessed last year. You also can help to manage some of the risks of investing through diversification. A stock fund is already diversified because it invests in many issues. You can diversify even further by placing some of your money in several different types of stock funds or in other investment categories, such as bonds. If you have a short investment time horizon, you might want to consider moving some of your investment into a money market fund, which seeks income and a stable share price by investing in high-quality, short-term investments. Of course, there is no assurance that a money market fund will achieve its goal, and it is important to remember that money market funds are not insured or guaranteed by any agency of the U.S. government. Finally, no matter what your investment horizon or portfolio diversity, it makes good sense to follow a regular investment plan - investing a certain amount of money at the same time each month or quarter - and to review your portfolio periodically. A periodic investment plan will not, of course, assure a profit or protect against a loss. If you have any questions, please call us at 1-800-544-8888. We stand ready to provide the information you need to make the investments that are right for you.
There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change, or the growth of a hypothetical $10,000 investment. A fund's total return includes changes in a fund's share price, plus reinvestment of any dividends (or income) and capital gains (the profits the fund earns when it sells securities that have grown in value). The fund has a 3% sales charge, which has been waived from January 1, 1995 through December 31, 1996. PERIODS ENDED NOVEMBER 30, 1995 PAST 1 PAST 5 PAST 10
Growth Company 41.22% 169.56% 406.80%
Growth Company (incl. 3% sales charge) 36.99% 161.48% 391.59%
S&P 500(registered trademark) 36.98% 117.34% 311.99%
Average Growth Fund 31.27% 118.54% 257.37%
CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case one, five, or 10 years. For example, if you invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Standard & Poor's Composite Index of 500 Stocks - a common proxy for the U.S. stock market. To measure how the fund's performance stacked up against its peers, you can compare it to the average growth fund, which reflects the performance of 565 growth funds with similar objectives tracked by Lipper Analytical Services over the past 12 months. Both benchmarks include reinvested dividends and capital gains, if any, and exclude the effects of sales charges. PERIODS ENDED NOVEMBER 30, 1995 PAST 1 PAST 5 PAST 10
Growth Company 41.22% 21.94% 17.62%
Growth Company (incl. 3% sales charge) 36.99% 21.20% 17.26%
S&P 500(registered trademark) 36.98% 16.80% 15.21%
Average Growth Fund 31.27% 16.15% 13.14%
AVERAGE ANNUAL TOTAL RETURNS take the fund's actual (or cumulative) return and show you what would have happened if the fund had performed at a constant rate each year. (Note: Lipper calculates average annual total returns by annualizing each fund's total return, then taking the arithmetic average. This may produce a slightly different figure than that obtained by averaging the cumulative total returns and annualizing the result.)
$10,000 OVER 10 YEARS: Let's say you invested $10,000 in Fidelity Growth Company Fund on November 30, 1985, and paid a 3% sales charge. As the chart shows, by November 30, 1995, the value of your investment would have grown to $49,159 - a 391.59% increase on your initial investment. For comparison, look at how the S&P 500 did over the same period. With dividends reinvested, the same $10,000 investment would have grown to $41,199 - a 311.99% increase. How a fund did yesterday is no guarantee of how it will do for example, has a history of growth in the long run and volatility in the short run. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a lose money. But if you can ride out the market's ups and downs, you may have a gain. FUND TALK: THE MANAGER'S OVERVIEW
Strong corporate earnings and a environment helped the U.S. stock market post robust returns for the 12 months ended Index of 500 Stocks finished the 12-month period with a total reinvested dividends ) - well average of roughly 12%. With interest rates fell during the first half of 1995. The Federal Reserve Board cut the fed funds rate - the rate banks charge each other for overnight loans - by 0.25% on July 6 to 5.75%. the rally, with the weak dollar growth and stock price gain, in October and November. Lower helped financial stocks perform well. In November, the Dow Jones 5000 for the first time. Returns from investors brought capital back to the was down 16.52% for the 12 months ended November 30. The Australia, Far East) Index was up 7.57% for the year ended have fared well through the first 11 months of 1995, while the shown signs of recovery. An interview with Bob Stansky, Portfolio Manager of Fidelity Growth Company Q. BOB, HOW DID THE FUND PERFORM? A. For the 12 months ended November 30, 1995, Growth Company returned 41.22%. That compares to a 31.27% total return by the average growth fund tracked by Lipper Analytical Services for the same time period. Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S STRONG PERFORMANCE? A. Growth stocks in general were in favor during the period because many cyclical companies were reporting profits that were lower than most estimates. In particular, the fund was heavily invested in the technology sector. Many of these companies were rewarded with higher valuations due to the favorable interest rate backdrop. Q. IF TECHNOLOGY STOCKS PERFORMED WELL, WHY DID YOU DECREASE THE FUND'S INVESTMENT IN THEM FROM 42% SIX MONTHS AGO TO 31.7% AS OF NOVEMBER 30, 1995? A. The fund's technology weighting peaked in June. During July, August and September, I began steadily selling some of the fund's technology holdings because the stocks were approaching the highest valuations they'd had in the past five years. While some companies were reporting impressive numbers, others had slowed down. As it turned out, taking profits in technology when I did proved beneficial to the fund's overall performance. Q. WHEN YOU BEGAN SELLING SOME OF YOUR TECHNOLOGY HOLDINGS, WHERE DID YOU DIRECT THE FUND'S ASSETS? A. A few sectors increased in weighting as technology was reduced. The healthcare sector increased from 6.1% to 9.1%. Pharmaceuticals in particular were increased. Merck, for example, performed well during the period due to an improved earnings outlook. I also increased the weighting in telephone services companies, including the Regional Bell companies, which have demonstrated the potential to grow as Internet-related traffic increases and new products and services are introduced. Q. THE FUND'S HOLDING IN FINANCIAL STOCKS ALSO INCREASED DURING THE PERIOD . . . A. Yes. I've increased the fund's financial sector holding - particularly banks and brokerage firms - from 7.4% of investments six months ago to 10.2% as of November 30, 1995. Interest rates have been steadily falling since September 1995. This backdrop has helped financial companies that have short-term borrowing needs. Fannie Mae was particularly attractive during the period given its interest-rate sensitivity and lower-than-average credit risk. Q. WHAT WAS YOUR PRIMARY INVESTMENT STRATEGY DURING THE PERIOD? A. It was the same as it's always been: stock prices follow earnings over the long run. Those companies with rising profits did well. The lower earnings from cyclical companies and falling long-term interest rates led to a focus on buying blue chip companies. Q. DURING THE PERIOD, HOW DID BLUE CHIPS PERFORM VERSUS SMALLER, MORE AGGRESSIVE COMPANIES? A. It was interesting. Both groups performed well but for different reasons. There was a flight toward more defensive holdings. Stock prices of companies such as PepsiCo and Philip Morris increased even though their earnings estimates were right on target. At the same time, more aggressive companies such as Cisco saw their stock prices rise due to increased earnings and higher price-to-earnings ratios. Q. WHAT INVESTMENT DECISIONS WERE DISAPPOINTING DURING THE PAST SIX MONTHS? A. In hindsight, I should have owned more consumer non-durable stocks during the period. Food and beverage companies performed especially well despite no meaningful increase in earnings estimates. This group's valuations increased more than any other sector. Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS? A. I think stock prices will follow earnings unless the current valuations are excessive. It was a good year for growth stocks, so I don't expect much of an increase in valuations. If stocks move with earnings increases, growth stock investors should be happy. THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER, ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND OTHER CONDITIONS.
GOAL: to increase the value of the fund's shares over the long term by investing in START DATE: January 17, 1983 SIZE: as of November 30, 1995, more than $6.1 billion PRICE-TO-EARNINGS GROWTH: "During the past six months, increased as the outlook for to decline and stock prices moved up as a result. I think it's reasonable not to expect any increases in valuations for a year or so until earnings catch up to prices. The fear is that and we would give back the gains of the past six months."
TOP TEN STOCKS AS OF NOVEMBER 30, 1995 % OF FUND'S % OF FUND'S
General Electric Co. 2.3 1.0
Cisco Systems, Inc. 2.3 1.5
Philip Morris Companies, Inc. 2.1 1.5
Compaq Computer Corp. 2.1 1.8
Oracle Systems Corp. 2.1 1.8
International Business Machines 1.6 2.5 Corp.
Federal National Mortgage 1.6 1.9
American Express Co. 1.3 1.0
TOP FIVE MARKET SECTORS AS OF NOVEMBER 30, 1995 % OF FUND'S % OF FUND'S
Retail & Wholesale 7.5 6.6
AS OF NOVEMBER 30, 1995* AS OF MAY 31, 1995** Row: 1, Col: 1, Value: 14.1 Row: 1, Col: 2, Value: 45.9 Row: 1, Col: 3, Value: 40.0 Row: 1, Col: 1, Value: 14.3 Row: 1, Col: 2, Value: 45.7 Row: 1, Col: 3, Value: 40.0
Showing Percentage of Total Value of Investment in Securities
AEROSPACE & DEFENSE - 0.4% General Motors Corp. Class H 599,000 $ 28,453 CHEMICALS & PLASTICS - 0.9% Airgas, Inc. (a) 229,200 6,417 Dow Chemical Co. 36,500 2,587 du Pont (E.I.) de Nemours & Co. 383,000 25,470 First Mississippi Corp. 99,900 2,547 Rohm & Haas Co. 11,300 681 Union Carbide Corp. 349,700 13,857 IRON & STEEL - 0.1% METALS & MINING - 1.0% Aluminum Co. of America 895,700 52,398 PAPER & FOREST PRODUCTS - 0.2% Boise Cascade Corp. 75,700 2,820 Champion International Corp. 259,000 12,205 CONSTRUCTION & REAL ESTATE - 0.2% Armstrong World Industries, Inc. 112,700 6,748 TOTAL CONSTRUCTION & REAL ESTATE 12,218 AUTOS, TIRES, & ACCESSORIES - 2.7% Autozone, Inc. (a) 963,600 28,065 AUTOS, TIRES, & ACCESSORIES - CONTINUED Dana Corp. 128,700 $ 3,764 Ford Motor Co. 41,800 1,181 General Motors Corp. 1,047,663 50,812 Goodyear Tire & Rubber Co. 100,100 4,242 Magna International, Inc. Class A 98,600 4,275 Pep Boys-Manny, Moe & Jack 356,600 9,450 Leggett & Platt, Inc. 193,200 4,661 TEXTILES & APPAREL - 0.7% Adidas AG (b) 25,500 1,359 Cygne Designs, Inc. (a) 191,000 239 Gucci Group NV (NY Reg.) (a) 21,400 738 Intimate Brands, Inc. Class A 124,200 2,065 Liz Claiborne, Inc. 80,200 2,356 Mohawk Industries, Inc. (a) 63,500 1,127 NIKE, Inc. Class B 157,000 9,106 Nine West Group, Inc. (a) 154,300 6,847 Reebok International Ltd. 271,500 7,059 Shaw Industries, Inc. 70,300 1,098 Tommy Hilfiger (a) 372,600 16,441 Diamond Offshore Drilling, Inc. (a) 133,600 3,858 Dresser Industries, Inc. 100,200 2,367 ENSCO International, Inc. (a) 50,000 844 Thermo Electron Corp. (a) 35,600 1,762 OIL & GAS - 0.7% British Petroleum PLC ADR 202,339 $ 19,348 Burlington Resources, Inc. 148,700 5,725 Petroleum Geo-Services AS ADR (a) 145,500 2,874 Union Pacific Resources Group, Inc. (a) 250,200 5,817 Banc One Corp. 100,100 3,816 Bank of Boston Corp. 429,908 19,937 Bank of New York Co., Inc. 441,700 20,815 Chase Manhattan Corp. 200,300 12,193 Chemical Banking Corp. 359,900 21,594 First Interstate Bancorp 362,500 48,575 CREDIT & OTHER FINANCE - 2.1% American Express Co. 2,023,016 85,978 First USA, Inc. 214,000 9,817 Green Tree Acceptance, Inc. 494,400 13,967 Household International, Inc. 260,850 16,303 FEDERAL SPONSORED CREDIT - 2.5% Federal Home Loan Mortgage Corporation 681,000 52,437 Federal National Mortgage Association 926,800 101,485 Student Loan Marketing Association 82,800 5,806 Aetna Life & Casualty Co. 144,200 10,581 Allmerica Financial Corp. (a) 11,200 291 American International Group, Inc. 28,000 2,513 CIGNA Corp. 105,100 $ 11,561 Chubb Corp. (The) 32,200 3,131 General Re Corp. 28,100 4,204 Prudential Reinsurance Holdings, Inc. 73,500 1,534 Travelers, Inc. (The) 208,900 12,430 Merrill Lynch & Co., Inc. 811,400 45,134 Morgan Stanley Group, Inc. 70,200 6,055 Schwab (Charles) Corp. 421,600 10,224 DRUGS & PHARMACEUTICALS - 5.5% ALZA Corp. Class A (a) 292,000 6,716 American Home Products Corp. 372,400 33,982 Amgen, Inc. (a) 988,400 49,049 Biogen, Inc. (a) 559,600 30,498 Bristol-Myers Squibb Co. 495,000 39,724 Elan Corp. PLC ADR (a) 282,250 13,548 Genetics Institute, Inc. depositary shares representing 1 common share (a) 31,100 1,365 Guilford Pharmaceuticals, Inc. (a) 128,500 1,654 Integrated Process Equipment Corp. (a) 30,100 926 Merck & Co., Inc. 1,184,400 73,285 Rhone Poulenc Rorer, Inc. 103,800 4,969 Watson Pharmaceuticals, Inc. (a) 30,100 1,418 MEDICAL EQUIPMENT & SUPPLIES - 1.9% Baxter International, Inc. 195,000 8,190 MEDICAL EQUIPMENT & SUPPLIES - CONTINUED Becton, Dickinson & Co. 270,700 $ 18,882 Boston Scientific Corp. (a) 112,800 4,568 Cardinal Health, Inc. 43,200 2,333 Exogen, Inc. (a) 70,900 1,196 Johnson & Johnson 745,100 64,544 Medisense, Inc. (a) 82,300 2,119 St. Jude Medical, Inc. (a) 171,600 6,778 MEDICAL FACILITIES MANAGEMENT - 1.6% ARV Assisted Living, Inc. (a) 49,600 502 Columbia/HCA Healthcare Corp. 635,800 32,823 HEALTHSOUTH Rehabilitation Corp. (a) 993,100 30,041 Lincare Holdings, Inc. (a) 39,700 1,062 National Surgery Centers, Inc. (a) 3,700 79 U.S. Healthcare, Inc. 722,300 32,865 Vencor, Inc. (a) 100,300 3,109 INDUSTRIAL MACHINERY & EQUIPMENT - 3.9% Adflex Solutions (a) 56,300 1,605 General Electric Co. 2,250,400 151,338 Telular Corp. (a) 60,500 666 INDUSTRIAL MACHINERY & EQUIPMENT - 1.1% Deere & Co. 1,083,900 35,633 INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED United Waste Systems, Inc. 49,900 $ 1,990 WMX Technologies, Inc. 548,300 16,175 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 250,250 MEDIA & LEISURE - 3.7% American Radio Systems Corp. Class A (a) 45,400 1,033 Argyle Television, Inc., Series A (a) 99,400 1,590 British Sky Broadcasting Group sponsored ADR 58,200 2,321 Capital Cities/ABC, Inc. 13,800 1,706 Clear Channel Communications, Inc. (a) 78,600 3,100 Comcast Corp. Class A (special) 253,500 5,007 Emmis Broadcasting Corp. Class A (a) 71,300 1,925 Grupo Televisa SA de CV sponsored ADR 79,300 1,715 Infinity Broadcasting Corp. (a) 142,592 4,563 Liberty Media Group, Series A 80,000 2,240 TCI Group Class A 320,000 5,920 Time Warner, Inc. 895,064 35,803 Viacom, Inc. (a): Class B (non-vtg.) 1,259,230 60,757 Disney (Walt) Co. 222,300 13,366 LEISURE DURABLES & TOYS - 0.2% Callaway Golf Co. 298,300 5,929 Cobra Golf, Inc. (a) 124,400 3,421 LODGING & GAMING - 0.2% HFS, Inc. (a) 64,400 4,460 La Quinta Motor Inns, Inc. 58,600 1,590 Mirage Resorts, Inc. (a) 258,500 8,756 MEDIA & LEISURE - CONTINUED Belo (A.H.) Corp. Class A 40,500 $ 1,443 Big Flower Press Holdings, Inc. 198,500 3,052 Dow Jones & Co., Inc. 197,100 7,564 Gannett Co., Inc. 195,700 11,938 K-III Communications Corp. (a) 199,700 2,346 Apple South, Inc. 95,100 1,997 Applebee's International, Inc. 111,800 3,102 Brinker International, Inc. (a) 50,100 770 Outback Steakhouse, Inc. (a) 254,900 9,304 Starbucks Corp. (a) 188,600 7,968 TOTAL MEDIA & LEISURE 237,278 Boston Beer, Inc. 2,900 75 Pete's Brewing Co. (a) 3,700 91 Seagram Co. Ltd. 151,400 5,535 Nabisco Holdings Class A 280,900 7,935 Philip Morris Companies, Inc. 1,539,500 135,091 RJR Nabisco Holdings Corp. 106,340 3,097 Firstmiss Gold, Inc. (a) 70,775 $ 1,389 RETAIL & WHOLESALE - 7.5% Just For Feet, Inc. 227,750 7,772 Limited, Inc. (The) 1,169,000 20,896 Mens Wearhouse, Inc. 46,350 1,338 TJX Companies, Inc. 583,414 9,699 General Nutrition Companies, Inc. (a) 796,200 17,616 GENERAL MERCHANDISE STORES - 1.5% Dayton Hudson Corp. 493,300 35,826 Federated Department Stores, Inc. (a) 224,900 6,550 Penney (J.C.) Co., Inc. 80,400 3,769 Price/Costco, Inc. (a) 664,800 11,052 Sears, Roebuck & Co. 91,200 3,591 Wal-Mart Stores, Inc. 1,613,500 38,724 RETAIL & WHOLESALE, MISCELLANEOUS - 4.7% Barnes & Noble, Inc. (a) 88,300 3,245 Bed Bath & Beyond, Inc. (a) 292,900 9,629 Circuit City Stores, Inc. 411,500 11,934 Corporate Express (a) 286,250 7,657 Creative Computers, Inc. (a) 83,300 2,249 Global Directmail Corp. (a) 47,700 1,330 Grupo Casa Autrey SA sponsored ADR 41,500 591 Henry Schein, Inc. (a) 18,600 475 Home Depot, Inc. (The) 901,300 39,995 Lowe's Companies, Inc. 2,469,700 77,796 Micro Warehouse, Inc. (a) 496,300 23,326 Officemax, Inc. (a) 1,420,700 32,321 Office Depot, Inc. (a) 621,725 15,232 Petco Animal Supplies, Inc. (a) 45,200 1,243 Staples, Inc. (a) 1,926,950 49,137 Sunglass Hut International, Inc. (a) 509,200 10,693 RETAIL & WHOLESALE - CONTINUED RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED U.S. Office Products Co. (a) 10,300 $ 173 Viking Office Products, Inc. (a) 220,000 10,120 Waban, Inc. (a) 296,900 5,493 TOTAL RETAIL & WHOLESALE 486,285 LEASING & RENTAL - 0.2% Danka Business Systems PLC sponsored ADR 104,600 3,557 Hollywood Entertainment Corp. (a) 390,100 6,290 Alco Standard Corp. 282,600 12,293 Western Atlas, Inc. (a) 202,900 9,714 ADC Telecommunications, Inc. (a) 158,100 7,194 Cisco Systems, Inc. (a) 1,793,200 150,853 DSC Communications Corp. (a) 1,268,000 50,245 Digital Link Corp. (a) 100,600 1,811 Ericsson (L.M.) Telephone Co. Class B ADR 769,100 18,266 General Instrument Corp. (a) 11,000 282 Inter-Tel, Inc. (a) 45,000 754 Microcom, Inc. (a) 100,200 2,530 Newbridge Networks Corp. (a) 348,800 14,868 Nokia Corp. AB sponsored ADR 629,500 34,150 3Com Corp. (a) 1,262,564 57,762 U.S. Robotics Corp. 530,900 58,266 Westell Technologies, Inc. Class A 3,800 49 Xircom, Inc. (a) 9,300 116 COMPUTER SERVICES & SOFTWARE - 10.0% ADAM Software, Inc. (a) 42,300 $ 449 Adobe Systems, Inc. 69,800 4,720 Alantec Corp. (a) 97,400 3,969 America Online, Inc. (a) 564,000 23,054 Arbor Software Corp. (a) 1,900 82 Ascend Communications, Inc. (a) 456,700 32,654 Automatic Data Processing, Inc. 332,000 26,436 BMC Software, Inc. 49,500 2,089 Broderbund Software, Inc. (a) 323,200 20,927 Business Objects SA sponsored ADR (a) 15,800 770 CUC International, Inc. (a) 981,650 37,303 Cadence Design Systems, Inc. (a) 808,350 29,101 Ceridian Corp. (a) 267,000 11,214 CompUSA, Inc. (a) 771,800 28,653 Computer Sciences Corp. (a) 132,900 9,668 Cooper & Chyan Technology, Inc. (a) 7,800 108 DST Systems, Inc. (a) 30,000 866 Diamond Multimedia Systems, Inc. (a) 34,000 1,148 Electronic Arts, Inc. (a) 637,300 21,748 FTP Software, Inc. (a) 140,700 4,274 First Data Corp. 158,431 11,249 General Motors Corp. Class E 1,105,700 55,838 Hummingbird Communications Ltd. (a) 49,900 2,512 Informix Corp. (a) 217,100 6,011 Insignia Solutions PLC sponsored ADR (a) 52,200 1,064 Mercury Interactive Group Corp. (a) 124,900 2,873 Microsoft Corp. (a) 915,800 79,789 NETCOM On-Line Communication Services, Inc. (a) 77,000 5,621 Novell, Inc. (a) 1,058,500 17,862 Objective Systems Integrators, Inc. 4,300 82 Oracle Systems Corp. (a) 2,935,400 133,192 Parametric Technology Corp. (a) 570,300 40,349 Peoplesoft, Inc. (a) 219,200 9,206 Sync Research, Inc. (a) 4,300 218 Softkey International, Inc. (a) 52,500 1,772 Spectrum Holobyte, Inc. (a) 67,000 578 COMPUTER SERVICES & SOFTWARE - CONTINUED Sterling Software, Inc. (a) 6,200 $ 366 Stratacom, Inc. (a) 20,200 1,515 Sybase, Inc. (a) 155,600 5,465 Symantec Corp. (a) 225,600 5,978 Verity, Inc. (a) 2,500 124 Visio Corp. (a) 4,700 126 COMPUTERS & OFFICE EQUIPMENT - 9.4% Adaptec, Inc. (a) 352,800 16,538 Bay Networks, Inc. (a) 1,725,750 77,659 Boca Research, Inc. (a) 30,500 877 Compaq Computer Corp. (a) 2,720,100 134,643 Dell Computer Corp. (a) 554,000 24,515 Digital Equipment Corp. (a) 380,800 22,420 Discreet Logic, Inc. (a) 126,200 3,849 International Business Machines Corp. 1,065,100 102,915 Iomega Corp. (a) 9,900 423 Komag, Inc. (a) 202,100 10,737 Madge NV (a) 160,100 7,215 MICROS Systems, Inc. (a) 100,000 4,225 Seagate Technology (a) 477,000 25,162 Silicon Graphics, Inc. (a) 1,405,300 51,293 Stratus Computer, Inc. (a) 106,300 3,534 Sun Microsystems, Inc. (a) 388,600 32,691 TSL Holding, Inc. (a) 1,682 -- Tech Data Corp. (a) 127,700 2,155 Applied Materials, Inc. (a) 471,200 22,912 Novellus System, Inc. (a) 113,500 7,037 Alliance Semiconductor Corp. (a) 468,400 10,539 Altera Corp. (a) 586,200 34,000 Analog Devices, Inc. (a) 900,150 33,305 Atmel Corp. (a) 722,200 21,666 Cascade Communications Corp. (a) 102,100 $ 8,908 Cypress Semiconductor Corp. (a) 198,800 3,106 Integrated Device Technology, Inc. (a) 232,700 3,956 LSI Logic Corp. (a) 868,800 36,381 Linear Technology Corp. 809,400 36,625 Maxim Integrated Products, Inc. (a) 424,100 31,808 Microchip Technology, Inc. (a) 23,100 936 National Semiconductor Corp. (a) 376,400 8,046 SGS-Thomson Microelectronics NV (NY Reg.) (a) 240,800 8,970 S-3, Inc. (a) 590,800 11,151 Samsung Electronics Co. Ltd. GDS (b) 33,100 3,045 Tencor Instruments (a) 302,000 11,401 Texas Instruments, Inc. 383,500 22,195 Xilinx, Inc. (a) 725,400 23,303 Eastman Kodak Co. 198,500 13,498 AMR Corp. (a) 248,600 19,049 America West Airlines, Inc. Class B (a) 475,700 8,503 Atlantic Southeast Airlines, Inc. 102,100 2,680 Delta Air Lines, Inc. 324,100 25,158 Midwest Express Holdings, Inc. (a) 5,300 156 Northwest Airlines Corp. Class A (a) 97,700 4,922 Southwest Airlines Co. 392,200 9,805 Trans World Airlines, Inc. (a) 99,600 1,195 UAL Corp. (a) 38,800 8,119 Burlington Northern Santa Fe Corp. 44,700 3,604 TRUCKING & FREIGHT - 0.1% Airborne Freight Corp. 73,300 $ 2,062 Hunt (J.B.) Transport Services, Inc. 99,500 1,629 PST Vans, Inc. (a) 17,900 111 Swift Transportation Co., Inc. (a) 200,600 3,360 Werner Enterprises, Inc. 61,700 1,311 AirTouch Communications, Inc. (a) 1,711,065 49,835 Palmer Wireless, Inc. (a) 51,000 1,084 Vanguard Cellular Systems, Inc. Class A (a) 319,200 7,222 Bell Atlantic Corp. 459,700 28,961 LCI International, Inc. (a) 605,200 11,196 SBC Communications, Inc. 1,083,600 58,514 Telebras sponsored ADR 128,900 6,187 Telefonos de Mexico SA sponsored ADR representing shares Ord. Class L 65,600 2,165 Telephone & Data Systems, Inc. 48,561 1,851 WorldCom, Inc. (a) 199,000 6,468 CONVERTIBLE PREFERRED STOCKS - 0.1% MEDICAL EQUIPMENT & SUPPLIES - 0.1% U.S. Surgical Corp. $2.20 (b) (Cost $6,555) 290,700 $ 8,285 U.S. TREASURY OBLIGATIONS - 6.4% U.S. Treasury Bills, yield at date of purchase 5.59% to 5.64%,12/21/95 (Cost $414,644) $ 416,000 414,719 (U.S. Treasury obligations) in a joint trading account at 5.90%, dated 11/30/95 due 12/1/95 $ 492,699 492,618 TOTAL INVESTMENT IN SECURITIES - 100% 2. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $12,689,000 or .21% of net assets. At November 30, 1995, the aggregate cost of investment securities for income tax purposes was $5,195,238,000. Net unrealized appreciation aggregated $1,255,971,000, of which $1,314,867,000 related to appreciated investment securities and $58,896,000 related to depreciated investment securities. The fund hereby designates $28,312,000 as a capital gain dividend for the purpose of the dividend paid deduction.
STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS YEAR ENDED NOVEMBER 30, 1995
Accounting fees and expenses 760
Custodian fees and expenses 139
Total expenses before reductions 42,363
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on:
Foreign currency transactions (1) 361,315
Change in net unrealized appreciation (depreciation) 1,122,571
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 1,517,419
STATEMENT OF CHANGES IN NET ASSETS
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). B TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE. C AS OF DECEMBER 1, 1991 THE FUND DISCONTINUED THE USE OF EQUALIZATION ACCOUNTING. D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE DECEMBER 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. For the period ended November 30, 1995
Fidelity Growth Company Fund (the fund) is a fund of Fidelity Mt. Vernon Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities for which exchange quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Securities (including restricted securities) for which exchange quotations are not readily available (and in certain cases debt securities which trade on an exchange) are valued primarily using dealer-supplied valuations or at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities maturing within sixty days of their purchase date are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and receipts, and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of forward currency contracts, disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Interest income, which includes accretion of original issue discount, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned between the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Dividends are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for litigation proceeds, non-taxable dividends and losses deferred due to wash sales and excise tax regulations. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital and may affect the per-share allocation between net investment income and realized and unrealized gain (loss). Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FORWARD FOREIGN CURRENCY CONTRACTS. The fund may use foreign currency contracts to facilitate transactions in foreign securities and to manage the fund's currency exposure. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the fund's investments against currency fluctuations. Also, a contract to buy or sell can offset a previous contract. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of forward foreign currency contracts is determined using forward currency exchange rates supplied by a quotation service. Purchases and sales of forward foreign currency contracts having the same settlement date and broker are offset and any realized gain (loss) is recognized on the date of offset; otherwise, gain (loss) is recognized on settlement date. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT - CONTINUED joint trading accounts. These balances are invested in one or more repurchase agreements that mature in 60 days or less from the date of purchase, and are collateralized by U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The fund, through its custodian, receives delivery of the underlying U.S. Treasury or Federal Agency securities, the market value of which is required to be at least equal to the repurchase price. For term repurchase agreement transactions, the underlying securities are marked-to-market daily and maintained at a value at least equal to the repurchase price. FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $4,976,823,000 and $3,768,236,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly basic fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .2700% to .5200% for the period. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. The annual individual fund fee rate is .30%. The basic fee is subject to a performance adjustment (up to a maximum of (plus/minus) .20%) based on the fund's investment performance as compared to the appropriate index over a specified period of time. For the period, the management fee was equivalent to an annual rate of .69% of average net assets after the performance adjustment. The Board of Trustees has approved a new group fee rate schedule with rates ranging from .2500% to .5200%. Effective January 1, 1996, FMR voluntarily agreed to implement this new group fee rate schedule as it results in the same or a lower management fee. SALES LOAD. For the period, Fidelity Distributors Corporation (FDC), an affiliate of FMR and the general distributor of the fund, received sales charges of $68,000 on sales of shares of the fund. For the period January 1, 1995 through December 31, 1996, FDC will voluntarily waive the sales charge (3% of the offering price) on the sales of shares. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED TRANSFER AGENT FEES. Fidelity Service Co. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. During the period December 1, 1994 to December 31, 1994, FSC received fees based on the type, size, number of accounts and the number of transactions made by shareholders. Effective January 1, 1995, the Board of Trustees approved a revised transfer agent contract pursuant to which FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC pays for typesetting, printing and mailing of all shareholder reports, except proxy statements. For the period, the transfer agent fees were equivalent to an annual rate of .23% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $1,883,000 for the period. 5. BANK BORROWINGS. The fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The fund has established borrowing arrangements with certain banks. Under the most restrictive arrangement, the fund must pledge to the bank securities having a market value in excess of 220% of the total bank borrowings. The interest rate on the borrowings is the bank's base rate, as revised from time to time. The maximum loan and the average daily loan balances during the period for which loans were outstanding amounted to $5,105,000. The weighted average interest rate was 6.4375%. 6. EXPENSE REDUCTIONS. FMR has directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $334,000 under this arrangement.
To the Trustees of Fidelity Mt. Vernon Street Trust and the Shareholders of Fidelity Growth Company Fund: We have audited the accompanying statement of assets and liabilities of Fidelity Mt. Vernon Street Trust: Fidelity Growth Company Fund, including the schedule of portfolio investments, as of November 30, 1995, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our 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 and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 1995 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Fidelity Mt. Vernon Street Trust: Fidelity Growth Company Fund as of November 30, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P.
The Board of Trustees of Fidelity Growth Company Fund voted to pay to shareholders of record at the opening of business on record date, the following distributions derived from capital gains realized from sales of portfolio securities, and dividends derived from net investment income: PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS A total of 4.25% of the dividends distributed during the fiscal year was derived from interest on U.S. Government securities which is generally exempt from state income tax. A total of 100% of the dividends distributed during the fiscal year qualifies for the dividends-received deductions for corporate shareholders. The fund will notify shareholders in January 1996 of these percentages for use in preparing 1995 income tax returns.
FOR FUND INFORMATION AND QUOTES The Fidelity Telephone Connection offers you special automated telephone services for quotes and balances. The services are easy to use, confidential and quick. All you need is a Touch Tone telephone. The first time you call one of our automated telephone services, we'll ask to set up your Personal Identification Number (PIN). The PIN assures that only you have automated telephone access to your account information. Please have your Customer Number (T-account #) handy when you call - you'll need it to establish your PIN. If you would ever like to change your PIN, just choose the "Change your you call. If you forget your PIN, please call a Fidelity representative at 1-800- 544-6666 for assistance.
Just make a selection from this record-ed menu: For quotes on funds you own. 1. For an individual fund quote. 2. For the ten most frequently requested Fidelity fund quotes. 3. For quotes on Fidelity Select Portfolios(registered trademark). 4. Identification Number (PIN). 5. To speak with a Fidelity representative. 6. Just make a selection from this record- ed menu: For balances on funds you own. 1. For your most recent fund activity dividends). 2. Identification Number (PIN). 3. To speak with a Fidelity representative. 4. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES.
If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (such as changing name, address, bank, etc.) 100 Crosby Parkway - KP2C 400 East Las Colinas Blvd. 400 East Las Colinas Blvd.
1907 West State Road 434 3525 Piedmont Road, N.E. 1 West Pennsylvania Ave. 280 North Woodward Ave. 29155 Northwestern Hwy. 400 East Las Colinas Blvd. 411 108th Avenue, N.E. 1775 K Street, N.W.
Edward C. Johnson 3d, President J. Gary Burkhead, Senior Vice President William J. Hayes, Vice President Robert E. Stansky, Vice President John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer Fidelity Service Co. AUTOMATED LINES FOR QUICKEST SERVICE Brown Brothers Harriman & Co. (8 a.m. - 9 p.m.) for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) | N-30D | N-30D | 1996-01-16T00:00:00 | 1996-01-16T14:14:41 |
0000950144-96-000105 | 0000950144-96-000105_0000.txt | [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
For the quarterly period ended November 30, 1995
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from to
(Exact name of small business issuer as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
8075 20th Street, Vero Beach, Florida 32966 (Address of principal executive offices)
(Former name, former address and former fiscal year, if changed since last
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
The registrant had 5,922,973 shares of common stock, $0.01 par value, outstanding at November 30, 1995.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited):
November 30, 1995 and August 31, 1995 1 - 2
Consolidated Statements of Income and Three Months Ended November 30, 1995 and November 30, 1994 3
Consolidated Statements of Cash Flows Three Months Ended November 30, 1995 and November 30, 1994 4 - 5
Notes to Consolidated Financial Statements 6 -7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 10
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11 - 12
Consolidated Statements of Income and Accumulated Deficit (In Thousands Except per Share Data)
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements Three Months Ended November 30, 1995
Note (1) Management's Opinion and Accounting Policies
The accompanying interim financial statements should be read in conjunction with the Florafax International, Inc. (the Company's) Form 10-KSB for the year ended August 31, 1995.
In the opinion of Management the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of November 30, 1995 and the consolidated results of operations and cash flows for the three months ended November 30, 1995.
Historically, the Company's flowers-by-wire operation is seasonal in that its member florists send a much larger volume of orders during Thanksgiving, the Christmas season, Valentine's Day, Easter and Mother's Day. Therefore, the results of operations of an interim period may not necessarily be indicative of the results expected for a full year. In an effort to increase orders to member florists the Company continues to engage in non traditional campaigns through it's wholly owned subsidiary, The Flower Club. The Flower Club, Inc. was formed to generate additional orders by pursuing relationships with nationally recognized corporations. The Company engages in joint marketing campaigns with these corporations not only during holidays, but also during non seasonal periods in an effort to provide member florists with orders during slow periods of the year. Floral orders and handling fees generated through The Flower Club have become significant, representing 57% of gross floral order revenue for the quarter ended November 30, 1995 compared to 42% for the quarter ended November 30, 1994. Management expects the upward trend in orders generated by The Flower Club to continue.
The Company continues to focus on its basic core business, which is primarily flowers by wire and processing credit cards.
Florafax International, Inc. vs. Bellerose Floral Inc. and GTE Market Resources Inc., et al.
In October 1989, Bellerose Floral, Inc. (Bellerose) of Bayside, N.Y., an affiliate of 800-FLOWERS, Inc. became a Florafax member florist, and Florafax agreed to provide certain telecommunication services to Bellerose for a fee. GTE Market Resources, Inc. (GTE/MR) was engaged by Florafax to provide order-entry services for Florafax and to customers of Florafax, including Bellerose.
Notes to Consolidated Financial Statements Three Months Ended November 30, 1995
In 1990 certain disputes arose among Florafax, Bellerose and GTE/MR regarding the services to be performed by GTE/MR. As a result, in 1990, Florafax filed an action in Tulsa County (Oklahoma) District Court against GTE/MR and Bellerose. Bellerose then filed an action in New York Federal Court against Florafax. Subsequently, Florafax and Bellerose settled their claims against each other. Florafax pursued its claim against GTE/MR for damages suffered as a result of GTE/MR's breach of the telecommunications service agreement. On November 23, 1993 a jury awarded Florafax $1,481,000 in net damages against GTE/MR.
GTE/MR appealed this case and posted bond with the Court in order to do so. On December 22, 1994 this case was assigned to the Oklahoma Court of Appeals by the Oklahoma Supreme Court. On April 4, 1995 the Court of Appeals of the State of Oklahoma released for publication its decision on the appeal filed by GTE/MR. The award to the Company of $743,117 for consequential damages was affirmed. To the extent that the Company was awarded lost profits for two years in the amount of $750,000, the judgment was reversed and remanded for a determination of lost profits as limited by Oklahoma law. The award to GTE/MR of a set-off amount of $88,750 for unpaid invoices was affirmed, a contractual rate of 18% per annum applied for prejudgment interest was applied and the case remanded for a determination of an award of GTE's reasonable attorney's fees, expenses and other collection costs incurred in recovering the unpaid invoice amounts, but not their fees or expenses in defending against the claims of the Company or in pursuing other unsuccessful aspects of GTE/MR's counterclaim. The denial of the Company's request for attorney's fees was affirmed. The Company and GTE/MR have each petitioned the Oklahoma Supreme Court for writ of certiorari to review the portions of the Oklahoma Court of Appeals decision adverse to their respective interests, and both of the parties appeals have been granted. There are no assurances that the Company will obtain a favorable ruling from the Oklahoma Supreme Court.
The Company's legal counsel has tried this case on a contingency fee basis and, accordingly, the Company has incurred minimal expenses related to this litigation. However, the agreement between the Company and its legal counsel stipulates that the Company's attorneys are to receive 40% of the net proceeds now that the case has reached the appellate court. Consequently, the Company is to receive 60% of the ultimate proceeds. Recognition of any of these amounts will not be reflected in the financial statements until ultimate resolution.
The Company is involved in various disputes involving routine business matters, the resolution of all of which in management's opinion will not have a material adverse effect upon the Company.
Management's Discussion and Analysis of Financial Condition and
Sources of cash to meet future requirements are existing cash balances and internally generated funds. Management is currently pursuing options that may give the Company access to additional working capital.
In addition, as discussed in Note 2, the Company is hopeful that they will reach a settlement with GTE/MR during the current year, which could provide an additional source of working capital. However, there is no guaranty that the Company will receive any funds as a result of the GTE/MR judgment.
The Company continues to generate positive cash flow from operations. Cash provided by operations for the Quarter ended November 30, 1995 was $397,000 compared to $561,000 for the quarter ended November 30, 1994. For the quarter ended November 30, 1995 the Company reported a total increase in cash of $234,000 compared to an overall cash decrease of ($455,000) for the quarter ended November 30, 1994.
Operating cash flows historically have been generated primarily from processing floral orders and charge card transactions for the Company's member florists, as well as collecting dues, fees and directory advertising from the members. Floral order processing may require settlement with the fulfilling florist before collection of funds from the sending florist. The terms of the Company's receivables are 30 days, which management believes are consistent within the industry. Charge card processing, however, generally allows the Company to collect funds from the charge card issuer prior to settlement with the merchant. Since in both types of transactions the Company is both collecting and settling funds, the timing of these cash flows has a significant impact on the Company's liquidity.
As discussed in Note 1 to the consolidated financial statements the Company continues to engage in non traditional campaigns through it's wholly owned subsidiary, The Flower Club. This has helped to improve the Company's cash flow as the majority of orders generated through The Flower Club are paid for by credit cards. This allows the Company to receive its funds within days after processing the transaction. For the quarter ended November 30, 1995 floral orders and handling fees generated through The Flower Club amounted to approximately $2,667,000 compared to $1,392,000 for the quarter ended November 30, 1994, an increase of 92%.
Management's Discussion and Analysis of Financial Condition and
The Company's return to profitability during fiscal 1995 appears to be continuing in fiscal 1996, as net income for the quarter ended November 30, 1995 was $157,000 compared to $20,000 for the quarter ended November 30, 1994. In addition, total revenues increased by 9% during the quarter ended November 30, 1995 when compared to the same period in the prior year while operating expenses increased by only 1%.
Revenues from member dues and fees remained relatively constant during the quarter ended November 30, 1995 when compared to the same period in the prior year. Management believes that the number of orders that the Company is now providing to it's members has allowed the Company to maintain it's membership base.
Floral order revenue increased by 60% for the quarter ended November 30, 1995 when compared to the same period in the previous year. This increase is primarily a result of orders generated by The Flower Club. Orders generated by The Flower Club increased by 92% during the quarter ended November 30, 1995 when compared to the same period in the previous year. Management expects the upward trend in orders generated by The Flower Club to continue.
Net revenues from credit card operations decreased by 22% for the quarter ended November 30, 1995 when compared to the same quarter in the previous year. The gross dollar amount of credit cards processed actually increased by 27%, however there were four primary factors that caused a decrease in net revenues, as follows. First, the Company lowered it's discount rate to be more competitive in certain markets. Second, the Company experienced an increase in the cost to clear credit card transactions as well as an increase in data capture and authorization fees. Third, certain credit card companies began settling credit card transactions directly with a segment of the Company's merchants, which eliminated the Companies ability to charge a discount rate on these transactions. Fourth, the Company no longer processes the credit card transactions for the Oklahoma State Treasurers office.
Member support, general and administrative expenses increased slightly (2%) for the quarter ended November 30, 1995 when compared to the same quarter in the
Management's Discussion and Analysis of Financial Condition and
expenses such as salaries and telephone expense experienced an increase. A portion of these increases were due to orders generated by The Flower Club as each order has two associated long distance phone calls as well as the need for an operator to take the order and often times to place the order. Other costs such as consulting fees, bank service charges, and bad debt expense declined.
Selling and advertising expenses increased by 4% for the quarter ended November 30, 1995 when compared to the same quarter in the previous year. The main component of this increase was an increase in advertising costs. Now that the Company is operating at a profit management has begun to focus on increasing membership which required expenditures for advertising. The Company may continue to incur advertising costs in an effort to increase membership.
The Company is reporting interest income of $20,000 for the quarter ended November 30, 1995 compared to no interest income for the quarter ended November 30, 1994. The current year interest income is a result of the Companies improved cash position when compared to the same period last year.
For a summary of legal proceedings, reference is made to Item 3, Legal Proceedings, included in the Company's annual report on Form 10-KSB for the year ended August 31, 1995 and to Note 2 of the Notes to Consolidated Financial Statements included in this filing.
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. The Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
The following items have been included as exhibits in filings by the Company in a previous year and, accordingly, are incorporated here by reference except for Exhibit 27.
(a) Convertible subordinated notes due to Clark Estates maturing June 30, 1996.
(b) Subordinated debentures maturing in 1998.
(c) Agreement dated December 3 1993, Addendum, Second Addendum, Third Addendum, Fourth Addendum and Fifth Addendum thereto by and between the Registrant and Citizens Fidelity Bank and Trust Company (now PNC Bank, Kentucky, Inc.).
(d) Purchase Agreement for certain assets formerly owned by Savannah Floral Services, Inc. dated March 10, 1994.
(e) Note Payable to Andrew Williams dated March 10, 1994.
(f) Promissory Note to Citrus Bank dated November 9, 1993.
(g) Promissory Note to Citrus Bank dated November 17, 1993.
(h) Promissory Note to Citrus Bank dated January 25, 1994.
(i) Loan to James H. West, Director, President and Chief Financial Officer, dated August 28, 1994.
(j) Consulting agreement with David Harper of Ventura County California dated December 10, 1993.
(k) Promissory Note to Citrus Bank dated August 31, 1995.
(l) Operating lease agreement between Registrant and Alvin Wunderlich dated April 1995.
(22) Subsidiaries of the Registrant
(27) Financial Data Schecule (for SEC use only)
(3) Articles of incorporation and Bylaws of the Registrant, as amended.
No reports on Form 8-K were filed during the first quarter of fiscal 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 thereunto duly authorized.
Date: January 11, 1996 James H. West | 10QSB | 10QSB | 1996-01-16T00:00:00 | 1996-01-16T09:34:51 |
0000889810-96-000007 | 0000889810-96-000007_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)
(Commission File Number) (I.R.S. Employer
(State or other jurisdiction of incorporation)
100 California Street, Suite 500 (Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
Exhibit Index on Page 4
On January 10, 1996, URS Corporation ("URS") and Greiner Engineering, Inc. ("Greiner") executed an Agreement and Plan of Merger, dated as of January 10, 1996, pursuant to which URS Acquisition Corporation, a wholly-owned subsidiary of URS, will be merged with and into Greiner and each outstanding share of the Common Stock of Greiner will be converted into the right to receive (i) 0.298 shares of the Common Stock of URS, and (ii) $13.50 in cash, for an aggregate acquisition price of approximately $63.5 million and 1.4 million shares of URS common stock (the "Acquisition"). As a result of the Acquisition, Greiner will become a wholly-owned subsidiary of URS. The transaction remains subject to Greiner stockholder approval and other closing conditions.
URS also executed a Credit Agreement, dated as of January 10, 1996, by and among URS, as Borrower, the Financial Institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent for the Lenders, pursuant to which the Lenders will make secured term loans aggregating $50 million which will mature in 2002 and 2003 and provide a secured $20 million revolving credit facility expiring in 1999 to finance the Acquisition and to provide for the working capital needs of URS thereafter.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (c) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K:
2(a) Agreement and Plan of Merger, dated as of January 10, 1996,
20(a) Press Release issued January 11,
99(a) Credit Agreement, dated as of January 10, 1996, by and among Lenders, and Wells Fargo Bank,
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/ Kent P. Ainsworth
2(a) Agreement and Plan of Merger, 5 dated as of January 10, 1996,
20(a) Press Release issued 59
99(a) Credit Agreement, dated as of 61 January 10, 1996, by and among Lenders, and Wells Fargo Bank,
AGREEMENT AND PLAN OF MERGER
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 1. THE MERGER . . . . . . . . . . . . . . . . . 2
1.1 Merger of the Subsidiary into Greiner . . . 2 1.2 Effective Time of the Merger . . . . . . . . 2 1.3 Effects of the Merger . . . . . . . . . . . 2
ARTICLE 2. EFFECT OF MERGER ON CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS . . . . . . 4
2.1 Conversion of the Greiner Common Stock. . . 4 2.2 Conversion of the Subsidiary Common Stock . 7 2.3 Cancellation of Treasury Shares . . . . . . 7 2.4 Withholding Tax . . . . . . . . . . . . . . 8
ARTICLE 3. CLOSING . . . . . . . . . . . . . . . . . . 8
3.1 Closing; Closing Date . . . . . . . . . . . 8
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF GREINER . 8
4.1 Organization . . . . . . . . . . . . . . . . 8 4.2 Capitalization . . . . . . . . . . . . . . . 9 4.3 Subsidiaries . . . . . . . . . . . . . . . . 9 4.4 Material Investments . . . . . . . . . . . 10 4.5 Authority Relative to this Agreement . . . . 11 4.6 Consents and Approvals; No Violations . . . 11 4.7 Greiner SEC Reports and Financial Statements . . . . . . . . . . . . . . . . . 12 4.8 Information Supplied . . . . . . . . . . . . 13 4.9 Absence of Material Adverse and Other Changes . . . . . . . . . . . . . . . . . . 14 4.10 Litigation . . . . . . . . . . . . . . . . . 14 4.11 Absence of Undisclosed Liabilities . . . . . 15 4.12 No Default . . . . . . . . . . . . . . . . . 15 4.13 Properties, Liens, Etc. . . . . . . . . . . 16 4.14 Taxes . . . . . . . . . . . . . . . . . . . 16 4.15 Benefit Plans . . . . . . . . . . . . . . . 17 4.16 Employment Matters; Labor Relations . . . . 21 4.17 Intellectual Property . . . . . . . . . . . 22 4.18 Insurance . . . . . . . . . . . . . . . . . 24 4.19 Compliance with Applicable Law . . . . . . . 24 4.20 Certain Contracts and Arrangements . . . . . 24 4.21 Prohibited Payments . . . . . . . . . . . . 25 4.22 Powers of Attorney . . . . . . . . . . . . . 26 4.23 Environmental Matters . . . . . . . . . . . 26 4.24 Regulatory Matters . . . . . . . . . . . . . 27
4.25 Immigration Reform and Control Act . . . . . 27 4.26 Board Approvals; Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . 28 4.27 Brokers . . . . . . . . . . . . . . . . . . 28 4.28 Disclosure . . . . . . . . . . . . . . . . . 28 4.29 Reliance . . . . . . . . . . . . . . . . . . 28
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF URS . . . 28
5.1 Organization . . . . . . . . . . . . . . . . 28 5.2 Capitalization . . . . . . . . . . . . . . . 29 5.3 Authority Relative to this Agreement . . . . 30 5.4 Consents and Approvals; No Violations . . . 30 5.5 URS SEC Reports and Financial Statements . . 31 5.6 Information Supplied . . . . . . . . . . . . 32 5.7 Board Approvals; Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . 32 5.8 Brokers . . . . . . . . . . . . . . . . . . 32 5.9 Disclosure . . . . . . . . . . . . . . . . . 33
ARTICLE 6. PRE-CLOSING COVENANTS . . . . . . . . . . . 33
6.1 Covenants of All Parties . . . . . . . . . . 33 6.1.1 Advice of Changes . . . . . . . . 33 6.1.2 Regulatory Approvals . . . . . . . 33 6.1.3 Confidentiality . . . . . . . . . 33 6.1.4 Best Efforts . . . . . . . . . . . 34 6.1.5 Credit Agreement . . . . . . . . . 34
6.2 Covenants of Greiner . . . . . . . . . . . . 34 6.2.1 Conduct of Business Pending Merger . . . . . . . . . . . . . . 34 Statement . . . . . . . . . . . . 37 6.2.3 Acquisition Proposals . . . . . . 37 6.2.4 Maintenance of Business . . . . . 38 6.2.5 Access . . . . . . . . . . . . . . 38 6.2.6 Liability Insurance . . . . . . . 39
6.3 Covenants of URS . . . . . . . . . . . . . . 39 6.3.1 Registration Statement . . . . . . 39 6.3.2 Listing Agreement . . . . . . . . 39
ARTICLE 7. CONDITIONS TO CONSUMMATION OF THE MERGER . . 40
7.1 Conditions to Obligations of Greiner . . . . 40 Warranties True at Closing . . . . 40 7.1.2 Covenants Performed . . . . . . . 40 7.1.3 Certificate . . . . . . . . . . . 40 7.1.4 Approval of Stockholders . . . . . 40 7.1.5 Opinion of Counsel . . . . . . . . 40
7.1.6 Form S-4 . . . . . . . . . . . . . 41 7.1.7 Merger Documents . . . . . . . . . 41 7.1.8 Material Adverse Changes . . . . . 41 7.1.9 HSR Filing . . . . . . . . . . . . 41
7.2 Conditions to Obligations of URS and the Subsidiary . . . . . . . . . . . . . . . 41 Warranties True at Closing . . . . 42 7.2.2 Covenants Performed . . . . . . . 42 7.2.3 Certificate . . . . . . . . . . . 42 7.2.4 Approval of Stockholders . . . . . 42 7.2.5 Opinion of Counsel . . . . . . . . 42 7.2.6 Form S-4 . . . . . . . . . . . . . 43 7.2.7 Merger Documents . . . . . . . . . 43 7.2.8 Material Adverse Changes . . . . . 43 7.2.9 HSR Filing . . . . . . . . . . . . 43 7.2.10 Consents . . . . . . . . . . . . . 43 7.2.11 No Litigation . . . . . . . . . . 43 7.2.12 Credit Agreement . . . . . . . . . 43
ARTICLE 8. ADDITIONAL AGREEMENTS . . . . . . . . . . . 44
8.1 Public Announcements . . . . . . . . . . . . 44 8.2 Confidentiality . . . . . . . . . . . . . . 44 8.3 Additional Agreements . . . . . . . . . . . 44 8.4 Use of Name . . . . . . . . . . . . . . . . 44 8.5 Employee Matters . . . . . . . . . . . . . 44 8.6 Non-Liability of Agents and Stockholders . . 45 8.7 Greiner Engineering, Inc. Performance Plan and Employee Stock Ownership Plan . . . . . 45
ARTICLE 9. TERMINATION . . . . . . . . . . . . . . . . 46
9.1 Termination . . . . . . . . . . . . . . . . 46 9.2 Effect of Termination and Abandonment . . . 47 9.3 Amendment . . . . . . . . . . . . . . . . . 47 9.4 Extension; Waiver . . . . . . . . . . . . . 47
ARTICLE 10. MISCELLANEOUS . . . . . . . . . . . . . . . 48
10.1 Survival of Representations and Warranties . 48 10.2 Entire Agreement; Modification; Waiver . . . 48 10.3 Counterparts . . . . . . . . . . . . . . . . 48 10.4 Assignment . . . . . . . . . . . . . . . . . 48 10.5 Fees and Expenses . . . . . . . . . . . . . 48 10.6 Notices . . . . . . . . . . . . . . . . . . 49 10.7 Governing Law . . . . . . . . . . . . . . . 50 10.8 Further Action . . . . . . . . . . . . . . . 50 10.9 No Third Party Beneficiary . . . . . . . . . 50 10.10 Effect of Headings . . . . . . . . . . . . . 50 10.11 Severability . . . . . . . . . . . . . . . . 50
Agreement and Plan of Merger
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is entered into as of January 10, 1996, by and among GREINER ENGINEERING, INC., a Nevada corporation ("Greiner"), URS CORPORATION, a Delaware corporation ("URS"), and URS ACQUISITION CORPORATION, a Nevada corporation (the "Subsidiary"). Greiner is sometimes referred to herein as the "Surviving Corporation" and Greiner and the Subsidiary are sometimes collectively referred to herein as the "Constituent Corporations."
A. Greiner is a corporation duly organized and existing under the laws of the State of Nevada, having as of the date hereof authorized capital stock consisting of (i) 20,000,000 shares of common stock, par value $0.50 per share (the "Greiner Common Stock"), of which as of the date hereof, 4,704,642 are issued and outstanding, 121,092 are issued and held in treasury, and 15,174,266 are reserved for issuance, and (ii) 1,000,000 shares of preferred stock, par value $1.00 per share, of which no shares are issued and outstanding.
B. URS is a corporation duly organized and existing under the laws of the State of Delaware, having as of the date hereof authorized capital stock consisting of (i) 20,000,000 shares of common stock, par value $0.01 per share (the "URS Common Stock"), of which as of the date hereof, 7,167,591 are issued and outstanding, 287,000 are issued and held in treasury, and 12,545,409 are reserved for issuance, and (ii) 1,000,000 shares of preferred stock, par value $1.00 per share, of which no shares are issued and outstanding.
C. The Subsidiary is a corporation duly organized and existing under the laws of the State of Nevada, having as of the date hereof authorized capital stock consisting of 100 shares of common stock, par value $1.00 per share (the "Subsidiary Common Stock"), all of which have been issued to, and are owned by, URS.
D. URS, Greiner and the Subsidiary have determined that it is advisable that the Subsidiary be merged with and into Greiner on the terms and conditions set forth herein and pursuant to the applicable statutes and regulations (the "Merger").
E. The respective boards of directors of Greiner, URS and the Subsidiary have authorized and approved the execution, delivery and the performance of this Agreement and the transactions contemplated hereby, and the board of directors of Greiner has directed that this Agreement be submitted to the stockholders of Greiner for consideration of and vote upon the approval of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, and subject to the terms and conditions hereof, and intending to be legally bound hereby, the parties hereto hereby agree as follows:
Section 1.1 MERGER OF THE SUBSIDIARY INTO GREINER. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Nevada Business Corporation Law set forth in Title 7 of the Nevada Revised Statues (the "Nevada Law"), at the Effective Time of the Merger (as defined in Section 1.2 below), the Subsidiary shall be merged with and into Greiner, and the separate existence of the Subsidiary shall thereupon cease, and Greiner shall continue its corporate existence as the surviving corporation of the Merger under the laws of the State of Nevada under the name of Greiner Engineering, Inc., and Greiner shall succeed to and assume all the rights and obligations of the Subsidiary in accordance with the Nevada Law.
Section 1.2 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this Agreement, as soon as practicable after the Closing Date, the parties shall file articles of merger, certificate of merger or other appropriate documents (in any such case, the "Merger Documents"), executed in accordance with the relevant provisions of the Nevada Law and shall make all other filings or recordings required under the Nevada Law. The Merger shall become effective at such time as the Merger Documents are duly filed with the Secretary of State of the State of Nevada, or at such other time as the parties hereto shall agree should be specified in the Merger Documents (the "Effective Time of the Merger").
Section 1.3 EFFECTS OF THE MERGER. At the Effective Time of the Merger:
(a) the separate corporate existence of the Subsidiary shall cease and the Subsidiary shall be merged with and into Greiner, which shall be the Surviving Corporation, and all of the assets of the Subsidiary shall become the property of Greiner as the Surviving Corporation of the Merger, subject to the liabilities of the Subsidiary as of the Effective Time
(b) the Articles of Incorporation of Greiner, as in effect immediately prior to the Effective Time of the Merger, shall be the Articles of Incorporation of the Surviving Corporation, and may be amended thereafter as provided by law;
(c) the by-laws of Greiner, as in effect immediately prior to the Effective Time of the Merger, shall be the by- laws of the Surviving Corporation; such by-laws may be amended thereafter in accordance with their terms and as provided by
(d) the directors of the Subsidiary immediately prior to the Effective Time of the Merger shall be the directors of the Surviving Corporation, each of such directors to hold office, subject to the applicable provisions of the Articles of Incorporation and by-laws of the Surviving Corporation, until the next annual stockholders' meeting of the Surviving Corporation and until their successors are elected and duly qualified; if at the Effective Time of the Merger, any of the foregoing persons shall for any reason be unwilling or unable to serve, the resulting vacancy shall be filled as
(e) the officers of Greiner immediately prior to the Effective Time of the Merger shall be the officers of the Surviving Corporation, each of such officers to hold office, subject to the applicable provisions of the Articles of Incorporation and by-laws of the Surviving Corporation, at the pleasure of the board of directors of the Surviving Corporation and until their successors are elected and duly qualified; and
(f) the Surviving Corporation shall possess all the rights, privileges, immunities, powers and purposes of each of the Constituent Corporations; and all the property, real, personal or mixed, including causes of action and every other asset of each of the Constituent Corporations, shall vest in the Surviving Corporation without further act or deed. The Surviving Corporation shall be responsible and liable for all liabilities and obligations of each of the Constituent Corporations. No liability or obligation due or to become due, claim or demand for any cause existing against either of the Constituent Corporations, or any stockholder, officer or director thereof, shall be released or impaired by the Merger. No action or proceeding, whether civil or criminal, then
pending by or against the Constituent Corporations, or any stockholder, officer or director thereof, shall abate or be discontinued by the Merger, but may be enforced, prosecuted, settled or compromised as if the Merger had not occurred, or the Surviving Corporation may be substituted in such action or special proceeding in place of the Constituent Corporations.
EFFECT OF MERGER ON CAPITAL STOCK Section 2.1 CONVERSION OF THE GREINER COMMON STOCK.
(a) CONVERSION; MERGER CONSIDERATION. At the Effective Time of the Merger, each share of the Greiner Common Stock issued and outstanding immediately prior to the Effective Time of the Merger shall, by virtue of the Merger, and without any action on the part of the holder thereof, be converted into the right to receive (i) 0.298 shares of the URS Common Stock, and (ii) $13.50 in cash, all of which shall be payable upon the surrender of the certificate(s) formerly representing such shares of Greiner Common Stock. The cash and the URS Common Stock so deliverable is hereinafter collectively referred to as the "Merger Consideration."
(b) FRACTIONAL SHARES. No fractional shares of the URS Common Stock will be issued as a result of the Merger. In lieu of the issuance of any fractional shares of the URS Common Stock, holders of shares of the Greiner Common Stock who would otherwise have been entitled to receive a fraction of a share of the URS Common Stock shall be entitled to receive, from URS, an amount of cash, without interest, equal to the closing price of the URS Common Stock as reported on the New York Stock Exchange on the trading day immediately preceding the Closing Date as listed in The Wall Street Journal, multiplied by the fraction of a share of the URS Common Stock to which such holder would otherwise have been entitled.
(c) OPTIONS. At the Effective Time of the Merger, all options to purchase Greiner Common Stock (the "Greiner Options") issued under the 1981 Stock Option Plan of Greiner Engineering, Inc. (the "1981 Greiner Plan") or under the 1991 Stock Option Plan of Greiner Engineering, Inc. (the "1991 Greiner Plan") which remain outstanding at that time (whether or not previously exercisable or vested) shall, by virtue of the Merger, and without any further action on the part of Greiner or any holder of said Greiner Options, be cancelled. If, at the Effective Time of the Merger, the Exercise Price per share with respect to any Greiner Option (whether or not previously exercisable or vested) so cancelled (the "Exercise
Price") is less than the sum of (x) $13.50 per share, plus (y) 0.298 multiplied by the closing price per share of the URS Common Stock as reported on the New York Stock Exchange on the trading day immediately preceding the Closing Date as listed in The Wall Street Journal (the "Merger Value"), then the holder of such Greiner Option shall be paid as soon as practicable following the Closing Date cash in an amount per each share of Greiner Common Stock subject to such option equal to the excess, if any, of the Merger Value over the Exercise Price. Notwithstanding anything to the contrary in this Section 2.1(c), pursuant to the terms of Section 6(b) of the 1981 Greiner Plan and Section 6(b) of the 1991 Greiner Plan, promptly following execution of this Agreement, Greiner shall give each holder of the Greiner Options (whether or not previously exercisable or vested) written notice that such Greiner Options will be cancelled in connection with the Merger and, shall permit said holders to exercise their Greiner Options and purchase Greiner Common Stock pursuant to the terms of the 1981 Greiner Plan and/or the 1991 Greiner Plan, as the case may be.
(d) SURRENDER OF CERTIFICATES AND RECEIPT OF CONSIDERATION. (1) APPOINTMENT OF EXCHANGE AGENT; EXCHANGE FUND. As of the Effective Time of the Merger, URS shall deposit, or shall cause to be deposited with an exchange agent selected by URS and reasonably satisfactory to Greiner (the "Exchange Agent"), for the benefit of holders of the Greiner Common Stock, for exchange in accordance with this Article 2, (i) certificates representing the number of shares of the URS Common Stock issuable as part of the Merger Consideration, and (ii) cash in an amount equal to the aggregate cash component of the Merger Consideration, and (iii) cash to be paid in lieu of the issuance of fractional shares (such cash and certificates for the shares of URS Common Stock are hereinafter referred to collectively as the "Exchange Fund").
(2) NOTICE TO GREINER STOCKHOLDERS. As soon as reasonably practicable after the Effective Time of the Merger, URS shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates representing the Greiner Common Stock (A) a letter of transmittal which shall specify that delivery shall be effected, and risk of loss and title to the certificates for shares of the Greiner Common Stock shall pass, only upon delivery of the certificates for the shares of the Greiner Common Stock to the Exchange Agent, and shall be in such form and have such other provisions as URS may reasonably specify, and (B) instructions for use in effecting the surrender of the certificates for the shares of the Greiner Common Stock in exchange for the Merger Consideration.
(3) SURRENDER OF GREINER STOCK CERTIFICATES. Upon surrender of a certificate for shares of the Greiner Common Stock (a "Greiner Stock Certificate") for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by URS, together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, the holder thereof shall be entitled to receive in exchange therefor the number of whole shares of the URS Common Stock to which the holder of the Greiner Common Stock is entitled pursuant to this Article 2 plus that portion of the Exchange Fund which such holder has the right to receive pursuant to the provisions of this Section 2.1, after giving effect to any required withholding tax, and the Greiner Stock Certificate for the shares of the Greiner Common Stock so surrendered shall forthwith be cancelled.
(4) LIMITATIONS. Notwithstanding any other provision of this Agreement, until holders of Greiner Stock Certificates representing shares of the Greiner Common Stock have surrendered them for exchange as provided herein, (1) no dividends or other distributions shall be paid with respect to any shares represented by such Certificates and no payment for fractional shares shall be made, and (2) without regard to when such Greiner Stock Certificates are surrendered for exchange as provided herein, no interest shall be paid on any dividends or other distributions or any payment for fractional shares. Upon surrender of a Greiner Stock Certificate, there shall be paid to the holder of such Greiner Stock Certificate the amount of any dividends or other distributions which theretofore became payable, but which were not paid by reason of the preceding sentence, with respect to the number of whole shares of URS Common Stock represented by the Greiner Stock Certificate or Certificates issued upon such surrender. If any certificate for URS Common Stock is to be issued in a name other than in which the Greiner Stock Certificate surrendered in exchange therefore is registered, it shall be a condition of such exchange that the person requesting such exchange pay any transfer or other taxes required by reason of the issuance of certificates for such shares of URS Common Stock in a name other than that of the registered holder of the Greiner Stock Certificate surrendered, or establish to the satisfaction of Greiner that such tax has been paid or is not applicable. Certificates of URS Common Stock issued to holders of Greiner Common Stock issued under a Greiner restricted stock plan shall bear legends substantially similar to the legends presently on the Greiner Common Stock Certificates and as required by applicable law.
(5) PAYMENT. The Exchange Agent shall within 15 business days of receipt of such Greiner Stock Certificate pay the holder of such Certificate, in immediately available
funds, the amount of cash into which the shares theretofore represented by such Certificate shall have been converted pursuant to Section 2.1, and the Greiner Stock Certificate so surrendered shall be cancelled. In the event of a transfer of ownership of shares of Greiner Common Stock that is not registered in the transfer records of Greiner, payment may be made to a person other than the person in whose name the Certificate so surrendered is registered, if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of such Greiner Stock Certificate or establish to the satisfaction of the Greiner that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 2.1, each Greiner Stock Certificate shall be deemed at any time after the Effective Time of the Merger to represent only the right to receive upon such surrender the amount of the Merger Consideration, without interest, into which the shares theretofore represented by such Greiner Stock Certificate shall be converted pursuant to Section 2.1. No interest will be paid or will accrue on the cash payable upon the surrender of any Greiner Stock Certificate.
(e) CANCELLATION OF THE GREINER COMMON STOCK. At the Effective Time of the Merger, all of the authorized and outstanding shares of the Greiner Common Stock shall be cancelled and cease to represent any interest in Greiner and such holders shall cease to have any rights of a stockholder of Greiner. From and after the Effective Time of the Merger, the holders of shares of the Greiner Common Stock outstanding immediately prior to the Effective Time of the Merger as such holders shall be entitled to receive only the Merger Consideration. From the Effective Time of the Merger, the holders of the shares of the Greiner Common Stock which shall be converted into the URS Common Stock pursuant to Section 2.1(a) shall have all of the rights of holders of the number of shares of the URS Common Stock into which such Greiner Common Stock has been converted.
Section 2.2 CONVERSION OF THE SUBSIDIARY COMMON STOCK. At the Effective Time of the Merger, each share of the Subsidiary Common Stock outstanding immediately prior to the Effective Time of the Merger shall be converted into one (1) share of a newly-created class of $1.00 par value common stock of the Surviving Corporation.
Section 2.3 CANCELLATION OF TREASURY SHARES. Any share of the Greiner Common Stock held in the treasury of Greiner at the Effective Time of the Merger shall be cancelled and retired at the Effective Time of the Merger and no shares shall be issuable with respect thereto.
Section 2.4 WITHHOLDING TAX. The right of any shareholder to receive the Merger Consideration shall be subject to and reduced by the amount of any required tax withholding obligation.
Section 3.1 CLOSING; CLOSING DATE. Unless this Merger Agreement shall have been terminated and the Merger abandoned pursuant to the provisions of Article 9, a closing ("Closing") shall take place at the offices of Messrs. Sheppard, Mullin, Richter & Hampton, Four Embarcadero Center, Suite 1700, San Francisco, CA 94111, at 10:00 A.M., California time, on the business day following approval of the Greiner stockholders as contemplated by Section 6.2.2, or at such other time and place as may be agreed upon in writing by the parties hereto (the "Closing Date").
REPRESENTATIONS AND WARRANTIES OF GREINER Except as otherwise disclosed to URS in a letter delivered to it prior to the execution hereof (which letter shall contain appropriate references to identify the representations and warranties herein to which the information in such letter relates) (the "Greiner Disclosure Letter"), Greiner represents and warrants to URS and the Subsidiary as follows:
Section 4.1 ORGANIZATION. Each of Greiner and the Greiner Subsidiaries (as hereinafter defined) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease, and operate its properties, and to carry on its business as now being conducted, except where the failure to be so organized, existing, and in good standing or to have such power and authority would not have a Greiner Material Adverse Effect (as defined below). Each of Greiner and the Greiner Subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased, or operated by it or the nature of the business conducted by it makes such qualification necessary, except in any such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a Greiner Material Adverse Effect (defined below) on the Business Condition (defined below) of Greiner. For purposes of this Agreement: (a) "Greiner Material Adverse Effect" means, when
used in connection with Greiner, any change or effect that is materially adverse to the Business Condition of Greiner, other than changes or effects resulting from (i) changes attributable to conditions affecting the engineering business generally, (ii) changes in general economic conditions, or (iii) changes attributable to the announcement or pendency of the Merger; and (b) "Business Condition" with respect to an entity shall mean the business, financial condition, results of operations, or assets (without giving effect to the consequences of the transactions contemplated by this Agreement) of such entity and its Subsidiaries taken as a whole.
Section 4.2 CAPITALIZATION. The authorized capital stock of Greiner consists of 20,000,000 shares of Greiner Common Stock, par value $0.50 per share, and 1,000,000 shares of preferred stock, par value $1.00 per share (the "Greiner Preferred Stock"). As of the date hereof, (i) 4,704,642 shares of Greiner Common Stock are issued and outstanding, (ii) options to acquire 377,650 shares of Greiner Common Stock are outstanding under all stock option plans and agreements of Greiner, (iii) 737,300 shares of Greiner Common Stock (including shares of Greiner Common Stock issuable upon exercise of the options identified in clause (ii) above) are reserved for issuance pursuant to all employee plans of Greiner, and (iv) there are no shares of Greiner Preferred Stock outstanding. All of the issued and outstanding shares of Greiner Common Stock are validly issued, fully paid and nonassessable and free of preemptive rights. Except as set forth above or as specified in Section 4.2 of the Greiner Disclosure Letter, as of the date of this Agreement there are no shares of capital stock of Greiner issued or outstanding or any options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating Greiner to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of its capital stock or securities. Except as provided in this Agreement or as set forth in Section 4.2 of the Greiner Disclosure Letter, after the Effective Time of the Merger, Greiner will have no obligation to issue, transfer or sell any shares of its capital stock pursuant to any employee benefit plan or otherwise.
Section 4.3 SUBSIDIARIES. Section 4.3 of the Greiner Disclosure Letter identifies each corporation or other entity of which Greiner, directly or indirectly, owns or controls voting securities or other interests which are sufficient to elect a majority of the board of directors or others performing similar functions of such corporation or other entity (a "Greiner Subsidiary") and sets forth for each Greiner Subsidiary: (i) its name and jurisdiction of incorporation or organization; (ii) its authorized capital stock; and (iii) the number of issued and outstanding shares of capital stock. Greiner owns directly or indirectly each of the outstanding
shares of capital stock (or other ownership interests having by their terms ordinary voting power to elect a majority of directors or others performing similar functions with respect to such Greiner Subsidiary) of each of the Greiner Subsidiaries. Each of the outstanding shares of capital stock of each of the Greiner Subsidiaries is duly authorized, validly issued, fully paid and nonassessable. Each of the outstanding shares of capital stock of each Greiner Subsidiary is owned, directly or indirectly, by Greiner, free and clear of all liens, pledges, security interests, claims, or other encumbrances of any nature whatsoever ("Liens"). There are not now, and at Closing there will not be, (a) any issued or outstanding securities convertible into or exchangeable for, or any options, warrants, calls, subscriptions or other rights (preemptive or otherwise) to acquire, any shares of capital stock of any of the Greiner Subsidiaries; or (b) any agreements or contractual commitments obligating Greiner, or restricting Greiner's rights, to transfer, sell, or vote, the capital stock of the Greiner Subsidiaries owned by it, directly or indirectly.
Section 4.4 MATERIAL INVESTMENTS. Except as set forth in Section 4.4 of the Greiner Disclosure Letter, Greiner does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation (other than a Greiner Subsidiary), partnership, joint venture or other business association or entity that is material to Greiner. With respect to those entities indicated on Section 4.4 of the Greiner Disclosure Letter, Greiner has heretofore delivered to URS financial statements (audited to the extent available) and interim unaudited financial statements of each of such entities (through the most recently concluded fiscal quarter for each of such persons) and, to the best knowledge of Greiner, such financial statements fairly present, in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis (except as may be indicated in the notes thereto or in Section 4.4 of the Greiner Disclosure Letter), the financial condition of each thereof as at and the results of operations for the periods so indicated (subject to normal year-end adjustments in the case of the interim unaudited financial statements), and Greiner's disclosures with respect to its investment in each such entities otherwise included in the Greiner SEC Reports (as defined below) do not contain any untrue statements of material fact or omit to state any material fact required to be stated therein or which are necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as set forth in Section 4.4 of the Greiner Disclosure Letter, Greiner (or, as indicated thereon, a Greiner Subsidiary) has good and marketable title to the securities evidencing its investment in the entities indicated in Section
4.4 of the Greiner Disclosure Letter, which have been validly issued and are fully paid and nonassessable and are held by Greiner or a Greiner Subsidiary free and clear of any Lien, restraint on alienation, or any other restriction with respect of the transferability or assignability thereof (other than restrictions on transfer imposed by Federal or state securities laws).
Section 4.5 AUTHORITY RELATIVE TO THIS AGREEMENT. Greiner has all requisite corporate power and authority to enter into this Agreement and subject, in the case of this Agreement, to approval of this Agreement by the stockholders of Greiner and to the consents and approvals set forth in Section 4.6 below, to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Greiner and the consummation by Greiner of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Greiner, including the unanimous approval of the Board of Directors of Greiner, and no other corporate proceedings on the part of Greiner are necessary to authorize this Agreement or the transactions contemplated hereby (except for approval by the stockholders of Greiner). This Agreement has been duly and validly executed and delivered by Greiner and constitutes a valid and binding agreement of Greiner, enforceable against Greiner in accordance with its terms, except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization or other similar laws relating to enforcement of creditors' rights generally, and (ii) general equitable principles.
Section 4.6 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act") (the HSR Act, Securities Act and Exchange Act, collectively, the "Governmental Requirements"), state or foreign laws relating to takeovers, if applicable, state securities or blue sky laws, state and local laws and regulations relating to licensing, and the filing of the Documents of Merger as required by the Nevada Law, no filing with, and no permit, authorization, consent or approval of, any court or tribunal or administrative, governmental or regulatory body, agency or authority ("Government Entity") is necessary for the execution, delivery and performance of this Agreement by Greiner or the transactions contemplated by this Agreement. Neither the execution, delivery nor performance of this Agreement by Greiner, nor the consummation by Greiner of the transactions contemplated hereby, nor compliance by Greiner with any of the provisions hereof, will (i) conflict with or result in any breach of any provisions of the Articles of Incorporation or By-Laws of Greiner or the Articles or
Certificate of Incorporation, as the case may be, or By-Laws of any of the Greiner Subsidiaries, (ii) except as set forth in Section 4.6(ii) of the Greiner Disclosure Letter, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, acceleration, vesting, payment, exercise, suspension or revocation) under, any of the terms, conditions or provisions of any note, bond, mortgage, deed of trust, security interest, indenture, license, contract, agreement, plan or other instrument or obligation to which Greiner or any of the Greiner Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or affected, (iii) except as set forth in Section 4.6(iii) of the Greiner Disclosure Letter, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Greiner, any Greiner Subsidiary or any of their properties or assets, (iv) except as set forth in Schedule 4.6(iv) of the Greiner Disclosure Letter, result in the creation or imposition of any Lien on any asset of Greiner or any Greiner Subsidiary, or (v) except as set forth in Section 4.6(v) of the Greiner Disclosure Letter, cause the suspension or revocation of any certificates of need, accreditation, registrations, licenses, permits and other consents or approvals of governmental agencies or accreditation organizations, except in the case of clauses (ii), (iii), (iv) and (v) for violations, breaches, defaults, terminations, suspensions or revocations which would not individually or in the aggregate have a Greiner Material Adverse Effect.
Section 4.7 GREINER SEC REPORTS AND FINANCIAL STATEMENTS. Greiner has delivered or made available to URS true and complete copies of each registration statement, report and proxy or information statement, including, without limitation, its Annual Reports to Stockholders incorporated in material part by reference in certain of such reports, in the form (including exhibits and any amendments thereto) required to be filed with the Securities and Exchange Commission ("SEC") since January 1, 1992 (collectively, the "Greiner SEC Reports"). Except as set forth in Section 4.7 of the Greiner Disclosure Letter, as of the respective dates such Greiner SEC Reports were filed or, if any such Greiner SEC Reports were amended, as of the date such amendment was filed, each of the Greiner SEC Reports (i) complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, and the rules and regulations promulgated thereunder, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the audited consolidated financial statements and unaudited consolidated interim financial statements of Greiner
(including any related notes and schedules) included (or incorporated by reference) in its Annual Reports on Form 10-K for each of the three fiscal years ended December 31, 1992, 1993 and 1994 and Quarterly Reports on Form 10-Q for all interim periods subsequent thereto (the "Greiner Financial Statements") fairly present, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Greiner and the Greiner Subsidiaries as of its date and the consolidated results of operations and cash flows for the period then ended (subject to normal year-end adjustments in the case of any unaudited interim financial statements). There has been no change in Greiner's accounting policies or the methods of making accounting estimates or changes in estimates that are material to the Greiner Financial Statements, except as described in the notes thereto.
Section 4.8 INFORMATION SUPPLIED. None of the information supplied or to be supplied by Greiner or the Greiner Subsidiaries, auditors, attorneys, financial advisors, or other consultants or advisors for inclusion in (a) the registration statement on Form S-4, and any amendment thereto, to be filed under Securities Act with the SEC by URS in connection with the issuance of the URS Common Stock in or as a result of the Merger (the "Form S-4"), or (b) the proxy statement and any amendment or supplement thereto to be distributed in connection with Greiner's meeting of stockholders to vote upon this Agreement and the transactions contemplated hereby (the "Proxy Statement" and, together with the Form S-4, the "Proxy Statement/Form S-4"), will: (i) in the case of the Proxy Statement and any amendment or supplement thereto, (1) at the time of the mailing of the Proxy Statement and any amendments or supplements thereto, and (2) at the time of Greiner's meeting of stockholders, and (ii) in the case of the Form S-4, as amended or supplemented, (x) at the time it becomes effective, (y) at the time of any post-effective amendment thereto, and (z) at the time of the meeting of the stockholders of Greiner, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Greiner agrees to correct as promptly as practicable any such information provided by it that shall have become false or misleading in any material respect and to take all steps necessary to file with the SEC and have declared effective or cleared by the SEC any amendment or supplement to the Proxy Statement so as to correct the same and to cause the Proxy Statement as so corrected to be disseminated to Greiner's stockholders to the extent required by applicable law. The Proxy Statement/Form S-4 shall comply as to form in all material respects with the provisions of all applicable laws, including the provisions of the Exchange Act and the rules and
regulations of the SEC thereunder, except that no representation is made by Greiner with respect to information supplied by URS specifically for inclusion therein.
Section 4.9 ABSENCE OF MATERIAL ADVERSE AND OTHER CHANGES. Except as contemplated by this Agreement, and except as set forth in Section 4.9 of the Greiner Disclosure Letter, since September 30, 1995, Greiner and the Greiner Subsidiaries have conducted their business in the ordinary course, consistent with past practices, and there has not been: (a) any event or occurrence that has resulted in a Greiner Material Adverse Effect, or any development or combination of developments of which Greiner has knowledge that is reasonably likely, in Greiner's commercially reasonable judgment, to result in a Greiner Material Adverse Effect, (b) any declaration, setting aside or payment of any dividend or other capital distributions in respect of any of its capital stock, except for regular cash dividends to holders of Greiner Common Stock in amounts and at times consistent with prior practice, or any redemption or repurchase or other acquisition of any shares of its capital stock, (c) any increase in the regular compensation of any of the officers or employees of Greiner or the Greiner Subsidiaries, except such increases as have been granted in the ordinary course of business in accordance with its customary practices (which shall include normal periodic performance reviews, promotions and related compensation increases), (d) any incurrence, assumption or guarantee by Greiner or any of the Greiner Subsidiaries of any indebtedness for borrowed money other than in the ordinary course of business consistent with past practices, (e) any transaction or commitment made, or any contract or agreement entered into, by Greiner or any of the Greiner Subsidiaries (including the acquisition or disposition of any assets) or any relinquishment by Greiner or any of the Greiner Subsidiaries of any contract or other right, in either case, material to Greiner's business taken as a whole, other than transactions and commitments in the ordinary course of business consistent with past practices and those contemplated by this Agreement, (f) any change in any method of accounting or accounting practice by Greiner or any of the Greiner Subsidiaries, except for any such change after the date hereof required by reason of a mandatory concurrent change in GAAP, (g) any loss or damage to the properties or assets of Greiner or the Greiner Subsidiaries which has resulted or is reasonably likely to result in a Greiner Material Adverse Effect, or (h) any agreement or any commitment to take any of the actions described in this Section 4.9.
Section 4.10 LITIGATION. Except for litigation disclosed in the notes to the financial statements included in the Greiner SEC Reports or as set forth in Section 4.10 of the Greiner Disclosure Letter, there is no suit, action or proceeding (whether at law or equity, before or by any Federal,
state or foreign court, tribunal, commission, board, agency or instrumentality, or before any arbitrator) pending or, to the best knowledge of Greiner, threatened against or affecting Greiner or any of the Greiner Subsidiaries, the outcome of which, in the reasonable judgment of Greiner, is likely individually or in the aggregate to have a Greiner Material Adverse Effect, or which challenges the validity of this Agreement or seeks to prevent, enjoin, materially alter or materially delay the transactions contemplated hereby, nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against Greiner or any of the Greiner Subsidiaries having, or which, insofar as can reasonably be foreseen, in the future may have, any such effect.
Section 4.11 ABSENCE OF UNDISCLOSED LIABILITIES. Except for liabilities or obligations which are accrued or reserved against in the Greiner Financial Statements (or reflected in the notes thereto) or which were incurred after September 30, 1995 in the ordinary course of business and consistent with past practices or in connection with the transactions contemplated by this Agreement, Greiner and the Greiner Subsidiaries do not have any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of a nature required by GAAP to be reflected in a consolidated balance sheet (or reflected in the notes thereto).
Section 4.12 NO DEFAULT. Except as set forth in Section 4.12 of the Greiner Disclosure Letter, neither Greiner nor any of the Greiner Subsidiaries is in violation or breach of, or default under (and no event has occurred which with notice or the lapse of time or both would constitute a violation or breach of, or default under) any term, condition or provision of (a) its Articles or Certificate of Incorporation, as the case may be, or By-Laws, (b) any note, bond, mortgage, deed of trust, security interest, indenture, license, contract, agreement, plan, lease, commitment or other instrument or obligation to which Greiner or any of the Greiner Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or affected, (c) any order, writ, injunction, decree, statute, rule or regulation applicable to Greiner or any of the Greiner Subsidiaries or any of their properties or assets, or (d) any certificate of need, accreditation, registration, license, permit and other consent or approval of governmental agencies or accreditation organization, except in the case of clauses (b), (c) and (d) above for violations, breaches or defaults which would not individually or in the aggregate have a Greiner Material Adverse Effect.
Section 4.13 PROPERTIES, LIENS, ETC. Greiner and the Greiner Subsidiaries own all of their tangible and intangible property, real and personal, free and clear of any Liens, except for statutory mechanics' and materialmens' liens, liens for current taxes not yet delinquent, and liens and encumbrances which do not confer upon the secured parties rights to property which, if exercised upon default, would have a Greiner Material Adverse Effect. All plants, structures and material equipment owned or leased by Greiner or the Greiner Subsidiaries and used in the operation of their business are in satisfactory condition and repair for the requirements of such business as presently conducted. Neither Greiner nor any of the Greiner Subsidiaries have received notice, or have knowledge of, any pending, threatened or contemplated condemnation proceeding, or of any sale or other disposition in lieu of condemnation, affecting any real property owned or leased by Greiner or any of the Greiner Subsidiaries.
Section 4.14 TAXES. Except as set forth in Section 4.14 of the Greiner Disclosure Letter:
(a) Greiner and each of the Greiner Subsidiaries has (i) timely filed (or has had timely filed on its behalf) or will cause to be timely filed all material Tax Returns (as defined below) required by applicable law to be filed by any of them for tax years ended prior to the date of this Agreement and all such Tax Returns and amendments thereto are or will be true, complete, and correct in all material respects, (ii) has paid (or has had paid on its behalf) all Taxes due or has properly accrued or reserved for all such Taxes for such periods, and (iii) has accrued for all Taxes for periods subsequent to the periods covered by such Tax Returns.
(b) There are no material liens for Taxes upon the assets of Greiner or any of the Greiner Subsidiaries, except liens for Taxes not yet due.
(c) There are no material deficiencies or adjustments for Taxes that have been proposed or assessed by any Tax Authority (as defined below) against Greiner or any of the Greiner Subsidiaries and which remain unpaid.
(d) The Federal income tax returns of Greiner and each of the Greiner Subsidiaries have been examined by the Internal Revenue Service for all past taxable years and periods to and including the years set forth in Section 4.14 of the Greiner Disclosure Letter, and all material deficiencies finally assessed as a result of such examinations have been paid. Section 4.14 of the Greiner Disclosure Letter sets forth (i) all taxable years and periods of Greiner and the Greiner Subsidiaries that are presently under Audit (as defined below) or in respect of which Greiner or any of the Greiner
Subsidiaries has been notified in writing by the relevant Tax Authority that it will be Audited, (ii) the taxable years of Greiner and the Greiner Subsidiaries in respect of which the statutory period of limitations for the assessment of Federal, state and local income or franchise Taxes has expired, and (iii) all waivers extending the statutory period of limitation applicable to any material Tax Return filed by Greiner or any of the Greiner Subsidiaries for any taxable period ending prior to the date of this Agreement.
(e) Prior to the date hereof, Greiner and the Greiner Subsidiaries have disclosed all material Tax sharing, Tax indemnity, or similar agreements to which Greiner or any of the Greiner Subsidiaries is a party to, is bound by, or has any obligation or liability for Taxes.
(f) As used in this Agreement, (i) "Audit" shall mean any audit, assessment of Taxes, other examination by any Tax Authority, proceeding or appeal of such proceeding relating to Taxes, (ii) "Taxes" shall mean all Federal, state, local and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto, (iii) "Tax Authority" shall mean the Internal Revenue Service and any other domestic or foreign governmental authority responsible for the administration of any Taxes, and (iv) "Tax Returns" shall mean all Federal, state, local and foreign tax returns, declarations, statements, reports, schedules, forms and information returns and any amended Tax Return relating to Taxes.
(a) Section 4.15 of the Greiner Disclosure Letter lists each Greiner Plan. With respect to each of the Greiner Plans, Greiner has heretofore delivered or made available to URS true and complete copies of each of the following documents: (i) a copy of each written plan (including all amendments thereto) or a description of each unwritten plan; (ii) a copy of the annual report, if required under ERISA, with respect to each Greiner Plan for the last three years; (iii) a copy of the actuarial report, if required under ERISA, with respect to each Greiner Plan for the last three years and any interim actuarial reports or calculations provided by the actuary since the date of the most recent annual actuarial report; (iv) the most recent summary plan description and all succeeding summaries of material modifications for each Greiner Plan for which a summary plan description is required; (v) if the Greiner Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement (including all amendments thereto) and the latest financial statements
thereof; and (vi) the most recent determination letter issued with respect to each Qualified Greiner Plan. Each of the Greiner Plans has been operated and administered in all material respects in accordance with their terms and with all applicable laws, including Federal and state securities laws. Each Greiner Plan intended to be qualified under Section 401(a) of the Code is so qualified and has received a favorable determination letter from the Internal Revenue Service with respect to such qualification, its related trust has been determined to be exempt from taxation under Section 501(a) of the Code and nothing has occurred since the date of such letter that would adversely affect such qualification or exemption.
(b) Section 4.15 of the Greiner Disclosure Letter lists each Greiner Benefit Arrangement. With respect to each of the Greiner Benefit Arrangements, Greiner has heretofore delivered to or made available to URS true and complete copies of each written plan (including all amendments thereto) or a description of each unwritten plan. Each Greiner Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules, and regulations, including, without limitation, ERISA and the Code, that are applicable to such Greiner Benefit Arrangement, including Federal and state securities laws.
(c) Neither Greiner nor the Greiner Subsidiaries nor any of their ERISA Affiliates has been involved in any transaction, taken any action, or failed to take any action that could cause Greiner or the Greiner Subsidiaries to be subject to any liability that would likely cause a Greiner Material Adverse Effect. No fiduciary of any Greiner Plan or Greiner Benefit Arrangement has taken any action that would result in such fiduciary being liable for the payment of damages under ERISA Section 409 and that would result in any material liability for Greiner, the Greiner Subsidiaries or URS.
(d) Except with respect to contributions to Greiner Plans under Section 412 that are current and not past due, neither Greiner nor the Greiner Subsidiaries has incurred (directly or indirectly) prior to the Closing any current obligation to pay (i) any liability under Title IV of ERISA or (ii) any liability under Section 412 of the Code that remains unpaid at the date of signing of this Agreement. There is no "unfunded pension liability," i.e., excess of the value of benefits earned to date over assets, with respect to Employee Benefit Plans subject to Title IV of ERISA. All premiums owed to the Pension Benefit Guaranty Corporation with respect to any Employee Benefit Plan subject to Title IV have been paid.
(e) None of Greiner, the Greiner Subsidiaries, or their ERISA Affiliates is making or accruing an obligation to make
contributions or has, on or after January 1, 1980, made or accrued an obligation to make contributions to a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA.
(f) Full payment has been made of all amounts that Greiner and the Greiner Subsidiaries are required to pay as contributions to the Employee Benefit Plans as of the last day of the most recent fiscal year of each of the plans ended prior to the date of this Agreement.
(g) No Greiner Plan or Greiner Benefit Arrangement provides or ever provided benefits, including without limitation, death or medical benefits (whether or not insured and whether or not funded), with respect to current or former employees of Greiner and the Greiner Subsidiaries beyond their retirement or other termination of service (other than (i) coverage mandated by applicable law, (ii) death benefits or retirement benefits under any "employee pension benefit plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of Greiner and disclosed heretofore to URS, or (iv) benefits the full cost of which are borne by the current or former employee (or his or her beneficiary)). The consummation of the transactions contemplated hereby will not (i) entitle any current or former employee of Greiner or the Greiner Subsidiaries to severance pay, unemployment compensation or any similar payment, or (ii) accelerate the time of payment or vesting, or increase the amount of any compensation due to any such employee or former employee.
(h) With respect to Greiner Plans and Greiner Benefit Arrangements, all reports, forms, and other documents required to be filed with any governmental authority or distributed to plan participants (including, without limitation, summary plan descriptions, Forms 5500, and summary annual reports) have been timely filed (if applicable) and distributed (if applicable) and were accurate.
(i) There are no pending, threatened, or anticipated claims (other than routine claims for benefits) by, on behalf of, or against any Greiner Plans or Greiner Benefit Arrangements. No Greiner Plans or Greiner Benefit Arrangements are presently under audit or examination (nor has notice been received of a potential audit) by the Internal Revenue Service, the Department of Labor, or PBGC, nor are there any matters pending with respect to any Greiner Plan with the Internal Revenue Service under its Voluntary Compliance Resolution program, its Closing Agreement Program, or other similar programs.
(j) No "prohibited transaction," as such term is defined in Code Section 4975 and ERISA Section 406, has occurred with
respect to any Greiner Plan or Greiner Benefit Arrangement that could subject such plan, any fiduciary thereof, Greiner, the Greiner Subsidiaries or URS to a material penalty for such prohibited transaction imposed by ERISA Section 502 or a material tax imposed by Code Section 4975.
(k) Any bonding required by applicable provisions of ERISA with respect to any Greiner Plan or Greiner Benefit Arrangement has been obtained and is in full force and effect.
(l) For purposes of this Section 4.15:
(1) "Greiner Benefit Arrangement" means each employment, severance, or other similar contract, arrangement, or policy and each plan or arrangement (written or oral, formal or informal) providing for insurance coverage (including any self-insured arrangements), cafeteria benefits under Section 125 of the Code, fringe benefits (including but not limited to paid holidays, personal leave, employee discount, educational benefit, or similar programs), workers' benefits, vacation benefits, severance benefits, disability benefits, death benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or postretirement insurance or health benefits, compensation or benefits that (i) is not a Greiner Plan, (ii) is or has been entered into, maintained, or contributed to by Greiner or its ERISA Affiliates, and (iii) covers, or within the last five years covered and has further or continuing obligations, any employee of Greiner or any Greiner Subsidiary.
(2) "Greiner Plan" means any Employee Benefit Plan or "multiemployer plan" as defined in Section 4001(a)(3) of ERISA (a) maintained or contributed to by or on behalf of Greiner or any Greiner Subsidiary, whether currently or within the six years prior to the Closing Date, or (b) in which any employee of Greiner or any Greiner Subsidiary has participated, as an employee of Greiner or any Greiner Subsidiary, within the six years prior to the Closing Date, or under which any such employee has accrued and remains entitled to any benefit.
(3) "Employee Benefit Plan" means any deferred compensation, retirement, severance, health, or other plan or program constituting an "employee benefit plan" as defined in Section 3(3) of ERISA maintained or previously maintained for current or former employees of Greiner or the Greiner Subsidiaries, or any ERISA Affiliate of Greiner or the Greiner Subsidiaries or in which any such employees participate or participated, other than a Multiemployer Plan.
(4) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all regulations
and published interpretations promulgated thereunder, as in effect from time to time.
(5) "ERISA Affiliate" means each person (as defined in Section 3(9) of ERISA) that, together with Greiner or a Greiner Subsidiary, would be treated as a single employer under Section 4001(b) of ERISA or that would be deemed to be a member of the same "controlled group" within the meaning of Section 414(b), (c), (m), and (o) of the Code (provided, however, that when the subject of the provision is a Multiemployer Plan only subsections (b) and (c) of Section 414 shall be taken into account).
Section 4.16 EMPLOYMENT MATTERS; LABOR RELATIONS.
(a) Section 4.16 of the Greiner Disclosure Letter sets forth a true and complete list of the names, classifications, dates of hire and base compensation for the year ending December 31, 1995, of each employee of Greiner and the Greiner Subsidiaries whose base compensation exceeds $75,000 per annum.
(b) With respect to current or former employees of Greiner and the Greiner Subsidiaries,
(i) Each of Greiner and the Greiner Subsidiaries is in substantial compliance with all applicable laws respecting employment and employment practices, and occupational safety and health, except for such violations, if any, that in the aggregate have not had and would not have a Greiner Material Adverse Effect. There is no charge or compliance action pending or threatened against or with respect to Greiner or any of the Greiner Subsidiaries before the Equal Employment Opportunity Commission or any state, local, or foreign agency responsible for the prevention of unlawful employment practices as to which there is a reasonable likelihood of adverse determination. None of Greiner nor any of the Greiner Subsidiaries has received notice of the intent of any Federal, state, local or foreign agency responsible for the enforcement of labor or employment laws to conduct an investigation, and, to Greiner's knowledge, no such investigation is in progress.
(ii) The employees of Greiner and the Greiner Subsidiaries are not represented by any labor union, nor are there any collective bargaining agreements or any other types of agreements with labor unions otherwise in effect with respect to such employees, nor are any collective bargaining agreements currently being negotiated, and, to Greiner's knowledge, no union organizational campaign is in progress. None of Greiner or the Greiner Subsidiaries is engaged in any unfair labor practices as defined in the National Labor
Relations Act or other applicable law, ordinance, or regulation. There is no unfair labor practice charge or complaint against any of Greiner or the Greiner Subsidiaries pending or, to Greiner's knowledge, threatened before the National Labor Relations Board. There is no labor strike, lockout, slow-down or work stoppage pending or threatened against Greiner or any of the Greiner Subsidiaries. None of Greiner and the Greiner Subsidiaries has experienced any significant work stoppage or been party to any proceedings before the National Labor Relations Board for the past three years.
(a) Except as set forth in Section 4.17 of the Greiner Disclosure Letter, and except to the extent that the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy), individually and in the aggregate, would not have a Greiner Material Adverse Effect:
(i) Greiner and the Greiner Subsidiaries own, or are licensed or otherwise have the right to use (in each case, clear of any lien or encumbrance of any kind) all Intellectual Property (as defined below) that in any material respect is used or proposed to be used in the business of Greiner and the Greiner Subsidiaries.
(ii) No claims are pending, or to the knowledge of Greiner, threatened that Greiner or any of the Greiner Subsidiaries is infringing on or otherwise violating the rights of any person with regard to any Intellectual Property owned by and/or licensed to Greiner or the Greiner Subsidiaries.
(iii) To the knowledge of Greiner, no person is infringing on or otherwise violating any right of Greiner or any Greiner Subsidiary with respect to any Intellectual Property owned by and/or licensed to Greiner or the Greiner Subsidiaries, PROVIDED, that the foregoing representation is qualified to the extent of publicly known problems of general applicability with respect to software piracy and copyright protection.
(iv) None of the former or current members of management or key personnel of Greiner or any Greiner Subsidiary, including all former and current employees, agents, consultants and contractors who have contributed to or participated in the conception and development of designs, computer software or other Intellectual Property of Greiner or the Greiner Subsidiaries, has asserted in writing any claim against Greiner or any of the Greiner Subsidiaries in connection with the involvement of such persons in the conception and development of any design, computer software or
other Intellectual Property, and no such claim, to the knowledge of Greiner, has been threatened.
(v) The execution and delivery of this Agreement, compliance with its terms and the consummation of the transactions contemplated hereby do not and will not conflict with or result in any violation or default (with or without notice or the lapse of time) or give rise to any right, license or encumbrance relating to the Intellectual Property, or any right of termination, cancellation, or acceleration of any material Intellectual Property right or obligation.
(b) For purposes of this Agreement, "Intellectual Property" means (a) trademarks (registered on unregistered), service marks, brand names, certification marks, trade dress, assumed names, trade names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; (b) inventions, discoveries and ideas, whether patented, patentable or not in any jurisdiction; (c) nonpublic information, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; (d) writings and other works, whether copyrighted, copyrightable or not in any jurisdiction; (e) registration or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; (f) any similar intellectual property or proprietary rights and computer programs and software (including source code, object code and data); (g) licenses, immunities, covenants not to sue and the like relating to the foregoing; and (h) any claims or causes of action arising out of or related to any infringement or misappropriation of any of the foregoing.
(c) Except for the name "Greiner" and the Greiner logo, there are no (i) material domestic and foreign registered trademarks, registered copyrights and patents, and applications for registration of any of the foregoing; (ii) material trade names, service marks, service names, logos and assumed names which are owned by Greiner or any of the Greiner Subsidiaries, as the case may be, and that are used or proposed to be used in the business of Greiner and the Greiner Subsidiaries as currently conducted; or (iii) material licenses and other agreements to which Greiner or any Greiner Subsidiary is a party and pursuant to which Greiner is authorized to use any Intellectual Property. To the knowledge of Greiner, all registered Intellectual Property has been validly issued or registered and is subsisting. Neither Greiner nor the Greiner Subsidiaries have taken or omitted to take any act which act or omission might have the effect of waiving or impairing any of the rights of Greiner to practice and enforce any patent, or to
use and enforce any trademark or copyright listed on Section 4.17 of the Greiner Disclosure Letter.
Section 4.18 INSURANCE. Section 4.18 of the Greiner Disclosure Letter contains a complete and correct list and accurate summary description of all insurance policies and material completion bonds (including, without limitation, professional liability coverage) maintained by or on behalf of or covering Greiner and the Greiner Subsidiaries, their assets or operations, or the conduct of their business. Greiner has made available to URS complete and correct copies of all the declaration sheets or binders (if declaration sheets are not yet issued) relating to such policies and bonds. Except as noted on Section 4.18 of the Greiner Disclosure Letter, all such policies and bonds are in full force and effect, no notices of cancellation or nonrenewal have been received with respect thereto, and all premiums due thereon have been paid. Greiner and the Greiner Subsidiaries have complied in all material respects with the provisions of such policies and bonds. Such policies and bonds are of the type and in amounts customarily carried by persons conducting businesses similar to the business conducted by Greiner and the Greiner Subsidiaries.
Section 4.19. COMPLIANCE WITH APPLICABLE LAW. Greiner and the Greiner Subsidiaries are not in violation of, or to Greiner's knowledge, are neither under investigation with respect to nor have been threatened to be charged with or given notice of any violation of, any applicable laws, ordinances, rules and regulations of any court, administrative agency or commission or other governmental authority or instrumentality, whether domestic or foreign (each a "Governmental Entity") applicable to Greiner or any Greiner Subsidiary, except for such violations, if any, that, in the aggregate, have not had and would not, in the reasonable judgment of Greiner, be likely to have a Greiner Material Adverse Effect.
Section 4.20. CERTAIN CONTRACTS AND ARRANGEMENTS. Section 4.20 of the Greiner Disclosure Letter lists all of the following agreements to which Greiner or any of the Greiner Subsidiaries is a party ("Material Agreements"):
(a) Each partnership, joint venture or other similar agreement or arrangement to which Greiner or any Greiner Subsidiary is a party that has involved or is expected to involve an annual sharing of revenues of $5,000,000 or more to
(b) Each lease for real or personal property in which the amount of payments which Greiner or a Greiner Subsidiary is required to make on an annual basis is $500,000
(c) Each agreement of Greiner and the Greiner Subsidiaries relating to indebtedness for borrowed money (whether incurred, assumed, guaranteed or secured by any asset) in an aggregate outstanding principal amount of $1,000,000 or
(d) Each other agreement, license or franchise which has not been terminated or performed in its entirety and not renewed which may be, by its terms, terminated, impaired or adversely affected by reason of the execution of this Agreement, the closing of the Merger, or the consummation of the transactions contemplated hereby or thereby, and the loss of which would, individually or in the aggregate with other such agreements, licenses, or franchises, have a Greiner
(e) Each agreement of Greiner or the Greiner Subsidiaries with or for the benefit of any affiliate of Greiner with annual payments of $50,000 or more;
(f) Each contract containing covenants purporting to materially limit the freedom of Greiner or any Greiner Subsidiary to compete in any line of business or in any
All Material Agreements are valid, binding and enforceable in accordance with their terms and none of Greiner or the Greiner Subsidiaries nor, to the knowledge of Greiner, any other party thereto, is in default under any of such agreements, nor, to the knowledge of Greiner, has any event or circumstance occurred that, with notice or lapse of time or both, would constitute any event of default by Greiner or the Greiner Subsidiaries or any other party thereto other than with respect to any of the foregoing such defaults, if any, that would not, individually or in the aggregate, have a Greiner Material Adverse Effect. To Greiner's knowledge, none of the parties to the contracts identified in this Section have terminated, or have expressed an intent to reduce materially or terminate presently or in the future, such contracts.
Section 4.21 PROHIBITED PAYMENTS. Greiner has not, with respect to the opportunities, business or operation of Greiner, (a) entered into any understanding agreement or arrangement, written or oral, under or pursuant to which bribes, kickbacks, rebates, payoffs or other forms of illegal payments have been or will be made, provided for or suffered, either directly or indirectly, through agents, brokers or other intermediaries, (b) made any illegal payment or contribution of moneys, services or property to any political party, candidate or elected official, directly or indirectly, for any purpose or (c) directly or indirectly engaged in any activity prohibited by the Foreign Corrupt Practices Act of 1977.
Section 4.22 POWERS OF ATTORNEY. Greiner has not given a power of attorney, except for revocable powers of attorney routinely granted in the ordinary course of business which related to routine representations before governmental agencies or given in connection with the qualification to conduct business in other jurisdictions.
(a) (i) Greiner and each of the Greiner Subsidiaries hold, and are in substantial compliance with, all Environmental Permits, and with all applicable Environmental Laws, except where the failure to hold such permits or to be in compliance would not have a Greiner Material Adverse Effect.
(ii) Neither Greiner nor any of the Greiner Subsidiaries has received any written request for information, or has been notified that it is a potentially responsible party, under the Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or any similar state law with respect to any on-site or off-site location.
(iii) No notice, notification, demand, request for information, citation, summons, complaint or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review (collectively, "Environmental Notices") is pending, or to Greiner's knowledge, threatened by any governmental entity or other person with respect to any (1) alleged violation by Greiner or any of the Greiner Subsidiaries of any Environmental Law or liability thereunder or (2) alleged failure by Greiner or any of the Greiner Subsidiaries to have any Environmental Permit, except, in each case, for Environmental Notices that would not have a Greiner Material Adverse Effect.
(iv) To Greiner's knowledge, there have been no discharges, emissions or releases of Hazardous Substances by Greiner which are or were reportable under Environmental Laws, other than such discharges, emissions or releases that would not have a Greiner Material Adverse Effect.
(b) There has been no material environmental investigation of Greiner, study, audit, test, review or other analysis (including any Phase I environmental assessments) conducted of which Greiner has knowledge in relation to any real property or lease which has not been delivered to URS prior to the date hereof. Neither Greiner nor any of the Greiner Subsidiaries is subject to any judgment, decree or order relating to compliance with, or the cleanup of regulated substances under, any applicable Environmental Law.
(c) For purposes of this Agreement: (i) the term "Environmental Laws" means any and all applicable Federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, judicial orders, decrees, codes, injunctions, permits, consent decrees, consent orders and governmental restrictions, now in effect, relating to human health, the environment or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment, including without limitation ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof; (ii) the term "Environmental Permits" means all permits licenses, authorizations, certificates and approvals of governmental authorities relating to or required by Environmental Laws and necessary or proper for the business of Greiner and the Greiner Subsidiaries as currently conducted; and (iii) "Hazardous Substance" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by- products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics, including, without limitation, any substance regulated under Environmental Laws.
Section 4.24 REGULATORY MATTERS. Greiner has filed or otherwise provided all reports, data, other information and applications which are required to be filed with or otherwise provided to the U.S. Environmental Protection Agency (the "EPA"), the U.S. Occupational Safety and Health Administration ("OSHA"), and any other Federal, state, local or foreign governmental authorities with jurisdiction and all regulatory approvals in respect thereof are in full force and effect on the date hereof, the failure to file or provide which or obtain which would, in the aggregate, result in a Greiner Material Adverse Effect.
Section 4.25 IMMIGRATION REFORM AND CONTROL ACT.
(a) Greiner has fully complied with the verification requirements and the recordkeeping requirements of the Immigration Reform and Control Act of 1986 ("IRCA").
(b) To the best knowledge and belief of Greiner and the Greiner Subsidiaries, the information and documents on which Greiner relied in complying with IRCA are true and correct.
(c) There have not been any discrimination complaints filed against Greiner pursuant to IRCA.
Section 4.26 BOARD APPROVALS; OPINION OF FINANCIAL ADVISOR. The Board of Directors of Greiner (at a meeting duly called and held or pursuant to valid written consent) has unanimously determined that the transactions contemplated hereby are fair to and in the best interests of Greiner and its stockholders. Greiner has received the opinion of Houlihan, Lokey, Howard & Zukin, Inc. ("HL"), Greiner's financial advisor, or another financial advisor selected by Greiner and reasonably acceptable to URS, substantially to the effect that the Merger consideration to be paid to holders of the Greiner Common Stock in the Merger is fair to such stockholders from a financial point of view.
Section 4.27 BROKERS. No broker, finder or investment banker is entitled to any brokerage, finder's fee or commission payable by Greiner in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Greiner.
Section 4.28 DISCLOSURE. No representation or warranty by Greiner in this Agreement, the schedules hereto or any certificates delivered pursuant to the terms hereof, contains or will contain an untrue statement of material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading.
Section 4.29 RELIANCE. The foregoing representations and warranties are made by Greiner with the knowledge and expectation that URS is placing reliance thereon.
REPRESENTATIONS AND WARRANTIES OF URS Except as otherwise disclosed to Greiner in a letter delivered to it prior to the execution hereof (which letter shall contain appropriate references to identify the representations and warranties herein to which the information in such letter relates) (the "URS Disclosure Letter"), URS and the Subsidiary represent and warrant to Greiner as follows:
Section 5.1 ORGANIZATION. Each of URS and the Subsidiary is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease, and operate its properties, and to carry on its business as now being conducted, except where the failure to be so organized, existing, and in good standing or to have such power and authority would not have a URS Material
Adverse Effect. Each of URS and the Subsidiary is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased, or operated by it or the nature of the business conducted by it makes such qualification necessary, except in any such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a URS Material Adverse Effect on the Business Condition of URS. For purposes of this Agreement, "URS Material Adverse Effect" means, when used in connection with URS, any change or effect that is materially adverse to the Business Condition of URS, other than changes or effects resulting from (i) changes attributable to conditions affecting the engineering business generally, (ii) changes in general economic conditions, or (iii) changes attributable to the announcement or pendency of the Merger.
Section 5.2 CAPITALIZATION. The authorized capital stock of URS consists of 20,000,000 shares of URS Common Stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $1.00 per share (the "URS Preferred Stock"). As of the date hereof, (i) 7,167,591 shares of URS Common Stock are issued and outstanding, (ii) options to acquire 1,166,324 shares of URS Common Stock are outstanding under all stock option plans and agreements of URS, (iii) 1,559,665 shares of URS Common Stock (including shares of URS Common Stock issuable upon exercise of the options identified in clause (ii) above) are reserved for issuance pursuant to all employee plans of URS, and (iv) there are no shares of URS Preferred Stock outstanding. All of the issued and outstanding shares of URS Common Stock are validly issued, fully paid and nonassessable and free of preemptive rights. All of the URS Common Stock reserved for issuance in exchange for the shares of the Greiner Common Stock at the Effective Time of the Merger in accordance with this Agreement will be, when so issued, duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights. The authorized capital stock of the Subsidiary consists of 100 shares of the Subsidiary Common Stock, par value $1.00 per share, all of which shares are validly issued and outstanding, fully paid and nonassessable and are owned by URS. Except as set forth above or as specified in Section 5.2 of the URS Disclosure Letter, as of the date of this Agreement there are no shares of capital stock of URS issued or outstanding or any options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating URS to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of its capital stock or securities. Except as provided in this Agreement or as set forth in Section 5.2 of the URS Disclosure Letter, after the Effective Time of the Merger, URS will have no obligation to issue, transfer or sell any shares of its capital stock pursuant to any employee benefit plan or otherwise.
Section 5.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of URS and the Subsidiary has all requisite corporate power and authority to enter into this Agreement and subject, in the case of this Agreement, to the consents and approvals set forth in Section 5.4 below, to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by URS and the Subsidiary and the consummation by URS and the Subsidiary of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of URS and the Subsidiary, including the unanimous approval of their respective Boards of Directors, and no other corporate proceedings on the part of URS or the Subsidiary are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by URS and the Subsidiary and consti- tutes a valid and binding agreement of each of them, enforceable against each of them in accordance with its terms, except that such enforceability may be subject to (i) bank- ruptcy, insolvency, reorganization or other similar laws relating to enforcement of creditors' rights generally, and (ii) general equitable principles.
Section 5.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for the applicable requirements of the Governmental Requirements, state or foreign laws relating to takeovers, if applicable, state securities or blue sky laws, state and local laws and regulations relating to licensing, and the filing of the Documents of Merger as required by the Nevada Law, no filing with, and no permit, authorization, consent or approval of, any Government Entity is necessary for the execution, delivery and performance of this Agreement by URS and the Subsidiary of the transactions contemplated by this Agreement. Neither the execution, delivery nor performance of this Agreement by URS and the Subsidiary, nor the consummation by URS and the Subsidiary of the transactions contemplated hereby, nor compliance by URS and the Subsidiary with any of the provisions hereof, will (i) conflict with or result in any breach of any provisions of the Certificate of Incorporation or By-Laws of URS or the Subsidiary or the Articles or Certificate of Incorporation, as the case may be, or By-Laws of any of the URS Subsidiaries, (ii) except as set forth in Section 5.4(ii) of the URS Disclosure Letter, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, acceleration, vesting, payment, exercise, suspension or revocation) under, any of the terms, conditions or provisions of any note, bond, mortgage, deed of trust, security interest, indenture, license, contract, agreement, plan or other instrument or obligation to which URS or any of the URS Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or affected,
(iii) except as set forth in Section 5.4(iii) of the URS Disclosure Letter, violate any order, writ, injunction, decree, statute, rule or regulation applicable to URS, any URS Subsidiary or any of their properties or assets, (iv) except as set forth in Section 5.4(iv) of the URS Disclosure Letter, result in the creation or imposition of any Lien on any asset of URS or any URS Subsidiary, or (v) except as set forth in Section 5.4(v) of the URS Disclosure Letter, cause the suspension or revocation of any certificates of need, accreditation, registrations, licenses, permits and other consents or approvals of governmental agencies or accreditation organizations, except in the case of clauses (ii), (iii), (iv) and (v) for violations, breaches, defaults, terminations, suspensions or revocations which would not individually or in the aggregate have a URS Material Adverse Effect.
Section 5.5 URS SEC REPORTS AND FINANCIAL STATEMENTS. URS has delivered to Greiner true and complete copies of each registration statement, report and proxy or information statement, including, without limitation, its Annual Reports to Stockholders incorporated in material part by reference in certain of such reports, in the form (including exhibits and any amendments thereto) required to be filed with SEC since January 1, 1992 (collectively, the "URS SEC Reports"). Except as set forth in Section 5.5 of the URS Disclosure Letter, as of the respective dates such URS SEC Reports were filed or, if any such URS SEC Reports were amended, as of the date such amendment was filed, each of the URS SEC Reports (i) complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, and the rules and regulations promulgated thereunder, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the audited consolidated financial statements and unaudited consolidated interim financial statements of URS (including any related notes and schedules) included (or incorporated by reference) in its Annual Reports on Form 10-K for each of the three fiscal years ended October 31, 1992, 1993 and 1994, and to be included on Form 10-K for the fiscal year ended October 31, 1995, when filed, and Quarterly Reports on Form 10-Q for all interim periods subsequent thereto (the "URS Financial Statements") fairly present, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of URS and the URS Subsidiaries as of its date and the consolidated results of operations and cash flows for the period then ended (subject to normal year-end adjustments in the case of any unaudited interim financial statements). There has been no change in URS's accounting policies or methods of making
accounting estimates or changes in estimates that are material to the URS Financial Statements, except as described in the notes thereto.
Section 5.6 INFORMATION SUPPLIED. None of the information supplied or to be supplied by URS, the URS Subsidiaries, auditors, attorneys, financial advisors, other consultants or advisors or the Subsidiary for inclusion in the Form S-4 or the Proxy Statement/Form S-4, will, in the case of the Proxy Statement and any amendment or supplement thereto, at the time of the mailing of the Proxy Statement and any amendment or supplement thereto, and at the time of any meeting of stockholders of Greiner to vote upon this Agreement and the transactions contemplated hereby, or in the case of the Form S-4, as amended or supplemented, at the time it becomes effective and at the time of any post-effective amendment thereto contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading or necessary to correct any statement in any earlier filing with the SEC of such Proxy Statement/Form S-4 or any amendment or supplement thereto or any earlier communication (including the Proxy Statement/Form S-4) to stockholders of Greiner with respect to the transactions contemplated by this Agreement. The Form S-4 and the Proxy Statement/Form S-4 will comply as to form in all material respects with the provisions of all applicable laws including the provisions of the Securities Act and the Exchange Act and the rules and regulations of the SEC thereunder, except that no representation is made by URS with respect to information supplied by Greiner specifically for inclusion therein.
Section 5.7 BOARD APPROVALS; OPINION OF FINANCIAL ADVISOR. The Boards of Directors of URS and the Subsidiary (at meetings duly called and held or pursuant to valid written consents) have unanimously determined that the transactions contemplated hereby are fair to and in the best interests of URS and the Subsidiary and the stockholders of URS. URS has received the opinion of Morgan Stanley & Co. Incorporated ("MS"), URS's financial advisor, substantially to the effect that the Merger consideration to be paid to holders of the Greiner Common Stock in the Merger is fair to URS from a financial point of view.
Section 5.8 BROKERS. No broker, finder or investment banker (other than MS) is entitled to any brokerage, finder's fee or commission payable by URS in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of URS.
Section 5.9 DISCLOSURE. No representation or warranty by URS in this Agreement, the schedules hereto or any certificates delivered pursuant to the terms hereof, contains or will contain an untrue statement of material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading.
Section 6.1 COVENANTS OF ALL PARTIES. During the period from the date of this Agreement until the earlier of the termination of this Agreement or the Effective Time of the Merger, each of the parties hereto covenants and agrees as
6.1.1 ADVICE OF CHANGES. Each party shall promptly advise each of the other parties in writing (i) of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of such party contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue or inaccurate in any material respect.
6.1.2 REGULATORY APPROVALS. Each party shall execute and file, or join in the execution and filing, of any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, Federal, state or local or foreign, which may be reasonably required, or which the other party may reasonably request, in connection with the consummation of the transactions contemplated by this Agreement, including, without limitation, filings under the HSR Act. Each party shall use its best efforts to obtain all such authorizations, approvals and consents.
6.1.3 CONFIDENTIALITY. Each party shall hold in confidence all nonpublic information until such time as such information is otherwise publicly available and, if this Agreement is terminated, each party will deliver to the other all documents, work papers and other materials (including copies) obtained by such party or on its behalf from the other party as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof. Each party shall continue to abide by the terms of the confidentiality agreement between URS and Greiner in effect as of the date hereof.
6.1.4 BEST EFFORTS. Upon the terms and subject to the conditions herein provided, each of the parties hereto agrees to use its best efforts to take or cause to be taken all actions, to do or cause to be done, and to assist and cooperate with the other party hereto in doing, all things necessary, proper or advisable under applicable laws and regulations, to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including (i) using all reasonable efforts to obtain all necessary waivers, consents and approvals from third parties, (ii) defending any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby and thereby, and (iii) executing and delivering such instruments, and taking such other actions as the other party hereto may reasonably require in order to carry out the intent of this Agreement.
6.1.5 CREDIT AGREEMENT. The parties hereto shall take all actions as may be reasonably necessary to fulfill the covenants and conditions set forth in that certain Credit Agreement dated as of January 10, 1996 (the "Credit Agreement"), by and among URS, as Borrower, the lenders listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent.
Section 6.2 COVENANTS OF GREINER. During the period from the date of this Agreement until the earlier of the termination of this Agreement or the Effective Time of the Merger, Greiner agrees (except as expressly contemplated by this Agreement or with the prior written consent of URS) that:
6.2.1 CONDUCT OF BUSINESS PENDING MERGER.
(a) ORDINARY COURSE. Greiner and the Greiner Subsidiaries shall carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent with such businesses, use all reasonable efforts to preserve intact their present business organizations, keep available the services of their present officers and employees, and preserve their relationships with customers, suppliers and others having business dealings with Greiner and the Greiner Subsidiaries. Greiner shall promptly notify URS of any event or occurrence or emergency not in the ordinary course of business, of Greiner or the Greiner Subsidiaries, and material and adverse to the Business Condition of Greiner. Neither Greiner nor any of the Greiner Subsidiaries shall (except with the prior written consent of URS):
(i) accelerate, amend or change the period of exercisability or vesting of options granted under any stock
option plans or restricted stock, stock bonus or other awards (including any discretionary acceleration of the exercise periods by Greiner's Board of Directors permitted under such plans) or authorize cash payments in exchange for any options, restricted stock, stock bonus or other awards granted under any
(ii) grant any severance or termination pay to any officer or director or, except in the ordinary course of business consistent with past practices, to any employee of Greiner or any Greiner Subsidiary;
(iii) except in the ordinary course of business consistent with past practices and other than transfers between or among Greiner and any Greiner Subsidiary, transfer to any person or entity any rights to the Greiner Intellectual
(iv) commence a lawsuit other than: (1) for the routine collection of bills; (2) in such cases where Greiner in good faith determines that failure to commence suit would result in a material impairment of a valuable aspect of Greiner's business, provided Greiner consults with URS prior to filing such suit; or (3) for a breach of this Agreement; and
(v) enter into one or more leases which extend for a period of two years beyond the date of this Agreement and which obligate the Company to pay aggregate gross rent in excess of $500,000.
(b) DIVIDENDS; CHANGES IN STOCK. Greiner shall not, and it shall not permit any of the Greiner Subsidiaries to, (i) declare or pay any dividends on or make other capital distributions in respect of any of its capital stock, except for intercompany dividends or regular quarterly cash dividends in an amount which shall not exceed $0.075 per share to holders of Greiner Common Stock and at times consistent with prior practice, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) repurchase, redeem or otherwise acquire, any shares of its capital stock.
(c) ISSUANCES OF SECURITIES. Greiner shall not, and it shall not permit any of the Greiner Subsidiaries to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or any securities convertible into such shares, or any rights, warrants, calls, subscriptions or options to acquire, any such shares or convertible securities, or any other ownership interests in such capital stock.
(d) GOVERNING DOCUMENTS. Greiner shall not, nor shall it cause or permit any of the Greiner Subsidiaries to, amend its articles or certificate of incorporation or by-laws.
(e) NO ACQUISITIONS. Greiner shall not, and it shall not permit any of the Greiner Subsidiaries to acquire, or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof.
(f) NO DISPOSITIONS. Other than sales or licenses of products or technology in the ordinary course of business consistent with prior practice, Greiner shall not, and it shall not permit any of the Greiner Subsidiaries to, sell, lease, license, encumber or otherwise dispose of, any of its assets, except for such dispositions in the ordinary course of business or in amounts which are not material, in the aggregate, to the business of Greiner.
(g) INDEBTEDNESS. Greiner shall not, and shall not permit any of the Greiner Subsidiaries to, incur any indebtedness for borrowed money or guarantee any such indebtedness or sell any debt securities or warrants or rights to acquire any debt securities of Greiner or any of the Greiner Subsidiaries or guarantee any debt securities of others, except in the ordinary course of business consistent with past practices.
(h) PLANS; COMPENSATION. Except as otherwise provided in this Agreement, Greiner shall not, and shall not permit any of the Greiner Subsidiaries to, adopt or amend in any material respect any Greiner Plan or pay any pension or retirement allowance not required by any existing Greiner Plan. Greiner shall not and shall not permit any Greiner Subsidiary to, enter into any employment contracts, pay any special bonuses or special remuneration to officers, directors or employees, or increase the salaries, wage rates or fringe benefits of (i) any of its officers or employees whose compensation exceeded $150,000 during the fiscal year ending December 31, 1995, or (ii) any of its other officers and employees other than pursuant to scheduled reviews under Greiner's or the Greiner Subsidiary's normal compensation review cycle, in all cases consistent with existing policies and past practice.
(i) TAX MATTERS. Greiner shall not make any tax election that would have a Greiner Material Adverse Effect or settle or compromise any income tax liability of Greiner or any of the Greiner Subsidiaries that would have a Greiner Material Adverse Effect.
(j) DISCHARGE OF LIABILITIES. Greiner shall not, and it shall not permit any of the Greiner Subsidiaries to, pay, discharge, settle or satisfy any claims, liabilities or obligations, except in the ordinary course of business or in amounts which are not material, individually or in the aggregate, to the business of Greiner.
(k) MATERIAL AGREEMENTS. Except in the ordinary course of business, neither Greiner nor any of the Greiner Subsidiaries shall modify, amend, or terminate any Material Agreement or waive, release or assign any material rights or claims under such Material Agreement.
(l) AGREEMENT. Neither Greiner nor any of the Greiner Subsidiaries shall agree or commit to do any of the actions described in this Section 6.2.1.
6.2.2 STOCKHOLDERS' MEETING; PROXY STATEMENT. Greiner shall hold a meeting of its stockholders at the earliest practicable date to submit this Agreement and related matters for their consideration and approval, which approval shall be recommended by Greiner's Board of Directors (subject to the fiduciary obligations of its directors and officers). Greiner shall send to its stockholders, for the purpose of considering and voting upon the Merger, a Proxy Statement satisfying all requirements of applicable state and Federal laws, and Greiner shall be solely responsible for any statement, information or omission in said Proxy Statement relating to it or its affiliates.
6.2.3 ACQUISITION PROPOSALS. From the date hereof until the earlier of the termination of this Agreement or the consummation of the Merger, Greiner and the Greiner Subsidiaries will not, and will cause their respective officers, directors, employees, agents and representatives not to, directly or indirectly, encourage, solicit, accept, initiate or conduct discussions or negotiations with, provide any information to, or enter into any agreement with, any corporation, partnership, limited liability company, person or other entity or group concerning the acquisition of all or a substantial part of the assets, business or capital stock of Greiner, whether through purchase, merger, consolidation, exchange or any other business combination (each of the foregoing, an "Acquisition Proposal"). Notwithstanding anything to the contrary in the preceding sentence, nothing herein shall prevent Greiner and its officers and directors, from responding to and considering unsolicited firm offers for any such transaction from persons other than URS if and to the extent that, in the written opinion of Greiner's outside counsel, failure to do so would be reasonably likely to constitute a violation of applicable law or a breach of the
fiduciary duties of Greiner's directors to Greiner's stockholders. Greiner shall immediately provide written notice to URS of the terms and other details of any such unsolicited inquiry or proposal relating to an Acquisition Proposal. In the event that Greiner or any of its officers or directors enters into any such negotiations or discussions for any reason which thereby constitute a breach of this Section 6.2.3, Greiner shall immediately reimburse URS for all expenses and costs incurred by URS in connection with the transactions contemplated by this Agreement. In the event that Greiner or any of its officers or directors shall enter into any letter of intent, understanding or other agreement with a party other than URS relating to the acquisition of all or a substantial part of the assets, business or capital stock of Greiner, whether through purchase, merger, consolidation, exchange or any other business combination, either in violation of the no- shop agreement set forth in this Section or within nine (9) months after termination of this Agreement for any reason, then immediately upon entering into such letter of intent, understanding or other agreement, Greiner shall pay to URS a termination fee in the amount of $5.0 million (the "Termination Fee"); provided, however, that such Termination Fee shall not be payable if, prior to the entry by Greiner into such letter of intent, understanding or other agreement, URS has unilaterally declined to close the Merger. The parties acknowledge and agree that the expense reimbursement obligation and Termination Fee described in this Section shall not be the exclusive remedy to URS in the event of a breach by Greiner of this Agreement, and, in any such event, URS shall be entitled, in addition to receiving such payments, to equitable remedies, including, without limitation, specific performance and enjoining of any actions determined to be in breach of this Agreement.
6.2.4 MAINTENANCE OF BUSINESS. Greiner will use its best efforts to carry on and preserve its business and its relationships with clients, customers, suppliers, employees and others in substantially the same manner as it has prior to the date hereof. If Greiner becomes aware of a deterioration in the relationship with any client, customer, supplier or key employee, it will promptly bring such information to the attention of URS in writing and, if requested by URS, will use its best efforts to restore the relationship.
6.2.5 ACCESS. Greiner shall afford to URS and to URS's financial advisors, legal counsel, accountants, financing sources and other authorized representatives access during normal business hours to all of its books, records, properties, offices and personnel.
(a) On or before the Closing Date, Greiner shall procure (subject to the approval of URS) continuing directors' and officers' liability coverage (tail coverage) for directors and officers of Greiner who have served as directors and officers of Greiner or its affiliates (the "Greiner D & O Policy"), prior to the Effective Time of the Merger, with respect to acts or failures to act prior to the Effective Time of the Merger. Said policy shall have a term of not less than three (3) years after the Closing Date.
(b) On or before the Closing Date, Greiner shall procure (subject to the approval of URS) continuing fiduciary liability coverage (tail coverage) for employees of Greiner who have served as fiduciaries under any Greiner Plan (the "Greiner Fiduciary Policy") prior to the Effective Time of the Merger, with respect to acts or failures to act prior to the Effective Time of the Merger. Said policy shall have a term that shall expire not less than one (1) year after the expiration of the term of the ESOP portion of The Performance Plan and Stock Ownership Plan of Greiner Engineering, Inc.
Section 6.3 COVENANTS OF URS. During the period from the date of this Agreement until the earlier of the termination of this Agreement or the Effective Time of the Merger, URS and the Subsidiary agree (except as expressly contemplated by this Agreement or with the prior written consent of Greiner) that:
6.3.1 REGISTRATION STATEMENT. The URS Common Stock to be issued in the Merger shall be registered under the 1933 Act on Form S-4. As promptly as practicable after the date hereof, URS shall prepare and file with the SEC the Form S-4 and any other documents required by the 1933 Act in connection with the Merger. URS shall use its best efforts to have the Form S-4 declared effective as promptly as practicable after such filing. URS shall also take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of the URS Common Stock in connection with the Merger.
6.3.2 LISTING AGREEMENT. As promptly as practicable after the date hereof, URS shall prepare and submit to each of the New York Stock Exchange and the Pacific Stock Exchange a listing application covering the shares of the URS Common Stock to be issued in connection with the Merger. URS shall use its best efforts to obtain, prior to the Effective Time of the Merger, approval for the listing of such URS Common Stock, subject to official notice of issuance.
CONDITIONS TO CONSUMMATION OF THE MERGER Section 7.1 CONDITIONS TO OBLIGATIONS OF GREINER. The obligations of Greiner to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the Merger of the following conditions:
7.1.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties contained in this Agreement of URS and the Subsidiary shall be deemed to have been made again at and as of the Closing with respect to the stated facts then existing and shall be true in all material respects.
7.1.2 COVENANTS PERFORMED. All of the obligations of URS and the Subsidiary to be performed at or before the Closing pursuant to the terms of this Agreement shall be been duly performed.
7.1.3 CERTIFICATE. At the Closing, Greiner shall have received a Certificate signed by the President of each of URS and the Subsidiary to the effect that each of the conditions set forth in Section 7.1.1 and 7.1.2 have been satisfied.
7.1.4 APPROVAL OF STOCKHOLDERS. This Agreement and the Merger shall have been approved by the stockholders of Greiner.
7.1.5 OPINION OF COUNSEL. Sheppard, Mullin, Richter & Hampton, counsel to URS, shall have issued an opinion of counsel to Greiner, dated the Effective Time of the Merger, in form and substance reasonably satisfactory to Greiner, to the effect that:
(i) URS is a corporation validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power to own, operate and lease its properties and to carry on its business as it is now being conducted;
(ii) URS has full corporate power to enter into this Agreement and to carry out the transactions
(iii) All corporate action required to be taken on the part of URS to authorize it to execute and deliver this Agreement and to consummate the transactions contemplated hereby have been duly and validly taken.
(iv) This Agreement has been duly and validly authorized, executed and delivered by URS and, assuming due authorization, execution, delivery and performance by each of the other parties hereto, constitutes the valid and binding obligation of URS, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy or other laws relating to or affecting creditors' rights generally and
(v) The shares of URS Common Stock issuable in connection with the Merger have been duly and validly authorized and, upon issuance, such shares will be fully paid and nonassessable.
In giving such opinions, such counsel shall be entitled to rely upon certificates of officers of URS or any of its subsidiaries and public officials with respect to factual matters upon which their opinions may be based, provided that the extent of such reliance is set forth in such opinion and such opinion states that it is reasonable for Greiner to rely thereon.
7.1.6 FORM S-4. The Form S-4 pertaining to the URS Common Stock to be issued in connection with the Merger shall have become effective under the 1933 Act and shall not be the subject of any stop order or proceedings seeking a stop order.
7.1.7 MERGER DOCUMENTS. The Merger Documents shall have been filed with the Secretary of State of the State of Nevada, as required by law.
7.1.8 MATERIAL ADVERSE CHANGES. There shall have been no URS Material Adverse Effect between the date of this Agreement and the date of the Closing.
7.1.9 HSR FILING. Any waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated, and no action shall have been instituted by the Department of Justice or Federal Trade Commission challenging or seeking to enjoin the consummation of the transaction contemplated by this Agreement, which action shall not have been withdrawn or terminated.
Section 7.2 CONDITIONS TO OBLIGATIONS OF URS AND THE SUBSIDIARY. The obligations of URS and the Subsidiary to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the Merger of the following conditions:
7.2.1 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. The representations and warranties contained in this Agreement of Greiner shall be deemed to have been made again at and as of the Closing with respect to the stated facts then existing and shall be true in all material respects.
7.2.2 COVENANTS PERFORMED. All of the obligations of URS and the Subsidiary to be performed at or before the Closing pursuant to the terms of this Agreement shall be been duly performed.
7.2.3 CERTIFICATE. At the Closing, URS and the Subsidiary shall have received a Certificate signed by the President of Greiner to the effect that each of the conditions set forth in Section 7.2.1 and 7.2.2 have been satisfied.
7.2.4 APPROVAL OF STOCKHOLDERS. This Agreement and the Merger shall have been approved by the stockholders of Greiner.
7.2.5 OPINION OF COUNSEL. Nossaman, Guthner, Knox & Elliott, counsel to Greiner, shall have issued an opinion of counsel to URS, dated the Effective Time of the Merger, in form and substance reasonably satisfactory to URS, to the effect that:
(i) Greiner is a corporation validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate power to own, operate and lease its properties and to carry on its business as it is now being conducted;
(ii) Greiner has full corporate power to enter into this Agreement and to carry out the
(iii) All corporate action required to be taken on the part of Greiner to authorize it to execute and deliver this Agreement and to consummate the transactions contemplated hereby have been duly and
(iv) This Agreement has been duly and validly authorized, executed and delivered by Greiner and, assuming due authorization, execution, delivery and performance by each of the other parties hereto, constitutes the valid and binding obligation of Greiner, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy or other laws relating to or affecting creditors' rights generally and by equitable principles.
In giving such opinions, such counsel shall be entitled to rely upon certificates of officers of Greiner or any of its subsidiaries and public officials with respect to factual matters upon which their opinions may be based, provided that the extent of such reliance is set forth in such opinion and such opinion states that it is reasonable for URS to rely thereon.
7.2.6 FORM S-4. The Form S-4 pertaining to the URS Common Stock to be issued in connection with the Merger shall have become effective under the 1933 Act and shall not be the subject of any stop order or proceedings seeking a stop order.
7.2.7 MERGER DOCUMENTS. The Merger Documents shall have been filed with the Secretary of State of the State of Nevada, as required by law.
7.2.8 MATERIAL ADVERSE CHANGES. There shall have been no Greiner Material Adverse Effect between the date of this Agreement and the date of the Closing.
7.2.9 HSR FILING. Any waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated, and no action shall have been instituted by the Department of Justice or Federal Trade Commission challenging or seeking to enjoin the consummation of the transaction contemplated by this Agreement, which action shall not have been withdrawn or terminated.
7.2.10 CONSENTS. Other than the filing of the Merger Documents as contemplated in Section 1.2, the parties shall have made such filings, and obtained all consents of Governmental Entities, required to consummate the transactions contemplated hereby.
7.2.11 NO LITIGATION. There shall not be pending any action, proceeding or other application before any court or Government Entity brought by any Government Entity (i) challenging or seeking to restrain or prohibit the consummation of the transactions contemplated by this AGreement, or seeking to obtain any material damages, or (ii) seeking to prohibit or impose any material limitations on URS's ownership or operation of all or any portion of the combined business of URS and Greiner.
7.2.12 CREDIT AGREEMENT. The conditions set forth in Sections 4.2, 4.3 and 4.4 of the Credit Agreement shall have been satisfied.
Section 8.1 PUBLIC ANNOUNCEMENTS. URS, the Subsidiary and Greiner agree that they will not issue any press release or otherwise make any public statement or respond to any press inquiry with respect to this Agreement or the transactions contemplated hereby without the prior approval of the other party (which approval will not be unreasonably withheld), except as may be required by applicable law.
Section 8.2 CONFIDENTIALITY. No party to this Agreement shall use or disclose any non-public information obtained from another party for any purpose unrelated to the Merger, and, if this Agreement is terminated for any reason whatsoever, each party shall return to the other all originals and copies of all documents and papers containing all information furnished to such party pursuant to this Agreement, or during the negotiations which preceded this Agreement, and shall neither use nor disclose any such information except to the extent that such information is available to the public, is rightfully obtained from third parties, or is independently developed.
Section 8.3. ADDITIONAL AGREEMENTS. In case at any time after the Effective Time of the Merger any further action is reasonably necessary or desirable to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of the constituent corporations, the proper officers and directors of each corporation which is a party to this Agreement shall take all such necessary corporate action.
Section 8.4. USE OF NAME. Without limiting the right of URS to conduct its business in such manner as it deems appropriate, URS intends, following the Closing Date, and for the foreseeable period thereafter, to maintain Greiner as a separate subsidiary operating under its own existing name.
Section 8.5. EMPLOYEE MATTERS. After the Closing Date, URS will use reasonable efforts to maintain the business of Greiner and, in particular, without limitation, URS will use best efforts to maintain health, medical, dental and other benefits for Greiner employees for a reasonable period after the Closing Date which, in the aggregate, are reasonably comparable to benefits provided to Greiner employees prior to the Closing Date, subject to reasonable business practices and changing conditions.
Section 8.6. NON-LIABILITY OF AGENTS AND STOCKHOLDERS. No stockholder, director, officer or employee of any party hereto shall be individually liable for any breach of the representations, warranties or covenants of any party hereto contained herein in the absence of fraud or willful misconduct on the part of such stockholder, director, officer or employee.
Section 8.7 THE PERFORMANCE PLAN AND STOCK OWNERSHIP PLAN OF GREINER ENGINEERING, INC. URS, the Greiner Subsidiaries and Greiner agree that as soon as practical following the execution of this Agreement, effective as of the Closing Date and contingent on closing the Merger, The Performance Plan and Employees Stock Ownership Plan of Greiner Engineering, Inc. (the "Plan") will be amended to cease to be an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code ("ESOP"), but will be continued as a profit sharing plan, subject to the terms of the Plan document regarding amendment and/or termination. Such Plan amendment will provide that the cash proceeds received by the Plan pursuant to this Agreement will not be reinvested in URS or Greiner stock, but shall be reinvested in the various investment options available under the non-ESOP portion of the Plan, as directed by Plan Participants, and that employer stock will no longer be one of the investment options offered under the Plan. URS stock received pursuant to this Agreement shall continue to be held by the Plan, subject to the investment discretion of the Plan's trustee, but no additional investments in URS stock shall be permitted, and, unless URS agrees otherwise, Plan Participants shall not have investment discretion with respect to the URS stock so held. In addition, in the event that as of the Closing Date, the aggregate value of the unvested ESOP portion of the Plan accounts shall be less than $1,000,000 (for purposes of this Section 8.7, unvested shares of Greiner stock shall be valued at an amount equal to the closing price of the Greiner stock as reported on the New York Stock Exchange on the trading day immediately preceding the Closing Date, as listed in The Wall Street Journal), URS, the Greiner Subsidiaries and Greiner agree that as soon as practical following the execution of this Agreement, effective as of the Closing Date and contingent on the closing of the Merger, the Plan will be amended so that Plan Participants will be fully vested in the ESOP portion of their accounts as of the Closing Date. The parties shall cooperate and take all steps as may be reasonably necessary to effect the foregoing.
Section 9.1. TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after the approval by the stockholders of Greiner (the "Stockholder Approval") has been obtained:
9.1.1 by mutual written consent of URS and Greiner;
9.1.2 by either Greiner or URS if (i) the Stockholder Approval shall not be obtained by reason of stockholders holding a majority of the Greiner Common Stock failing to vote in favor of approval of this Agreement at a meeting of stockholders or any adjournment thereof; (ii) a Governmental Entity of competent jurisdiction shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; or (iii) the Merger shall not have been consummated before September 30, 1996 (provided that the terminating party is not then in material breach of any representation, warranty, covenant or agreement contained in
9.1.3 By URS if there has been a breach by Greiner of any representation, warranty, covenant or other agreement in this Agreement which has a Greiner Material Adverse Effect, and such breach has not been cured, or Greiner has not commenced reasonable efforts to cure such breach, within thirty (30) days after written notice of such breach is given by URS to Greiner;
9.1.4 By URS if Greiner shall enter into any discussions, negotiations or any letter of intent, understanding or other agreement relating to an Acquisition Proposal, provided that no such termination shall effect the rights of URS to reimbursement of expenses and the Termination Fee as provided in Section 6.2.3; or
9.1.5 By Greiner if there has been a breach by URS or the Subsidiary of any material representation, warranty, covenant or other agreement, and such breach has not been cured, or URS and the Subsidiary have not commenced reasonable efforts to cure such breach, within thirty (30) days after written notice of such breach is given by Greiner to URS.
9.1.6 By Greiner if any of the conditions set forth in Section 7.1 hereof shall not have been fulfilled on or prior to the date specified for fulfillment thereof, or shall
have become impossible to fulfill for reasons beyond the control of Greiner, and such condition shall not have been waived.
9.1.7 By URS if any of the conditions set forth in Section 7.2 hereof shall not have been fulfilled on or prior to the date specified for fulfillment thereof, or shall have become impossible to fulfill for reasons beyond the control of URS, and such condition shall not have been waived.
Where action is taken to terminate this Agreement pursuant to this Section 9.1, it shall be sufficient for such action to be authorized by the Board of Directors of the party taking such action without any requirement to submit such action to the stockholders of such party.
Section 9.2. EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of the Agreement by either Greiner or URS as provided in Section 9.1, this Agreement shall forthwith become void and have no effect, and there shall be no liability or obligation on the part of Greiner, URS or the Subsidiary, or their respective officers and directors, except that (i) the provisions of Section 6.2.3, this Section 9.2, and the Confidentiality Agreement shall survive any such termination, and (ii) no party whose breach of its representations, warranties, covenants or agreements set forth in this Agreement was the basis of the other party's termination of this Agreement shall be relieved from liability for damages occasioned by such breach, including any expenses incurred by the other party in connection with this Agreement and the transactions contemplated hereby; provided, however, that in the event such breach is the result of negligence, such damages shall not exceed the sum of $500,000; but, provided, further, that in the event that such breach is the result of recklessness or willful conduct, the amount of damages shall not be limited hereby.
Section 9.3. AMENDMENT. This Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors at any time before or after the approval of the stockholders of Greiner (the "Stockholder Approval"), but after the Stockholder Approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.
Section 9.4. EXTENSION; WAIVER. At any time prior to the Effective Time of the Merger, any party hereto, by action taken by its Board of Directors may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements, covenants, or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement shall not constitute a waiver of these rights.
Section 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No representations or warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive beyond the Effective Time of the Merger. This Section 10.1 shall not limit any covenant or agreement after the Effective Time of the Merger.
Section 10.2 ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes the entire agreement among the parties pertaining to the subject matter contained herein and supersedes all prior and contemporaneous agreements, representations and undertakings of the parties. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all the parties. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by any party making the waiver.
Section 10.3 COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed in original, but all of which together shall constitute one and the same instrument.
Section 10.4 ASSIGNMENT. This Agreement shall be binding on, and shall inure to the benefit of, the parties to it and their respective heirs, legal representatives, successors and assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties hereto.
Section 10.5 FEES AND EXPENSES. Each of the parties shall pay their own fees, costs and expenses (including, without limitation, legal and accounting expenses) incurred, or to be incurred, by them in negotiating and preparing this
Agreement and in closing and carrying out the transactions contemplated by this Agreement.
Section 10.6 NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service if served personally or by facsimile on the party to whom notice is to be given, or on the fifth day after mailing, if mailed to the party on whom notice is to be given, by registered or certified mail, postage prepaid, and properly addressed as follows:
If to URS and the Subsidiary:
100 California Street, Suite 500
Sheppard, Mullin, Richter & Hampton Four Embarcadero Center, Suite 1700 Attn: Samuel M. Livermore, Esq.
909 E. Las Colinas Blvd.,
Nossaman, Guthner, Knox & Elliott 445 S. Figueroa Street, 31st Floor
Any party may change its address for purposes of this Section by giving the other party written notice of the new address in the manner set forth above.
Section 10.7 GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of California, United States of America, without giving effect to provisions thereof relating to conflicts of law.
Section 10.8 FURTHER ACTION. Each of the parties hereto shall use such party's best efforts to take such action as may be necessary or reasonably requested by the other party hereto to carry out and consummate the transactions contemplated by this Agreement.
Section 10.9 NO THIRD PARTY BENEFICIARY. Nothing herein is intended to create rights in any third party.
Section 10.10 EFFECT OF HEADINGS. The subject headings of the Articles and Sections of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions.
Section 10.11 SEVERABILITY. If any term of this Agreement or application thereof shall be invalid or unenforceable, the remainder of this Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it on the day and year first above written.
THE SUBSIDIARY: URS ACQUISITION CORPORATION
For further information contact: For immediate release
Morgen-Walke Associates, Inc. January 11, 1996
URS Corporation Greiner Engineering, Inc. Kent P. Ainsworth Robert L. Costello Vice President and President & CEO Chief Financial Officer (214) 869-1001
URS CORPORATION SIGNS DEFINITIVE AGREEMENT TO ACQUIRE GREINER ENGINEERING, INC.
SAN FRANCISCO, CA & IRVING, TX / JANUARY 11, 1996 - URS
Corporation (NYSE: URS) and Greiner Engineering, Inc.
(NYSE: GII) today jointly announced that they have signed a
Definitive Agreement for URS to acquire all of the outstanding
shares of Greiner's common stock. The transaction remains
subject to Greiner stockholder approval and other closing
conditions. The combined Company will be the 20th largest
design engineering company and it will be among the top five
transportation engineering firms in the nation.
Terms of the transaction are unchanged from the letter of
intent announced on December 4, 1995. As a result of the
acquisition, Greiner will become a wholly-owned subsidiary of
URS. Greiner stockholders will receive $13.50 per share in
cash plus .298 share of URS common stock for every common share
of Greiner. Based on Greiner's 4,704,642 outstanding shares of
common stock, the aggregate consideration will be approximately
$63.5 million in cash and 1.4 million shares of URS common
URS also announced today that to finance the acquisition
and to provide for working capital needs, it has entered into a
new $70 million secured credit facility with Wells Fargo Bank,
N.A. The credit facility consists of $50 million in term loans
maturing in 2002 and 2003, and a $20 million revolving line of
Headquartered in San Francisco, URS offers a broad range
of services to public and private sector clients in two
principal markets: infrastructure projects involving
transportation systems, institutional and commercial
facilities, pollution control and water resources; and
environmental projects involving hazardous waste management.
Headquartered in Irving, Texas, Greiner is a professional
services firm which provides engineering, planning,
architectural, environmental, program management and other
services to public and private sector clients throughout the
U.S. and in foreign countries, including Malaysia and Hong
DATED AS OF JANUARY 10, 1996
WELLS FARGO BANK, NATIONAL ASSOCIATION,
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . i
EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . v
SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . vi
Section 1. DEFINITIONS . . . . . . . . . . . . . . . . 2
1.1 Certain Defined Terms . . . . . . . . . . . 2 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement . . 40 1.3 Other Definitional Provisions and Rules of Construction . . . . . . . . . . . . . . . . 40
Section 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS . 41
2.1 Commitments; Making of Loans; Notes . . . . 41 2.2 Interest on the Loans . . . . . . . . . . . 46 2.3 Fees . . . . . . . . . . . . . . . . . . . . 52 2.4 Repayments, Prepayments and Reductions in Provisions Regarding Payments . . . . . . . 53 2.5 Use of Proceeds . . . . . . . . . . . . . . 63 2.6 Special Provisions Governing Eurodollar Rate Loans . . . . . . . . . . . . . . . . . 63 2.7 Increased Costs; Taxes; Capital Adequacy . . 66 2.8 Obligation of Lenders and Issuing Lenders to Mitigate . . . . . . . . . . . . . . . . 71
Section 3. LETTERS OF CREDIT . . . . . . . . . . . . . 72
3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein . . . . . 72 3.2 Letter of Credit Fees . . . . . . . . . . . 75 3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit. . . . . . . . . . . 76 3.4 Obligations Absolute . . . . . . . . . . . . 79 3.5 Indemnification; Nature of Issuing Lenders' Duties . . . . . . . . . . . . . . . . . . . 81 3.6 Increased Costs and Taxes Relating to Letters of Credit . . . . . . . . . . . . . 82
Section 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT . 83
4.1 Conditions to Signing Date. . . . . . . . . 83 4.2 Conditions to Term Loans and Initial Revolving Loans . . . . . . . . . . . . . . 87 4.3 Conditions to All Loans. . . . . . . . . . . 97 4.4 Conditions to Letters of Credit . . . . . . 98
Section 5. COMPANY'S REPRESENTATIONS AND WARRANTIES . . 99
5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries . . . . 99 5.2 Authorization of Borrowing, etc. . . . . . . 101 5.3 Financial Condition . . . . . . . . . . . . 102 5.4 No Material Adverse Change; No Restricted Junior Payments; No Deterioration in Quality of Accounts Receivable . . . . . . . 103 5.5 Title to Properties; Liens; Real Property; Licenses, Trademarks; etc. . . . . . . . . . 103 5.6 Litigation; Adverse Facts . . . . . . . . . 104 5.7 Payment of Taxes . . . . . . . . . . . . . . 105 5.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts . . . 105 5.9 Governmental Regulation . . . . . . . . . . 106 5.10 Securities Activities . . . . . . . . . . . 106 5.11 Employee Benefit Plans . . . . . . . . . . . 106 5.12 Certain Fees . . . . . . . . . . . . . . . . 107 5.13 Environmental Protection . . . . . . . . . . 107 5.14 Employee Matters . . . . . . . . . . . . . . 108 5.15 Solvency . . . . . . . . . . . . . . . . . . 108 5.16 Matters Relating to Collateral . . . . . . . 109 5.17 Merger Agreement . . . . . . . . . . . . . . 110 5.18 Disclosure . . . . . . . . . . . . . . . . . 110
Section 6. COMPANY'S AFFIRMATIVE COVENANTS . . . . . . 111
6.1 Financial Statements and Other Reports . . . 111 6.2 Corporate Existence, etc. . . . . . . . . . 120 6.3 Payment of Taxes and Claims; Tax Consolidation . . . . . . . . . . . . . . . 120 6.4 Maintenance of Properties; Insurance; Application of Net Insurance/ Condemnation Proceeds . . . . . . . . . . . . . . . . . . 121 6.5 Inspection Rights . . . . . . . . . . . . . 122 6.6 Compliance with Laws, etc. . . . . . . . . . 122 6.7 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Subsidiaries . . . . . . . . . . . . . . . . 122 6.8 Interest Rate Protection . . . . . . . . . . 123
Section 7. COMPANY'S NEGATIVE COVENANTS . . . . . . . . 123
7.1 Indebtedness . . . . . . . . . . . . . . . . 124 7.2 Liens and Related Matters . . . . . . . . . 125 7.3 Investments; Joint Ventures . . . . . . . . 126 7.4 Contingent Obligations . . . . . . . . . . . 127 7.5 Restricted Junior Payments . . . . . . . . . 128 7.6 Financial Covenants . . . . . . . . . . . . 129 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions . . . . . . . . . . . 131 7.8 Sale or Discount of Receivables . . . . . . 132 7.9 Transactions with Shareholders and Affiliates . . . . . . . . . . . . . . . . . 132 7.10 Disposal of Subsidiary Stock . . . . . . . . 132 7.11 Conduct of Business . . . . . . . . . . . . 133 7.12 Foreign Subsidiaries. . . . . . . . . . . . 133 7.13 Prepayments . . . . . . . . . . . . . . . . 133 7.14 Amendments or Waivers of Merger Agreement; Amendments of Documents Relating to Subordinated Indebtedness . . . . . . . . . 134 7.15 Fiscal Year . . . . . . . . . . . . . . . . 134
Section 8. EVENTS OF DEFAULT . . . . . . . . . . . . . 134
8.1 Failure to Make Payments When Due . . . . . 134 8.2 Default in Other Agreements . . . . . . . . 134 8.3 Breach of Certain Covenants . . . . . . . . 135 8.4 Breach of Warranty . . . . . . . . . . . . . 135 8.5 Other Defaults Under Loan Documents . . . . 135 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc. . . . . . . . . . . . . . . . 135 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc. . . . . . . . . . . . . . . . 136 8.8 Judgments and Attachments . . . . . . . . . 136 8.9 Dissolution . . . . . . . . . . . . . . . . 137 8.10 Employee Benefit Plans . . . . . . . . . . . 137 8.11 Material Adverse Effect . . . . . . . . . . 137 8.12 Change in Control . . . . . . . . . . . . . 137 8.13 Invalidity of Subsidiary Guaranty; Failure of Security; Repudiation of Obligations . . 137 8.14 Failure to Consummate Merger . . . . . . . . 138 8.15 Failure to Comply with Subordination Provisions. . . . . . . . . . . . . . . . . 138
Section 9. ADMINISTRATIVE AGENT . . . . . . . . . . . . 139
9.1 Appointment . . . . . . . . . . . . . . . . 139 9.2 Powers and Duties; General Immunity . . . . 141 9.3 Representations and Warranties; No Creditworthiness . . . . . . . . . . . . . . 143 9.4 Right to Indemnity . . . . . . . . . . . . . 143
9.5 Successor Administrative Agent . . . . . . . 144 9.6 Collateral Documents and Guaranties . . . . 144
Section 10. MISCELLANEOUS . . . . . . . . . . . . . . . 145
10.1 Assignments and Participations in Loans and Letters of Credit . . . . . . . . . . . . . 145 10.2 Expenses . . . . . . . . . . . . . . . . . . 149 10.3 Indemnity . . . . . . . . . . . . . . . . . 150 10.4 Set-Off . . . . . . . . . . . . . . . . . . 151 10.5 Ratable Sharing . . . . . . . . . . . . . . 151 10.6 Amendments and Waivers . . . . . . . . . . . 152 10.7 Independence of Covenants . . . . . . . . . 154 10.8 Notices . . . . . . . . . . . . . . . . . . 154 10.9 Survival of Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . 154 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . 155 10.11 Marshalling; Payments Set Aside . . . . . . 155 10.12 Severability . . . . . . . . . . . . . . . . 155 10.13 Obligations Several; Independent Nature of Lenders' Rights . . . . . . . . . . . . . . 155 10.14 Headings . . . . . . . . . . . . . . . . . . 156 10.15 Applicable Law . . . . . . . . . . . . . . . 156 10.16 Successors and Assigns . . . . . . . . . . . 156 10.17 Waiver of Jury Trial . . . . . . . . . . . . 156 10.18 Confidentiality . . . . . . . . . . . . . . 157 10.19 Counterparts; Effectiveness . . . . . . . . 157
Signatures . . . . . . . . . . . . . . . . . . . . . . . . S-1
I FORM OF NOTICE OF BORROWING II FORM OF NOTICE OF CONVERSION/CONTINUATION III FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT IV-A FORM OF TRANCHE A TERM NOTE IV-B FORM OF TRANCHE B TERM NOTE V FORM OF REVOLVING NOTE VI FORM OF COMPLIANCE CERTIFICATE VII-A FORM OF OPINION OF COMPANY COUNSEL VII-B FORM OF OPINION OF COMPANY COUNSEL VIII FORM OF OPINION OF ADMINISTRATIVE AGENT COUNSEL IX FORM OF ASSIGNMENT AGREEMENT X-A FORM OF AUDITOR'S LETTER (Coopers & Lybrand, LLP) X-B FORM OF AUDITOR'S LETTER (Price Waterhouse, LLP) XI FORM OF CERTIFICATE RE NON-U.S. BANK STATUS XII FORM OF COLLATERAL ACCOUNT AGREEMENT XIII FORM OF COMPANY PLEDGE AGREEMENT XIV FORM OF COMPANY SECURITY AGREEMENT XV FORM OF SUBSIDIARY GUARANTY XVI FORM OF SUBSIDIARY PLEDGE AGREEMENT XVII FORM OF SUBSIDIARY SECURITY AGREEMENT XVIII FORM OF FINANCIAL CONDITION CERTIFICATE
2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES
This CREDIT AGREEMENT is dated as of January 10, 1996 and entered into by and among URS CORPORATION, a Delaware corporation ("Company"), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred to herein as a "Lender" and collectively as "Lenders"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Wells Fargo"), as agent for Lenders (in such capacity, "Administrative Agent").
R E C I T A L S - - - - - - - - WHEREAS, Merger Sub (this and other capitalized terms used in these recitals without definition being used as defined in subsection 1.1) has been formed by Company for the purpose of acquiring all of the outstanding shares of capital stock of
WHEREAS, on the Initial Funding Date, (i) Company will acquire all of the outstanding shares of capital stock of Greiner pursuant to the Merger Agreement and (ii) immediately upon the consummation of the Acquisition, Merger Sub will be merged with and into Greiner pursuant to the Merger Agreement, with Greiner being the surviving corporation in such merger and becoming a wholly-owned Domestic Subsidiary of Company;
WHEREAS, Lenders have agreed to extend certain credit facilities to Company, a portion of the proceeds of which will be used to fund the Acquisition Financing Requirements and the remainder of which will be used to provide financing for working capital and other general corporate purposes of Company and its Subsidiaries following the Merger;
WHEREAS, Company desires to secure all of the Obligations hereunder and under the other Loan Documents by granting to Administrative Agent, on behalf of Lenders, a first priority Lien on its accounts receivable and certain other collateral and pledging to Administrative Agent, on behalf of Lenders, 100% of the capital stock held by Company of each of its Domestic Subsidiaries with assets or revenues in excess of $100,000 and the lesser of (i) 100% of the capital stock held by Company of each of its Foreign Subsidiaries with assets or revenues in excess of $100,000 or (ii) 65% of the capital stock of any such Foreign Subsidiary; and
WHEREAS, all of the Domestic Subsidiaries of Company with assets or revenues in excess of $100,000 have agreed to
guarantee the Obligations hereunder and under the other Loan Documents and to secure their guaranties by granting to Administrative Agent, on behalf of Lenders, a first priority Lien on their accounts receivable and certain other collateral and pledging to Administrative Agent, on behalf of Lenders, 100% of the capital stock held by such Domestic Subsidiaries of each of their respective Domestic Subsidiaries with assets or revenues in excess of $100,000 and the lesser of (i) 100% of the capital stock held by such Domestic Subsidiaries of each of their respective Foreign Subsidiaries with assets or revenues in excess of $100,000 or (ii) 65% of the capital stock of any such Foreign Subsidiary:
NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders and Administrative Agent agree as follows:
The following terms used in this Agreement shall have the following meanings:
"Account Receivable" means any right to payment for goods sold or leased or for services rendered.
"Acquisition" means the purchase of all of the outstanding shares of capital stock of Greiner contemplated by the Merger Agreement.
"Acquisition Consideration" means the Cash portion of the aggregate consideration paid to the shareholders of Greiner in exchange for all of the outstanding shares of capital stock of Greiner.
"Acquisition Financing Requirements" means the aggregate of all amounts necessary (i) to pay the Acquisition Consideration and (ii) to pay Transaction Costs.
"Adjusted Eurodollar Rate" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate Loan, the rate per annum obtained by DIVIDING (i) the offered quotation (rounded upward to the nearest 1/16 of 1%) by first class banks in the London interbank market to Wells Fargo for U.S. dollar deposits of amounts in same day funds comparable to the principal amount of the Eurodollar Rate Loan of Wells Fargo for which the Adjusted Eurodollar Rate is then being determined (which principal amount shall be deemed to be $1,000,000 in the event Wells Fargo is not making, converting to or continuing such a Eurodollar Rate Loan) with
maturities comparable to such Interest Period as of approximately 9:00 A.M. (San Francisco time) on such Interest Rate Determination Date BY (ii) a percentage equal to 100% MINUS the stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable on such Interest Rate Determination Date to any member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" as defined in Regulation D (or any successor category of liabilities under Regulation D).
"Administrative Agent" has the meaning assigned to that term in the introduction to this Agreement and also means and includes any successor Administrative Agent appointed pursuant to subsection 9.5.
"Affected Class" has the meaning assigned to that term in subsection 10.6.
"Affected Lender" has the meaning assigned to that term in subsection 2.6C.
"Affiliate", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. Any Person, other than a Lender, who owns beneficially or of record Securities representing more than 5% of the total outstanding Securities of Company shall be an Affiliate of Company.
"Aggregate Amounts Due" has the meaning assigned to that term in subsection 10.5.
"Agreement" means this Credit Agreement dated as of January 10, 1996, as it may be amended, supplemented or otherwise modified from time to time.
"Applicable Base Rate Margin" means, as at any date of determination, the percentage per annum set forth below opposite the applicable Leverage Ratio, as determined in accordance with subsection 2.2A:
Leverage Ratio Applicable Base Rate Margin Greater than or equal to 3.50 to 1.00 1.375% Less than 3.50 to 1.00 1.125% but greater than or equal to Less than 3.00 to 1.00 0.875% but greater than or equal to Less than 2.75 to 1.00 but greater than or equal to 0.625% Less than 2.50 to 1.00 but greater than or equal to 0.375% Less than 2.00 to 1.00 0.000%
"Applicable Commitment Fee Percentage" means, as at any date of determination, the percentage per annum set forth below opposite the applicable Leverage Ratio, as determined in accordance with subsection 2.3:
Greater than or equal to 3.50 to 1.00 0.500% Less than 3.50 to 1.00 0.500% but greater than or equal to Less than 3.00 to 1.00 0.375% but greater than or equal to Less than 2.75 to 1.00 0.375% but greater than or equal to Less than 2.50 to 1.00 0.375% but greater than or equal to Less than 2.00 to 1.00 0.250%
"Applicable Eurodollar Rate Margin" means, as at any date of determination, the percentage per annum set forth below opposite the applicable Leverage Ratio, as determined in accordance with subsection 2.2A:
Leverage Ratio Applicable Eurodollar Rate Margin
Greater than or equal to 3.50 to 1.00 2.625% Less than 3.50 to 1.00 2.375% but greater than or equal to Less than 3.00 to 1.00 2.125% but greater than or equal to Less than 2.75 to 1.00 1.875% but greater than or equal to Less than 2.50 to 1.00 1.625% but greater than or equal to Less than 2.00 to 1.00 1.375%
"Applied Amount" has the meaning assigned to that term in subsection 2.4B(iv)(b).
"Asset Sale", as applied to any Person, means the sale by such Person or any of its Subsidiaries to any other Person (other than such Person or any of its wholly-owned Subsidiaries) of (i) any of the stock of any Subsidiary of such Person (other than any stock sold to licensed professionals employed by such Person or its Subsidiaries in order to comply with state licensing laws), (ii) substantially all of the assets of any division or line of business of such Person or any of its Subsidiaries (other than the assets of any division or line of business to the extent that the aggregate value of such assets is equal to $100,000 or less), or (iii) any other assets (whether tangible or intangible) of such Person or any of its Subsidiaries (other than any assets to the extent that the aggregate value of such assets sold in any single transaction during any fiscal year or related series of transactions is equal to $100,000 or less).
"Assignment Agreement" means an Assignment Agreement substantially in the form of Exhibit IX annexed hereto. "Auditor's Letters" means (i) a letter, substantially in the form of Exhibit X-A annexed hereto, to Company from Coopers & Lybrand, LLP and delivered to Administrative Agent pursuant to subsection 4.1I and (ii) a letter, substantially in the form of Exhibit X-B annexed hereto, to Greiner from Price Waterhouse, LLP and delivered to Administrative Agent pursuant to subsection 4.2R.
"Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute.
"Base Rate" means, at any time, the higher of (i) the Prime Rate or (ii) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate.
"Base Rate Loans" means Loans bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A.
"Business Day" means (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of California or is a day on which banking institu- tions located in such state are authorized or required by law or other governmental action to close, and (ii) with respect to all notices, determinations, fundings and payments in connection with the Adjusted Eurodollar Rate or any Eurodollar Rate Loans, any day that is a Business Day described in clause (i) above and that is also a day for trading by and between banks in Dollar deposits in the London interbank market.
"Capital Lease", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person.
"Cash" means money, currency or a credit balance in a Deposit Account.
"Cash Equivalents" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States of America the obligations of which are backed by the full faith and credit of the United States of America, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any
Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; and (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's.
"Certificate re Non-Bank Status" means a certificate substantially in the form of Exhibit XI annexed hereto delivered by a Lender to Administrative Agent pursuant to subsection 2.7B(iii).
"Class" as applied to Lenders, means each of the following two classes of Lenders: (i) Lenders having Tranche A Term Loan Exposure and/or Revolving Loan Exposure (taken together as a single class) and (ii) Lenders having Tranche B Term Loan Exposure.
"Collateral" means, collectively, all Accounts Receivable, other collateral and capital stock in which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations.
"Collateral Account" has the meaning assigned to that term in the Collateral Account Agreement.
"Collateral Account Agreement" means the Collateral Account Agreement executed and delivered by Company and Administrative Agent on the Signing Date, substantially in the form of Exhibit XII annexed hereto, as such Collateral Account Agreement may hereafter be amended, supplemented or otherwise modified from time to time.
"Collateral Documents" means the Company Pledge Agreement, the Company Security Agreement, the Collateral Account Agreement, the Subsidiary Pledge Agreements, the Subsidiary Security Agreements, and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Administrative Agent, on behalf of Lenders, a Lien on any property of that Loan Party as security for the Obligations.
"Commitments" means the commitments of Lenders to make Loans as set forth in subsection 2.1A.
"Company" has the meaning assigned to that term in the introduction to this Agreement.
"Company Pledge Agreement" means the Company Pledge Agreement executed and delivered by Company on the Signing Date, substantially in the form of Exhibit XIII annexed hereto, as such Company Pledge Agreement may thereafter be amended, supplemented or otherwise modified from time to time.
"Company Security Agreement" means the Company Security Agreement executed and delivered by Company on the Signing Date, substantially in the form of Exhibit XIV annexed hereto, as such Company Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time.
"Compliance Certificate" means a certificate substan- tially in the form of Exhibit VI annexed hereto delivered to Administrative Agent and Lenders by Company pursuant to subsection 6.1(vii).
"Consolidated Capital Expenditures" means, for any period following consummation of the Merger, the sum of (i) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of Company and its Subsidiaries) by Company and its Subsidiaries during that period for fixed assets and leasehold improvements of Company and its Subsidiaries PLUS (ii) to the extent not covered by clause (i) of this definition, the aggregate of all expenditures by Company and its Subsidiaries during that period (a) to purchase or develop computer software or systems (but only to the extent such expenditures are capitalized on the consolidated balance sheet of Company and its Subsidiaries in conformity with GAAP) or (b) to acquire (by purchase or otherwise) the business, property or fixed assets of any other Person, or the stock or other evidence of beneficial ownership of any other Person that, as a result of such acquisition, becomes a Subsidiary of Company (other than the portion of the Acquisition Consideration allocated to the net fixed assets of Greiner and its Subsidiaries in an amount not to exceed $12,000,000).
"Consolidated Cash Interest Expense" means, for any period following consummation of the Merger, Consolidated Interest Expense for such period, excluding, however, any interest expense not payable in Cash (including amortization of discount and amortization of debt issuance costs).
"Consolidated Current Liabilities" means, as at any date of determination following consummation of the Merger, the total liabilities of Company and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP, including the aggregate principal amount of all outstanding Revolving Loans and the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding and the current portion of the aggregate principal amount of all outstanding Term Loans.
"Consolidated EBITDA" means, for any period following consummation of the Merger, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense, and (vi) other non-cash items reducing Consolidated Net Income LESS other non-cash items increasing Consolidated Net Income, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP.
"Consolidated Excess Cash" means, as at the last day of the first Fiscal Quarter following the Initial Funding Date, (i) the sum as at such date of Cash, Cash Equivalents and other items constituting "cash" on the balance sheet of Company and its Subsidiaries consistent with historical practices MINUS (ii) $5,000,000.
"Consolidated Excess Cash Flow" means, for any period, an amount (if positive) equal to (i) Consolidated EBITDA for such period MINUS (ii) the sum, without duplication, of (a) Consolidated Principal Payments for such period, (b) Consolidated Capital Expenditures (net of any proceeds of any related financings with respect to such expenditures) for such period, (c) Consolidated Cash Interest Expense for such period, (d) the provision for current taxes based on income of Company and its Subsidiaries on a consolidated basis and payable in Cash during such period, and (e) $1,000,000; PROVIDED, HOWEVER, that in the event that any such period includes any period prior to consummation of the Merger, (1) "Consolidated EBITDA" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated EBITDA for such period PLUS Pre Merger Greiner Consolidated EBITDA for such period; (2) "Consolidated Principal Payments" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated Principal Payments for such period PLUS Pre Merger Greiner Consolidated Principal Payments for such period (in each case excluding repayments of revolving loans); (3) "Consolidated Capital Expenditures" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated Capital Expenditures for such
period PLUS Pre Merger Greiner Consolidated Capital Expenditures for such period (in each case net of any proceeds of any related financings with respect to such expenditures); (4) "Consolidated Cash Interest Expense" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated Cash Interest Expense for such period PLUS Pre Merger Greiner Consolidated Cash Interest Expense for such period; and (5) the provision for current taxes based on income of Company and its Subsidiaries for any such period prior to consummation of the Merger shall mean the sum of (A) the provision for current taxes based on income of URS and its Subsidiaries on a consolidated basis and payable in Cash during such period PLUS (B) the provision for current taxes based on income of Greiner and its Subsidiaries on a consolidated basis and payable in Cash during such period.
"Consolidated Fixed Charges" means, for any period following consummation of the Merger, the sum (without duplication) of the amounts for such period of (i) Consolidated Interest Expense, (ii) provisions for taxes based on income and payable in Cash, and (iii) Consolidated Scheduled Principal Payments, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP.
"Consolidated Interest Expense" means, for any period following consummation of the Merger, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries during such period, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements to which Company or any of its Subsidiaries is a party, but excluding, however, any amounts referred to in subsection 2.3 payable to Administrative Agent and Lenders on or before the Signing Date.
"Consolidated Net Income" means, for any period following consummation of the Merger, the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; PROVIDED that there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of Company or a Joint Venture) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are
acquired by Company or any of its Subsidiaries, (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) any after-tax gains or losses attributable to Asset Sales by Company or any of its Subsidiaries or returned surplus assets of any Pension Plan of Company or any of its Subsidiaries, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains or net non-cash extraordinary losses.
"Consolidated Principal Payments" means, for any period following consummation of the Merger, the aggregate amount of all voluntary and scheduled repayments of principal by Company and its Subsidiaries on a consolidated basis during such period under all Indebtedness of Company or any of its Subsidiaries (including the principal component of Capital Leases), other than any repayment of the Existing Blum Subordinated Convertible Note solely through the issuance of shares of Company's common stock.
"Consolidated Quick Assets" means, as at any date of determination following consummation of the Merger, all Cash, Cash Equivalents and Eligible Accounts Receivable of Company and its Subsidiaries on a consolidated basis which may properly be classified as current assets in conformity with GAAP.
"Consolidated Scheduled Principal Payments" means, for any period following consummation of the Merger, the aggregate amount of all scheduled repayments of principal by Company and its Subsidiaries on a consolidated basis during such period under all Indebtedness of Company or any of its Subsidiaries (including the principal component of Capital Leases), other than any repayment of the Existing Blum Subordinated Convertible Note solely through the issuance of shares of Company's common stock.
"Consolidated Tangible Net Worth" means, as at any date of determination, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficits) of Company and its Subsidiaries LESS (i) the aggregate amount of all treasury stock, (ii) any goodwill or other intangible assets and (iii) the aggregate amount of all obligations owing to Company or any of its Subsidiaries from any employee or Affiliate of Company, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP.
"Consolidated Total Funded Debt" means, as at any date of determination following consummation of the Merger, the sum of (i) the aggregate principal amount of all outstanding Term Loans, (ii) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding, (iii) the aggregate amount of that portion of obligations with respect to Capital Leases of Company or any of its Subsidiaries that is properly classified as a liability on a balance sheet in conformity with GAAP, (iv) all Indebtedness of Company or any of its Subsidiaries for borrowed money evidenced by a note or similar written instrument, and (v) the average aggregate principal amount of all Revolving Loans outstanding during the 12-month period immediately preceding the date of determination.
"Contingent Obligation", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebted- ness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Hedge Agreements. Contingent Obligations shall include, without limitation, (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (1) to purchase, repurchase or other- wise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (2) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (1) or (2) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited.
"Contractual Obligation", as applied to any Person, means any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject.
"Currency Agreement" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement.
"Deposit Account" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit.
"Dollars" and the sign "$" mean the lawful money of the United States of America.
"Domestic Subsidiary" means any Subsidiary organized or incorporated under the laws of a state of the United States of America.
"Domestic Subsidiary Guarantor" means any Domestic Subsidiary of Company that executes and delivers a Subsidiary Guaranty on the Signing Date, the Initial Funding Date or from time to time thereafter pursuant to subsection 6.7.
"Eligible Accounts Receivable", as applied to any Person, means all billed Accounts Receivable of such Person and its Subsidiaries.
"Eligible Assignee" means (i) (a) a commercial bank organized under the laws of the United States of America or any state thereof and having a combined capital and surplus of at least $100,000,000; (b) a savings and loan association or savings bank organized under the laws of the United States of America or any state thereof and having a combined capital and surplus of at least $100,000,000; (c) a commercial bank organized under the laws of any other country or a political subdivision thereof and having a combined capital and surplus of at least $100,000,000; PROVIDED that (1) such bank is acting through a branch or agency located in the United States of America or (2) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; and (d) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses including, but not limited to, insurance companies, mutual funds and lease financing companies; and (ii) any Lender and
any Affiliate of any Lender; PROVIDED that no Affiliate of Company shall be an Eligible Assignee.
"Employee Benefit Plan", as applied to any Person, means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by such Person, any of its Subsidiaries or any of their respective ERISA Affiliates.
"Environmental Claim" means any investigation, notice, notice of violation, claim, action, suit, proceeding, demand, abatement order or other order or directive (conditional or otherwise), by any governmental authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law, (ii) in connection with any Hazardous Materials or any actual or alleged Hazardous Materials Activity, or (iii) in connection with any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment.
"Environmental Laws" means any and all current or future statutes, ordinances, orders, rules, regulations, guidance documents, judgments, Governmental Authorizations, or any other requirements of governmental authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any Facility, including the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. sec. 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. sec. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. sec. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. sec. 1251 et seq.), the Clean Air Act (42 U.S.C. sec. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. sec. 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. sec. 136 et seq.), the Occupational Safety and Health Act (29 U.S.C. sec. 651 et seq.), the Oil Pollution Act (33 U.S.C. sec. 2701 et seq) and the Emergency Planning and Community Right-to-Know Act (42 U.S.C. sec. 11001 et seq.), each as amended or supplemented, any analogous present or future state or local statutes or laws, and any regulations promulgated pursuant to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto.
"ERISA Affiliate," as applied to any Person, means (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company or such Subsidiary and with respect to liabilities arising after such period for which Company or such Subsidiary could be liable under the Internal Revenue Code or ERISA.
"ERISA Event" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan of Company or any of its Subsidiaries (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan of Company or any of its Subsidiaries (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure by Company or any of its Subsidiaries to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure by Company or any of its Subsidiaries to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan of Company or any of its Subsidiaries pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan of Company or any of its Subsidiaries, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan of Company or any of its Subsidiaries; (vi) the imposition of liability on Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of
the application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on Company, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan of Company or any of its Subsidiaries other than a Multiemployer Plan or the assets thereof, or against Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan of Company or any of its Subsidiaries (or any other Employee Benefit Plan of Company or any of its Subsidiaries intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan of Company or any of its Subsidiaries to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan of Company or any of its Subsidiaries.
"Eurodollar Rate Loans" means Loans bearing interest at rates determined by reference to the Adjusted Eurodollar Rate as provided in subsection 2.2A.
"Event of Default" means each of the events set forth in Section 8.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute.
"Exchange Rate" means, on any date when an amount expressed in a currency other than Dollars is to be determined with respect to any Letter of Credit, the nominal rate of exchange of the Issuing Lender in the New York foreign exchange market for the purchase by the Issuing Lender (by cable transfer) of such currency in exchange for Dollars at 12:00
noon (New York time) one Business Day prior to such date, expressed as a number of units of such currency per one Dollar.
"Existing Blum Subordinated Credit Agreement" means the Credit and Security Agreement, dated January 30, 1989, as amended through the date hereof, pursuant to which the Existing Blum Subordinated Convertible Note was issued, as such agreement may be further amended from time to time to the extent permitted under subsection 7.14B.
"Existing Blum Subordinated Convertible Note" means the promissory note executed by Company dated January 30, 1989 and due November 1, 2000 in the principal amount of $4,000,000.
"Existing Blum Subordination Agreement" means the Subordination Agreement, dated October 19, 1992, between Wells Fargo, Richard C. Blum & Associates, Inc., BK Capital Partners, BK Capital Partners II and BK Capital Partners III, Company, Thortec Environmental Systems, Inc., Mitchell Management Systems, Inc. and URS Consultants, Inc.
"Existing Company Letters of Credit" means those letters of credit issued for the account of Company and identified on Schedule 1.1 of the Initial Funding Date Company Disclosure Letter.
"Existing Credit Agreements" means (i) that certain Third Restated Credit Agreement dated as of May 12, 1995 between Company, URS Consultants, Inc. and Wells Fargo and (ii) that certain Line of Credit Agreement dated as of May 31, 1993 among Greiner and Sanwa Bank, in each case as amended prior to the Initial Funding Date.
"Existing Greiner Letters of Credit" means those letters of credit issued for the account of Greiner and identified on Schedule 1.1 of the Initial Funding Date Company Disclosure Letter.
"Existing Public Debt" means, collectively, the Existing Senior Subordinated Notes and the Existing Subordinated Notes.
"Existing Senior Subordinated Note Indenture" means the Indenture, dated as of March 16, 1989, between Thortec International, Inc. and MTrust Corp, National Association, as amended by Amendment Number 1 and Amendment Number 2, as such indenture may be further amended from time to time to the extent permitted under subsection 7.14B.
"Existing Senior Subordinated Notes" means Company's 8 % Senior Subordinated Notes due 2004 in the original aggregate principal amount of $36,814,500 and the remaining
aggregate principal amount of $6,454,750 as of the Signing Date.
collectively, the Existing Blum Subordinated Credit Agreement, the Existing Senior Subordinated Note Indenture and the Existing Subordinated Note Indenture.
collectively, the Existing Public Debt and the Existing Blum Subordinated Convertible Note.
"Existing Subordinated Note Indenture" means the Indenture, dated as of February 15, 1987, between Company and First Interstate Bank of California, as amended by Amendment Number 1, as such indenture may be further amended from time to time to the extent permitted under subsection 7.14B.
"Existing Subordinated Notes" means Company's 6-1/2% Convertible Subordinated Notes due 2012 in the original aggregate principal amount of $57,500,000 and the remaining aggregate principal amount of $2,145,000 as of the Signing Date.
"Facilities" means any and all real property (including, without limitation, all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by Company or any of its Subsidiaries or any of their respective predecessors or Affiliates.
"Federal Funds Effective Rate" means, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent.
"Financial Plan" has the meaning assigned to that term in subsection 6.1(xvi).
"First Priority" means, with respect to any Lien purported to be created in any Collateral pursuant to any Collateral Document, that (i) such Lien has priority over any other Lien on such Collateral and (ii) such Lien is the only Lien to which such Collateral is subject.
"Fiscal Quarter" means a fiscal quarter of any Fiscal Year.
"Fiscal Year" means the fiscal year of Company and its Subsidiaries ending on October 31 of each calendar year. For purposes of this Agreement, any particular Fiscal Year shall be designated by reference to the calendar year in which such Fiscal Year ends.
"Foreign Subsidiary" means any Subsidiary formed or organized under the laws of a jurisdiction other than a state of the United States of America.
"Funding and Payment Office" means (i) the office of Administrative Agent located at 420 Montgomery Street, San Francisco, California 94163 or (ii) such other office of Administrative Agent as may from time to time hereafter be designated as such in a written notice delivered by Administrative Agent to Company and each Lender.
"Funding Date" means the date of the funding of a Loan.
"GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in opinions and pro- nouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination.
"Governmental Acts" has the meaning assigned to that term in subsection 3.5A.
"Governmental Authorization" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court.
"Greiner" means Greiner Engineering, Inc., a Nevada corporation.
"Greiner Fiscal Quarter" means, prior to consummation of the Merger, a fiscal quarter of any Greiner Fiscal Year.
"Greiner Fiscal Year" means, prior to consummation of the Merger, the fiscal year of Greiner and its Subsidiaries ending on December 31 of each calendar year.
"Hazardous Materials" means (i) any chemical, material or substance at any time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", acutely hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic pollutant", "contaminant", "restricted hazardous waste", "infectious waste", "toxic substances", or any other term or expression intended to define, list or classify substances by reason of properties harmful to health, safety or the indoor or outdoor environment (including harmful properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws); (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials; (vi) any asbestos-containing materials; (vii) urea formaldehyde foam insulation; (viii) electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls; (ix) pesticides; and (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons in the vicinity of any Facility or to the indoor or outdoor environment.
"Hazardous Materials Activity" means any past, current, proposed or threatened activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing.
"Hedge Agreement" means an Interest Rate Agreement or a Currency Agreement designed to hedge against fluctuations in interest rates or currency values, respectively.
"Inactive Subsidiary" has the meaning assigned to that term in subsection 5.1E.
"Indebtedness", as applied to any Person, means (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with
GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA), which purchase price is (a) due more than six months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. Obligations under Interest Rate Agreements and Currency Agreements constitute (1) in the case of Hedge Agreements, Contingent Obligations, and (2) in all other cases, Investments, and in neither case constitute Indebtedness.
"Indemnified Liabilities" has the meaning assigned to that term in subsection 10.3.
"Indemnitee" has the meaning assigned to that term in subsection 10.3.
"Initial Funding Date" means the date, on or before May 31, 1996, or such later date as may be established pursuant to subsection 2.1E, on which the initial Loans are made.
"Initial Funding Date Company Disclosure Letter" means the letter dated the Initial Funding Date delivered to Administrative Agent by Company containing information with respect to Company and its Subsidiaries and Greiner and its Subsidiaries.
"Initial Revolving Loans" has the meaning assigned to that term in subsection 2.5A.
"Interest Payment Date" means (i) with respect to any Base Rate Loan, each January 31, April 30, July 31 and October 31 of each year, commencing on the first such date to occur after the Initial Funding Date, and (ii) with respect to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan; PROVIDED that in the case of each Interest Period of six months "Interest Payment Date" shall also include the date that is three months after the commencement of such Interest Period.
"Interest Period" has the meaning assigned to that term in subsection 2.2B.
"Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement.
"Interest Rate Determination Date" means, with respect to any Interest Period, the second Business Day prior to the first day of such Interest Period.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute.
"Investment" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any Securities of any other Person (including any Subsidiary of Company), (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Company from any Person other than Company or any of its Subsidiaries, of any equity Securities of such Subsidiary, (iii) any direct or indirect loan, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person, including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordi- nary course of business, or (iv) Interest Rate Agreements or Currency Agreements not constituting Hedge Agreements. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment.
"Issuing Lender" means, with respect to any Letter of Credit, Wells Fargo.
"Joint Venture" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; PROVIDED that in no event shall any corporate Subsidiary of any Person be considered to be a Joint Venture to which such Person is a party.
"Lender" and "Lenders" means the persons identified as "Lenders" and listed on the signature pages of this Agree- ment, together with their successors and permitted assigns pursuant to subsection 10.1.
"Letter of Credit" or "Letters of Credit" means (i) any letter of credit or similar instrument issued or to be issued by the Issuing Lender for the account of Company pursuant to subsection 3.1 for the purpose of supporting (a) Indebtedness of Company or any of its Subsidiaries in respect of industrial revenue or development bonds or financings, (b) workers' compensation liabilities of Company or
any of its Subsidiaries, (c) the obligations of third party insurers of Company or any of its Subsidiaries arising by virtue of the laws of any jurisdiction requiring third party insurers, (d) obligations with respect to Capital Leases or Operating Leases of Company or any of its Subsidiaries, and (e) performance, payment, deposit or surety obligations of Company or any of its Subsidiaries, in any case if required by law or governmental rule or regulation or in accordance with custom and practice in the industry; PROVIDED that Letters of Credit may not be issued for the purpose of supporting any Indebtedness constituting "antecedent debt" (as that term is used in Section 547 of the Bankruptcy Code), and (ii) the Existing Company Letters of Credit.
"Letter of Credit Usage" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding PLUS (ii) the aggregate amount of all drawings under Letters of Credit honored by the Issuing Lender and not theretofore reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B). For purposes of this definition, any amount described in clause (i) or (ii) of the preceding sentence which is denominated in a currency other than Dollars shall be valued based on the applicable Exchange Rate for such currency as of the applicable date of determination.
"Leverage Ratio" has the meaning assigned to that term in subsection 7.6C.
"Lien" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing.
"Loan" or "Loans" means one or more of the Tranche A Term Loans, Tranche B Term Loans or Revolving Loans or any combination thereof.
"Loan Documents" means this Agreement, the Notes, the Letters of Credit (and any applications for, or reimbursement agreements or other documents or certificates executed by Company in favor of the Issuing Lender relating to, the Letters of Credit) and the Collateral Documents.
"Loan Party" means each of Company and any of Company's Subsidiaries from time to time executing a Loan
Document, and "Loan Parties" means all such Persons, collectively.
"Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time.
"Material Adverse Effect", as applied to any Person, means (i) a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of such Person or any of its Subsidiaries or (ii) the material impairment of the ability of any Loan Party to perform, or of Administrative Agent or Lenders to enforce, the Obligations.
"Material Contract", as applied to any Person, means any contract or other arrangement to which such Person or any of its Subsidiaries is a party (other than the Loan Documents) for which breach, nonperformance, cancellation or failure to renew could have a Material Adverse Effect on such Person.
"Merger" means the merger of Merger Sub with and into Greiner in accordance with the terms of the Merger Agreement, with Greiner being the surviving corporation in such Merger.
"Merger Agreement" means that certain Agreement and Plan of Merger by and among Greiner, Company and Merger Sub dated as of January 9, 1996, in the form delivered to Administrative Agent and Lenders prior to their execution of this Agreement and as such agreement may be amended from time to time thereafter to the extent permitted under subsection 7.14A.
"Merger Sub" means URS Acquisition Corporation, a Nevada corporation and a wholly-owned Subsidiary of Company.
"Multiemployer Plan" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA.
"Net Asset Sale Proceeds" means, with respect to any Asset Sale by Company or any of its Subsidiaries, Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale, net of any bona fide direct costs incurred in connection with such Asset Sale, including, without limitation, (i) income taxes reasonably estimated to be actually payable within two years of the date of such Asset Sale as a result of any gain recognized in connection with such Asset Sale and (ii) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness (other than
the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid under the terms thereof as a result of such Asset Sale.
"Net Pension Proceeds" has the meaning assigned to that term in subsection 2.4B(iii)(b).
"Net Proceeds Amount" has the meaning assigned to that term in subsection 2.4B(iii)(g).
"Net Securities Proceeds" has the meaning assigned to that term in subsection 2.4B(iii)(c).
"Non-US Lender" has the meaning assigned to that term in subsection 2.7B(iii)(a).
"Notes" means one or more of the Tranche A Term Notes, Tranche B Term Notes or Revolving Notes or any combination thereof.
"Notice of Borrowing" means a notice substantially in the form of Exhibit I annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.1B with respect to a proposed borrowing.
"Notice of Conversion/Continuation" means a notice substantially in the form of Exhibit II annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the Loans specified therein.
"Notice of Issuance of Letter of Credit" means a notice substantially in the form of Exhibit III annexed hereto delivered by Company to Administrative Agent pursuant to subsection 3.1B(i) with respect to the proposed issuance of a Letter of Credit.
"Obligations" means all obligations of every nature of each Loan Party from time to time owed to Administrative Agent, Lenders or any of them under the Loan Documents, whether for principal, interest, reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnification or otherwise.
"Officer's Certificate" means, as applied to any corporation, a certificate executed on behalf of such corporation by its president or by its chief financial officer; PROVIDED that every Officer's Certificate with respect to the
compliance with a condition precedent to the making of any Loans hereunder shall include (i) a statement that the officer making or giving such Officer's Certificate has read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signer, he or she has made or has caused to be made such examination or investigation as is necessary to enable such signer to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signer, such condition has been complied with.
"Operating Lease" as applied to any Person, means any lease (including, without limitation, leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is not a Capital Lease other than any such lease under which that Person is the lessor.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto.
"Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA.
"Permitted Encumbrances" means the following types of Liens (excluding any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA, any such Lien relating to or imposed in connection with any Environmental Claim, and any such Lien expressly prohibited by any applicable terms of any of the Collateral Documents):
(i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 6.3;
(ii) statutory Liens of landlords, statutory Liens of banks and rights of set-off, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of business (a) for amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of five days) are being contested in good faith by appropriate proceedings, so long as such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such
(iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of
social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any property of Company or any of its Subsidiaries on account
(iv) any attachment or judgment Lien not consti- tuting an Event of Default under subsection 8.8;
(v) leases or subleases granted to third parties and not interfering in any material respect with the ordinary conduct of the business of Company or any of its
(vi) any (a) interest or title of a lessor or sublessor under any lease, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee
(vii) Liens arising from filing UCC financing statements relating solely to leases permitted by this Agreement.
"Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof.
"Pledged Collateral" means, collectively, the "Pledged Collateral" as defined in the Company Pledge Agreement and the Subsidiary Pledge Agreements.
"Potential Event of Default" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default.
"Pre Closing Date" means the date which is two weeks in advance of the Initial Funding Date.
"Pre Merger Greiner Consolidated Capital Expenditures" means, for any period prior to consummation of the Merger, the sum of (i) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of Greiner and its Subsidiaries) by Greiner and its Subsidiaries during that period for fixed assets and leasehold improvements of Greiner and its Subsidiaries PLUS (ii) to the extent not covered by clause (i) of this definition, the aggregate of all expenditures by Greiner and its Subsidiaries during that period (a) to purchase or develop computer software or systems (but only to the extent such expenditures are capitalized on the consolidated balance sheet of Greiner and its Subsidiaries in conformity with GAAP) or (b) to acquire (by purchase or otherwise) the business, property or fixed assets of any other Person, or the stock or other evidence of beneficial ownership of any other Person that, as a result of such acquisition, becomes a Subsidiary of Greiner.
"Pre Merger Greiner Consolidated Cash Interest Expense" means, for any period prior to consummation of the Merger, Pre Merger Greiner Consolidated Interest Expense for such period, excluding, however, any interest expense not payable in Cash (including amortization of discount and amortization of debt issuance costs).
"Pre Merger Greiner Consolidated EBITDA" means (i) for the Fiscal Quarter ended January 31, 1995, the Fiscal Quarter ended April 30, 1995, the Fiscal Quarter ended July 31, 1995, the Fiscal Quarter ended October 31, 1995 and the Fiscal Quarter ended January 31, 1996, $1,100,000 and (ii) for any period thereafter prior to consummation of the Merger, the sum of the amounts for such period of (a) Pre Merger Greiner Consolidated Net Income, (b) Pre Merger Greiner Consolidated Interest Expense, (c) provisions for taxes based on income, (d) total depreciation expense, (e) total amortization expense, and (f) other non-cash items reducing Pre Merger Greiner Consolidated Net Income LESS other non-cash items increasing Pre Merger Greiner Consolidated Net Income, all of the foregoing as determined on a consolidated basis for Greiner and its Subsidiaries in conformity with GAAP.
"Pre Merger Greiner Consolidated Fixed Charges" means, for any period prior to consummation of the Merger, the sum (without duplication) of the amounts for such period of (i) Pre Merger Greiner Consolidated Interest Expense, (ii) provisions for taxes based on income and payable in Cash, and (iii) Pre Merger Greiner Consolidated Scheduled Principal Payments, all of the foregoing as determined on a consolidated basis for Greiner and its Subsidiaries in conformity with GAAP.
"Pre Merger Greiner Consolidated Interest Expense" means, for any period prior to consummation of the Merger, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of Greiner and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Greiner and its Subsidiaries during such period, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements to which Greiner or any of its Subsidiaries is a party.
"Pre Merger Greiner Consolidated Net Income" means, for any period prior to consummation of the Merger, the net income (or loss) of Greiner and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; PROVIDED that there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of Greiner or a Joint Venture) in which any other Person (other than Greiner or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Greiner or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Greiner or is merged into or consolidated with Greiner or any of its Subsidiaries or that Person's assets are acquired by Greiner or any of its Subsidiaries, (iii) the income of any Subsidiary of Greiner to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) any after-tax gains or losses attributable to Asset Sales by Greiner or any of its Subsidiaries or returned surplus assets of any Pension Plan of Greiner or any of its Subsidiaries, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains or net non- cash extraordinary losses.
"Pre Merger Greiner Consolidated Principal Payments" means, for any period prior to consummation of the Merger, the aggregate amount of all voluntary and scheduled repayments of principal by Greiner and its Subsidiaries on a consolidated basis during such period under all Indebtedness of Greiner or any of its Subsidiaries (including the principal component of Capital Leases).
"Pre Merger Greiner Consolidated Scheduled Principal Payments" means, for any period prior to consummation of the
Merger, the aggregate amount of all scheduled repayments of principal by Greiner and its Subsidiaries on a consolidated basis during such period under all Indebtedness of Greiner or any of its Subsidiaries (including the principal component of Capital Leases).
"Pre Merger Greiner Consolidated Total Funded Debt" means, as at any date of determination prior to consummation of the Merger, the sum of (i) the aggregate principal amount of all outstanding term loans, (ii) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all letters of credit then outstanding, (iii) the aggregate amount of that portion of obligations with respect to Capital Leases of Greiner or any of its Subsidiaries that is properly classified as a liability on a balance sheet in conformity with GAAP, (iv) all Indebtedness of Greiner or any of its Subsidiaries for borrowed money evidenced by a note or similar written instrument, and (v) the average aggregate principal amount of all revolving loans outstanding during the 12-month period immediately preceding the date of determination.
"Pre Merger URS Consolidated Capital Expenditures" means, for any period prior to consummation of the Merger, the sum of (i) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of URS and its Subsidiaries) by URS and its Subsidiaries during that period for fixed assets and leasehold improvements of URS and its Subsidiaries PLUS (ii) to the extent not covered by clause (i) of this definition, the aggregate of all expenditures by URS and its Subsidiaries during that period (a) to purchase or develop computer software or systems (but only to the extent such expenditures are capitalized on the consolidated balance sheet of URS and its Subsidiaries in conformity with GAAP) or (b) to acquire (by purchase or otherwise) the business, property or fixed assets of any other Person, or the stock or other evidence of beneficial ownership of any other Person that, as a result of such acquisition, becomes a Subsidiary of URS.
"Pre Merger URS Consolidated Cash Interest Expense" means, for any period prior to consummation of the Merger, Pre Merger URS Consolidated Interest Expense for such period, excluding, however, any interest expense not payable in Cash (including amortization of discount and amortization of debt issuance costs).
"Pre Merger URS Consolidated EBITDA" means, for any period prior to consummation of the Merger, the sum of the amounts for such period of (i) Pre Merger URS Consolidated Net Income, (ii) Pre Merger URS Consolidated Interest Expense,
(iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense, and (vi) other non-cash items reducing Pre Merger URS Consolidated Net Income LESS other non-cash items increasing Pre Merger URS Consolidated Net Income, all of the foregoing as determined on a consolidated basis for URS and its Subsidiaries in conformi- ty with GAAP.
"Pre Merger URS Consolidated Fixed Charges" means, for any period prior to consummation of the Merger, the sum (without duplication) of the amounts for such period of (i) Pre Merger URS Consolidated Interest Expense, (ii) provisions for taxes based on income and payable in Cash, and (iii) Pre Merger URS Consolidated Scheduled Principal Payments, all of the foregoing as determined on a consolidated basis for URS and its Subsidiaries in conformity with GAAP.
"Pre Merger URS Consolidated Interest Expense" means, for any period prior to consummation of the Merger, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of URS and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of URS and its Subsidiaries during such period, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements to which URS or any of its Subsidiaries is a party, but excluding, however, any amounts referred to in subsection 2.3 payable to Administrative Agent and Lenders on or before the Signing Date.
"Pre Merger URS Consolidated Net Income" means, for any period prior to consummation of the Merger, the net income (or loss) of URS and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; PROVIDED that there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of URS or a Joint Venture) in which any other Person (other than URS or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to URS or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of URS or is merged into or consolidated with URS or any of its Subsidiaries or that Person's assets are acquired by URS or any of its Subsidiaries, (iii) the income of any Subsidiary of URS to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) any after-tax gains or losses attributable to Asset Sales
by URS or any of its Subsidiaries or returned surplus assets of any Pension Plan of URS or any of its Subsidiaries, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains or net non-cash extraordinary losses.
"Pre Merger URS Consolidated Principal Payments" means, for any period prior to consummation of the Merger, the aggregate amount of all voluntary and scheduled repayments of principal by URS and its Subsidiaries on a consolidated basis during such period under all Indebtedness of URS or any of its Subsidiaries (including the principal component of Capital Leases).
"Pre Merger URS Consolidated Scheduled Principal Payments" means, for any period prior to consummation of the Merger, the aggregate amount of all scheduled repayments of principal by URS and its Subsidiaries on a consolidated basis during such period under all Indebtedness of URS or any of its Subsidiaries (including the principal component of Capital Leases).
"Pre Merger URS Consolidated Total Funded Debt" means, as at any date of determination prior to consummation of the Merger, the sum of (i) the aggregate principal amount of all outstanding term loans, (ii) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all letters of credit then outstanding, (iii) the aggregate amount of that portion of obligations with respect to Capital Leases of URS or any of its Subsidiaries that is properly classified as a liability on a balance sheet in conformity with GAAP, (iv) all Indebtedness of URS or any of its Subsidiaries for borrowed money evidenced by a note or similar written instrument, and (v) the average aggregate principal amount of all revolving loans outstanding during the 12-month period immediately preceding the date of determination.
"Prime Rate" means the rate most recently announced by Wells Fargo at its principal office in San Francisco from time to time as its "Prime Rate." The Prime Rate is one of Wells Fargo's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. Wells Fargo or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. Any change in the interest rate resulting from a change in such Prime Rate shall become effective as of 12:01 a.m. of the Business Day on which each change in Prime Rate is announced by Wells Fargo.
"Pro Rata Share" means (i) with respect to all payments, computations and other matters relating to the Tranche A Term Loan Commitment or the Tranche A Term Loan of any Lender, the percentage obtained by DIVIDING (a) the Tranche A Term Loan Exposure of that Lender BY (b) the aggregate Tranche A Term Loan Exposure of all Lenders, (ii) with respect to all payments, computations and other matters relating to the Tranche B Term Loan Commitment or the Tranche B Term Loan of any Lender, the percentage obtained by DIVIDING (a) the Tranche B Term Loan Exposure of that Lender BY (b) the aggregate Tranche B Term Loan Exposure of all Lenders, (iii) with respect to all payments, computations and other matters relating to the Revolving Loan Commitment or the Revolving Loans of any Lender or any Letters of Credit issued or participations therein purchased by any Lender, the percentage obtained by DIVIDING (a) the Revolving Loan Exposure of that Lender BY (b) the aggregate Revolving Loan Exposure of all Lenders, and (iv) for all other purposes with respect to each Lender, the percentage obtained by dividing (a) the sum of the Tranche A Term Loan Exposure of that Lender plus the Tranche B Term Loan Exposure of that Lender plus the Revolving Loan Exposure of that Lender by (b) the sum of the aggregate Tranche A Term Loan Exposure of all Lenders PLUS the aggregate Tranche B Term Loan Exposure of all Lenders PLUS the aggregate Revolving Loan Exposure of all Lenders, in any such case as the applicable percentage may be adjusted by assignments permitted pursuant to subsection 10.1. The initial Pro Rata Share of each Lender for purposes of each of clauses (i), (ii), (iii) and (iv) of the preceding sentence is set forth opposite the name of that Lender in Schedule 2.1 annexed hereto.
"Proceedings" has the meaning assigned to that term in subsection 6.1(xiii).
"Projections" means (i) the consolidated projected balance sheets and consolidated projected statements of income and cash flows of Company and its Subsidiaries, prepared by Company, for each month during the period from and including January 1, 1996 to and including August 31, 1996, (ii) the consolidated projected balance sheets and consolidated projected statements of income and cash flows of Greiner and its Subsidiaries, prepared by Company for each month during the period from and including January 1, 1996 to and including August 31, 1996, (iii) the consolidated projected balance sheets and consolidated projected statements of income and cash flows of Company and its Subsidiaries, prepared by Company assuming the Acquisition and the Merger have been consummated, for each Fiscal Quarter during the period from and including January 1, 1996 to and including October 31, 1996, and (iv) the consolidated projected balance sheets and consolidated projected statements of income and cash flows of Company and
its Subsidiaries, prepared by Company assuming the Acquisition and the Merger have been consummated, for each of Fiscal Years 1996 through 2003 delivered to Administrative Agent by Company under cover of a letter dated the Signing Date.
"Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.
"Reimbursement Date" has the meaning assigned to that term in subsection 3.3B.
"Release" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including, without limitation, the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Materials through the air, soil, surface water or groundwater.
"Requisite Class Lenders" means (i) for the Class of Lenders having Tranche A Term Loan Exposure and/or Revolving Loan Exposure, two or more Lenders having or holding 51% of the sum of (a) the aggregate Tranche A Term Loan Exposure of all Lenders PLUS (b) the aggregate Revolving Loan Exposure of all Lenders and (ii) for the Class of Lenders having Tranche B Term Loan Exposure, two or more Lenders having or holding at least 51% of the aggregate Tranche B Term Loan Exposure of all Lenders; PROVIDED, HOWEVER, that if as of any date of determination there is only one Lender with respect to any Class, then such Lender shall constitute Requisite Class Lenders with respect to such Class.
"Requisite Lenders" means two or more Lenders having or holding at least 51% of the sum of (i) the aggregate Tranche A Term Loan Exposure of all Lenders PLUS (ii) the aggregate Tranche B Term Loan Exposure of all Lenders PLUS (iii) the aggregate Revolving Loan Exposure of all Lenders; PROVIDED, HOWEVER, that if as of any date of determination there is only one Lender, then such Lender shall constitute Requisite Lenders.
"Restricted Junior Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Company now or hereafter
outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Subordinated Indebtedness.
"Revolving Loan Commitment" means the commitment of a Lender to make Revolving Loans to Company pursuant to subsection 2.1A(iii), and "Revolving Loan Commitments" means such commitments of all Lenders in the aggregate.
"Revolving Loan Commitment Termination Date" means April 30, 1999.
"Revolving Loan Exposure" means, with respect to any Lender as of any date of determination (i) prior to the termination of the Revolving Loan Commitments, that Lender's Revolving Loan Commitment and (ii) after the termination of the Revolving Loan Commitments, the sum of (a) the aggregate outstanding principal amount of the Revolving Loans of that Lender PLUS (b) in the event that Lender is the Issuing Lender, the aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Lender (in each case net of any participations purchased by other Lenders in such Letters of Credit or any unreimbursed drawings thereunder) PLUS (c) the aggregate amount of all participations purchased by that Lender in any outstanding Letters of Credit or any unreimbursed drawings under any Letters of Credit.
"Revolving Loans" means the Loans made by Lenders to Company pursuant to subsection 2.1A(iii).
"Revolving Notes" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(i)(c) on the Signing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Revolving Loan Commitments and Revolving Loans of any Lenders, in each case substantially in the form of Exhibit V annexed hereto, as they may be amended, supplemented or otherwise modified from time to time.
"Securities" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates
of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing.
"Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute.
"Signing Date" means the date on which the conditions set forth in subsection 4.1 are satisfied.
"Signing Date Company Disclosure Letter" means the letter dated the Signing Date delivered to Administrative Agent by Company containing information with respect to Company and its Subsidiaries and Greiner and its Subsidiaries.
"Solvent" means, with respect to any Person, that as of the date of determination both (i) (a) the then fair saleable value of the property of such Person is (1) greater than the total amount of liabilities (including contingent liabilities) of such Person and (2) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (b) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (c) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (ii) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
"Subordinated Indebtedness" means (i) the Existing Subordinated Indebtedness and (ii) any other Indebtedness of Company subordinated in right of payment to the Obligations pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance satisfactory to Administrative Agent and Requisite Lenders.
"Subsequent Acquisition" has the meaning assigned to that term in subsection 7.7(vi).
"Subsidiary" means, with respect to any Person, any corporation, partnership, limited liability company, association, or other business entity of which more than 50% of
the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof; PROVIDED that in no event shall any Joint Venture be considered to be a Subsidiary of any Person. Upon consummation of the Merger, Greiner shall be a Subsidiary of Company.
"Subsidiary Guarantor" means any Subsidiary of Company, Greiner and any Subsidiary of Greiner that executes and delivers a Subsidiary Guaranty on the Signing Date, the Initial Funding Date or from time to time thereafter pursuant to subsection 6.7.
"Subsidiary Guaranty" means each Subsidiary Guaranty executed and delivered by existing Subsidiaries of Company on the Signing Date or the Initial Funding Date and to be executed and delivered by additional Subsidiaries of Company from time to time thereafter in accordance with subsection 6.7, substantially in the form of Exhibit XV annexed hereto, as such Subsidiary Guaranty may hereafter be amended, supplemented or otherwise modified from time to time, and "Subsidiary Guaranties" means all such Subsidiary Guaranties, collectively.
"Subsidiary Pledge Agreement" means each Subsidiary Pledge Agreement executed and delivered by existing Subsidiary Guarantors on the Signing Date or the Initial Funding Date and to be executed and delivered by additional Subsidiary Guarantors from time to time thereafter in accordance with subsection 6.7, substantially in the form of Exhibit XVI annexed hereto, as such Subsidiary Pledge Agreement may hereafter be amended, supplemented or otherwise modified from time to time, and "Subsidiary Pledge Agreements" means all such Subsidiary Pledge Agreements, collectively.
"Subsidiary Security Agreement" means each Subsidiary Security Agreement executed and delivered by existing Subsidiary Guarantors on the Signing Date or the Initial Funding Date and to be executed and delivered by additional Subsidiary Guarantors from time to time thereafter in accordance with subsection 6.7, substantially in the form of Exhibit XVII annexed hereto, as such Subsidiary Security Agreement may hereafter be amended, supplemented or otherwise modified from time to time, and "Subsidiary Security
Agreements" means all such Subsidiary Security Agreements, collectively.
"Supplemental Collateral Agent" has the meaning assigned to that term in subsection 9.1B.
"Tax" or "Taxes" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; PROVIDED that "Tax on the overall net income" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its lending office).
"Term Loans" means, collectively, the Tranche A Term Loans and the Tranche B Term Loans.
"Total Purchase Price" means, with respect to any Subsequent Acquisition, (i) the sum of (a) the aggregate amount of all consideration payable by or on behalf of Company or any of its Subsidiaries in connection with such Subsequent Acquisition in Cash, property (including Securities of Company), services, notes, bonds, debentures or other debt instruments, (b) the aggregate principal amount of all Indebtedness assumed by Company or any or its Subsidiaries in connection with such Subsequent Acquisition, (c) the reasonable estimate of the amount of any Contingent Obligation of Company or any of its Subsidiaries incurred in connection with such Subsequent Acquisition, and (d) the aggregate amount of any Indebtedness incurred by Company or any Subsidiary in connection with such Subsequent Acquisition MINUS (ii) all Cash and Cash Equivalents acquired by Company or any of its Subsidiaries as a result of such Subsequent Acquisition. For purposes of this definition, any amount which is payable in a currency other than Dollars shall be valued based on the applicable Exchange Rate for such currency as of the date of such Subsequent Acquisition.
"Total Utilization of Revolving Loan Commitments" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Revolving Loans (other than Revolving Loans made for the purpose of reimbursing the Issuing Lender for any amount drawn under any
Letter of Credit but not yet so applied) PLUS (ii) the Letter of Credit Usage.
"Tranche A Term Loan Commitment" means the commitment of a Lender to make a Tranche A Term Loan to Company pursuant to subsection 2.1A(i), and "Tranche A Term Loan Commitments" means such commitments of all Lenders in the aggregate.
"Tranche A Term Loan Exposure" means, with respect to any Lender as of any date of determination (i) prior to the funding of the Tranche A Term Loans, that Lender's Tranche A Term Loan Commitment and (ii) after the funding of the Tranche A Term Loans, the outstanding principal amount of the Tranche A Term Loan of that Lender.
"Tranche A Term Loan Maturity Date" means October 31, 2002.
"Tranche A Term Loans" means the Loans made by Lenders to Company pursuant to subsection 2.1A(i).
Tranche A Term Notes" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(i)(a) on the Signing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Tranche A Term Loan Commitments or Tranche A Term Loans of any Lenders, in each case substantially in the form of Exhibit IV-A annexed hereto, as they may be amended, supplemented or otherwise modified from time to time.
"Tranche B Term Loan Commitment" means the commitment of a Lender to make a Tranche B Term Loan to Company pursuant to subsection 2.1A(ii), and "Tranche B Term Loan Commitments" means such commitments of all Lenders in the aggregate.
"Tranche B Term Loan Exposure" means, with respect to any Lender as of any date of determination (i) prior to the funding of the Tranche B Term Loans, that Lender's Tranche B Term Loan Commitment and (ii) after the funding of the Tranche B Term Loans, the outstanding principal amount of the Tranche B Term Loan of that Lender.
"Tranche B Term Loan Maturity Date" means April 30, 2003.
"Tranche B Term Loans" means the Loans made by Lenders to Company pursuant to subsection 2.1A(ii).
"Tranche B Term Notes" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(i)(b) on the
Signing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Tranche B Term Loan Commitments or Tranche B Term Loans of any Lenders, in each case substantially in the form of Exhibit IV-B annexed hereto, as they may be amended, supplemented or otherwise modified from time to time.
"Transaction Costs" means the fees, costs and expenses payable by Company on or before the Initial Funding Date in connection with the transactions contemplated by the Loan Documents and the Merger Agreement.
"UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction.
"Unrestricted Subsidiary" means any Subsidiary of the Company with assets or revenues of less than $100,000.
"URS" means URS Corporation, a Delaware corporation, prior to consummation of the Merger.
"Wells Fargo" has the meaning assigned to that term in the introduction to this Agreement.
1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to clauses (i), (ii), (iii), (iv), (v), (vi) and (xvi) of subsection 6.1 shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconcilia- tion statements provided for in subsection 6.1(viii)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall utilize accounting principles and policies in conformity with those used to prepare the financial statements referred to in subsection 5.3.
1.3 Other Definitional Provisions and Rules of Construction. A. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference.
B. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided.
C. The use herein of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter.
Section 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS
2.1 Commitments; Making of Loans; Notes. A. COMMITMENTS. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Lender hereby severally agrees to make the Loans described in subsections 2.1A(i), 2.1A(ii) and 2.1A(iii).
(i) TRANCHE A TERM LOANS. Each Lender severally agrees to lend to Company on the Initial Funding Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche A Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Lender's Tranche A Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate amount of the Tranche A Term Loan Commitments is $32,500,000; PROVIDED that the Tranche A Term Loan Commitments of Lenders shall be adjusted to give effect to any assignments of the Tranche A Term Loan Commitments pursuant to subsection 10.1B. Each Lender's Tranche A Term Loan Commitment shall expire immediately and without further action on May 31, 1996, or such later date as may be established pursuant to subsection 2.1E, if the Tranche A Term Loans are not made on or before that date. Company may make only one borrowing under the Tranche A Term Loan Commitments. Amounts borrowed under this subsection 2.1A(i) and subsequently repaid or prepaid may not be reborrowed.
(ii) TRANCHE B TERM LOANS. Each Lender severally agrees to lend to Company on the Initial Funding Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche B Term Loan Commitments to be used
for the purposes identified in subsection 2.5A. The amount of each Lender's Tranche B Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate amount of the Tranche B Term Loan Commitments is $17,500,000; PROVIDED that the Tranche B Term Loan Commitments of Lenders shall be adjusted to give effect to any assignments of the Tranche B Term Loan Commitments pursuant to subsection 10.1B. Each Lender's Tranche B Term Loan Commitment shall expire immediately and without further action on May 31, 1996, or such later date as may be established pursuant to subsection 2.1E, if the Tranche B Term Loans are not made on or before that date. Company may make only one borrowing under the Tranche B Term Loan Commitments. Amounts borrowed under this subsection 2.1A(ii) and subsequently repaid or prepaid may not be reborrowed.
(iii) REVOLVING LOANS. Each Lender severally agrees, subject to the limitations set forth below with respect to the maximum amount of Revolving Loans permitted to be outstanding from time to time, to lend to Company from time to time during the period from the Initial Funding Date to but excluding the Revolving Loan Commitment Termination Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Revolving Loan Commitments to be used for the purposes identified in subsection 2.5. The original amount of each Lender's Revolving Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate original amount of the Revolving Loan Commitments is $20,000,000; PROVIDED that the Revolving Loan Commitments of Lenders shall be adjusted to give effect to any assignments of the Revolving Loan Commitments pursuant to subsection 10.1B; and PROVIDED, FURTHER that the amount of the Revolving Loan Commitments shall be reduced from time to time by the amount of any reductions thereto made pursuant to subsections 2.4B(ii) and 2.4B(iii). Each Lender's Revolving Loan Commitment shall expire on the Revolving Loan Commitment Termination Date and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Loan Commitments shall be paid in full no later than that date; PROVIDED that each Lender's Revolving Loan Commitment shall expire immediately and without further action on May 31, 1996, or such later date as may be established pursuant to subsection 2.1E, if the Term Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(iii) may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date.
Anything contained in this Agreement to the contrary notwithstanding, the Revolving Loans and the Revolving Loan Commitments shall be subject to the following limitations in the amounts and during the periods indicated:
(a) in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect; and
(b) for 30 consecutive days during each Fiscal Year, the aggregate outstanding principal amount of all Revolving Loans shall not exceed $5,000,000.
B. BORROWING MECHANICS. Tranche A Term Loans, Tranche B Term Loans or Revolving Loans made on any Funding Date (other than Revolving Loans made pursuant to subsection 3.3B for the purpose of reimbursing the Issuing Lender for the amount of a drawing under a Letter of Credit) shall be in an aggregate minimum amount of $500,000 and integral multiples of $10,000 in excess of that amount; PROVIDED that Tranche A Term Loans, Tranche B Term Loans or Revolving Loans made on any Funding Date as Eurodollar Rate Loans with a particular Interest Period shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $10,000 in excess of that amount. Whenever Company desires that Lenders make Term Loans or Revolving Loans it shall deliver to Administrative Agent a Notice of Borrowing substantially in the form of Exhibit I annexed hereto no later than 10:00 A.M. (San Francisco time) at least three Business Days in advance of the proposed Funding Date (in the case of a Eurodollar Rate Loan) or at least one Business Day in advance of the proposed Funding Date (in the case of a Base Rate Loan). The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount and type of Loans requested, (iii) in the case of any Loans made on the Initial Funding Date, that such Loans shall be Base Rate Loans, (iv) in the case of Revolving Loans not made on the Initial Funding Date, whether such Loans shall be Base Rate Loans or Eurodollar Rate Loans, and (v) in the case of any Loans requested to be made as Eurodollar Rate Loans, the initial Interest Period requested therefor. Term Loans and Revolving Loans may be continued as or converted into Base Rate Loans and Eurodollar Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; PROVIDED that such notice shall be promptly confirmed in writing by delivery of a Notice of Borrowing to Administrative Agent on or before the applicable Funding Date.
Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of Loans by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected Loans hereunder.
Company shall notify Administrative Agent prior to the funding of any Loans in the event that any of the matters to which Company is required to certify in the applicable Notice of Borrowing is no longer true and correct in all material respects as of the applicable Funding Date, and the acceptance by Company of the proceeds of any Loans shall constitute a re-certification by Company, as of the applicable Funding Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing.
Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable, and Company shall be bound to make a borrowing in accordance therewith.
C. DISBURSEMENT OF FUNDS. All Term Loans and Revolving Loans under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender to make the particular type of Loan requested be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make a Loan requested hereunder. Promptly after receipt by Administrative Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent shall notify each Lender of the proposed borrowing. Each Lender shall make the amount of its Loan available to Administrative Agent not later than 10:00 A.M. (San Francisco time) on the applicable Funding Date in same day funds in Dollars, at the Funding and Payment Office. Except as provided in subsection 3.3B with respect to Revolving Loans used to reimburse the Issuing Lender for the amount of a drawing under a Letter of Credit issued by it, upon satisfaction or waiver of the conditions precedent specified in subsections 4.1 and 4.2 (in the case of Loans made on the Initial Funding Date) and 4.3 (in the case of all Loans), Administrative Agent shall make the proceeds of such Loans available to Company on the applicable Funding Date by causing an amount of same day funds in Dollars equal to the proceeds of
all such Loans received by Administrative Agent from Lenders to be credited to the account of Company at the Funding and Payment Office.
Unless Administrative Agent shall have been notified by any Lender prior to the Funding Date for any Loans that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Loan requested on such Funding Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Funding Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Base Rate Loans. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder.
D. NOTES. Company shall execute and deliver on the Signing Date to each Lender (or to Administrative Agent for that Lender) (a) a Tranche A Term Note substantially in the form of Exhibit IV-A annexed hereto to evidence that Lender's Tranche A Term Loan, in the principal amount of that Lender's Tranche A Term Loan and with other appropriate insertions, (b) a Tranche B Term Note substantially in the form of Exhibit IV-B annexed hereto to evidence that Lender's Tranche B Term Loan, in the principal amount of that Lender's Tranche B Term Loan, and (c) a Revolving Note substantially in the form of Exhibit V annexed hereto to evidence that Lender's Revolving Loans, in the principal amount of that Lender's Revolving Loan Commitment and with other appropriate insertions.
Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Administrative Agent as provided in subsection 10.1B(ii). Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, assignee or transferee of that Note or of any Note or Notes issued in exchange therefor.
E. EXTENSION OF INITIAL FUNDING DATE. On the date that is ten Business Days prior to the end of each month, commencing May 16, 1996, Company may, at its option, deliver to Administrative Agent a copy of an extension request requesting an extension of the Initial Funding Date to the last day of the next succeeding month; provided, however, that in no event shall the Initial Funding Date be extended beyond September 30, 1996. Company's request shall be deemed approved and the Initial Funding Date shall be so extended without further action by the parties PROVIDED that (i) the representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on and as of the date of the extension request to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; (ii) no event shall have occurred and be continuing that would constitute an Event of Default or a Potential Event of Default; (iii) the Merger Agreement shall be in full force and effect and no provision thereof shall have been modified or waived in any respect without the written consent of Administrative Agent; and (iv) Company represents that (a) no facts have occurred since the Signing Date that would lead Company to believe that the Projections are inaccurate in any material respect or that the assumptions on which the Projections are based are unreasonable, and (b) Company will be able to make the scheduled principal payments provided for in subsection 2.4A and satisfy the covenants set forth in subsection 7.6 notwithstanding the change in the proposed date of consummation of the Merger.
2.2 Interest on the Loans. A. RATE OF INTEREST. Subject to the provisions of subsections 2.6 and 2.7, each Term Loan and each Revolving Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted Eurodollar Rate. The applicable basis for
determining the rate of interest with respect to any Term Loan or any Revolving Loan shall be selected by Company initially at the time a Notice of Borrowing is given with respect to such Loan pursuant to subsection 2.1B, and the basis for determining the interest rate with respect to any Term Loan or any Revolving Loan may be changed from time to time pursuant to subsection 2.2D. If on any day a Term Loan or Revolving Loan is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the applicable basis for deter- mining the rate of interest, then for that day that Loan shall bear interest determined by reference to the Base Rate.
(i) Subject to the provisions of subsections 2.2E and 2.7, the Tranche A Term Loans and the Revolving Loans shall bear interest through maturity as follows:
(a) if a Base Rate Loan, then (1) for the period from and including the Initial Funding Date to and excluding the date on which Administrative Agent receives a Compliance Certificate pursuant to subsection 6.1(vii) for the Fiscal Year ended October 31, 1996, or the Fiscal Quarter ended April 30, 1997 in the event the Initial Funding Date is extended pursuant to subsection 2.1E, at the sum of the Base Rate PLUS 1.375% per annum and (2) thereafter, at the sum of the Base Rate PLUS the Applicable Base Rate Margin; or
(b) if a Eurodollar Rate Loan, then (1) for the period from and including the Initial Funding Date to and excluding the date on which Administrative Agent receives a Compliance Certificate pursuant to subsection 6.1(vii) for the Fiscal Year ended October 31, 1996, or the Fiscal Quarter ended April 30, 1997 in the event the Initial Funding Date is extended pursuant to subsection 2.1E, at the sum of the Adjusted Eurodollar Rate PLUS 2.625% per annum and (2) thereafter, at the sum of the Adjusted Eurodollar Rate PLUS the Applicable Eurodollar Rate Margin.
(ii) Subject to the provisions of subsections 2.2E and 2.7, the Tranche B Term Loans shall bear interest through maturity as follows:
(a) if a Base Rate Loan, then at the sum of the Base Rate PLUS 1.75% per annum; or
(b) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate PLUS 3% per annum.
The Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin shall be determined on the first day of the
calendar month following the delivery of each Compliance Certificate pursuant to subsection 6.1(vii), commencing with the Compliance Certificate for the Fiscal Year ended October 31, 1996 or the Fiscal Quarter ended April 30, 1997, as the case may be, by reference to such Compliance Certificate (without regard to any subsequent corrections to reflect year- end audit adjustments). The Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin shall apply to all Base Rate Loans for the period from and including the date of determination to and excluding the first day of the calendar month following the delivery of the next Compliance Certificate and to all Eurodollar Rate Loans for any Interest Period commencing during the period from and including the date of determination to and excluding the first day of the calendar month following the delivery of the next Compliance Certificate; PROVIDED, HOWEVER, that (1) if the Company fails to deliver any Compliance Certificate in a timely manner pursuant to subsection 6.1(vii), or (2) upon the occurrence and during the continuation of any Event of Default, the highest percentage per annum set forth in the definition of Applicable Base Rate Margin shall apply to all Base Rate Loans for the period from and including the first day of the calendar month following the date on which such Compliance Certificate was required to be delivered to and excluding the date on which Administrative Agent receives such Compliance Certificate or during the continuation of such Event of Default, as the case may be, and to all Eurodollar Rate Loans for any Interest Period commencing during the period from and including the first day of the calendar month following the date on which such Compliance Certificate was required to be delivered to and excluding the date on which Administrative Agent receives such Compliance Certificate or during the continuation of such Event of Default, as the case may be.
B. INTEREST PERIODS. In connection with each Eurodollar Rate Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, select an interest period (each an "Interest Period") to be applicable to such Loan, which Interest Period shall be, at Company's sole option, either a one, two, three or six month period; PROVIDED that:
(i) the initial Interest Period for any Eurodollar Rate Loan shall commence on the Funding Date in respect of such Loan, in the case of a Loan initially made as a Eurodollar Rate Loan, or on the date specified in the applicable Notice of Conversion/Continuation, in the case of a Loan converted to a Eurodollar Rate Loan;
(ii) in the case of immediately successive Interest Periods applicable to a Eurodollar Rate Loan continued as such pursuant to a Notice of Conversion/Continuation, each
successive Interest Period shall commence on the day on which the next preceding Interest Period expires;
(iii) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; PROVIDED that, if any Interest Period would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding
(iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month;
(v) no Interest Period with respect to any portion of the Tranche A Term Loans shall extend beyond the Tranche A Term Loan Maturity Date, no Interest Period with respect to any portion of the Tranche B Term Loans shall extend beyond the Tranche B Term Loan Maturity Date and no Interest Period with respect to any portion of the Revolving Loans shall extend beyond the Revolving Loan
(vi) no Interest Period with respect to any portion of the Tranche A Term Loans or Tranche B Term Loans shall extend beyond a date on which Company is required to make a scheduled payment of principal of the Tranche A Term Loans or Tranche B Term Loans, as the case may be, unless the sum of (a) the aggregate principal amount of Tranche A Term Loans or Tranche B Term Loans, as the case may be, that are Base Rate Loans PLUS (b) the aggregate principal amount of Tranche A Term Loans or Tranche B Term Loans, as the case may be, that are Eurodollar Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on the Tranche A Term Loans or Tranche B Term Loans, as the case may be, on such date;
(vii) there shall be no more than six Interest Periods outstanding at any time; and
(viii) in the event Company fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month.
C. INTEREST PAYMENTS. Subject to the provisions of subsection 2.2E, interest on each Loan shall be payable in arrears on and to each Interest Payment Date applicable to that Loan, upon any prepayment of that Loan (to the extent accrued on the amount being prepaid), upon any conversion of a Loan from a Loan bearing interest at a rate determined by reference to one basis to a Loan bearing interest at a rate determined by reference to an alternative basis and at maturity (including final maturity).
D. CONVERSION OR CONTINUATION. Subject to the provisions of subsection 2.6, Company shall have the option (i) to convert at any time all or any part of its outstanding Tranche A Term Loans, Tranche B Term Loans or Revolving Loans equal to $5,000,000 and integral multiples of $10,000 in excess of that amount from Loans bearing interest at a rate determined by reference to one basis to Loans bearing interest at a rate determined by reference to an alternative basis or (ii) upon the expiration of any Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Loan equal to $5,000,000 and integral multiples of $10,000 in excess of that amount as a Eurodollar Rate Loan; PROVIDED, HOWEVER, that a Eurodollar Rate Loan may only be converted into a Base Rate Loan on the expiration date of an Interest Period applicable thereto.
Company shall deliver a Notice of Conversion/ Continuation to Administrative Agent no later than 10:00 A.M. (San Francisco time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount and type of the Loan to be con- verted/continued, (iii) the nature of the proposed conver- sion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has occurred and is continuing. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; PROVIDED that such notice shall be promptly confirmed in writing by delivery of a Notice of Conversion/Continuation to Administrative Agent on or before the proposed conversion/ continuation date. Upon receipt of written or telephonic notice of any proposed conversion/continuation under this
subsection 2.2D, Administrative Agent shall promptly transmit such notice by telefacsimile or telephone to each Lender.
Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of Company or for otherwise acting in good faith under this subsection 2.2D, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any Loans in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder.
Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith.
E. DEFAULT RATE. Upon the occurrence and during the continuation of any Event of Default, the outstanding principal amount of all Loans and, to the extent permitted by applicable law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable upon demand at a rate that is 2% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans); PROVIDED that, in the case of Eurodollar Rate Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Administrative Agent or any Lender.
F. COMPUTATION OF INTEREST. Interest on the Loans shall be computed on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it
accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded; PROVIDED that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan.
A. COMMITMENT FEES. Company agrees to pay to Administrative Agent, for distribution to each Lender in proportion to that Lender's Pro Rata Share, commitment fees for the period from and including the Signing Date to and excluding the Initial Funding Date equal to the Commitments MULTIPLIED BY 0.375 of 1% per annum, such commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable in arrears on the last day of each month, commencing January 31, 1996, and on the Initial Funding Date; PROVIDED, HOWEVER, that if the Initial Funding Date occurs after May 31, 1996, Company agrees to pay to Administrative Agent, for distribution to each Lender in proportion to that Lender's Pro Rata Share, an additional commitment fee for the period from and including June 1, 1996 to and excluding the Initial Funding Date equal to the Commitments MULTIPLIED BY 0.125 of 1% per annum, such additional commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable in arrears on the last day of each month, commencing June 30, 1996, and on the Initial Funding Date. In addition, Company agrees to pay to Administrative Agent, for distribution to each Lender in proportion to that Lender's Pro Rata Share, commitment fees for the period from and including the Initial Funding Date to and excluding the Revolving Loan Commitment Termination Date equal to the average of the daily excess of the Revolving Loan Commitments over the sum of (i) the aggregate principal amount of outstanding Revolving Loans PLUS (ii) the Letter of Credit Usage MULTIPLIED BY (a) for the period from and including the Initial Funding Date to and excluding the date on which Administrative Agent receives a Compliance Certificate pursuant to subsection 6.1(vii) for the Fiscal Year ended October 31, 1996, or the Fiscal Quarter ended April 30, 1997 in the event the Initial Funding Date is extended pursuant to subsection 2.1E, 0.375 of 1% per annum and (b) thereafter, the Applicable Commitment Fee Percentage. Such commitment fees shall be calculated on the basis of a 360-day
year and the actual number of days elapsed and shall be payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on the first such date to occur after the Initial Funding Date, and on the Revolving Loan Commitment Termination Date.
The Applicable Commitment Fee Percentage shall be determined on the first day of the calendar month following the delivery of each Compliance Certificate pursuant to subsection 6.1(vii), commencing with the Compliance Certificate for the Fiscal Year ended October 31, 1996 or the Fiscal Quarter ended April 30, 1997, as the case may be, by reference to such Compliance Certificate (without regard to any subsequent corrections to reflect year-end audit adjustments). The Applicable Commitment Fee Percentage shall apply for the period from and including the date of determination to and excluding the first day of the calendar month following the delivery of the next Compliance Certificate; PROVIDED, HOWEVER, that (1) if the Company fails to deliver any Compliance Certificate in a timely manner pursuant to subsection 6.1(vii), or (2) upon the occurrence and during the continuation of any Event of Default, the highest percentage per annum set forth in the definition of Applicable Commitment Fee Percentage shall apply for the period from and including the first day of the calendar month following the date on which such Compliance Certificate was required to be delivered to and excluding the date on which Administrative Agent receives such Compliance Certificate or during the continuation of such Event of Default, as the case may be.
B. OTHER FEES. Company agrees to pay to Administrative Agent the fees described in the letter dated January 10, 1996 from Administrative Agent to Company, as well as any other fees, in the amounts and at the times set forth in such letter or separately agreed upon in writing between Company and Administrative Agent.
2.4 Repayments, Prepayments and Reductions in Revolving Loan Commitments; General Provisions Regarding Payments. A. SCHEDULED PAYMENTS OF TERM LOANS.
(i) SCHEDULED PAYMENTS OF TRANCHE A TERM LOANS. Company shall make principal payments on the Tranche A Term Loans in installments on the dates and in the amounts set forth below:
Date of Tranche A Term Loans October 31, 1996 $ 500,000
; PROVIDED that the scheduled installments of principal of the Tranche A Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Tranche A Term Loans in accordance with subsection 2.4B(iv); and PROVIDED, FURTHER that the Tranche A Term Loans and all other amounts owed hereunder with respect to the Tranche A Term Loans shall be paid in full no later than the Tranche A Term Loan Maturity Date and the final installment payable by Company in respect of the Tranche A Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche A Term Loans.
(ii) SCHEDULED PAYMENTS OF TRANCHE B TERM LOANS. Company shall make principal payments on the Tranche B Term Loans in installments on the dates and in the amounts set forth below:
Date of Tranche B Term Loans
; PROVIDED that the scheduled installments of principal of the Tranche B Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Tranche B Term Loans in accordance with subsection 2.4B(iv); and PROVIDED, FURTHER that the Tranche B Term Loans and all other amounts owed hereunder with respect to the Tranche B Term Loans shall be paid in full no later than the Tranche B Term Loan Maturity Date and the final installment payable by Company in respect of the Tranche B Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche B Term Loans.
B. PREPAYMENTS AND UNSCHEDULED REDUCTIONS IN REVOLVING LOAN COMMITMENTS.
(i) VOLUNTARY PREPAYMENTS. Company may, upon not less than one Business Day's prior written or telephonic
notice, in the case of Base Rate Loans, and three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans, in each case given to Administrative Agent by 10:00 A.M. (San Francisco time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay, without premium or penalty (except as provided in subsection 2.6D), any Tranche A Term Loans, Tranche B Term Loans or Revolving Loans on any Business Day in whole or in part in an aggregate minimum amount of $5,000,000 and integral multiples of $10,000 in excess of that amount. Notice of prepayment having been given as aforesaid, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. Any such voluntary prepayment shall be applied as specified in subsection 2.4B(iv).
(ii) VOLUNTARY REDUCTIONS OF REVOLVING LOAN COMMITMENTS. Company may, upon not less than five Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Loan Commitments in an amount up to the amount by which the Revolving Loan Commitments exceed the Total Utilization of Revolving Loan Commitments at the time of such proposed termination or reduction; PROVIDED that any such partial reduction of the Revolving Loan Commitments shall be in an aggregate minimum amount of $2,000,000 and integral multiples of $500,000 in excess of that amount. Company's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Loan Commitments shall be effective on the date specified in Company's notice and shall reduce the Revolving Loan Commitment of each Lender proportionately to its Pro Rata Share.
(iii) MANDATORY PREPAYMENTS AND MANDATORY REDUCTIONS OF REVOLVING LOAN COMMITMENTS. The Loans shall be prepaid and/or the Revolving Loan Commitments shall be permanently reduced in the amounts and under the circumstances set forth below, all such prepayments and/or reductions to be applied as set forth below or as more specifically provided in subsection 2.4B(iv):
(a) PREPAYMENTS AND REDUCTIONS FROM NET ASSET SALE PROCEEDS. No later than the first Business Day following the date of receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds in respect of any Asset Sale by Company or any of its Subsidiaries, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 100% of such Net Asset Sale Proceeds.
(b) PREPAYMENTS AND REDUCTIONS DUE TO REVERSION OF SURPLUS ASSETS OF PENSION PLANS. On the date of return to Company or any of its Subsidiaries of any surplus assets of any pension plan of Company or any of its Subsidiaries, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount (such amount being the "Net Pension Proceeds") equal to 100% of such returned surplus assets, net of transaction costs and expenses incurred in obtaining such return, including incremental taxes payable as a result thereof.
(c) PREPAYMENTS AND REDUCTIONS DUE TO ISSUANCE OF DEBT OR EQUITY SECURITIES. On the date of receipt by Company of the Cash proceeds (any such Cash proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including without limitation reasonable legal fees and expenses, being "Net Securities Proceeds") from the issuance of any debt or equity Securities of Company or any of its Subsidiaries after the Initial Funding Date (other than (1) issuances of equity Securities of Company under an employee benefit plan maintained by Company or any of its Subsidiaries, (2) issuances of equity Securities of Company pursuant to the exercise of any stock options or warrants outstanding as of the Signing Date and identified on Schedule 5.1G of the Signing Date Company Disclosure Letter and (3) issuances of Indebtedness permitted under subsection 7.1), Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 100% of such Net Securities Proceeds.
(d) PREPAYMENTS FROM CONSOLIDATED EXCESS CASH FLOW. In the event that the Leverage Ratio as at the end of any Fiscal Year (commencing with Fiscal Year 1996) is greater than 3.00 to 1.00, Company shall, no later than 105 days after the end of such Fiscal
Year, prepay the Term Loans in an aggregate amount equal to 75% of Consolidated Excess Cash Flow, if any, for such Fiscal Year. In the event that the Leverage Ratio as at the end of any Fiscal Year (commencing with Fiscal Year 1996) is less than or equal to 3.00 to 1.00 but greater than 2.50 to 1.00, Company shall, no later than 105 days after the end of such Fiscal Year, prepay the Term Loans in an aggregate amount equal to 50% of Consolidated Excess Cash Flow, if any, for such Fiscal Year.
(e) PREPAYMENT FROM CONSOLIDATED EXCESS CASH. Company shall, no later than 45 days after the end of the first Fiscal Quarter following the Initial Funding Date, prepay the Term Loans in an aggregate amount equal to all Consolidated Excess Cash.
(f) PREPAYMENT OF INITIAL REVOLVING LOANS. Company shall, no later than the tenth Business Day after the Merger, prepay Revolving Loans in an aggregate amount at least equal to the amount of the Initial Revolving Loans.
(g) CALCULATIONS OF NET PROCEEDS AMOUNTS; ADDITIONAL PREPAYMENTS AND REDUCTIONS BASED ON SUBSEQUENT CALCULATIONS. Concurrently with any prepayment of the Loans and/or reduction of the Revolving Loan Commitments pursuant to subsec- tions 2.4B(iii)(a)-(e), Company shall deliver to Administrative Agent an Officer's Certificate demonstrating the calculation of the amount (the "Net Proceeds Amount") of the applicable Net Asset Sale Proceeds, the applicable Net Pension Proceeds or Net Securities Proceeds, the applicable Consolidated Excess Cash Flow, or the applicable Consolidated Excess Cash, as the case may be, that gave rise to such prepayment and/or reduction. In the event that Company shall subsequently determine that the actual Net Proceeds Amount was greater than the amount set forth in such Officer's Certificate, Company shall promptly make an additional prepayment of the Loans (and/or, if applicable, the Revolving Loan Commit- ments shall be permanently reduced) in an amount equal to the amount of such excess, and Company shall concurrently therewith deliver to Administrative Agent an Officer's Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess.
(h) PREPAYMENTS DUE TO REDUCTIONS OR RESTRICTIONS OF REVOLVING LOAN COMMITMENTS. Company shall from time to time prepay the Revolving Loans to
the extent necessary (1) so that the Total Utilization of Revolving Loan Commitments shall not at any time exceed the Revolving Loan Commitments then in effect and (2) to give effect to the limitations set forth in clause (b) of the second paragraph of subsection 2.1A(iii).
(iv) APPLICATION OF PREPAYMENTS AND UNSCHEDULED REDUCTIONS OF REVOLVING LOAN COMMITMENTS.
(a) APPLICATION OF VOLUNTARY PREPAYMENTS BY TYPE OF LOANS AND ORDER OF MATURITY. Any voluntary prepayments pursuant to subsection 2.4B(i) shall be applied as specified by Company in the applicable notice of prepayment; PROVIDED that in the event Company fails to specify the Loans to which any such prepayment shall be applied, such prepayment shall be applied FIRST, to repay outstanding Revolving Loans to the full extent thereof and SECOND, to repay outstanding Term Loans to the full extent thereof. Any voluntary prepayments of the Term Loans pursuant to subsection 2.4B(i) shall be applied to prepay the Tranche A Term Loans and the Tranche B Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) and to reduce the scheduled installments of principal of the Tranche A Term Loans and the Tranche B Term Loans set forth in subsections 2.4A(i) and 2.4A(ii) on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) to each such scheduled installment that is unpaid at the time of such prepayment.
(b) APPLICATION OF MANDATORY PREPAYMENTS BY TYPE OF LOANS. Prior to the occurrence of a Potential Event of Default or an Event of Default, any amount (the "Applied Amount") required to be applied as a mandatory prepayment of the Loans and/or a reduction of the Revolving Loan Commitments pursuant to subsections 2.4B(iii)(a)-(c) shall be applied FIRST, to prepay the Term Loans to the full extent thereof, SECOND, to the extent of any remaining portion of the Applied Amount, to prepay the Revolving Loans to the full extent thereof and to permanently reduce the Revolving Loan Commitments by the amount of such prepayment, THIRD, to the extent of any remaining portion of the Applied Amount, to cash collateralize the Letters of Credit to the full extent thereof and to permanently reduce the Revolving Loan Commitments by the amount of such prepayment, and FOURTH, to the extent of any remaining portion of the Applied Amount, to further
permanently reduce the Revolving Loan Commitments to the full extent thereof. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, the Applied Amount shall be applied FIRST, to prepay outstanding Loans and cash collateralize the Letters of Credit to the full extent thereof and, unless Administrative Agent, in its sole discretion, gives notice to the Lenders that all or any portion of such prepayment shall not reduce the Revolving Loan Commitments, to permanently reduce the Revolving Loan Commitments by the amount of such prepayment and SECOND, to the extent of any remaining portion of the Applied Amount, to further permanently reduce the Revolving Loan Commitments to the full extent thereof.
(c) APPLICATION OF MANDATORY PREPAYMENTS OF LOANS PRIOR TO THE OCCURRENCE OF A DEFAULT. Any mandatory prepayments of the Term Loans pursuant to subsection 2.4B(iii) prior to the occurrence of a Potential Event of Default or an Event of Default shall be applied to prepay the Tranche A Term Loans and the Tranche B Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof). Any such mandatory prepayments applied to the Tranche A Term Loans or the Tranche B Term Loans shall be applied to reduce the scheduled installments of principal of the Tranche A Term Loans or the Tranche B Term Loans, as the case may be, set forth in subsection 2.4A(i) or 2.4A(ii), respectively, as follows:
(1) NET ASSET SALE PROCEEDS/NET PENSION EXCESS CASH FLOW. Any such mandatory 2.4B(iii)(a), (b), (c) and (d) prior to the occurrence of a Potential Event of Default or an Event of Default shall be applied on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) to each such scheduled installment that is unpaid at the time of such prepayment.
(2) CONSOLIDATED EXCESS CASH. Any such mandatory prepayments pursuant to subsections 2.4B(iii)(e) prior to the occurrence of a Potential Event of Default or an Event of Default shall be applied to reduce such scheduled installments in inverse order of maturity.
(d) APPLICATION OF MANDATORY PREPAYMENTS OF LOANS AFTER THE OCCURRENCE OF A DEFAULT. Any mandatory prepayments of the Loans pursuant to subsection 2.4B(iii) after the occurrence of and during the continuation of a Potential Event of Default or an Event of Default shall be applied to prepay the Revolving Loans, cash collateralize the Letters of Credit, prepay the Tranche A Term Loans and prepay the Tranche B Term Loans on a pro rata basis (in accordance with the respective amounts of the Revolving Loan Commitments, the outstanding principal amount of the Tranche A Term Loans and the outstanding principal amount of the Tranche B Term Loans). Any such mandatory prepayments applied to the Tranche A Term Loans or the Tranche B Term Loans shall be applied to reduce the scheduled installments of principal of the Tranche A Term Loans or the Tranche B Term Loans, as the case may be, set forth in subsection 2.4A(i) or 2.4A(ii), respectively, as follows:
(1) NET ASSET SALE PROCEEDS/NET PENSION EXCESS CASH FLOW. Any such mandatory 2.4B(iii)(a), (b), (c) and (d) after the occurrence of and during the continuation of a Potential Event of Default or an Event of Default shall be applied on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) to each such scheduled installment that is unpaid at the time of such prepayment.
(2) CONSOLIDATED EXCESS CASH. Any such mandatory prepayments pursuant to subsections 2.4B(iii)(e) shall be applied to reduce such scheduled installments in inverse order of maturity.
(e) APPLICATION OF PREPAYMENTS TO BASE RATE LOANS AND EURODOLLAR RATE LOANS. Considering Tranche A Term Loans, Tranche B Term Loans and Revolving Loans being prepaid separately, any prepayment thereof shall be applied first to Base Rate Loans to the full extent thereof before application to Eurodollar Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D.
C. GENERAL PROVISIONS REGARDING PAYMENTS.
(i) MANNER AND TIME OF PAYMENT. All payments by Company of principal, interest, fees and other Obligations hereunder and under the Notes shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 10:00 A.M. (San Francisco time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. Company hereby authorizes Administrative Agent to charge its accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose).
(ii) APPLICATION OF PAYMENTS TO PRINCIPAL AND INTEREST. All payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal.
(iii) APPORTIONMENT OF PAYMENTS. Aggregate principal and interest payments in respect of Term Loans and Revolving Loans shall be apportioned among all out- standing Loans to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Administrative Agent shall promptly distribute to each Lender, at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Administrative Agent and the commitment fees of such Lender when received by Administrative Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter.
(iv) PAYMENTS ON BUSINESS DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day
that 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 the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be.
(v) NOTATION OF PAYMENT. Each Lender agrees that before disposing of any Note held by it, or any part thereof (other than by granting participations therein), that Lender will make a notation thereon of all Loans evidenced by that Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; PROVIDED that the failure to make (or any error in the making of) a notation of any Loan made under such Note shall not limit or otherwise affect the obligations of Company hereunder or under such Note with respect to any Loan or any payments of principal or interest on such Note.
A. TERM LOANS. The proceeds of the Term Loans, together with up to $20,000,000 in proceeds of the initial Revolving Loans (the "Initial Revolving Loans") shall be applied to fund the Acquisition Financing Requirements.
B. REVOLVING LOANS. The Initial Revolving Loans shall be applied by Company as provided in subsection 2.5A. Any other Revolving Loans shall be applied by Company for working capital purposes, which may include the making of intercompany loans to certain of Company's wholly-owned Domestic Subsidiaries, in accordance with subsection 7.1(iv), for their own working capital purposes.
C. MARGIN REGULATIONS. No portion of the proceeds of any borrowing under this Agreement shall be used by Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation G, Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds.
2.6 Special Provisions Governing Eurodollar Rate Loans. Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered:
A. DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable after 9:00 A.M. (San Francisco time) on each
Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender.
B. INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that Administrative Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that by reason of circumstances affecting the London interbank market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice of Conversion/ Continuation given by Company with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by Company.
C. ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful) or (ii) has become impracticable, or would cause such Lender material hardship, as a result of contingencies occurring after the date of this Agreement which materially and adversely affect the London interbank market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "Affected Lender" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to make Loans as, or to convert Loans to, Eurodollar Rate Loans
shall be suspended until such notice shall be withdrawn by the Affected Lender, (b) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan, (c) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "Affected Loans") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (d) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, to rescind such Notice of Borrowing or Notice of Conversion/ Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in accordance with the terms of this Agreement.
D. COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including, without limitation, any interest paid by that Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any reasonable loss, expense or liability sustained by that Lender in connection with the liquidation or re-employment of such funds) which that Lender may sustain: (i) if for any reason (other than a default by that Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment (including, without limitation, any prepayment pursuant to subsection 2.4B(i)) or other principal payment or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan, (iii) if any
prepayment of any of its Eurodollar Rate Loans is not made on any date specified in a notice of prepayment given by Company, or (iv) as a consequence of any other default by Company in the repayment of its Eurodollar Rate Loans when required by the terms of this Agreement.
E. BOOKING OF EURODOLLAR RATE LOANS. Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender.
F. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; PROVIDED, HOWEVER, that each Lender may fund each of its Eurodollar Rate Loans in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this subsection 2.6 and under subsection 2.7A.
G. EURODOLLAR RATE LOANS AFTER DEFAULT. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, (i) Company may not elect to have a Loan be made or maintained as, or converted to, a Eurodollar Rate Loan after the expiration of any Interest Period then in effect for that Loan and (ii) subject to the provisions of subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to a requested borrowing or conversion/continuation that has not yet occurred shall be deemed to be rescinded by Company.
2.7 Increased Costs; Taxes; Capital Adequacy. A. COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that any Lender shall reasonably determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes
effective after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law):
(i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable
(ii) imposes, modifies or holds applicable any reserve (including without limitation any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or
(iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the London interbank market;
and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender reasonably shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder; PROVIDED, HOWEVER, that Company shall not be obligated to pay such Lender any compensation attributable to any period prior to the date that is 180 days prior to the date on which such Lender gave notice to Company of the circumstances entitling such Lender to compensation. Such Lender shall promptly deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which
statement shall be conclusive and binding upon all parties hereto absent manifest error.
(i) PAYMENTS TO BE FREE AND CLEAR. All sums payable by Company under this Agreement and the other Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of Company or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment.
(ii) GROSSING-UP OF PAYMENTS. If Company or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by Company to Administrative Agent or any Lender under any of the Loan Documents:
(a) Company shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it;
(b) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on Company) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender;
(c) the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and
(d) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, Company shall deliver to Administrative
Agent evidence satisfactory to Administrative Agent of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other
PROVIDED that no such additional amount shall be required to be paid to any Lender under clause (c) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender.
(iii) EVIDENCE OF EXEMPTION FROM U.S. WITHHOLDING TAX.
(a) Each Lender that is organized under the laws of any jurisdiction other than the United States of America or any state or other political subdivision thereof (for purposes of this subsec- tion 2.7B(iii), a "Non-US Lender") shall deliver to Administrative Agent for transmission to Company, on or prior to the Initial Funding Date (in the case of each Lender listed on the signature pages hereof) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status
substantially in the form of Exhibit XI annexed hereto together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Loan Documents.
(b) Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly (1) deliver to Administrative Agent for transmission to Company two new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Loan Documents or (2) notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence.
(c) Company shall not be required to pay any additional amount to any Non-US Lender under clause (c) of subsection 2.7B(ii) if such Lender shall have failed to satisfy the requirements of clause (a) or (b)(1) of this subsection 2.7B(iii); PROVIDED that if such Lender shall have satisfied the requirements of subsection 2.7B(iii)(a) on the Initial Funding Date (in the case of each Lender listed on the signature pages hereof) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection 2.7B(iii)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to clause (c) of subsection 2.7B(ii) in the event that,
as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iii)(a).
C. CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Loans or Commitments or Letters of Credit or participations therein or other obligations hereunder with respect to the Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction; PROVIDED, HOWEVER, that Company shall not be obligated to pay such Lender any compensation attributable to any period prior to the date that is 180 days prior to the date on which such Lender gave notice to Company of the circumstances entitling such Lender to compensation. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error.
2.8 Obligation of Lenders and Issuing Lenders to Mitigate. Each Lender and the Issuing Lender agrees that, as promptly as practicable after the officer of such Lender or Issuing Lender responsible for administering the Loans or
Letters of Credit of such Lender or Issuing Lender, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender or Issuing Lender to receive payments under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal policies of such Lender or Issuing Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, issue, fund or maintain the Commitments of such Lender or the affected Loans or Letters of Credit of such Lender or Issuing Lender through another lending or letter of credit office of such Lender or Issuing Lender, or (ii) take such other measures as such Lender or Issuing Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be materially reduced and if, as determined by such Lender or Issuing Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans or Letters of Credit through such other lending or letter of credit office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or Letters of Credit or the interests of such Lender or Issuing Lender; PROVIDED that such Lender or Issuing Lender will not be obligated to utilize such other lending or letter of credit office pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender or Issuing Lender as a result of utilizing such other lending or letter of credit office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender or Issuing Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error.
Section 3. LETTERS OF CREDIT
3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein. A. LETTERS OF CREDIT. In addition to Company requesting that Lenders make Revolving Loans pursuant to subsection 2.1A(iii), Company may request, in accordance with the provisions of this subsection 3.1, from time to time during the period from the Initial Funding Date to but excluding the Revolving Loan Commitment Termination Date, that the Issuing Lender issue Letters of Credit for the account of Company for the purposes specified in the definition of Letters of Credit. Subject to the terms and conditions of this Agreement and in
reliance upon the representations and warranties of Company herein set forth, the Issuing Lender shall issue such Letters of Credit in accordance with the provisions of this subsec- tion 3.1; PROVIDED that Company shall not request that the Issuing Lender issue (and the Issuing Lender shall not issue):
(i) any Letter of Credit if, after giving effect to such issuance, the Total Utilization of Revolving Loan Commitments would exceed the Revolving Loan Commitments
(ii) any Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage would exceed
(iii) any Letter of Credit having an expiration date later than the earlier of (a) the Revolving Loan Commit- ment Termination Date and (b) the date which is one year from the date of issuance of such Letter of Credit; PROVIDED that the immediately preceding clause (b) shall not prevent the Issuing Lender from agreeing that a Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each unless the Issuing Lender elects not to extend for any such additional period; and PROVIDED, FURTHER that the Issuing Lender shall elect not to extend such Letter of Credit if it has knowledge that an Event of Default has occurred and is continuing (and has not been waived in accordance with subsection 10.6) at the time the Issuing Lender must elect whether or not to allow such extension; or
(iv) any Letter of Credit denominated in a foreign currency which in the judgment of Administrative Agent is not readily and freely available.
On and after the Initial Funding Date, the Existing Company Letters of Credit shall be deemed for all purposes, including for purposes of the fees to be collected pursuant to subsection 3.2, and reimbursement of costs and expenses to the extent provided herein, to be Letters of Credit outstanding under this Agreement and entitled to the benefits of this Agreement and the other Loan Documents, and shall be governed by the applications and agreements pertaining thereto and by this Agreement; PROVIDED, HOWEVER, that, notwithstanding any other provision of this Agreement, no fees with respect to the issuance of the Existing Company Letters of Credit shall be due hereunder.
(i) NOTICE OF ISSUANCE. Whenever Company desires the issuance of a Letter of Credit, it shall deliver to Administrative Agent a Notice of Issuance of Letter of Credit substantially in the form of Exhibit III annexed hereto no later than 10:00 A.M. (San Francisco time) at least three Business Days, or such shorter period as may be agreed to by the Issuing Lender in any particular instance, in advance of the proposed date of issuance. The Notice of Issuance of Letter of Credit shall specify (a) the proposed date of issuance (which shall be a Business Day), (b) the face amount of the Letter of Credit, (c) in the case of a Letter of Credit which Company requests to be denominated in a currency other than Dollars, the currency in which Company requests such Letter of Credit to be issued, (d) the expiration date of the Letter of Credit, (e) the name and address of the beneficiary, and (f) the verbatim text of the proposed Letter of Credit or the proposed terms and conditions thereof; PROVIDED that the Issuing Lender, in its reasonable discretion, may require changes in the text of the proposed Letter of Credit; and PROVIDED, FURTHER that no Letter of Credit shall require payment against a conforming draft to be made thereunder on the same business day (under the laws of the jurisdiction in which the office of the Issuing Lender to which such draft is required to be presented is located) that such draft is presented if such presentation is made after 10:00 A.M. (in the time zone of such office of the Issuing Lender) on such business day.
Company shall notify the Administrative Agent prior to the issuance of any Letter of Credit in the event that any of the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit is no longer true and correct in all material respects as of the proposed date of issuance of such Letter of Credit, and upon the issuance of any Letter of Credit Company shall be deemed to have re-certified, as of the date of such issuance, as to the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit.
(ii) ISSUANCE OF LETTER OF CREDIT. Upon satisfaction or waiver (in accordance with subsection 10.6) of the conditions set forth in subsection 4.4, the Issuing Lender shall issue the requested Letter of Credit in accordance with the Issuing Lender's standard operating procedures.
(iii) NOTIFICATION TO LENDERS. Upon the issuance of any Letter of Credit the Administrative Agent shall promptly notify each other Lender of such issuance, which notice shall be accompanied by a copy of such Letter of Credit and shall notify each Lender of the amount of such Lender's respective participation in such Letter of Credit, determined in accordance with subsection 3.1C.
C. LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT. Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from the Issuing Lender a participa- tion in such Letter of Credit and any drawings honored thereunder in an amount equal to such Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder.
3.2 Letter of Credit Fees. Company agrees to pay the following amounts with respect to Letters of Credit issued hereunder:
(i) with respect to each Letter of Credit, (a) a fronting fee, payable directly to the Issuing Lender for its own account, equal to 0.25% per annum of the amount available to be drawn under such Letter of Credit and (b) a nonrefundable letter of credit fee, payable to Administrative Agent for the account of Lenders, equal to the amount available to be drawn under such Letter of Credit MULTIPLIED by (a) for the period from and including the Initial Funding Date to and excluding the date on which Administrative Agent receives a Compliance Certificate pursuant to subsection 6.1(vii) for the Fiscal Year ended October 31, 1996 or the Fiscal Quarter ended April 30, 1997 in the event the Initial Funding Date is extended pursuant to subsection 2.1E, 2.625% and (b) thereafter, the Applicable Eurodollar Rate Margin, each such fronting fee or letter of credit fee to be payable in advance at issuance and on each January 31, April 30, July 31 and October 31 of each year and computed on the basis of a 360-day year; and
(ii) with respect to the issuance, amendment, negotiation or transfer of each Letter of Credit and each payment of a drawing made thereunder (without duplication of the fees payable under clause (i) above), documentary and processing charges payable directly to the Issuing Lender for its own account in accordance with the Issuing Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or payment, as the case may be.
For purposes of calculating any fees payable under this subsection 3.2, any amount described in such clauses which is denominated in a currency other than Dollars shall be valued based on the applicable Exchange Rate for such currency as of the applicable date of determination. The Applicable Eurodollar Rate Margin shall be determined on the first day of the calendar month following the delivery of each Compliance Certificate pursuant to subsection 6.1(vii), commencing with the Compliance Certificate for the Fiscal Year ended October 31, 1996 or April 30, 1997, as the case may be, by reference to such Compliance Certificate (without regard to any subsequent corrections to reflect year-end audit adjustments). The Applicable Eurodollar Rate Margin shall apply to all Letters of Credit for the period from and including the date of determination to and excluding the first day of the calendar month following the delivery of the next Compliance Certificate; PROVIDED, HOWEVER, that (1) if the Company fails to deliver any Compliance Certificate in a timely manner pursuant to subsection 6.1(vii), or (2) upon the occurrence and during the continuation of any Event of Default, the highest percentage per annum set forth in the definition of Applicable Eurodollar Rate Margin shall apply for the period from and including the first day of the calendar month following the date on which such Compliance Certificate was required to be delivered to and excluding the date on which Administrative Agent receives such Compliance Certificate or during the continuation of such Event of Default, as the case may be. Promptly upon receipt by Administrative Agent of any amount described in clause (i)(b) of this subsection 3.2, Administrative Agent shall distribute to each Lender its Pro Rata Share of such amount.
3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit. A. RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the Issuing Lender shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in accordance with the terms and conditions of such Letter of Credit.
B. REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF CREDIT. In the event the Issuing Lender has determined to honor a drawing under a Letter of Credit issued by it, the Issuing Lender shall immediately notify Company, and Company shall reimburse the Issuing Lender on or before the Business Day immediately following the date on which such drawing is honored (the "Reimbursement Date") in an amount in Dollars (which amount, in the case of a drawing under a Letter
of Credit which is denominated in a currency other than Dollars, shall be calculated by reference to the applicable Exchange Rate) and in same day funds equal to the amount of such honored drawing; PROVIDED that, anything contained in this Agreement to the contrary notwithstanding, (i) unless Company shall have notified the Issuing Lender prior to 10:00 A.M. (San Francisco time) on the date such drawing is honored that Company intends to reimburse the Issuing Lender for the amount of such honored drawing with funds other than the proceeds of Revolving Loans, Company shall be deemed to have given a timely Notice of Borrowing to Administrative Agent requesting Lenders to make Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars (which amount, in the case of a drawing under a Letter of Credit which is denominated in a currency other than Dollars, shall be calculated by reference to the applicable Exchange Rate) equal to the amount of such honored drawing and (ii) subject to satisfaction or waiver of the conditions specified in subsection 4.3B, Lenders shall, on the Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount of such honored drawing, the proceeds of which shall be applied directly by Administrative Agent to reimburse the Issuing Lender for the amount of such honored drawing; and PROVIDED, FURTHER that if for any reason proceeds of Revolving Loans are not received by the Issuing Lender on the Reimbursement Date in an amount equal to the amount of such honored drawing, Company shall reimburse the Issuing Lender, on demand, in an amount in same day funds equal to the excess of the amount of such honored drawing over the aggregate amount of such Revolving Loans, if any, which are so received. Nothing in this subsection 3.3B shall be deemed to relieve any Lender from its obligation to make Revolving Loans on the terms and conditions set forth in this Agreement, and Company shall retain any and all rights it may have against any Lender resulting from the failure of such Lender to make such Revolving Loans under this subsection 3.3B.
C. PAYMENT BY LENDERS OF UNREIMBURSED AMOUNTS PAID UNDER LETTERS OF CREDIT.
(i) PAYMENT BY LENDERS. In the event that Company shall fail for any reason to reimburse the Issuing Lender as provided in subsection 3.3B in an amount (calculated, in the case of a drawing under a Letter of Credit denominated in a currency other than Dollars, by reference to the applicable Exchange Rate) equal to the amount of any drawing honored by the Issuing Lender under a Letter of Credit issued by it, the Issuing Lender shall promptly notify each other Lender of the unreimbursed amount of such honored drawing and of such other Lender's respective participation therein based on such Lender's Pro Rata Share. Each Lender shall make available to the Issuing
Lender an amount equal to its respective participation, in Dollars and in same day funds, at the office of the Issuing Lender specified in such notice, not later than 10:00 A.M. (San Francisco time) on the first business day (under the laws of the jurisdiction in which such office of the Issuing Lender is located) after the date notified by the Issuing Lender. In the event that any Lender fails to make available to the Issuing Lender on such business day the amount of such Lender's participation in such Letter of Credit as provided in this subsection 3.3C, the Issuing Lender shall be entitled to recover such amount on demand from the Lender together with interest thereon at the rate customarily used by the Issuing Lender for the correction of errors among banks for three Business Days and thereafter at the Base Rate. Nothing in this subsection 3.3C shall be deemed to prejudice the right of any Lender to recover from the Issuing Lender any amounts made available by such Lender to the Issuing Lender pursuant to this subsection 3.3C in the event that it is determined by the final judgment of a court of competent jurisdiction that the payment with respect to a Letter of Credit by the Issuing Lender in respect of which payment was made by such Lender constituted gross negligence or willful misconduct on the part of the Issuing Lender.
(ii) DISTRIBUTION TO LENDERS OF REIMBURSEMENTS RECEIVED FROM COMPANY. In the event the Issuing Lender shall have been reimbursed by other Lenders pursuant to subsection 3.3C(i) for all or any portion of any drawing honored by the Issuing Lender under a Letter of Credit issued by it, the Issuing Lender shall distribute to each other Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Lender's Pro Rata Share of all payments subsequently received by the Issuing Lender from Company in reimbursement of such honored drawing when such payments are received. Any such distribution shall be made to a Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request.
D. INTEREST ON AMOUNTS PAID UNDER LETTERS OF CREDIT.
(i) PAYMENT OF INTEREST BY COMPANY. Company agrees to pay to the Issuing Lender, with respect to drawings honored under any Letters of Credit issued by it, interest on the amount paid by the Issuing Lender in respect of each such honored drawing from the date such drawing is honored to but excluding the date such amount is reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B) at a rate equal to (a) for the period
from the date such drawing is honored to but excluding the Reimbursement Date, the rate then in effect under this Agreement with respect to Revolving Loans that are Base Rate Loans and (b) thereafter, if and to the extent not fully reimbursed, a rate which is 2% per annum in excess of the rate of interest otherwise payable under this Agreement with respect to Revolving Loans that are Base Rate Loans. Interest payable pursuant to this subsection 3.3D(i) shall be computed on the basis of a 360-day year for the actual number of days elapsed in the period during which it accrues and shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full.
(ii) DISTRIBUTION OF INTEREST PAYMENTS BY ISSUING LENDER. Promptly upon receipt by the Issuing Lender of any payment of interest pursuant to subsection 3.3D(i) with respect to a drawing honored under a Letter of Credit issued by it, (a) the Issuing Lender shall distribute to each other Lender, out of the interest received by the Issuing Lender in respect of the period from the date such drawing is honored to but excluding the date on which the Issuing Lender is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B), the amount that such other Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period pursuant to subsection 3.2 if no drawing had been honored under such Letter of Credit, and (b) in the event the Issuing Lender shall have been reimbursed by other Lenders pursuant to subsection 3.3C(i) for all or any portion of such honored drawing, the Issuing Lender shall distribute to each other Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Lender's Pro Rata Share of any interest received by the Issuing Lender in respect of that portion of such honored drawing so reimbursed by other Lenders for the period from the date on which the Issuing Lender was so reimbursed by other Lenders to but excluding the date on which such portion of such honored drawing is reimbursed by Company. Any such distribution shall be made to a Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request.
The obligation of Company to reimburse the Issuing Lender for drawings honored under the Letters of Credit issued by it and to repay any Revolving Loans made by Lenders pursuant
to subsection 3.3B and the obligations of Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including, without limitation, any of the following circumstances:
(i) any lack of validity or enforceability of any
(ii) the existence of any claim, set-off, defense or other right which Company or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Issuing Lender or other Lender or any other Person or, in the case of a Lender, against Company, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of its Subsidiaries and the beneficiary for which any Letter of Credit was procured);
(iii) any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;
(iv) payment by the Issuing Lender under any Letter of Credit against presentation of a draft or other document which does not substantially comply with the terms of such Letter of Credit;
(v) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries;
(vi) any breach of this Agreement or any other Loan Document by any party thereto;
(vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or
(viii) the fact that an Event of Default or a Potential Event of Default shall have occurred and be continuing;
PROVIDED, in each case, that payment by the Issuing Lender under the applicable Letter of Credit shall not have constituted gross negligence or willful misconduct of the Issuing Lender under the circumstances in question (as deter- mined by a final judgment of a court of competent jurisdiction).
3.5 Indemnification; Nature of Issuing Lenders' Duties. A. INDEMNIFICATION. In addition to amounts payable as provided in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save harmless the Issuing Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which the Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by the Issuing Lender, other than as a result of (a) the gross negligence or willful misconduct of the Issuing Lender as determined by a final judgment of a court of competent jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor by the Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it or (ii) the failure of the Issuing Lender to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts").
B. NATURE OF ISSUING LENDERS' DUTIES. As between Company and the Issuing Lender, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by the Issuing Lender by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Issuing Lender shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Issuing Lender, including,
without limitation, any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of the Issuing Lender's rights or powers hereunder.
In furtherance and extension and not in limitation of the specific provisions set forth in the first paragraph of this subsection 3.5B, any action taken or omitted by the Issuing Lender under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put the Issuing Lender under any resulting liability to Company.
Notwithstanding anything to the contrary contained in this subsection 3.5, Company shall retain any and all rights it may have against any Issuing Lender for any liability arising solely out of the gross negligence or willful misconduct of the Issuing Lender, as determined by a final judgment of a court of competent jurisdiction.
3.6 Increased Costs and Taxes Relating to Letters of Credit. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that the Issuing Lender or any Lender shall reasonably determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by the Issuing Lender or any Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law):
(i) subjects the Issuing Lender or any Lender (or its applicable lending or letter of credit office) to any additional Tax (other than any Tax on the overall net income of the Issuing Lender or such Lender) with respect to the issuing or maintaining of any Letters of Credit or the purchasing or maintaining of any participations therein or any other obligations under this Section 3, whether directly or by such being imposed on or suffered
(ii) imposes, modifies or holds applicable any reserve (including without limitation any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or
similar requirement in respect of any Letters of Credit issued by the Issuing Lender or participations therein purchased by any Lender; or
(iii) imposes any other condition (other than with respect to a Tax matter) on or affecting the Issuing Lender or any Lender (or its applicable lending or letter of credit office) regarding this Section 3 or any Letter of Credit or any participation therein;
and the result of any of the foregoing is to increase the cost to the Issuing Lender or any Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to purchase, purchasing or maintaining any participation therein or to reduce any amount received or receivable by the Issuing Lender or any Lender (or its applicable lending or letter of credit office) with respect thereto; then, in any case, Company shall promptly pay to the Issuing Lender or any Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate the Issuing Lender or any Lender for any such increased cost or reduction in amounts received or receivable hereunder; PROVIDED, HOWEVER, that Company shall not be obligated to pay such Lender any compensation attributable to any period prior to the date that is 180 days prior to the date on which such Lender gave notice to Company of the circumstance entitling such Lender to compensation. The Issuing Lender or any Lender shall deliver to Company a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to the Issuing Lender or any Lender under this subsection 3.6, which statement shall be conclusive and binding upon all parties hereto absent manifest error.
Section 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT
4.1 Conditions to Signing Date. The obligations of Lenders to execute this Agreement and the effectiveness of this Agreement are subject to prior or concurrent satisfaction of the following conditions:
A. LOAN PARTY DOCUMENTS. On the Signing Date, Company shall, and shall cause each Subsidiary of Company (other than Inactive Subsidiaries or Unrestricted Subsidiaries) to, deliver to Administrative Agent (with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Signing Date:
(i) Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery
and performance of the Loan Documents and the Merger Agreement, if such Person is a party thereto, certified as of the Signing Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment;
(ii) Signature and incumbency certificates of the officers of such Person executing the Loan Documents to which it is a party; and
(iii) Executed originals of the Loan Documents to which such Person is a party.
B. PROJECTIONS; PROJECTED BALANCE SHEET. On or before the Signing Date, Administrative Agent shall have received from Company (i) the Projections, which Projections shall be in form and substance reasonably satisfactory to Administrative Agent, and (ii) a projected consolidated balance sheet of Company and its Subsidiaries as at March 31, 1996 (the projected date of the consummation of the Merger), prepared in accordance with GAAP and reflecting the consummation of the Acquisition and the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Merger Agreement, which projected balance sheet shall be in form and substance reasonably satisfactory to Administrative Agent.
C. FINANCIAL STATEMENTS. On or before the Signing Date, Administrative Agent shall have received from Company (i) audited consolidated financial statements of Company and its Subsidiaries for Fiscal Years 1993, 1994 and 1995, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Years, (ii) an unaudited balance sheet of each Subsidiary of Company as at October 31, 1995 and the related statement of income for each such Subsidiary for the Fiscal Year then ended, (iii) audited consolidated financial statements of Greiner and its Subsidiaries for Greiner Fiscal Years 1992, 1993 and 1994, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Greiner Fiscal Years, (iv) unaudited consolidated financial statements of Greiner and its Subsidiaries for the Greiner Fiscal Quarters ended March 31, 1995, June 30, 1995 and September 30, 1995, consisting of a balance sheet and the related consolidated statements of income, stockholders' equity and cash flows for the three-month, six-month and nine-month periods, respectively, ending on such dates, all in reasonable detail, and (v) an unaudited balance sheet of each Subsidiary of Greiner as at December 31, 1994 and the related statement of income for each such Subsidiary for the Greiner Fiscal Year then ended.
D. FINANCIAL PERFORMANCE. As of the Signing Date:
(i) The ratio of (a) the sum of (1) Pre Merger URS Consolidated Total Funded Debt as of the Signing Date PLUS (2) Pre Merger Greiner Consolidated Total Funded Debt as of the Signing Date PLUS (3) the aggregate amount of the Tranche A Term Loan Commitments and the Tranche B Term Loan Commitments to (b) the sum of Pre Merger URS Consolidated EBITDA PLUS Pre Merger Greiner Consolidated EBITDA for the immediately preceding four-Fiscal Quarter period shall not exceed 4.00 to 1.00.
(ii) The sum of Pre Merger URS Consolidated EBITDA PLUS Pre Merger Greiner Consolidated EBITDA for the immediately preceding four-Fiscal Quarter period shall not be less than $15,000,000.
On the Signing Date, Company shall deliver to Administrative Agent an Officer's Certificate of Company demonstrating in reasonable detail compliance with such restrictions.
E. CORPORATE AND CAPITAL STRUCTURE, OWNERSHIP, MANAGEMENT; MERGER STRUCTURE, ETC.
(i) CORPORATE STRUCTURE. The corporate organizational structure of Company, Greiner and their respective Subsidiaries, both before and after giving effect to the Acquisition and the Merger, shall be as set forth on Schedule 4.1E of the Signing Date Company Disclosure Letter.
(ii) CAPITAL STRUCTURE AND OWNERSHIP. The capital structure and ownership of Company, Greiner and their respective Subsidiaries, both before and after giving effect to the Acquisition and the Merger, shall be as set forth on Schedule 4.1E of the Signing Date Company Disclosure Letter.
(iii) MERGER STRUCTURE. The structure to be used to consummate the Acquisition and the Merger shall be as set forth on Schedule 4.1E of the Signing Date Company Disclosure Letter.
(iv) MERGER AGREEMENT. Administrative Agent shall have received a fully executed or conformed copy of the Merger Agreement and any documents executed in connection therewith, and the Merger Agreement shall be in full force and effect and no provision thereof shall have been modified or waived in any respect without the consent of Administrative Agent.
F. MATTERS RELATING TO EXISTING SUBORDINATED INDEBTEDNESS. On or before the Signing Date, Company shall
have obtained all such consents with respect to the Existing Subordinated Indebtedness and the Existing Blum Subordination Agreement as may be required to permit the consummation of the Acquisition and the Merger, the related financings (including the incurrence of the Obligations hereunder) and the other transactions contemplated by the Loan Documents and the Merger Agreement. The terms and conditions of such consents shall be in form and substance satisfactory to Administrative Agent. Company shall have delivered to Administrative Agent a fully executed or conformed copy of the Existing Subordinated Agreements and the Existing Blum Subordination Agreement.
G. REPORT ON ACCOUNTS RECEIVABLE. Prior to the Signing Date, Administrative Agent shall have received a report from KPMG Peat Marwick in form, scope and substance reasonably satisfactory to Administrative Agent regarding the Accounts Receivable of Company and its Subsidiaries for the 1995 Fiscal Year. Prior to the Signing Date, Administrative Agent shall have received a report from KPMG Peat Marwick in form, scope and substance reasonably satisfactory to Administrative Agent regarding the Accounts Receivable of Greiner and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1994.
H. OPINIONS OF COUNSEL TO LOAN PARTIES. Administrative Agent shall have received sufficient originally executed copies for each Lender and its counsel of one or more favorable written opinions of Sheppard, Mullin, Richter & Hampton, counsel for Company and its Subsidiaries, addressed to Administrative Agent and Lenders and in form and substance reasonably satisfactory to Administrative Agent and its counsel, dated as of the Signing Date and setting forth substantially the matters in the opinions designated in Exhibit VII-A annexed hereto.
I. AUDITOR'S LETTER. Administrative Agent shall have received the executed Auditor's Letter from Coopers & Lybrand, LLP.
J. SIGNING DATE COMPANY DISCLOSURE LETTER. On or before the Signing Date, Company shall have delivered to Administrative Agent the Signing Date Company Disclosure Letter containing (i) Schedules 4.1E, 5.1D, 5.1E, 5.1F, 5.1G, 5.5B, 5.5C, 5.6, 5.11, 5.13, 7.2 and 7.3, (ii) preliminary Summary of Operations of Greiner and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1995 by division, which shall be annexed as Schedule 4.2A, (iii) preliminary Results of Operations of Greiner and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1995 formatted by adjustment item, which shall be annexed as Schedule 4.2B, and (iv) preliminary Results of Operations of Greiner and its
Subsidiaries for the Greiner Fiscal Year ended December 31, 1995 formatted by discontinued business segments, which shall be annexed as Schedule 4.2C.
K. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company shall have delivered to Administrative Agent an Officer's Certificate, in form and substance satisfactory to Administrative Agent, to the effect that the representations and warranties in Section 5 hereof are true, correct and complete in all material respects on and as of the Signing Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before the Signing Date except as otherwise disclosed to and agreed to in writing by Administrative Agent. There are no amendments to the Existing Subordinated Agreements or the Existing Blum Subordination Agreement that have not been delivered to Administrative Agent.
4.2 Conditions to Term Loans and Initial Revolving Loans. The obligations of Lenders to make the Term Loans and the Initial Revolving Loans are, in addition to the conditions precedent specified in subsections 4.1 and 4.3, subject to prior or concurrent satisfaction of the following conditions:
A. LOAN PARTY DOCUMENTS. On or before the Initial Funding Date, Company shall, and shall cause each other Loan Party to, deliver to Administrative Agent (with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Initial Funding Date:
(i) Certified copies of the Certificate or Articles of Incorporation of such Person, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the
(ii) Copies of the Bylaws of such Person, certified as of the Initial Funding Date by such Person's corporate secretary or an assistant secretary;
(iii) Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance of the Loan Documents and the Merger Agreement, if such Person is a party thereto, certified as of the Initial Funding Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment;
(iv) Signature and incumbency certificates of the officers of such Person executing the Loan Documents to which it is a party;
(v) Executed originals of the Loan Documents to which such Person is a party; and
(vi) Such other documents as Administrative Agent may reasonably request.
B. PROJECTIONS. On the Initial Funding Date, Company shall deliver to Administrative Agent (with sufficient copies for each Lender) an Officer's Certificate of Company certifying that no facts have occurred since the Signing Date that would lead Company to believe that the Projections are inaccurate in any material respect or that the assumptions on which the Projections are based are unreasonable.
C. PROJECTED BALANCE SHEET. On or prior to the Pre Closing Date, Company shall deliver to Administrative Agent (with sufficient copies for each Lender) a projected consolidated balance sheet of Company and its Subsidiaries as at the projected date of the consummation of the Merger, prepared in accordance with GAAP and reflecting the consummation of the Acquisition and the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Merger Agreement, which projected balance sheet shall be (i) in form and substance reasonably satis- factory to Administrative Agent and (ii) consistent with the projected consolidated balance sheet of Company and its Subsidiaries delivered pursuant to subsection 4.1B.
(i) Company shall have satisfied the covenants set forth in subsections 7.6A, 7.6B, 7.6C, and 7.6D as if the Merger had been consummated and the Term Loans funded on the Signing Date for each period set forth therein from the Signing Date to and including the Initial Funding Date. On the Initial Funding Date, Company shall deliver
to Administrative Agent (with sufficient originally executed copies for each Lender) an Officer's Certificate of Company demonstrating in reasonable detail compliance with such restrictions.
(ii) As at the last day of each month ending prior to consummation of the Merger:
(a) There shall be no Indebtedness outstanding under the Existing Credit Agreements (other than letters of credit) and the sum of Cash and Cash Equivalents of Company and its Subsidiaries on a consolidated basis shall not be less than $5,000,000.
(b) Pre Merger URS Consolidated EBITDA for the period set forth below then ended shall not be less than the correlative amount indicated below:
One-month period ended January 31, 1996 $ 680,000 Two-month period ended February 28, 1996 1,360,000 Three-month period ended March 31, 1996 2,040,000 Four-month period ended April 30, 1996 2,805,000 Five-month period ended May 31, 1996 3,740,000 Six-month period ended June 30, 1996 4,675,000 Seven-month period ended July 31, 1996 5,610,000 Eight-month period ended August 31, 1996 6,780,000
(c) Pre Merger URS Consolidated Net Income for the period set forth below then ended shall not be less than the correlative amount indicated below:
One-month period ended January 31, 1996 $ 170,000 Two-month period ended February 28, 1996 425,000 Three-month period ended March 31, 1996 680,000 Four-month period ended April 30, 1996 935,000 Five-month period ended May 31, 1996 1,275,000 Six-month period ended June 30, 1996 1,700,000 Seven-month period ended July 31, 1996 2,040,000 Eight-month period ended August 31, 1996 2,490,000
(d) The sum of Company's contract backlog PLUS designations, in each case calculated in a manner consistent with the method used in preparing Company's annual and quarterly reports filed with the Securities and Exchange Commission, shall not be less than $350,000,000.
(iii) As at the last day of each month ending prior to consummation of the Merger:
(a) There shall be no Indebtedness outstanding under the Existing Credit Agreements (other than letters of credit) and the sum of Cash, Cash Equivalents and U.S. Treasury securities of Greiner and its Subsidiaries on a consolidated basis shall not be less than $16,000,000.
(b) Pre Merger Greiner Consolidated EBITDA for the period set forth below then ended shall not be less than the correlative amount indicated below:
One-month period ended January 31, 1996 $ 400,000 Two-month period ended February 28, 1996 880,000 Three-month period ended March 31, 1996 1,440,000 Four-month period ended April 30, 1996 2,320,000 Five-month period ended May 31, 1996 3,120,000 Six-month period ended June 30, 1996 3,920,000 Seven-month period ended July 31, 1996 4,720,000 Eight-month period ended August 31, 1996 5,530,000
(c) Pre Merger Greiner Consolidated Net Income for the period set forth below then ended shall not be less than the correlative amount indicated below:
One-month period ended January 31, 1996 $ 80,000 Two-month period ended February 28, 1996 160,000 Three-month period ended March 31, 1996 320,000 Four-month period ended April 30, 1996 640,000 Five-month period ended May 31, 1996 880,000 Six-month period ended June 30, 1996 1,120,000 Seven-month period ended July 31, 1996 1,360,000 Eight-month period ended August 31, 1996 1,630,000
(d) The sum of Greiner's category I backlog PLUS category II backlog, in each case calculated in a manner consistent with the method used in preparing Greiner's annual and quarterly reports filed with the Securities and Exchange Commission, MULTIPLIED BY 130% shall not be less than $200,000,000.
E. NO MATERIAL ADVERSE EFFECT. Since October 31, 1995, no Material Adverse Effect (in the sole opinion of Administrative Agent) with respect to Company shall have occurred. Since September 30, 1995, no Material Adverse Effect (in the sole opinion of Administrative Agent) with respect to
Greiner shall have occurred, including any Material Adverse Effect with respect to Greiner resulting from audit or normal year-end adjustments made in connection with the December 31, 1995 audited financial statements. For purposes of this subsection 4.2E, it shall not be a Material Adverse Effect with respect to Greiner if (i) the pretax net loss reflected on the financial statements of Greiner and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1995 does not exceed $7,700,000 and (ii) Schedules 4.2A, 4.2B and 4.2C of the Company Initial Funding Date Disclosure Letter are not materially inconsistent with Schedules 4.2A, 4.2B and 4.2C of the Company Signing Date Disclosure Letter.
F. CONDUCT OF BUSINESS. Since the Signing Date, Company and its Subsidiaries and Greiner and its Subsidiaries shall have conducted their respective businesses in the usual, regular and ordinary course in substantially the same manner as conducted prior to December 20, 1995.
G. CORPORATE AND CAPITAL STRUCTURE, OWNERSHIP, MANAGEMENT, ETC.
(i) CORPORATE STRUCTURE. The corporate organizational structure of Company, Greiner and their respective Subsidiaries, both before and after giving effect to the Acquisition and the Merger, shall be as set forth on Schedule 4.1E of the Signing Date Company Disclosure Letter.
(ii) CAPITAL STRUCTURE AND OWNERSHIP. The capital structure and ownership of Company, Greiner and their respective Subsidiaries, both before and after giving effect to the Acquisition and the Merger, shall be as set forth on Schedule 4.1E of the Signing Date Company Disclosure Letter.
(iii) MERGER STRUCTURE. The structure to be used to consummate the Acquisition and the Merger shall be as set forth on Schedule 4.1E of the Signing Date Company Disclosure Letter.
(iv) MERGER AGREEMENT. The Merger Agreement shall be in full force and effect and no provision thereof shall have been modified or waived in any respect without the consent of Administrative Agent.
H. TERMINATION OF EXISTING CREDIT AGREEMENTS AND RELATED LIENS; EXISTING GREINER LETTER OF CREDIT. On the Initial Funding Date, Company, Greiner and their respective Subsidiaries shall have (i) terminated any commitments to lend or make other extensions of credit under the Existing Credit Agreements, (ii) delivered to Administrative Agent all
documents or instruments necessary to release all Liens securing Indebtedness or other obligations of Company and its Subsidiaries thereunder and (iii) cash collateralized the Existing Greiner Letters of Credit by delivering to Sanwa Bank an amount equal to the maximum amount that may at any time be drawn under the Existing Greiner Letters of Credit.
I. NECESSARY GOVERNMENTAL AUTHORIZATIONS AND CONSENTS; EXPIRATION OF WAITING PERIODS, ETC. Company shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with the Acquisition and the Merger, the other transactions contemplated by the Loan Documents and the Merger Agreement, and the continued operation of the business conducted by Greiner and its Subsidiaries in substantially the same manner as conducted prior to the consummation of the Acquisition and the Merger, and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on Company or Greiner. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Acquisition or the Merger or the financing thereof. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired.
(i) All conditions to the Acquisition and the Merger set forth in Sections 7.1 and 7.2 of the Merger Agreement shall have been satisfied or the fulfillment of any such conditions shall have been waived with the consent of
(ii) The Acquisition and the Merger shall become effective concurrently with the making of the initial Loans in accordance with the terms of the Merger Agreement, no provision of which shall have been amended, supplemented, waived or otherwise modified in any respect without the prior written consent of Administrative Agent, and the laws of the State of Nevada;
(iii) The Acquisition Consideration shall not exceed
(iv) Transaction Costs shall not exceed $5,000,000, and Administrative Agent shall have received evidence to its satisfaction to such effect;
(v) Administrative Agent shall have received evidence to its satisfaction that at least $16,000,000 in Cash is on hand at Greiner and at least $5,000,000 in Cash is on hand at Company; and
(vi) Effective upon consummation of the Merger, the outstanding capital stock of Greiner shall be a class of common stock that does not constitute Margin Stock.
K. SECURITY INTERESTS IN PERSONAL PROPERTY. On or prior to the Pre-Closing Date, Administrative Agent shall have received evidence satisfactory to it that Company and Subsidiary Guarantors shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing of items described in clause (iii) below) that may be necessary or, in the opinion of Administrative Agent, desirable in order to create in favor of Administrative Agent, for the benefit of Lenders, a valid and (upon such filing and recording) perfected First Priority security interest in the entire Collateral. Such actions shall include, without limitation, the following:
(i) SCHEDULES TO COLLATERAL DOCUMENTS. Delivery to Administrative Agent of accurate and complete schedules to all of the applicable Collateral Documents;
(ii) STOCK CERTIFICATES AND INSTRUMENTS. Delivery to Administrative Agent of certificates and instruments (which certificates and instruments shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Administrative Agent) representing all capital stock and intercompany debt, if required pursuant to subsection 7.1(iv), pledged pursuant to the Company Pledge Agreement and the Subsidiary Pledge Agreement and identified on Schedule 4.2K of the Initial Funding Date Company
(iii) LIEN SEARCHES AND UCC TERMINATION STATEMENTS. Delivery to Administrative Agent of (a) the results of a recent search, by a Person satisfactory to Administrative Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any property of any Loan Party, together with copies of all such filings disclosed by such search, and (b) UCC termination
statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the
(iv) UCC FINANCING STATEMENTS. Delivery to Administrative Agent of UCC financing statements duly executed by each applicable Loan Party with respect to all Collateral of such Loan Party, for filing in all jurisdictions as may be necessary or, in the opinion of Administrative Agent, desirable to perfect the security interests created in such Collateral pursuant to the
(v) DEPOSIT NOTICES. Delivery to Administrative Agent of notices with respect to the security interest of Administrative Agent, in form and substance reasonably satisfactory to Administrative Agent, addressed to the financial institutions in which the Deposit Accounts listed on Schedule I to the Company Security Agreement and Schedule I to the Subsidiary Security Agreement are
(vi) CASH MANAGEMENT SYSTEM. Establishment of a cash management system with Wells Fargo, satisfactory to Administrative Agent.
L. SOLVENCY ASSURANCES. On the Initial Funding Date, Company shall deliver to Administrative Agent (with sufficient copies for each Lender) a Financial Condition Certificate dated the Initial Funding Date, substantially in the form of Exhibit XVIII annexed hereto and with appropriate attachments, in each case demonstrating that, after giving effect to the consummation of the Acquisition and the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Merger Agreement, both Company and Greiner will be Solvent.
M. EVIDENCE OF INSURANCE. Administrative Agent shall have received a certificate from Company's insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to subsection 6.4 is in full force and effect.
N. OPINIONS OF COUNSEL TO LOAN PARTIES. Administrative Agent shall have received sufficient originally executed copies
for each Lender and its counsel of one or more favorable written opinions of Sheppard, Mullin, Richter & Hampton, counsel for Loan Parties, addressed to Administrative Agent and Lenders and in form and substance reasonably satisfactory to Administrative Agent and its counsel, dated as of the Initial Funding Date and setting forth substantially the matters in the opinions designated in Exhibit VII-B annexed hereto and as to such other matters as Administrative Agent may reasonably request.
O. OPINIONS OF ADMINISTRATIVE AGENT'S COUNSEL. Administrative Agent shall have received sufficient originally executed copies for each Lender and its counsel of one or more favorable written opinions of O'Melveny & Myers, counsel to Administrative Agent, addressed to Administrative Agent and Lenders and dated as of the Initial Funding Date, substan- tially in the form of Exhibit VIII annexed hereto and as to such other matters as Administrative Agent may reasonably request.
P. OPINIONS OF COUNSEL DELIVERED UNDER MERGER AGREEMENT. Administrative Agent shall have received sufficient copies for each Lender and its counsel of each of the opinions of counsel delivered to the parties under the Merger Agreement, together with a letter from each such counsel authorizing Lenders to rely upon such opinion to the same extent as though it were addressed to Lenders.
Q. FEES. Company shall have paid to Administrative Agent, for distribution (as appropriate) to Administrative Agent and Lenders, the fees payable referred to in subsection 2.3.
R. AUDITOR'S LETTER. Administrative Agent shall have received the executed Auditor's Letter from Price Waterhouse, LLP with respect to the consolidated financial statements of Greiner and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1995.
S. INITIAL FUNDING DATE COMPANY DISCLOSURE LETTER. On or before the Initial Funding Date, Company shall have delivered to Administrative Agent the Initial Funding Date Company Disclosure Letter containing (i) Schedules 1.1 and 5.8, (ii) final Summary of Operations of Greiner and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1995 by division, which shall be annexed as Schedule 4.2A, (iii) final Results of Operations of Greiner and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1995 formatted by adjustment item, which shall be annexed as Schedule 4.2B, and (iv) final Results of Operations of Greiner
and its Subsidiaries for the Greiner Fiscal Year ended December 31, 1995 formatted by discontinued business segments, which shall be annexed as Schedule 4.2C.
T. NO DISRUPTION OF FINANCIAL AND CAPITAL MARKETS. Since December 20, 1995, there shall not have occurred and be continuing a material disruption of or material adverse change in the financial, banking or capital markets that would have an adverse effect on the syndication markets for credit facilities similar in nature to those provided for in this Agreement, as determined by Administrative Agent in its sole discretion.
U. SYNDICATION. Company and Greiner shall have cooperated with Administrative Agent in the syndication of the Commitments (such cooperation to include, without limitation, participating in meetings with the Lenders and assisting in the preparation of a Confidential Information Memorandum and other materials to be used in connection with such syndication) and shall have provided and caused their respective advisors to provide all information reasonably deemed necessary by Administrative Agent to such syndication. Company and Greiner shall also have coordinated any other financings by Company and Greiner with Administrative Agent's primary syndication efforts relating to the Commitments.
V. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company shall have delivered to Administrative Agent an Officer's Certificate, in form and substance satisfactory to Administrative Agent, (i) to the effect that the representations and warranties in Section 5 hereof are true, correct and complete in all material respects on and as of the Initial Funding Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before the Initial Funding Date except as otherwise disclosed to and agreed to in writing by Administrative Agent and (ii) to the effect set forth in clauses (i)-(v) of subsection 4.2J and stating that Company will proceed to consummate the Acquisition and the Merger concurrently with the making of the initial Loans.
W. COMPLETION OF PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent and its counsel shall be reasonably satisfactory in form and substance to Administrative Agent and such counsel, and
Administrative Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent may reasonably request.
4.3 Conditions to All Loans. The obligations of Lenders to make Loans on each Funding Date are subject to the following further conditions precedent:
A. Administrative Agent shall have received before that Funding Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by the chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent.
B. As of that Funding Date:
(i) The representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date;
(ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of
(iii) Each Loan Party shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before that Funding
(iv) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making the Loans to be made by it on that Funding Date;
(v) The making of the Loans requested on such Funding Date shall not violate any law including, without limitation, Regulation G, Regulation T, Regulation U or
Regulation X of the Board of Governors of the Federal
(vi) (a) There shall not be pending or, to the actual knowledge of Company, threatened, any action, suit, pro- ceeding, governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries that has not been disclosed by Company in writing pursuant to subsection 5.6 or 6.1(xiii) prior to the making of the last preceding Loans (or, in the case of the initial Loans, prior to the execution of this Agreement), and (b) there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, that, in either event, in the reasonable opinion of Administrative Agent or of Requisite Lenders, would be expected to have a Material Adverse Effect on Company; and no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or other- wise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of Loans hereunder.
4.4 Conditions to Letters of Credit. The issuance of any Letter of Credit hereunder (whether or not the Issuing Lender is obligated to issue such Letter of Credit) is subject to the following conditions precedent:
A. On or before the date of issuance of the initial Letter of Credit pursuant to this Agreement, the initial Loans shall have been made.
B. On or before the date of issuance of such Letter of Credit, Administrative Agent shall have received, in accordance with the provisions of subsection 3.1B(i), an originally executed Notice of Issuance of Letter of Credit, in each case signed by the chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent, together with all other information specified in subsection 3.1B(i) and such other documents or information as the Issuing Lender may reasonably require in connection with the issuance of such Letter of Credit.
C. On the date of issuance of such Letter of Credit, all conditions precedent described in subsection 4.3B shall be satisfied to the same extent as if the issuance of such Letter of Credit were the making of a Loan and the date of issuance of such Letter of Credit were a Funding Date.
Section 5. COMPANY'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Agree- ment and to make the Loans, to induce the Issuing Lender to issue Letters of Credit and to induce other Lenders to purchase participations therein, Company represents and warrants to each Lender, on the date of this Agreement, on each Funding Date and on the date of issuance of each Letter of Credit, that the following statements (other than the statements set forth in subsection 5.16 on the date of this Agreement) are true, correct and complete:
5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries. A. ORGANIZATION AND POWERS. Each Loan Party is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each Loan Party has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Loan Documents and the Merger Agreement if it is a party thereto and to carry out the transactions contemplated thereby.
B. QUALIFICATION AND GOOD STANDING. Each Loan Party is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and will not have a Material Adverse Effect on such Loan Party.
C. CONDUCT OF BUSINESS. Company and its Subsidiaries are engaged only in the businesses permitted to be engaged in pursuant to subsection 7.11.
D. SUBSIDIARIES. As of the Signing Date and as of the Initial Funding Date, all of the Subsidiaries of Company, Greiner and all of the Subsidiaries of Greiner are identified on Schedule 5.1D of the Signing Date Company Disclosure Letter. The capital stock of each entity identified on Schedule 5.1D of the Signing Date Company Disclosure Letter is duly authorized, validly issued, fully paid and nonassessable and none of such capital stock constitutes Margin Stock. Each of the Sub- sidiaries of Company is a corporation duly organized, validly existing and in good standing under the laws of its respective
jurisdiction of incorporation, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporate power and authority has not had and will not have a Material Adverse Effect on Company. Except as set forth on Schedule 5.1D of the Signing Date Company Disclosure Letter, Company, Greiner or a Subsidiary of Company or Greiner has executed an agreement with respect to the capital stock of each non-wholly owned Subsidiary of Company or Greiner that gives Company, Greiner or a Subsidiary of Company or Greiner the right to purchase any shares of capital stock of such non-wholly owned Subsidiary held by any Person other than Company, Greiner or a Subsidiary of Company or Greiner in the event of any proposed transfer thereof unless the failure to execute such an agreement would not have a Material Adverse Effect on Company.
E. INACTIVE SUBSIDIARIES. None of the Subsidiaries of Company identified on Schedule 5.1E of the Signing Date Company Disclosure Letter under the heading "Inactive Subsidiaries" ("Inactive Subsidiaries"), as said Schedule 5.1E may be supplemented from time to time pursuant to the provisions of subsection 6.1(xx), is conducting business, owns any property or is generating any revenue.
F. CAPITALIZATION. As of the Signing Date and as of the Initial Funding Date, Schedule 5.1F of the Signing Date Company Disclosure Letter correctly sets forth the ownership interest of Company and each of its Subsidiaries in each of the Subsidiaries of Company identified therein and of Greiner and each of its Subsidiaries in each of the Subsidiaries of Greiner identified therein. Schedule 5.1F of the Signing Date Company Disclosure Letter correctly sets forth, as of the Signing Date and as of the Initial Funding Date, the authorized classes of capital stock of Company and each of its Subsidiaries and of Greiner and each of its Subsidiaries, the par value of each share of such class, the number of authorized shares of each such class, and the number of outstanding shares of each such class. As of the Signing Date and as of the Initial Funding Date, no other class of capital stock of Company or Greiner is outstanding. The capital stock of Company and Greiner is duly authorized, validly issued, fully paid and nonassessable.
G. OPTIONS AND OTHER RIGHTS. As of the Signing Date and as of the Initial Funding Date, except as set forth on Schedule 5.1G of the Signing Date Company Disclosure Letter, there are no outstanding subscriptions, warrants, calls, options, rights (including unsatisfied preemptive rights), commitments or
agreements to which Company or any of its Subsidiaries or Greiner or any of its Subsidiaries is bound that permit or entitle any Person to purchase or otherwise to receive from or to be issued any shares of capital stock of Company or any of its Subsidiaries or Greiner or any of its Subsidiaries or any security or obligation of any kind convertible into any class of capital stock of Company or any of its Subsidiaries or Greiner or any of its Subsidiaries. Neither Company, Greiner nor any of their respective Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock.
5.2 Authorization of Borrowing, etc. A. AUTHORIZATION OF BORROWING. The execution, delivery and performance of the Loan Documents and the Merger Agreement have been duly authorized by all necessary corporate action on the part of each Loan Party that is a party thereto.
B. NO CONFLICT. The execution, delivery and performance by Loan Parties of the Loan Documents and the Merger Agreement to which they are parties and the consummation of the trans- actions contemplated by the Loan Documents and the Merger Agreement do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Company or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries, except for such approvals or consents which will be obtained on or before the Signing Date and disclosed in writing to Lenders.
C. GOVERNMENTAL CONSENTS. The execution, delivery and performance by Loan Parties of the Merger Agreement if they are parties thereto and the Loan Documents to which they are parties and the consummation of the transactions contemplated by the Loan Documents and the Merger Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body.
D. BINDING OBLIGATION. Each of the Loan Documents and the Merger Agreement has been duly executed and delivered by each Loan Party that is a party thereto and is the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability.
Company has heretofore delivered to Lenders, at Lenders' request, (i) the audited consolidated balance sheet of Company and its Subsidiaries as at October 31, 1995 and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the Fiscal Year then ended, (ii) an unaudited balance sheet of each Subsidiary of Company as at October 31, 1995 and the related statement of income for each such Subsidiary for the Fiscal Year then ended, and (iii) a copy of the schedules relating to each Subsidiary of Company included in Company's consolidated income tax return for such Fiscal Year. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year- end adjustments. Company does not (and will not following the funding of the initial Loans) have any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the foregoing financial statements or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries.
Company has heretofore delivered to Lenders, at Lenders' request, (i) the audited consolidated balance sheet of Greiner and its Subsidiaries as at December 31, 1994 and the related consolidated statements of income, stockholders' equity and cash flows of Greiner and its Subsidiaries for the Greiner Fiscal Year then ended, (ii) the unaudited consolidated balance sheet of Greiner and its Subsidiaries as at September 30, 1995 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of Greiner and its Subsidiaries for the nine months then ended, (iii) an unaudited balance sheet of each Subsidiary of Greiner as at December 31, 1994 and the related statement of income for each such
Subsidiary for the Greiner Fiscal Year then ended, and (iv) a copy of the schedules relating to each Subsidiary of Greiner included in Greiner's consolidated income tax return for such Greiner Fiscal Year. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments. Greiner does not (and will not following the funding of the initial Loans) have any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the foregoing financial statements or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of Greiner or any of its Subsidiaries.
5.4 No Material Adverse Change; No Restricted Junior Payments; No Deterioration in Quality of Accounts Receivable. Since October 31, 1995, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect on Company. Neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Junior Payment or agreed to do so except as permitted by subsection 7.5.
5.5 Title to Properties; Liens; Real Property; Licenses, Trademarks; etc. A. TITLE TO PROPERTIES; LIENS. Company and its Subsidiaries and Greiner and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in the financial statements referred to in subsection 5.3 or in the most recent financial statements delivered pursuant to subsection 6.1, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 7.7. Except as permitted by this Agreement and except, at any time prior to the Initial Funding Date, for Liens in favor of Wells Fargo, all such properties and assets are free and clear of Liens.
B. REAL PROPERTY. As of the Signing Date and as of the Initial Funding Date, Schedule 5.5B of the Signing Date Company Disclosure Letter contains a true, accurate and complete list of (i) all fee interests in real property and (ii) all leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting any real property of Company or any of its Subsidiaries or of Greiner or any of its Subsidiaries, regardless of whether such entity is the landlord or tenant (whether directly or as an assignee or successor in interest) under such lease, sublease or assignment. Except as specified on Schedule 5.5B of the Signing Date Company Disclosure Letter, each agreement listed in clause (ii) of the immediately preceding sentence is in full force and effect and Company does not have actual knowledge of any default that has occurred and is continuing thereunder, and each such agreement constitutes the legally valid and binding obligation of each entity party thereto, enforceable against such entity in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles.
C. LICENSES, TRADEMARKS, ETC. Company and its Subsidiaries have all patents, licenses, trademarks, trademark rights, trade names, trade name rights, copyrights, permits and franchises which are required in order for it to conduct its business and to operate its properties as now or proposed to be conducted without known conflict with the rights of others, other than as set forth on Schedule 5.6 of the Signing Date Company Disclosure Letter. As of the Signing Date and as of the Initial Funding Date, Schedule 5.5C of the Signing Date Company Disclosure Letter contains a complete and correct list of all patents, copyrights, trade marks, licenses, service marks, trade names and other similar rights owned or used by Company or any of its Subsidiaries or by Greiner or any of its Subsidiaries, showing for each item the owner thereof and each public body with which such ownership is registered.
Except as set forth on Schedule 5.6 of the Signing Date Company Disclosure Letter, there are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including any Environmental Claims) that are pending or, to the knowledge of Company, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries and that, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse Effect on Company. Neither Company nor any of its Subsidiaries (i) is in violation of any applicable laws (including Environmental Laws) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect on Company, or (ii) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect on Company.
Except to the extent permitted by subsection 6.3, all tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable. Company knows of no proposed tax assessment against Company or any of its Subsidiaries which is not being actively contested by Company or such Subsidiary in good faith and by appropriate proceedings; PROVIDED that such reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor.
5.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts. A. Neither Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a Material Adverse Effect on Company.
B. Neither Company nor any of its Subsidiaries is a party to or is otherwise subject to any agreements or instruments or any charter or other internal restrictions which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect on Company.
C. Schedule 5.8 of the Initial Funding Date Company Disclosure Letter contains a true, correct and complete list of all the Material Contracts in effect on the Initial Funding Date, including, with respect to any contracts with the
government of the United States of America, or any department, agency, public corporation or other instrumentality thereof, the name of the contracting officer, disbursing officer and contract number. Except as described on Schedule 5.8 of the Initial Funding Date Company Disclosure Letter, all such Material Contracts are in full force and effect and no material defaults currently exist thereunder.
Neither Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable.
A. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock.
B. Following application of the proceeds of each Loan, not more than 25% of the value of the assets (either of Company only or of Company and its Subsidiaries on a consolidated basis) subject to the provisions of subsection 7.2 or 7.7 or subject to any restriction contained in any agreement or instrument, between Company and any Lender or any Affiliate of any Lender, relating to Indebtedness and within the scope of subsection 8.2, will be Margin Stock.
A. Company, each of its Subsidiaries and each of their respective ERISA Affiliates are in compliance with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan of Company and its Subsidiaries, and have performed all their obligations under each such Employee Benefit Plan. Each such Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified.
B. No ERISA Event has occurred or is reasonably expected to occur.
C. Except to the extent required under Section 4980B of the Internal Revenue Code or except as set forth on Schedule 5.11 of the Signing Date Company Disclosure Letter, no
such Employee Benefit Plan provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employee of Company, any of its Subsidiaries or any of their respective ERISA Affiliates.
D. As of the most recent valuation date for any Pension Plan of Company and its Subsidiaries, the amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all such Pension Plans (excluding for purposes of such computation any such Pension Plans with respect to which assets exceed benefit liabilities), does not exceed $500,000.
E. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Company, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all such Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, does not exceed $500,000.
No broker's or finder's fee or commission will be payable with respect to this Agreement or any of the transactions contemplated hereby, and Company hereby indemnifies Lenders against, and agrees that it will hold Lenders harmless from, any claim, demand or liability for any such broker's or finder's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability.
Except as set forth on Schedule 5.13 of the Signing Date Company Disclosure Letter:
(i) neither Company nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree or settlement agreement with any Person relating to (a) any Environmental Law, (b) any Environmental Claim, or (c) any Hazardous Materials Activity that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on Company;
(ii) neither Company nor any of its Subsidiaries has received any letter or request for information under Section 104 of the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. sec. 9604) or any
(iii) there are and, to Company's knowledge, have been no conditions, occurrences, or Hazardous Materials Activities which could reasonably be expected to form the basis of an Environmental Claim against Company or any of its Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse
(iv) neither Company nor any of its Subsidiaries nor, to Company's knowledge, any predecessor of Company or any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment of Hazardous Materials at any Facility, and none of Company's or any of its Subsidiaries' operations involves the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260- 270 or any state equivalent; and
(v) compliance with all current or reasonably foreseeable future requirements pursuant to or under Environmental Laws will not, individually or in the aggregate, have a reasonable possibility of giving rise to a Material Adverse Effect on Company.
Notwithstanding anything in this subsection 5.13 to the contrary, no event or condition has occurred or is occurring with respect to Company or any of its Subsidiaries relating to any Environmental Law, any Release of Hazardous Materials, or any Hazardous Materials Activity, including any matter disclosed on Schedule 5.13 of the Signing Date Company Disclosure Letter, which individually or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect on Company.
There is no strike or work stoppage in existence or threatened involving Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect on Company.
Each of Company, Greiner and URS Consultants, Inc. (Delaware), a Delaware corporation, upon the incurrence of any Obligations by such Loan Party on any date on which this representation is made, will be, Solvent.
5.16 Matters Relating to Collateral. A. CREATION, PERFECTION AND PRIORITY OF LIENS. The execution and delivery of the Collateral Documents by Loan Parties, together with (i) the actions taken on or prior to the Pre Closing Date pursuant to subsections 4.2K and 6.7 and (ii) the delivery to Administrative Agent of any Pledged Collateral not delivered to Administrative Agent at the time of execution and delivery of the applicable Collateral Document (all of which Pledged Collateral has been so delivered) are effective to create in favor of Administrative Agent for the benefit of Lenders, as security for the respective Secured Obligations (as defined in the applicable Collateral Document in respect of any Collateral), a valid and perfected First Priority Lien on all of the Collateral, and all filings and other actions necessary or desirable to perfect and maintain the perfection and First Priority status of such Liens have been duly made or taken and remain in full force and effect, other than the filing of any UCC financing statements delivered to Administrative Agent for filing (but not yet filed) and the periodic filing of UCC continuation statements in respect of UCC financing statements filed by or on behalf of Administrative Agent.
B. GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge or grant by any Loan Party of the Liens purported to be created in favor of Administrative Agent pursuant to any of the Collateral Documents or (ii) the exercise by Administrative Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by subsection 5.16A and except as may be required, in connection with the disposition of any Pledged Collateral, by laws generally affecting the offering and sale of securities.
C. ABSENCE OF THIRD-PARTY FILINGS. Except such as may have been filed in favor of Administrative Agent as contemplated by subsection 5.16A, no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office.
D. MARGIN REGULATIONS. The pledge of the Pledged Collateral pursuant to the Collateral Documents does not violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System.
E. INFORMATION REGARDING COLLATERAL. All information supplied to Administrative Agent by or on behalf of any Loan
Party with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects.
A. DELIVERY OF MERGER AGREEMENT. Company has delivered to Lenders complete and correct copies of the Merger Agreement and of all exhibits and schedules thereto.
B. GREINER'S WARRANTIES. Except to the extent otherwise set forth herein or in the schedules hereto, each of the representations and warranties given by Greiner to Company in the Merger Agreement is true and correct in all material respects as of the date hereof (or as of any earlier date to which such representation and warranty specifically relates) and will be true and correct in all material respects as of the Initial Funding Date (or as of such earlier date, as the case may be), in each case subject to the qualifications set forth in the schedules to the Merger Agreement.
C. WARRANTIES OF COMPANY. Subject to the qualifications set forth therein, each of the representations and warranties given by Company to Greiner in the Merger Agreement is true and correct in all material respects as of the date hereof and will be true and correct in all material respects as of the Initial Funding Date.
D. SURVIVAL. Notwithstanding anything in the Merger Agreement to the contrary, the representations and warranties of Company set forth in subsections 5.17B and 5.17C shall, solely for purposes of this Agreement, survive the Initial Funding Date for the benefit of Lenders.
No representation or warranty of Company or any of its Subsidiaries contained in any Loan Document or the Merger Agreement or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contemplated by this Agreement, including, without limitation, the Signing Date Company Disclosure Letter and the Initial Funding Date Company Disclosure Letter, contains any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized
by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect on Company and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby.
Section 6. COMPANY'S AFFIRMATIVE COVENANTS
Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6.
6.1 Financial Statements and Other Reports. Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of consolidated financial statements in conformity with GAAP. Company will deliver to Administrative Agent and Lenders:
(i) COMPANY MONTHLY FINANCIALS: as soon as available and in any event within 25 days after the end of each month during the period from the Signing Date to consummation of the Merger, the consolidated balance sheet of Company and its Subsidiaries as at the end of each month and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such month, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end
(ii) GREINER MONTHLY FINANCIALS: as soon as available and in any event within 25 days after the end of each month during the period from the Signing Date to consummation of the Merger, the consolidated balance sheet of Greiner and its Subsidiaries as at the end of such
month and the related consolidated statements of income, stockholders' equity and cash flows of Greiner and its Subsidiaries for such month, all in reasonable detail and certified by the chief financial officer of Greiner that they fairly present, in all material respects, the financial condition of Greiner and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end
(iii) COMPANY QUARTERLY FINANCIALS: (a) as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year, (1) the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, (2) a report containing the aggregate amount of gross billings in excess of costs and the aggregate amount of gross costs in excess of billings, (3) a statement describing any post-Merger changes in accounting that have been made to standardize the accounting practices of Company and Greiner, and (4) an office earnings report for the Fiscal Quarter then ended, and (b) as soon as available and in any event within 90 days after the end of each Fiscal Quarter, a summary of such consolidated statements setting forth in comparative form the corresponding figures from the Financial Plan for the current Fiscal Year and a narrative report describing the operations of Company and its Subsidiaries in each case in the form prepared for presentation to the Board of Directors for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end
(iv) GREINER QUARTERLY FINANCIALS: as soon as available and in any event within 45 days after the end of each Greiner Fiscal Quarter during the period from the Signing Date to consummation of the Merger, (a) the consolidated balance sheet of Greiner and its Subsidiaries
as at the end of such Greiner Fiscal Quarter and the related consolidated statements of income, stockholders' equity and cash flows of Greiner and its Subsidiaries for such Greiner Fiscal Quarter and for the period from the beginning of the then current Greiner Fiscal Year to the end of such Greiner Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Greiner Fiscal Year, all in reasonable detail and certified by the chief financial officer of Greiner that they fairly present, in all material respects, the financial condition of Greiner and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, (b) a narrative report describing the operations of Greiner and its Subsidiaries in the form prepared for presentation to senior management for such Greiner Fiscal Quarter and for the period from the beginning of the then current Greiner Fiscal Year to the end of such Fiscal Greiner Quarter, and (c) a current earnings report for the Greiner Fiscal Quarter then ended;
(v) COMPANY YEAR-END FINANCIALS: as soon as available and in any event within 90 days after the end of each Fiscal Year, (a) the consolidated balance sheet of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year, all in reasonable detail and certi- fied by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, (b) a summary of such consolidated statements setting forth in comparative form the corresponding figures from the Financial Plan for the current Fiscal Year and, a narrative report describing the operations of Company and its Subsidiaries in each case in the form prepared for presentation to the Board of Directors for such Fiscal Year, (c) an unaudited balance sheet and income statement of each Subsidiary for such Fiscal Year and the schedules to Company's consolidated income tax return relating to each Subsidiary of Company for such Fiscal Year, (d) a report containing the aggregate amount of gross billings in excess of costs and the aggregate amount of gross costs in excess of billings, (e) a statement describing any post-Merger changes in accounting that have been made to standardize the accounting practices of Company and Greiner, (f) an office earnings report for the Fiscal Year then ended, and (g) in
the case of such consolidated financial statements, a report thereon of Coopers & Lybrand or other independent certified public accountants of recognized national standing selected by Company, which report shall be unqualified, shall express no doubts about the ability of Company and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards, together with an executed Auditor's Letter regarding such financial
(vi) GREINER YEAR-END FINANCIALS: as soon as available and in any event within 90 days after the end of each Greiner Fiscal Year during the period from the Signing Date to consummation of the Merger, (a) the consolidated balance sheet of Greiner and its Subsidiaries as at the end of such Greiner Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of Greiner and its Subsidiaries for such Greiner Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Greiner Fiscal Year, all in reasonable detail and certified by the chief financial officer of Greiner that they fairly present, in all material respects, the finan- cial condition of Greiner and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, and (b) an unaudited balance sheet and income statement of each Subsidiary of Greiner for such Greiner Fiscal Year and the schedules to Greiner's consolidated income tax return relating to each Subsidiary for such Greiner Fiscal Year, (c) a narrative report describing the operations of Greiner and its Subsidiaries in the form prepared for presentation to senior management for such Greiner Fiscal Year, (d) a current earnings report for the Greiner Fiscal Year then ended, and (e) in the case of such consolidated financial statements, a report thereon of Price Waterhouse or other independent certified public accountants of recognized national standing selected by Greiner, which report shall be unqualified, shall express no doubts about the ability of Greiner and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present, in all material
respects, the consolidated financial position of Greiner and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards;
(vii) OFFICER'S AND COMPLIANCE CERTIFICATES: together with each delivery of financial statements of Company and its Subsidiaries pursuant to subdivisions (i), (ii), (iii), (iv), (v) and (vi) above, (a) an Officer's Certifi- cate of Company stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Company has taken, is taking and proposes to take with respect thereto; and (b) a Compliance Certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in subsection 4.2D and Section 7, in each case to the extent compliance with such restrictions is required to be tested at the end of the applicable accounting period;
(viii) RECONCILIATION STATEMENTS: if, as a result of any change in accounting principles and policies from those used in the preparation of the audited financial statements referred to in subsection 5.3, the consolidated financial statements delivered pursuant to subdivisions (i), (ii), (iii), (iv), (v), (vi) or (xvi) of this subsection 6.1 will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made, then (a) together with the first delivery of financial statements pursuant to subdivision (i), (ii), (iii), (iv), (v), (vi) or (xvi) of this subsection 6.1 following such change, consolidated financial statements of Company and its Subsidiaries or Greiner and its Subsidiaries, as the case may be, for (y) the current Fiscal Year or Greiner
Fiscal Year, as the case may be, to the effective date of such change and (z) the two full Fiscal Years or Greiner Fiscal Years, as the case may be, immediately preceding the Fiscal Year or Greiner Fiscal Year, as the case may be, in which such change is made, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (i), (ii), (iii), (iv), (v), (vi) or (xvi) of this subsection 6.1 following such change, a written statement of the chief accounting officer or chief financial officer of Company setting forth the differences (including, without limitation, any differences that would affect any calculations relating to the financial covenants set forth in subsection 7.6) which would have resulted if such financial statements had been prepared without giving
(ix) ACCOUNTANTS' CERTIFICATION: together with each delivery of consolidated financial statements of Company and its Subsidiaries pursuant to subdivision (v) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit examination has included a review of the terms of this Agreement and the other Loan Documents as they relate to accounting matters, (b) stating whether, in connection with their audit examination, any condition or event that constitutes an Event of Default or Potential Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; PROVIDED that such accountants shall not be liable by reason of any failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examina- tion, and (c) stating that based on their audit examination nothing has come to their attention that causes them to believe either or both that the information contained in the certificates delivered therewith pursuant to subdivision (vii) above is not correct or that the matters set forth in the Compliance Certificates delivered therewith pursuant to clause (b) of subdivision (vii) above for the applicable Fiscal Year are not stated in accordance with the terms of this Agreement;
(x) ACCOUNTANTS' REPORTS: promptly upon receipt thereof (unless restricted by applicable professional standards), copies of all reports submitted to Company by independent certified public accountants in connection with each annual, interim or special audit of the financial statements of Company and its Subsidiaries made by such accountants, including, without limitation, any
comment letter submitted by such accountants to management in connection with their annual audit;
(xi) SEC FILINGS AND PRESS RELEASES: promptly upon their becoming available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Company to its security holders or by any Subsidiary of Company to its security holders other than Company or another Subsidiary of Company, (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (c) all press releases and other statements made available generally by Company or any of its Subsidiaries to the public concerning material developments in the business of Company or any of its Subsidiaries;
(xii) EVENTS OF DEFAULT, ETC.: promptly upon any officer of Company obtaining knowledge (a) of any condition or event that constitutes an Event of Default or Potential Event of Default, or becoming aware that any Lender has given any notice (other than to Administrative Agent) or taken any other action with respect to a claimed Event of Default or Potential Event of Default, (b) that any Person has given any notice to Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 8.2, (c) of any condition or event that would be required to be disclosed in a current report filed by Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) if Company were required to file such reports under the Exchange Act, or (d) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect on Company, an Offi- cer's Certificate specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Potential Event of Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto;
(xiii) LITIGATION OR OTHER PROCEEDINGS: (a) promptly upon any officer of Company obtaining knowledge of (x) the institution of, or non-frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration
against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries (collectively, "Proceedings") not previously disclosed in writing by Company to Lenders or (y) any material development in any Proceeding that, in any case:
(1) if adversely determined, has a reasonable possibility of giving rise to a Material Adverse
(2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated
written notice thereof together with such other information as may be reasonably available to Company to enable Lenders and their counsel to evaluate such matters; and (b) within twenty days after the end of each Fiscal Quarter, a schedule of all Proceedings involving an alleged liability of, or claims against or affecting, Company or any of its Subsidiaries equal to or greater than $500,000, and promptly after request by Administrative Agent such other information as may be reasonably requested by Administrative Agent to enable Administrative Agent and its counsel to evaluate any of
(xiv) ERISA EVENTS: promptly upon becoming aware of the occurrence of or forthcoming occurrence of any ERISA Event, a written notice specifying the nature thereof, what action Company, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect
(xv) ERISA NOTICES: with reasonable promptness, copies of (a) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Company, any of its Subsidiaries or any of their respective ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan of Company or any of its Subsidiaries; (b) all notices received by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (c) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan of Company or any of its Subsidiaries as Administrative Agent shall reasonably request;
(xvi) FINANCIAL PLANS: as soon as practicable and in any event no later than 60 days following the end of each Fiscal Year, a consolidated plan and financial forecast for the current Fiscal Year (the "Financial Plan" for such Fiscal Year), including, without limitation, (a) fore- casted consolidated balance sheets and forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each such Fiscal Year, together with a projected Compliance Certificate for each such Fiscal Year and an explanation of the assumptions on which such forecasts are based, (b) forecasted consolidated statements of income and cash flows of Company and its Subsidiaries for each Fiscal Quarter of the first such Fiscal Year, together with an explanation of the assumptions on which such forecasts are based, and (c) such other information and projections as any Lender
(xvii) RECEIVABLES: as soon as practicable and in any event no later than 60 days after the end of each Fiscal Quarter, aging reports with respect to all billed and unbilled Accounts Receivable, in form and substance reasonably satisfactory to Administrative Agent;
(xviii) INSURANCE: as soon as practicable and in any event by the last day of each Fiscal Year, a report in form and substance reasonably satisfactory to Administrative Agent outlining all material insurance coverage maintained as of the date of such report by
(xix) BOARD OF DIRECTORS: with reasonable promptness, written notice of any change in the Board of Directors of
(xx) NEW SUBSIDIARIES OR CHANGE IN STATUS OF INACTIVE SUBSIDIARIES: quarterly, all of the data required to be set forth on Schedules 5.1D and 5.1E of the Signing Date Company Disclosure Letter with respect to all Subsidiaries
(xxi) REAL PROPERTY; LICENSES: annually, all of the data required to be set forth on Schedule 5.5 of the Signing Date Company Disclosure Letter with respect to all real property, leases, subleases, assignments of leases, patents, licenses, trademarks, trademark rights, trade names, trade name rights, copyrights, permits and franchises of Company and its Subsidiaries;
(xxii) MATERIAL CONTRACTS: annually, all of the data required to be set forth on Schedule 5.8 of the Initial
Funding Date Company Disclosure Letter with respect to all
(xxiii) UCC SEARCH REPORT: as promptly as practicable after the date of delivery to Administrative Agent of any UCC financing statement executed by any Loan Party pursuant to subsection 4.1K(iv), copies of completed UCC searches evidencing the proper filing, recording and indexing of all such UCC financing statement and listing all other effective financing statements that name such Loan Party as debtor, together with copies of all such other financing statements not previously delivered to Administrative Agent by or on behalf of Company or such
(xxiv) SUBORDINATED DEBT NOTICES: promptly upon receipt by Company or any of its Subsidiaries of any notice under any of the Existing Subordinated Agreements, and promptly upon the giving of notice by Company or any of its Subsidiaries under any of the Existing Subordinated Agreements, a copy of such notice; and
(xxv) OTHER INFORMATION: with reasonable promptness, such other information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender.
Except as permitted under subsection 7.7, Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business; PROVIDED, HOWEVER that neither Company nor any of its Subsidiaries shall be required to preserve any such right or franchise if the Board of Directors of Company or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of Company or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to Company, such Subsidiary or Lenders.
6.3 Payment of Taxes and Claims; Tax Consolidation. A. Company will, and will cause each of its Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets,
prior to the time when any penalty or fine shall be incurred with respect thereto; PROVIDED that no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as (i) such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor and (ii) in the case of a charge or claim which has or may become a Lien against any of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral to satisfy such charge or claim.
B. Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Company or any of its Subsidiaries).
6.4 Maintenance of Properties; Insurance; Application of Net Insurance/ Condemnation Proceeds. A. MAINTENANCE OF PROPERTIES. Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries (including, without limitation, all Intellectual Property) and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof.
B. INSURANCE. Company will maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry. Without limiting the generality of the foregoing, Company will maintain or cause to be maintained replacement value casualty insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, with such deductibles, and covering such risks as are at all times satisfactory to Administrative Agent in its commercially reasonable judgment.
Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties of Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that Company may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested.
6.6 Compliance with Laws, etc. Company shall comply, and shall cause each of its Subsidiaries to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including all Environmental Laws), noncompliance with which could reasonably be expected to cause, individually or in the aggregate, a Material Adverse Effect.
6.7 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries. A. EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL DOCUMENTS. In the event that any Subsidiary of Company (including any Inactive Subsidiary) existing on the Initial Funding Date that has not previously executed a Subsidiary Guaranty, or any Person that becomes a Subsidiary of Company after the date hereof hereafter, owns or acquires assets with an aggregate fair market value (without netting such fair market value against any liability of such Subsidiary) exceeding $100,000 or has gross revenues for any Fiscal Year exceeding $100,000, Company will promptly notify Administrative Agent of that fact and cause such Subsidiary to execute and deliver to Administrative Agent a Subsidiary Guaranty, a Subsidiary Pledge Agreement, and a Subsidiary Security Agreement and to take all such further actions and execute all such further documents and instruments (including, without limitation, actions, documents and instruments comparable to those described in subsection 4.2K) as may be necessary or, in the opinion of Administrative Agent, desirable to create in favor of Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority Lien on all of the assets of such Subsidiary described in the applicable forms of Collateral Documents.
B. SUBSIDIARY CHARTER DOCUMENTS, LEGAL OPINIONS, ETC. Company shall deliver to Administrative Agent, together with such Loan Documents, (i) certified copies of the Certificate or Articles of Incorporation of each Subsidiary described in subsection 6.7A, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation and each other state in which such Subsidiary is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each to be dated a recent date prior to their delivery to Administrative Agent, (ii) a copy of such Subsidiary's Bylaws, certified by its corporate secretary or an assistant secretary as of a recent date prior to their delivery to Administrative Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the fact that the attached resolutions of the Board of Directors of such Subsidiary approving and authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Subsidiary executing such Loan Documents, and (iv) a favorable opinion of counsel to such Subsidiary, in form and substance satisfactory to Administrative Agent and its counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such Loan Documents, (c) the enforceability of such Loan Documents against such Subsidiary, (d) such other matters (including without limitation matters relating to the creation and perfection of Liens in any Collateral pursuant to such Loan Documents) as Administrative Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to Administrative Agent and its counsel.
At all times during the period from and including the date which is 90 days after the Initial Funding Date to and excluding the fourth anniversary of the Initial Funding Date, Company shall maintain in effect one or more Interest Rate Agreements with respect to the Term Loans, in an aggregate notional principal amount of not less than 50% of the aggregate principal amount of all outstanding Term Loans, each such Interest Rate Agreement to be in form and substance reasonably satisfactory to Administrative Agent.
Section 7. COMPANY'S NEGATIVE COVENANTS
Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and
the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 7.
Company shall not, and shall not permit any of its Subsidiaries or any Joint Venture in which Company or any of its Subsidiaries has any interest to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except:
(i) Company may become and remain liable with
(ii) Company, its Subsidiaries and such Joint Ventures may become and remain liable with respect to Contingent Obligations permitted by subsection 7.4 and, upon any matured obligations actually arising pursuant thereto, the Indebtedness corresponding to the Contingent
(iii) Company, its Subsidiaries (other than Inactive Subsidiaries) and such Joint Ventures may become and remain liable with respect to Indebtedness in respect of Capital Leases for the purchase of equipment in the
(iv) Company may become and remain liable with respect to Indebtedness to any of its wholly-owned Domestic Subsidiaries (other than Inactive Subsidiaries or Unrestricted Subsidiaries), and any wholly-owned Subsidiary of Company (other than Inactive Subsidiaries or Unrestricted Subsidiaries) may become and remain liable with respect to Indebtedness to Company or any other wholly-owned Domestic Subsidiary of Company (other than Inactive Subsidiaries or Unrestricted Subsidiaries); PROVIDED that (a) in the event the proceeds of the Term Loans and the Initial Revolving Loans are loaned to Merger Sub, such loan shall be evidenced by a promissory note in form and substance satisfactory to Administrative Agent that is pledged to Administrative Agent on behalf of Lenders pursuant to the Company Pledge Agreement, (b) all intercompany Indebtedness owed by Company to any of its Subsidiaries and by any of Company's Subsidiaries to Company shall be subordinated in right of payment to the payment in full of the Obligations and all trade creditors pursuant to the terms of an intercompany subordination agreement in form and substance satisfactory to Administrative Agent, and (c) any payment by any
Subsidiary of Company under any guaranty of the Obligations shall result in a pro tanto reduction of the amount of any intercompany Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made;
(v) Company may remain liable with respect to Indebtedness evidenced by the Existing Subordinated Indebtedness in an aggregate principal amount not to
(vi) such Joint Ventures may become and remain liable with respect to Indebtedness; provided that such Indebtedness is nonrecourse to Company, its Subsidiaries and their respective assets; and
(vii) Company, its Subsidiaries (other than Inactive Subsidiaries) and such Joint Ventures may become and remain liable with respect to other Indebtedness in an aggregate principal amount not to exceed $5,000,000 at any time outstanding.
7.2 Liens and Related Matters. A. PROHIBITION ON LIENS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the Uniform Commercial Code of any State or under any similar recording or notice statute, except:
(i) Permitted Encumbrances on any property, asset, income or profits (other than Accounts Receivable) of Company or any of its Subsidiaries;
(ii) Liens granted pursuant to the Collateral
(iii) Liens described on Schedule 7.2 of the Signing Date Company Disclosure Letter; and
(iv) Other Liens securing Indebtedness in an aggregate amount not to exceed $5,000,000 at any time outstanding.
B. EQUITABLE LIEN IN FAVOR OF LENDERS. If Company or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or here- after acquired, other than Liens excepted by the provisions of subsection 7.2A, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; PROVIDED that, notwithstanding the foregoing, this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not permitted by the provisions of subsection 7.2A.
C. NO FURTHER NEGATIVE PLEDGES. Except with respect to specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to an Asset Sale, neither Company nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired.
D. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO COMPANY OR OTHER SUBSIDIARIES. Except as provided herein, Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Company, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Company or any other Subsidiary of Company, (iii) make loans or advances to Company or any other Subsidiary of Company, or (iv) transfer any of its property or assets to Company or any other Subsidiary of Company.
Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any Joint Venture, except:
(i) Company and its Subsidiaries may make and own
(ii) Company and its Subsidiaries may make inter- company loans to the extent permitted under subsection
(iii) Company and its Subsidiaries (other than Inactive Subsidiaries) may make Consolidated Capital
(iv) Company and Merger Sub may consummate the
(v) Company and its Subsidiaries may continue to own the Investments owned by them and described on Schedule 7.3 of the Signing Date Company Disclosure Letter;
(vi) Company and its Subsidiaries (other than Inactive Subsidiaries) may make and own Investments in Domestic Guarantor Subsidiaries following the Signing
(vii) Company and its Subsidiaries (other than Inactive Subsidiaries) may make and own Investments in Foreign Subsidiaries following the Signing Date in an aggregate amount not to exceed $5,000,000 at any time;
(viii) Company and its Subsidiaries (other than Inactive Subsidiaries) may make and own Investments in Unrestricted Subsidiaries following the Signing Date in an aggregate amount not to exceed $5,000,000 at any time;
(ix) Company and its Subsidiaries (other than Inactive Subsidiaries) may make and own Investments in Joint Ventures in an aggregate amount not to exceed $1,000,000 at any time; and
(x) Company and its Subsidiaries (other than Inactive Subsidiaries) may make and own other Investments (other than Investments in Subsidiaries and Joint Ventures) in an aggregate amount not to exceed $5,000,000 at any time.
Company shall not, and shall not permit any of its Subsidiaries or any Joint Venture in which Company or any of its Subsidiaries has an interest to, directly or indirectly, create or become or remain liable with respect to any Contingent Obligation, except:
(i) Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect
(ii) Company may become and remain liable with respect to Contingent Obligations in respect of the
(iii) Company may become and remain liable with respect to Contingent Obligations under Hedge Agreements
(iv) Company, its Subsidiaries (other than Inactive Subsidiaries) and such Joint Ventures may become and remain liable with respect to Contingent Obligations under guarantees in the ordinary course of business of the obligations of suppliers, customers, franchisees and licensees of Company and its Subsidiaries in an aggregate amount not to exceed at any time $5,000,000;
(v) Company may become and remain liable with respect to Contingent Obligations in respect of any Indebtedness of Company or any of its Domestic Subsidiaries (other than Inactive Subsidiaries) permitted
(vi) Company may become and remain liable with respect to any Contingent Obligations under guaranties in the ordinary course of business of the performance by its Subsidiaries of their obligations under agreements entered into by such Subsidiaries with their customers in the ordinary course of business provided such Subsidiary is permitted to enter into such agreement;
(vii) such Joint Ventures may become and remain liable with respect to Contingent Obligations; provided that such Contingent Obligations are nonrecourse to Company, its Subsidiaries and their respective assets; and
(viii) Company, its Subsidiaries (other than Inactive Subsidiaries) and such Joint Ventures may become and remain liable with respect to other Contingent Obligations; PROVIDED that the maximum aggregate liability, contingent or otherwise, of Company, its Subsidiaries and such Joint Ventures in respect of all such Contingent Obligations shall at no time exceed $5,000,000.
Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; PROVIDED that (i) Company may make regularly scheduled payments of interest in respect of any Subordinated Indebtedness in accordance with the terms of, and only to the extent required by, and subject to the subordination provisions contained in, the indenture or other agreement pursuant to which such Subordinated Indebtedness was issued, as such indenture or other agreement may be amended from time to time to the extent permitted under subsection 7.14B and (ii) Company may repay the Existing Blum Subordinated Convertible Note through the issuance of shares of Company's common stock.
A. MINIMUM QUICK RATIO. Company shall not permit the ratio of (i) Consolidated Quick Assets to (ii) Consolidated Current Liabilities as of the last day of any Fiscal Quarter ending after consummation of the Merger to be less than 1.25 to 1.00.
B. MINIMUM FIXED CHARGE COVERAGE RATIO. Company shall not permit the ratio of (i) Consolidated EBITDA for any four- Fiscal Quarter period ending after consummation of the Merger and during any of the periods set forth below MINUS Consolidated Capital Expenditures for such four-Fiscal Quarter period to (ii) Consolidated Fixed Charges for such four-Fiscal Quarter period to be less than the correlative ratio indicated; PROVIDED, HOWEVER, that in the event that any such period includes any period prior to consummation of the Merger, (a) "Consolidated EBITDA" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated EBITDA for such period PLUS Pre Merger Greiner Consolidated EBITDA for such period; (b) "Consolidated Capital Expenditures" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated Capital Expenditures for such period PLUS Pre Merger Greiner Consolidated Capital Expenditures for such period; and (c) "Consolidated Fixed Charges" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated Fixed Charges for such period PLUS Pre Merger Greiner Consolidated Fixed Charges for such period:
January 31, 1996 through October 31, 2002 1.05 to 1.00 January 31, 2003 and thereafter 0.65 to 1.00
C. MAXIMUM LEVERAGE RATIO. As of the last day of any Fiscal Quarter ending after consummation of the Merger and during any of the periods set forth below, Company shall not permit the ratio of (i) Consolidated Total Funded Debt as of such day to (ii) Consolidated EBITDA for the four-Fiscal Quarter period ending on such day (the "Leverage Ratio") to exceed the correlative ratio indicated; PROVIDED, HOWEVER, that in the event that any such period includes any period prior to consummation of the Merger, "Consolidated EBITDA" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated EBITDA for such period PLUS Pre Merger Greiner Consolidated EBITDA for such period:
January 31, 1996 4.00 to 1.00 April 30, 1996 4.00 to 1.00 July 31, 1996 3.50 to 1.00 October 31, 1996 through July 31, 1997 3.40 to 1.00 October 31, 1997 through July 31, 1998 2.65 to 1.00 October 31, 1998 through July 31, 1999 2.50 to 1.00 October 31, 1999 through July 31, 2000 2.25 to 1.00 October 31, 2000 through July 31, 2001 2.00 to 1.00 October 31, 2001 through July 31, 2002 1.50 to 1.00 October 31, 2002 and thereafter 1.25 to 1.00
D. MINIMUM CONSOLIDATED EBITDA. Company shall not permit Consolidated EBITDA for any four-Fiscal Quarter period ending after consummation of the Merger and during any of the periods set forth below to be less than the correlative amount indicated; PROVIDED, HOWEVER, that in the event that any such period includes any period prior to consummation of the Merger, "Consolidated EBITDA" for any such period prior to consummation of the Merger shall mean the sum of Pre Merger URS Consolidated EBITDA for such period PLUS Pre Merger Greiner Consolidated EBITDA for such period:
October 31, 1996 through July 31, 1997 18,000,000 October 31, 1997 through July 31, 1998 19,750,000 October 31, 1998 through July 31, 1999 20,650,000 October 31, 1999 through July 31, 2000 21,450,000 October 31, 2000 through July 31, 2001 22,400,000 October 31, 2001 through July 31, 2002 23,450,000 October 31, 2002 and thereafter 24,475,000
E. MINIMUM TANGIBLE NET WORTH. Company shall not permit Consolidated Tangible Net Worth as of the last day of any Fiscal Quarter ending after consummation of the Merger to be less than the sum of (i) $8,500,000 PLUS (ii) 75% of Consolidated Net Income for each Fiscal Quarter commencing on or after consummation of the Merger and ending on or prior to the date of determination; PROVIDED, HOWEVER, that for purposes of this subsection 7.6E, in the event that Consolidated Net Income for any period is less than $0, it shall be deemed to be $0.
7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions. Company shall not, and shall not permit any of its Subsidiaries to, alter the corporate, capital or legal structure of Company or any of its Subsidiaries, or enter into any transaction of merger or consolidation, or liquidate, wind- up or dissolve itself (or suffer any liquidation or dissolu- tion), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or sub- stantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except:
(i) Company and Merger Sub may consummate the
(ii) any Subsidiary of Company may be merged with or into Company or any wholly-owned Subsidiary Guarantor, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Company or any wholly-owned Subsidiary Guarantor; PROVIDED that, in the case of such a merger, Company or such wholly-owned Subsidiary Guarantor shall be the continuing or surviving
(iii) Company and its Subsidiaries may dispose of obsolete, worn out or surplus property in the ordinary
(iv) Company and its Subsidiaries may sell or otherwise dispose of assets in transactions that do not constitute Asset Sales; PROVIDED that the consideration received for such assets shall be in an amount at least equal to the fair market value thereof;
(v) subject to subsection 7.10, Company and its Subsidiaries may make Asset Sales of assets having a fair market value of not in excess of $1,000,000 during any Fiscal Year; PROVIDED that (a) the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (b) the sole consideration received shall be Cash; and (c) the proceeds of such Asset Sales shall be applied as required by subsec-
(vi) subject to subsection 6.7, Company and its Subsidiaries may acquire by purchase or otherwise (each, a "Subsequent Acquisition") all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person (other than Greiner) or any division or line of business of any Person (other than Greiner), provided that the Total Purchase Price of any such Subsequent Acquisition does not exceed $5,000,000 in any Fiscal Year or $15,000,000 in the aggregate during the term of this Agreement.
7.8 Sale or Discount of Receivables. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable.
7.9 Transactions with Shareholders and Affiliates. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of equity Securities of Company or with any Affiliate of Company or of any such holder, on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such a holder or Affiliate; PROVIDED that the foregoing restriction shall not apply to (i) any transaction between Company and any of its wholly-owned Subsidiaries or between any of its wholly-owned Subsidiaries, (ii) reasonable and customary fees paid to members of the Boards of Directors of Company and its Subsidiaries or (iii) existing related party transactions described in Company's Annual Report on Form 10-K for the 1995 Fiscal Year.
7.10 Disposal of Subsidiary Stock. Company shall not:
(i) directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidi- aries, except that (a) Company and its Subsidiaries may sell 100% of the capital stock or other equity Securities of any Subsidiary the annual gross revenues of which do not exceed $10,000,000; PROVIDED that (a) the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (b) the sole consideration received shall be Cash; and (c) the proceeds of such Asset Sales shall be applied as required by subsection 2.4B(iii)(a); and (b) any Subsidiary of Company may sell capital stock or other equity Securities to qualify directors if required by applicable law or to licensed professionals employed by such Subsidiary in order to comply with state licensing
(ii) permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries (including such Subsidiary), except to Company, another Subsidiary of Company, or to qualify directors if required by applicable law.
From and after the Signing Date, Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by Company, Greiner and their respective Subsidiaries on the Signing Date and similar or related businesses and (ii) such other lines of business as may be consented to by Requisite Lenders.
The Company shall not permit the aggregate annual gross revenues of its Foreign Subsidiaries to exceed 25% of consolidated gross revenues of Company and its Subsidiaries.
Company shall not, and shall not permit any Subsidiary to, (i) prepay any Indebtedness for borrowed money, Indebtedness secured by any Permitted Lien, salaries or any other obligations of Company or any Subsidiary to any Person, other than Capital Leases, or (ii) enter into or modify any agreement as a result of which the terms of payment of any of the foregoing Indebtedness are waived or modified, except prepayments to Lenders permitted by this Agreement and payments
in severance of employment to any employee of Company or any Subsidiary.
7.14 Amendments or Waivers of Merger Agreement; Amendments of Documents Relating to Subordinated Indebtedness. A. AMENDMENTS OR WAIVERS OF MERGER AGREEMENT. Neither Company nor any of its Subsidiaries will agree to any material amendment to, or waive any of its material rights under, the Merger Agreement after the Signing Date without in each case obtaining the prior written consent of Administrative Agent to such amendment or waiver.
B. AMENDMENTS OF DOCUMENTS RELATING TO SUBORDINATED INDEBTEDNESS. Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of any Subordinated Indebtedness or the Existing Subordinated Agreements, or make any payment consistent with an amendment thereof or change thereto.
Company shall not change its Fiscal Year-end from October 31.
Section 8. EVENTS OF DEFAULT
If any of the following conditions or events ("Events of Default") shall occur:
8.1 Failure to Make Payments When Due. Failure by Company to pay any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by Company to pay when due any amount payable to the Issuing Lender in reimbursement of any drawing under a Letter of Credit; or failure by Company to pay any interest on any Loan or any fee or any other amount due under this Agreement within five days after the date due; or
8.2 Default in Other Agreements. (i) Failure of Company or any of its Subsidiaries to pay when due any principal of or interest on or any other amount payable in respect of any Subordinated Indebtedness or one or more items of any other Indebtedness (other than Indebtedness referred to in subsection 8.1) or Contingent Obligations in an individual principal amount of $1,000,000 or more or with an aggregate principal amount of $1,000,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default
by Company or any of its Subsidiaries with respect to any other material term of (a) any Subordinated Indebtedness or one or more items of any other Indebtedness or Contingent Obligations in the individual or aggregate principal amounts referred to in clause (i) above or (b) any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness or Contingent Obligation(s), if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise); or
8.3 Breach of Certain Covenants. Failure of Company to perform or comply with any term or condition contained in subsection 2.5 or 6.2 or Section 7 of
Any representation, warranty, certification or other statement made by Company or any of its Subsidiaries in any Loan Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made;
8.5 Other Defaults Under Loan Documents. Any Loan Party shall default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents, other than any such term referred to in any other subsection of this Section 8, and such default shall not have been remedied or waived within 30 days after the earlier of (i) an officer of Company becoming aware of such default or (ii) receipt by Company and such Loan Party of notice from Administrative Agent or any Lender of such default;
8.6 Involuntary Bankruptcy; Appointment of Receiver, etc. (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Company or any of its Subsidiaries in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in
effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Company or any of its Subsidiaries under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdic- tion in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Company or any of its Subsidiaries, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of Company or any of its Subsidiaries for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Company or any of its Subsidiaries, and any such event described in this clause (ii) shall continue for 60 days unless dismissed, bonded
8.7 Voluntary Bankruptcy; Appointment of Receiver, etc. (i) Company or any of its Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Company or any of its Subsidiaries shall make any assignment for the benefit of creditors; or (ii) Company or any of its Subsidiaries shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Direc- tors of Company or any of its Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or
Any money judgment, writ or warrant of attachment or similar process involving (i) in any individual case an amount in excess of $1,000,000 or (ii) in the aggregate at any time an amount in excess of $1,000,000 shall be entered or filed against Company or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated,
unbonded or unstayed for a period of 60 days (or in any event later than five days prior to the date of any proposed sale
Any order, judgment or decree shall be entered against Company or any of its Subsidiaries decreeing the dissolution or split up of Company or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of 30 days; or
There shall occur one or more ERISA Events which individually or in the aggregate results in or might reasonably be expected to result in liability of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $1,000,000 during the term of this Agreement; or there shall exist an amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans of Company and its Subsidiaries (excluding for purposes of such computation any such Pension Plans with respect to which assets exceed benefit liabilities), which exceeds $1,000,000; or
Any event or change shall occur that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect on Company; or
Any Person or any two or more Persons acting in concert shall have acquired after the date hereof beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act), directly or indirectly, of Securities of Company (or other Securities convertible into such Securities) representing 30% or more of the combined voting power of all Securities of Company entitled to vote in the election of directors, other than Securities having such power only by reason of the happening of a
8.13 Invalidity of Subsidiary Guaranty; Failure of Security; Repudiation of Obligations. At any time after the execution and delivery thereof, (i) any Subsidiary Guaranty for any reason, other than the satisfaction in full of all Obligations, shall cease to be in full force and effect (other than in accordance with its terms)
or shall be declared to be null and void, (ii) any Collateral Document shall cease to be in full force and effect (other than by reason of a release of Collateral thereunder in accordance with the terms hereof or thereof, the satisfaction in full of the Obligations or any other termination of such Collateral Document in accordance with the terms hereof or thereof) or shall be declared null and void, or Administrative Agent shall not have or shall cease to have a valid and perfected First Priority Lien in any Collateral purported to be covered thereby, in each case for any reason other than the failure of Administrative Agent or any Lender to take any action within its control, or (iii) any Loan Party shall contest the validity or enforceability of any Loan Document in writing or deny in writing that it has any further liability, including without limitation with respect to future advances by Lenders, under any Loan Document to which it is a party; or
8.14 Failure to Consummate Merger. The Acquisition or the Merger shall not be consummated in accordance with the Merger Agreement concurrently with the making of the initial Loans, or the Acquisition or the Merger shall be unwound, reversed or otherwise rescinded in whole or in part for any reason; or
8.15 Failure to Comply with Subordination Provisions. Any obligee of any Subordinated Indebtedness shall fail to comply with the subordination provision of the documents or instruments evidencing such Subordinated
THEN (i) upon the occurrence of any Event of Default described in subsection 8.6 or 8.7, each of (a) the unpaid principal amount of and accrued interest on the Loans, (b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letter of Credit), and (c) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and the obligation of each Lender to make any Loan and the obligation of the Issuing Lender to issue any Letter of Credit hereunder shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, Administrative Agent shall, upon the written request or with the written consent of Requisite Lenders, by written notice to Company, declare all or any portion of the amounts described in clauses (a) through (c) above to be, and the same shall
forthwith become, immediately due and payable, and the obligation of each Lender to make any Loan and the obligation of the Issuing Lender to issue any Letter of Credit hereunder shall thereupon terminate; PROVIDED that the foregoing shall not affect in any way the obligations of Lenders under subsection 3.3C(i).
Any amounts described in clause (b) above, when received by Administrative Agent, shall be held by Administrative Agent pursuant to the terms of the Collateral Account Agreement and shall be applied as therein provided.
Notwithstanding anything contained in the second preceding paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to clause (ii) of such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non-payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended, directly or indirectly, to benefit Company, and such provisions shall not at any time be construed so as to grant Company the right to require Lenders to rescind or annul any acceleration hereunder or to preclude Administrative Agent or Lenders from exercising any of the rights or remedies available to them under any of the Loan Documents, even if the conditions set forth in this paragraph are met.
A. APPOINTMENT OF ADMINISTRATIVE AGENT. Wells Fargo is hereby appointed Administrative Agent hereunder and under the other Loan Documents and each Lender hereby authorizes Administrative Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents. Administrative Agent agrees to act upon the express conditions contained in this Agreement and the other Loan Documents, as applicable. The provisions of this Section 9 are solely for
the benefit of Administrative Agent and Lenders and Company shall have no rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties under this Agreement, Administrative Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company or any of its Subsidiaries.
B. APPOINTMENT OF SUPPLEMENTAL COLLATERAL ADMINISTRATIVE AGENTS. It is the purpose of this Agreement and the other Loan Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such jurisdiction. It is recognized that in case of litigation under this Agreement or any of the other Loan Documents, and in particular in case of the enforcement of any of the Loan Documents, or in case Administrative Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other Loan Documents or take any other action which may be desirable or necessary in connection therewith, it may be necessary that Administrative Agent appoint an additional individual or institution reasonably acceptable to Company as a separate trustee, co- trustee, collateral agent or collateral co-agent (any such additional individual or institution being referred to herein individually as a "Supplemental Collateral Agent" and collectively as "Supplemental Collateral Agents"). Company shall not be obligated to pay any fees to such Supplemental Collateral Agent.
In the event that Administrative Agent appoints a Supplemental Collateral Administrative Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended by this Agreement or any of the other Loan Documents to be exercised by or vested in or conveyed to Administrative Agent with respect to such Collateral shall be exercisable by and vest in such Supplemental Collateral Administrative Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Administrative Agent to exercise such rights, powers and privileges with respect to such Collateral and to perform such duties with respect to such Collateral, and every covenant and obligation contained in the Loan Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Administrative Agent shall run to and be enforceable by either Administrative Agent or such Supplemental Collateral Administrative Agent, and (ii) the provisions of this Section 9 and of subsections 10.2 and 10.3 that refer to Administrative Agent shall inure to the benefit of such Supplemental Collateral Administrative Agent and all references therein to Administrative Agent shall be deemed to be references to
Administrative Agent and/or such Supplemental Collateral Administrative Agent, as the context may require.
Should any instrument in writing from Company or any other Loan Party be required by any Supplemental Collateral Administrative Agent so appointed by Administrative Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Company shall, or shall cause such Loan Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Administrative Agent. In case any Supplemental Collateral Administrative Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Administrative Agent, to the extent permitted by law, shall vest in and be exercised by Administrative Agent until the appointment of a new Supplemental Collateral Administrative Agent.
9.2 Powers and Duties; General Immunity. A. POWERS; DUTIES SPECIFIED. Each Lender irrevocably authorizes Administrative Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Loan Documents as are specifically delegated or granted to Administrative Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Administrative Agent shall have only those duties and responsi- bilities that are expressly specified in this Agreement and the other Loan Documents. Administrative Agent may exercise such powers, rights and remedies and perform such duties by or through its agents or employees. Administrative Agent shall not have, by reason of this Agreement or any of the other Loan Documents, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the other Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon Administrative Agent any obligations in respect of this Agreement or any of the other Loan Documents except as expressly set forth herein or therein.
B. NO RESPONSIBILITY FOR CERTAIN MATTERS. Administrative Agent shall not be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by Administrative Agent to Lenders or by or on behalf of Company to Administrative Agent or any Lender in connection with the Loan Documents and the
transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall Administrative Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or the use of the Letters of Credit or as to the existence or possible existence of any Event of Default or Potential Event of Default. Anything contained in this Agreement to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Loans or the Letter of Credit Usage or the component amounts thereof.
C. EXCULPATORY PROVISIONS. Neither Administrative Agent nor any of its officers, directors, employees or agents shall be liable to Lenders for any action taken or omitted by Administrative Agent under or in connection with any of the Loan Documents except to the extent caused by Administrative Agent's gross negligence or willful misconduct. Administrative Agent shall be entitled to refrain from any act or the taking of any action (including the failure to take an action) in connection with this Agreement or any of the other Loan Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until Administrative Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), Administrative Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against Administrative Agent as a result of Administrative Agent acting or (where so instructed) refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6).
D. ADMINISTRATIVE AGENT ENTITLED TO ACT AS LENDER. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, Administrative Agent in its individual capacity as a Lender hereunder. With respect to its participation in the Loans and the Letters of Credit, Administrative Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include Administrative Agent in its individual capacity. Administrative Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Company or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Company for services in connection with this Agreement and otherwise without having to account for the same to Lenders.
9.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness. Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the making of the Loans and the issuance of Letters of Credit hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. Administrative Agent shall not have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter, and Administrative Agent shall not have any responsibility with respect to the accuracy of or the complete- ness of any information provided to Lenders.
Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify Administrative Agent, to the extent that Administrative Agent shall not have been reimbursed by Company, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Administrative Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Loan Documents or otherwise in its capacity as
Administrative Agent in any way relating to or arising out of this Agreement or the other Loan Documents; PROVIDED that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Administrative Agent's gross negligence or willful misconduct. If any indemnity furnished to Administrative Agent for any purpose shall, in the opinion of Administrative Agent, be insufficient or become impaired, Administrative Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished.
Administrative Agent may resign at any time by giving 30 days' prior written notice thereof to Lenders and Company, and Administrative Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to Company and Administrative Agent and signed by Requisite Lenders. Upon any such notice of resignation or any such removal, Requisite Lenders shall have the right, upon five Business Days' notice to Company, to appoint a successor Administrative Agent reasonably acceptable to Company. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Administrative Agent and the retiring or removed Administrative Agent shall be discharged from its duties and obligations under this Agree- ment. After any retiring or removed Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement.
9.6 Collateral Documents and Guaranties. Each Lender hereby further authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to enter into each Collateral Document as secured party and to be the agent for and representative of Lenders under each Subsidiary Guaranty, and each Lender agrees to be bound by the terms of each Collateral Document and each Subsidiary Guaranty; PROVIDED that Administrative Agent shall not (i) enter into or consent to any material amendment, modification, termination or waiver of any provision contained in any Collateral Document or any Subsidiary Guaranty or (ii) release any Collateral (except as otherwise expressly permitted or required pursuant to the terms of this Agreement or the applicable Collateral Document), in each case without the prior consent of Requisite Lenders (or,
if required pursuant to subsection 10.6, all Lenders); PROVIDED FURTHER, HOWEVER, that, without further written consent or authorization from Lenders, Administrative Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by this Agreement or to which Requisite Lenders have otherwise consented or (b) release any Subsidiary Guarantor if all of the capital stock of such Subsidiary Guarantor is sold to any Person (other than an Affiliate of Company) pursuant to a sale or other disposition permitted hereunder or to which Requisite Lenders have otherwise consented. Anything contained in any of the Loan Documents to the contrary notwithstanding, Company, Administrative Agent and each Lender hereby agree that (1) no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document or to enforce any Subsidiary Guaranty, it being understood and agreed that all powers, rights and remedies under the Collateral Documents and the Subsidiary Guaranties may be exercised solely by Administrative Agent for the benefit of Lenders in accordance with the terms thereof, and (2) in the event of a foreclosure by Administrative Agent on any of the Collateral pursuant to a public or private sale, Administrative Agent or any Lender may be the purchaser of any or all of such Collateral at any such sale and Administrative Agent, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Administrative Agent at such sale.
10.1 Assignments and Participations in Loans and Letters of Credit. A. GENERAL. Subject to subsection 10.1B, each Lender shall have the right at any time to (i) sell, assign or transfer to any Eligible Assignee, or (ii) sell participations to any Person in, all or any part of its Commitments or any Loan or Loans made by it or its Letters of Credit or participations therein or any other interest herein or in any other Obligations owed to it; PROVIDED that no such sale, assignment, transfer or participation shall, without the consent of Company, require Company to file a registration statement with the Securities and Exchange Commission or apply to qualify such sale, assignment, transfer or participation under the securities laws of any state; PROVIDED, FURTHER that no such sale, assignment or transfer described in clause (i)
above shall be effective unless and until an Assignment Agreement effecting such sale, assignment or transfer shall have been accepted by Administrative Agent and consented to by Company and Administrative Agent as provided in subsection 10.1B(ii); PROVIDED, FURTHER that no such sale, assignment, transfer or participation of any Letter of Credit or any participation therein may be made separately from a sale, assignment, transfer or participation of a corresponding interest in the Revolving Loan Commitment and the Revolving Loans of the Lender effecting such sale, assignment, transfer or participation. Except as otherwise provided in this subsection 10.1, no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any granting of participations in, all or any part of its Commitments or the Loans, the Letters of Credit or participations therein, or the other Obligations owed to such Lender.
(i) AMOUNTS AND TERMS OF ASSIGNMENTS. Each Commitment, Loan, Letter of Credit or participation therein, or other Obligation may (a) be assigned in any amount to another Lender, or to an Affiliate of the assigning Lender or another Lender, with the giving of notice to Company and Administrative Agent or (b) be assigned in an aggregate amount of not less than $5,000,000 (or such lesser amount as shall constitute the aggregate amount of the Commitments, Loans, Letters of Credit and participations therein, and other Obligations of the assigning Lender) to any other Eligible Assignee with the consent of Company and Administrative Agent (which consent of Company and Administrative Agent shall not be unreasonably withheld or delayed). To the extent of any such assignment in accordance with either clause (a) or (b) above, the assigning Lender shall be relieved of its obligations with respect to its Commitments, Loans, Letters of Credit or participations therein, or other Obligations or the portion thereof so assigned. The parties to each such assignment shall execute and deliver to Administrative Agent, for its acceptance, an Assignment Agreement, together with a processing fee of $3,500 and such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a). Upon such execution, delivery and acceptance, from and after the effective date specified in such Assignment Agreement, (1) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the
rights and obligations of a Lender hereunder and (2) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination of this Agreement under subsection 10.9B) and be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto; PROVIDED that, anything contained in any of the Loan Documents to the contrary notwithstanding, if such Lender is the Issuing Lender with respect to any outstanding Letters of Credit such Lender shall continue to have all rights and obligations of the Issuing Lender with respect to such Letters of Credit until the cancellation or expiration of such Letters of Credit and the reimbursement of any amounts drawn thereun- der). The Commitments hereunder shall be modified to reflect the Commitment of such assignee and any remaining Commitment of such assigning Lender and, if any such assignment occurs after the issuance of the Notes hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Notes to Administrative Agent for cancellation, and thereupon new Notes shall be issued to the assignee and to the assigning Lender, substantially in the form of Exhibit IV-A, Exhibit IV-B or Exhibit V annexed hereto, as the case may be, with appropriate insertions, to reflect the new Commitments and/or outstanding Tranche A Term Loans and/or Tranche B Term Loans, as the case may be, of the assignee and the assigning Lender.
(ii) ACCEPTANCE BY ADMINISTRATIVE AGENT. Upon its receipt of an Assignment Agreement executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with the processing fee referred to in subsection 10.1B(i) and any forms, certificates or other evidence with respect to United States federal income tax withholding matters that such assignee may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if Administrative Agent and Company have consented to the assignment evidenced thereby (in each case to the extent such consent is required pursuant to subsection 10.1B(i)), (a) accept such Assignment Agreement by executing a counterpart thereof as provided therein (which acceptance shall evidence any required consent of Administrative Agent to such assignment), and (b) give
prompt notice thereof to Company. Administrative Agent shall maintain a copy of each Assignment Agreement delivered to and accepted by it as provided in this subsection 10.1B(ii).
C. PARTICIPATIONS. The holder of any participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting (i) the extension of the regularly scheduled maturity of any portion of the principal amount of or interest on any Loan allocated to such participation or (ii) a reduc- tion of the principal amount of or the rate of interest payable on any Loan allocated to such participation, and all amounts payable by Company hereunder (including without limitation amounts payable to such Lender pursuant to subsections 2.6D, 2.7 and 3.6) shall be determined as if such Lender had not sold such participation.
D. ASSIGNMENTS TO FEDERAL RESERVE BANKS. In addition to the assignments and participations permitted under the foregoing provisions of this subsection 10.1, any Lender may assign and pledge all or any portion of its Loans, the other Obligations owed to such Lender, and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank; PROVIDED that (i) no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (ii) in no event shall such Federal Reserve Bank be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder.
E. INFORMATION. Each Lender may furnish any informa- tion concerning Company and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 10.18.
F. REPRESENTATIONS OF LENDERS. Each Lender listed on the signature pages hereof hereby represents and warrants (i) that it is an Eligible Assignee described in clause (i) of the definition thereof; (ii) that it has experience and expertise in the making of loans such as the Loans; and (iii) that it will make its Loans for its own account in the ordinary course of its business and without a view to distribution of such Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this subsection 10.1, the disposition of such Loans or any interests therein shall at all times remain within its exclusive control). Each Lender that
becomes a party hereto pursuant to an Assignment Agreement shall be deemed to agree that the representations and warranties of such Lender contained in Section 2(c) of such Assignment Agreement are incorporated herein by this reference.
Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual and reasonable costs and expenses of preparation of the Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; (ii) all the costs of furnishing all opinions by counsel for Company required hereunder and of Company's perfor- mance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Loan Documents, including, without limitation, with respect to confirming compliance with environmental, insurance and solvency requirements; (iii) the reasonable fees, expenses and disbursements of counsel to Administrative Agent (including allocated costs of internal counsel) in connection with the negotiation, preparation, execution and administra- tion of the Loan Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (iv) all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Administrative Agent on behalf of Lenders pursuant to any Collateral Document, including without limitation filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, and reasonable fees, expenses and disbursements of counsel to Administrative Agent and of counsel providing any opinions required hereunder; (v) all the actual costs and reasonable expenses (including without limitation the reasonable fees, expenses and disbursements of any auditors, accountants or other consultants, advisors and agents employed or retained by Administrative Agent or its counsel) of obtaining and reviewing any audits or reports provided for under subsection 4.1G with respect to Accounts Receivable of Company and its Subsidiaries; (vi) the custody or preservation of any of the Collateral; (vii) all the actual and reasonable costs and expenses incurred by Administrative Agent in connection with the syndication of the Commitments; and (viii) after the occurrence of an Event of Default, all costs and expenses, including reasonable attorneys' fees (including allocated costs of internal counsel) and costs of settlement, incurred by Administrative Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Loan Party hereunder or under the other Loan Documents by reason of such Event of Default (including, without limitation, in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranties) or in connection with any
refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings.
In addition to the payment of expenses pursuant to subsection 10.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to Indemnitees' selection of counsel) indemnify, pay and hold harmless Administrative Agent and Lenders, and the officers, directors, employees, agents and affiliates of Administrative Agent and Lenders (collectively called the "Indemnitees"), from and against any and all Indemnified Liabilities (as hereinafter defined); PROVIDED that Company shall not have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise solely from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction.
As used herein, "Indemnified Liabilities" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, admini- strative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Loan Documents or the Merger Agreement or the transactions contemplated hereby or thereby (including Lenders' agreement to make the Loans hereunder or the use or intended use of the proceeds thereof or the issuance of Letters of Credit hereunder or the use or intended use of any thereof, or any enforcement of any of the Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranties), (ii) the statements contained in the commitment
letter delivered by any Lender to Company with respect thereto, or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries.
To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this subsection 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. Promptly after receipt by an Indemnitee of notice of the commencement of any action, such Indemnitee shall use reasonable efforts to notify Company of the commencement of such action.
In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default each Lender is hereby authorized by Company at any time or from time to time, without notice to Company or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities of Company to that Lender under this Agreement, the Letters of Credit and participations therein and the other Loan Documents, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement, the Letters of Credit and participations therein or any other Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loans or any amounts in respect of the Letters of Credit or any other amounts due hereunder shall have become due and payable pursuant to Section 8 and although said obligations and liabilities, or any of them, may be contingent or unmatured.
Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms of this Agreement), by realization upon security, through the exercise of any right of set-off or
banker's lien, by counterclaim or cross action or by the enforcement of any right under the Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to that Lender hereunder or under the other Loan Documents (collectively, the "Aggre- gate Amounts Due" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Administrative Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; PROVIDED that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganiza- tion of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. Each Lender hereby agrees that, solely for purposes of this subsection 10.5, a participant shall be considered to be a Lender.
No amendment, modification, termination or waiver of any provision of this Agreement or of the Notes, and no consent to any departure by Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders; PROVIDED that any such amendment, modification, termination, waiver or consent which: increases the amount of any of the Commitments or reduces the principal amount of any of the Loans; increases the maximum amount of Letters of Credit; changes in any manner the definition of "Class" or the definition of "Pro Rata Share" or the definition of "Requisite Class Lenders" or the definition of "Requisite Lenders"; changes in any manner any provision of this Agreement which, by its terms, expressly requires the approval or concurrence of all Lenders; postpones the date or reduces the amount of any
scheduled payment (but not prepayment) of principal of any of the Loans; postpones the date on which any interest or any fees are payable; decreases the interest rate borne by any of the Loans (other than any waiver of any increase in the interest rate applicable to any of the Loans pursuant to subsection 2.2E) or the amount of any fees payable hereunder; increases the maximum duration of Interest Periods permitted hereunder; reduces the amount or postpones the due date of any amount payable in respect of, or extends the required expiration date of, any Letter of Credit; changes in any manner the obligations of Lenders relating to the purchase of participations in Letters of Credit; releases any Lien granted in favor of Administrative Agent with respect to all or substantially all of the Collateral; releases all or substantially all of the Subsidiary Guarantors from their obligations under the Subsidiary Guaranties, in each case other than in accordance with the terms of the Loan Documents; or changes in any manner the provisions contained in subsection 8.1 or this subsection 10.6 shall be effective only if evidenced by a writing signed by or on behalf of all Lenders. In addition, (i) any amend- ment, modification, termination or waiver of any of the provisions contained in Section 4 shall be effective only if evidenced by a writing signed by or on behalf of Administrative Agent and Requisite Lenders, (ii) no amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the Lender which is the holder of that Note, (iii) no amendment, modification, termination or waiver of any provision of Section 9 or of any other provision of this Agreement which, by its terms, expressly requires the approval or concurrence of Administrative Agent shall be effective without the written concurrence of Administrative Agent and (iv) no amendment, modification, termination or waiver of any provision of subsection 2.4 which has the effect of changing any voluntary or mandatory prepayments, or Commitment reductions applicable to either Class (the "Affected Class") in a manner that disproportionately disadvantages such Class relative to the other Class shall be effective without the written concurrence of Requisite Class Lenders of the Affected Class (it being understood and agreed that any amendment, modification, termination or waiver of any such provision which only postpones or reduces any voluntary or mandatory prepayment, or Commitment reduction from those set forth in subsection 2.4 with respect to one Class but not the other Class shall be deemed to disproportionately disadvantage such one Class but not to disproportionately disadvantage such other Class for purposes of this clause (iv). Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on
Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 10.6 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by Company, on Company.
All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occur- rence of an Event of Default or Potential Event of Default if such action is taken or condition exists.
Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; PROVIDED that notices to Administrative Agent shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Administrative Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Administrative Agent.
10.9 Survival of Representations, Warranties and Agreements. A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit hereunder.
B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 3.5A, 3.6, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, and the termination of this Agreement.
10.10 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Administrative Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available.
10.11 Marshalling; Payments Set Aside. Neither Administrative Agent nor any Lender shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent for the benefit of Lenders), or Administrative Agent or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred.
In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or un- enforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
10.13 Obligations Several; Independent Nature of Lenders' Rights. The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commit- ments of any other Lender hereunder. Nothing contained herein
or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose.
Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect.
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING WITHOUT LIMITATION SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders (it being understood that Lenders' rights of assignment are subject to subsection 10.1). Neither Company's rights or obligations hereunder nor any interest therein may be assigned or delegated by Company without the prior written consent of all Lenders.
10.17 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already
relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.17 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.
Each Lender shall hold all non-public information obtained pursuant to the requirements of this Agreement, including, without limitation, pursuant to any inspection under subsection 6.5, which has been identified as confidential by Company in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates of such Lender or disclosures reasonably required by any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Loans or any participations therein or disclosures required or requested by any govern- mental agency or representative thereof or pursuant to legal process; PROVIDED that, unless specifically prohibited by applicable law or court order, each Lender shall notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; and PROVIDED, FURTHER that in no event shall any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries.
This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered 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. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
By: /s/ Kent P. Ainsworth Title: Vice President and Chief Financial
Attention: Mr. Kent P. Ainsworth
WELLS FARGO BANK, NATIONAL ASSOCIATION, individually and as Administrative Agent
By: /s/ David A. Neumann
420 Montgomery Street, 9th Floor Attention: Mr. David A. Neumann
LENDERS' COMMITMENTS AND PRO RATA SHARES
Term Loan Revolving Loan Pro Rata
[FORM OF NOTICE OF BORROWING]
Pursuant to that certain Credit Agreement dated as of January 10, 1996, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among URS Corporation, a Delaware corporation ("Company"), the financial institutions listed therein as Lenders ("Lenders"), and Wells Fargo Bank, National Association, as Administrative Agent ("Administrative Agent"), this represents Company's request to borrow as follows:
1. Date of borrowing: ___________________, _______
2. Amount of borrowing: $___________________
3. Type of Loans: a. Revolving Loans b. Tranche A Term Loans c. Tranche B Term Loans
4. Interest rate option: a. Base Rate Loans b. Eurodollar Rate Loans with
The proceeds of such Revolving Loans are to be deposited in Company's account at Administrative Agent.
The undersigned officer, to the best of his or her knowledge, on behalf of Company, certifies that:
(i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and
warranties were true, correct and complete in all material respects on and as of such earlier date;
(ii) No event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute an Event of Default or a Potential Event of Default; and
(iii) Company has performed in all material respects all agreements and satisfied all conditions which the Credit Agreement provides shall be performed or satisfied by it on or before the date hereof.
[FORM OF NOTICE OF CONVERSION/CONTINUATION]
Pursuant to that certain Credit Agreement dated as of January 10, 1996, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among URS Corporation, a Delaware corporation ("Company"), the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, this represents Company's request to convert or continue Loans as follows:
1. Date of conversion/continuation: _______________, ______
2. Amount of Loans being converted/continued: $____________
3. Type of Loans being a. Tranche A Term Loans converted/continued: b. Tranche B Term Loans
a. Conversion of Base Rate Loans to Eurodollar Rate b. Conversion of Eurodollar Rate Loans to Base Rate c. Continuation of Eurodollar Rate Loans as such
5. If Loans are being continued as or converted to Eurodollar Rate Loans, the duration of the new Interest Period that commences on the conversion/continuation date:
In the case of a conversion to or continuation of Eurodollar Rate Loans, the undersigned officer, to the best of his or her knowledge, on behalf of Company, certifies that no Event of Default or Potential Event of Default has occurred and is continuing under the Credit Agreement.
[FORM OF NOTICE OF ISSUANCE OF STANDBY LETTER OF CREDIT]
NOTICE OF ISSUANCE OF STANDBY LETTER OF CREDIT
Pursuant to that certain Credit Agreement dated as of January 10, 1996, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among URS Corporation, a Delaware corporation ("Company"), the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent ("Administrative Agent"), this represents Company's request for the issuance of a Letter of Credit as follows:
1. Date of issuance of Letter of Credit: ____________, _____
2. Face amount of Letter of Credit: $_______________
3. Expiration date of Letter of Credit: _____________, _____
4. Name and address of beneficiary:
a. the verbatim text of such proposed Letter of b. a description of the proposed terms and conditions of such Letter of Credit
The undersigned officer, to the best of his or her knowledge, on behalf of Company, certifies that:
(i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true, correct and complete in all material respects on and as of such earlier date;
(ii) No event has occurred and is continuing or would result from the issuance of the Letter of Credit
contemplated hereby that would constitute an Event of Default or a Potential Event of Default; and
(iii) Company has performed in all material respects all agreements and satisfied all conditions which the Credit Agreement provides shall be performed or satisfied by it on or before the date hereof.
[FORM OF TRANCHE A TERM NOTE]
PROMISSORY NOTE DUE OCTOBER 31, 2002
FOR VALUE RECEIVED, URS Corporation, a Delaware corporation ("Company"), promises to pay to the order of ________________________________ ("Payee") the principal amount of _________ Million United States Dollars ($____________) on October 31, 2002 in the installments referred to below.
Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of January 10, 1996 by and among Company, the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined).
Company shall make principal payments on this Note in consecutive quarterly installments, commencing on October 31, 1996 and ending on October 31, 2002. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; PROVIDED that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon.
This Note is one of Company's "Tranche A Term Notes" in the aggregate principal amount of $32,500,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Tranche A Term Loan evidenced hereby was made and is to be repaid.
All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement.
Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Administrative Agent and consented to by Company and Administrative Agent as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Administrative Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; PROVIDED, HOWEVER, that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note.
Whenever any payment on this Note shall be stated to be 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 the computation of the payment of interest on this Note.
This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement.
THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement.
The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement.
This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement.
No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this
Note at the place, at the respective times, and in the currency herein prescribed.
Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder.
IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above.
[FORM OF TRANCHE B TERM NOTE]
PROMISSORY NOTE DUE APRIL 30, 2003
FOR VALUE RECEIVED, URS Corporation, a Delaware corporation ("Company"), promises to pay to the order of ________________________________ ("Payee") the principal amount of ___________ Million United States Dollars ($_____________) on April 30, 2003 in the installments referred to below.
Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of January 10, 1996 by and among Company, the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined).
Company shall make principal payments on this Note in consecutive quarterly installments, commencing on January 31, 1997 and ending on April 30, 2003. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; PROVIDED that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon.
This Note is one of Company's "Tranche B Term Notes" in the aggregate principal amount of $17,500,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Tranche B Term Loan evidenced hereby was made and is to be repaid.
All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the
assignment or transfer of this Note shall have been accepted by Administrative Agent and consented to by Company and Administrative Agent as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Administrative Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; PROVIDED, HOWEVER, that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note.
Whenever any payment on this Note shall be stated to be 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 the computation of the payment of interest on this Note.
This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement.
THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement.
The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement.
This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement.
No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this
Note at the place, at the respective times, and in the currency herein prescribed.
Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder.
IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above.
PROMISSORY NOTE DUE APRIL 30, 1999
FOR VALUE RECEIVED, URS Corporation, a Delaware corporation ("Company"), promises to pay to the order of __________ ("Payee"), on or before April 30, 1999, the lesser of (x) ______ Million United States Dollars ($__________) or (y) the unpaid principal amount of all advances made by Payee to Company as Revolving Loans under the Credit Agreement referred to below.
Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of January 10, 1996 by and among Company, the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined).
This Note is one of Company's "Revolving Notes" in the aggregate principal amount of $20,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Revolving Loans evidenced hereby were made and are to be repaid.
All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Administrative Agent and consented to by Company and Administrative Agent as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Administrative Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loans evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or
any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; PROVIDED, HOWEVER, that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note.
Whenever any payment on this Note shall be stated to be 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 the computation of the payment of interest on this Note.
This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement.
THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement.
The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement.
This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement.
No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed.
Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and
extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder.
IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above.
Type of Amount of Principal Principal Loan Made Loan Made Paid Balance Notation Date This Date This Date This Date This Date Made By ----- --------- --------- --------- --------- --------
THE UNDERSIGNED HEREBY CERTIFIES THAT:
(1) I am the duly elected [President] [Chief Financial Officer] of URS Corporation, a Delaware
(2) I have reviewed the terms of that certain Credit Agreement dated as of January 10, 1996, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined in this Certificate (including Attachment No. 1 and Attachment No. 2 annexed hereto and made a part hereof) being used in this Certificate as therein defined), by and among Company, the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, and the terms of the other Loan Documents, and I have made, or have caused to be made under my supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by the attached
(3) The examination described in paragraph (2) above did not disclose, and I have no actual knowledge of, the existence of any condition or event which constitutes an Event of Default or Potential Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below.
Set forth below are all exceptions to paragraph (3) above listing, in detail, the nature of the condition or event, the period during which it has existed and the action which Company has taken, is taking, or proposes to take with respect to each such condition or event:
The foregoing certifications, together with the computations set forth in [Attachment No. 1] [Attachment No. 2] annexed hereto and made a part hereof and the financial statements delivered with this Certificate in support hereof, are made and delivered this __________ day of _____________, 199_ pursuant to subsection 6.1(vii) of the Credit Agreement.
This Attachment No. 1 is attached to and made a part of a Compliance Certificate dated as of ____________, 199_ and pertains to the period from ____________, 199_ to ____________, 199_. Subsection references herein relate to subsections of the Credit Agreement.
1. Indebtedness permitted under $_________ subsection 7.1(vii):
1. Liens permitted under subsection
C. Investments; Joint Ventures (7.3)
1. Investments in Foreign Subsidiaries permitted under subsection 7.3(vii): $_________
2. Investments in Unrestricted Subsidiaries permitted under subsection 7.3(viii): $_________
3. Investments in Joint Ventures permitted
of business of the obligations of
E. Minimum Quick Ratio (as of _____________, 199_) (7.6A)
1. Consolidated Quick Assets: $_________
2. Consolidated Current Liabilities: $_________
3. Minimum ratio required under
F. Minimum Fixed Charge Coverage Ratio (for the four-Fiscal Quarter period ending _____________, 199_) (7.6B)
1. Consolidated Net Income: $_________
2. Consolidated Interest Expense: $_________
3. Provisions for taxes based on income: $_________
4. Total depreciation expense: $_________
5. Total amortization expense: $_________
6. Other non-cash items reducing
7. Consolidated EBITDA (1+2+3+4+5+6): $_________
8. Consolidated Capital Expenditures: $_________
9. Adjusted Consolidated EBITDA (7-8): $_________
10. Consolidated Interest Expense (F.2 above): $_________
11. Provisions for taxes based on income and payable in Cash: $_________
12. Consolidated Scheduled Principal Payments: $_________
13. Consolidated Fixed Charges (10+11+12): $_________
14. Fixed Charge Coverage Ratio (9):(13): ____:1.00
15. Minimum ratio required under
G. Maximum Leverage Ratio (as of _____________, 199_) (7.6C)
1. Aggregate principal amount of all
2. Maximum aggregate amount which is or at any time thereafter may become available for drawing under all letters of credit then outstanding: $_________
3. Aggregate amount of that proportion of obligations with respect to Capital Leases that is properly classified as a
4. Indebtedness evidenced by a note or
5. Average aggregate principal amount of all
6. Consolidated Total Funded Debt
7. Consolidated EBITDA (F.7 above): $_________
8. Leverage Ratio (6):(7): ____:1.00
9. Maximum ratio permitted under
H. Minimum Consolidated EBITDA (for the four- Fiscal Quarter period ending ____________, 199_) (7.6D)
I. Maximum Tangible Net Worth (as of_____________, 199_)
1. Consolidated Tangible Net Worth: $_________
3. 75% of Consolidated Net Income since the quarter ending after consummation of the
4. Minimum Consolidated Net Worth required under subsection 7.6E (2 + 3): $_________
1. Aggregate fair market value of assets sold in any one or more Asset Sales after Closing Date in one or more
2. Total Purchase Price of Subsequent
3. Aggregate Total Purchase Price of
K. Disposal of Subsidiary Stock
1. Annual gross revenue of any Subsidiary sold during the period for the immediately
1. Aggregate annual gross revenues of
2. Consolidated gross revenues of Company and
3. Foreign Subsidiary revenue as a revenues (1 / 2): __%
4. Maximum percentage permitted under
This Attachment No. 2 is attached to and made a part of a Compliance Certificate dated as of _____________, 199_ and pertains to the month of ____________, 199_. Subsection references herein relate to subsections of the Credit Agreement.
1. Cash and Cash Equivalents $__________ $__________ Securities held:
1.Consolidated Net Income: $__________ $__________
3. Provisions for taxes based
4. Total depreciation expense: $__________ $__________
5. Total amortization expense: $__________ $__________
Consolidated Net Income: $__________ $__________
1. Consolidated Net Income: $__________ $__________
D. Sum of Backlog Plus $__________ $__________
1. Backlog + Designations $__________
[FORM OF OPINION OF COMPANY COUNSEL]
Wells Fargo Bank, National Association,
Re: Credit Agreement dated as of January 10, 1996 among URS Corporation, a Delaware corporation, the financial institutions listed therein as Lenders, and Wells Fargo Bank, National
We have acted as counsel to URS Corporation, a Delaware corporation (the "Company"), in connection with that certain Credit Agreement dated as of January 10, 1996 (the "Credit Agreement") between the Company, the financial institutions listed therein as Lenders ("Lenders") and Wells Fargo Bank, National Association, as Administrative Agent on behalf of the Lenders ("Administrative Agent"). We are providing this opinion to you at the request of the Company pursuant to Section 4.1H of the Credit Agreement. Except as otherwise indicated, capitalized terms used in this opinion and defined in the Credit Agreement will have the meanings given in the Credit Agreement.
In our capacity as such counsel, we have examined originals or copies of those corporate and other records and documents we considered appropriate, including the following:
a. the Certificate of Incorporation of the Company,
Wells Fargo Bank, National Association, as Administrative Agent
b. the Bylaws of the Company, as amended to date;
c. all records of proceedings and actions of the Board of Directors of the Company relating to the Loan Documents and the transactions
d. the Credit Agreement; and
e. the other Loan Documents.
As to relevant factual matters, we have relied upon, among other things, the Certified Resolutions of the Company delivered to you pursuant to Section 4.1A(i) of the Credit Agreement and the Incumbency Certificate delivered to you pursuant to Section 4.1A(ii) of the Credit Agreement. In addition, we have obtained and relied upon those certificates of public officials we considered appropriate.
We have assumed the genuineness of all signatures (other than the signatures of officers of the Company on the Loan Documents), the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies. To the extent the Company's obligations depend on the due authorization, execution and delivery of the Credit Agreement and the other Loan Documents by the other parties thereto, we have assumed that the Credit Agreement and the other Loan Documents have been so authorized, executed and delivered and that they constitute legally valid and binding obligations of each such party enforceable in accordance with their respective terms. We have also assumed that Administrative Agent and all Lenders will exercise their rights under the Loan Documents in a commercially reasonable manner.
On the basis of such examination, our reliance upon the assumptions contained herein and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that the Loan Documents to which the Company is a party constitute legally valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally (including, without
Wells Fargo Bank, National Association, as Administrative Agent
limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, PROVIDED, HOWEVER, we express no opinion with regard to the enforceability of any Letters of Credit to which the Company is an account party but is not liable for payment.
Our opinion as to the enforceability of the Credit Agreement and the other Loan Documents is subject to:
(i) public policy considerations, statutes or court decisions that may limit the rights of a party to obtain indemnification against its own gross negligence, willful misconduct or unlawful
(ii) the unenforceability under certain circumstances of waivers of rights granted by law where the waivers are against public policy or prohibited by law or the rights waived are not specifically
(iii) the unenforceability under certain circumstances of provisions waiving the right to a jury trial;
(iv) the unenforceability under certain circumstances of provisions imposing penalties, forfeitures, late payment charges or an increase in interest rate upon delinquency in payment or the occurrence of a default; and
(v) the unenforceability under certain circumstances of provisions appointing one party as attorney- in-fact or trustee for an adverse party.
We express no opinion with respect to your ability to collect attorneys' fees and costs in an action involving the Credit Agreement if you are not the prevailing party in such action (we call your attention to the effect of Section 1717 of the California Civil Code, which provides that where a contract permits one party thereto to recover attorneys' fees, the prevailing party in any action to enforce any provision of the
Wells Fargo Bank, National Association, as Administrative Agent
contract shall be entitled to recover its reasonable attorneys' fees).
We express no opinion as to any provision of the Loan Documents requiring written amendments or waivers of the Loan Documents insofar as it suggests that oral or other modifications, amendments or waivers could not be effectively agreed upon by the parties or that the doctrine of promissory estoppel might not apply.
We express no opinion as to the effect of non- compliance by you with any state or federal laws or regulations applicable to the transactions contemplated by the Credit Agreement because of the nature of your business.
We have further assumed with your consent that each Lender is a bank incorporated or organized under, or a foreign bank licensed to conduct a banking business through an agency located in the United States of America pursuant to, the laws of the United States of America or any state of the United States of America, within the meaning of Section 1 of Article XV of the California Constitution and Section 1716 of the California Financial Code.
We are members of the Bar of the State of California only, and express no opinion as to matters of law in jurisdictions other than the State of California and the United States.
This opinion is furnished by us as counsel for the Company and may be relied upon by you only in connection with the Credit Agreement. It may not be used or relied upon by you for any other purpose or by any other person, nor may copies be delivered to any other person, without in each instance our prior written consent. You may, however, deliver a copy of this opinion to permitted transferees of the Notes in connection with such transfer, and such transferees may rely on this opinion as if it were addressed and had been delivered to them on the date of this opinion.
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Wells Fargo Bank, National Association, as Administrative Agent
Wells Fargo Bank, National Association
[FORM OF OPINION OF COMPANY COUNSEL]
Wells Fargo Bank, National Association,
Re: Credit Agreement, dated as of January 10, 1996, among URS Corporation, a Delaware corporation, the financial institutions listed therein as Lenders, and Wells Fargo Bank, National
We have acted as counsel to URS Corporation, a Delaware corporation (the "Company"), and certain of its subsidiaries (collectively, the "Guarantor Subsidiaries", which term shall include Greiner Engineering, Inc., a Nevada corporation ("Greiner")) in connection with that certain Credit Agreement dated as of January 10, 1996 (the "Credit Agreement") between the Company, the financial institutions listed therein as Lenders ("Lenders") and Wells Fargo Bank, National Association, as Administrative Agent ("Administrative Agent"). We are providing this opinion to you at the request of the Company pursuant to Section 4.2N of the Credit Agreement. Except as otherwise indicated, capitalized terms used in this opinion and defined in the Credit Agreement will have the meanings given in the Credit Agreement.
In our capacity as such counsel, we have examined originals or copies of those corporate and other records and documents we considered appropriate, including the following:
a. The Certificate of Incorporation of the Company,
b. The Bylaws of the Company, as amended to date;
c. All records of proceedings and actions of the Board of Directors of the Company relating to the Loan Documents and the transactions
d. The Articles or Certificate of Incorporation of each Guarantor Subsidiary, as amended to date;
e. The Bylaws of each Guarantor Subsidiary, as
f. All records of proceedings and actions of the Board of Directors of each Guarantor Subsidiary relating to the Loan Documents and the
i. The other Loan Documents;
j. The documents, orders, judgments and decrees listed in the Company Certificate dated the Initial Funding Date (the "Company
k. The documents, orders, judgments and decrees listed in the Guarantor Subsidiary Certificate dated the Initial Funding Date (the "Subsidiary
l. Unfiled copies of UCC-1 Financing Statements (the "Company UCC-1 Financing Statements") naming the Company as debtor and the Administrative Agent as Secured Party, which we understand will be filed with the filing offices listed on Schedule C hereto (the "Company Filing
m. Unfiled copies of UCC-1 Financing Statements (the "Subsidiary UCC-1 Financing Statements") naming each Guarantor Subsidiary as debtor and the Administrative Agent as Secured Party, which we understand will be filed with the filing
offices listed on Schedule D hereto (the "Subsidiary Filing Offices").
As to relevant factual matters, we have relied upon, among other things, the factual representations of the Company in the Company Certificate and of the Guarantor Subsidiaries in the Subsidiary Certificate, copies of which have been delivered to you. In addition, we have obtained and relied upon those certificates of public officials we considered appropriate.
We have assumed, with your consent, the genuineness of all signatures [(other than the signatures of officers of the Company),] the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies. To the extent any Loan Party's obligations depend on the due authorization, execution and delivery of the Credit Agreement and the other Loan Documents by the other parties thereto, we have assumed that the Credit Agreement and the other Loan Documents have been so authorized, executed and delivered and that they constitute legally valid and binding obligations of each such party enforceable in accordance with their respective terms. We have also assumed that Administrative Agent and all Lenders will exercise their rights under the Loan Documents in a commercially reasonable manner.
On the basis of such examination, our reliance upon the assumptions contained herein and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that:
1. The Company has been duly incorporated, and is validly existing in good standing under the laws of the State of Delaware, with corporate power to enter into the Loan Documents to which it is a party, and to perform its obligations thereunder.
2. The execution, delivery and performance of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action on the part of the Company, and the Loan Documents to which it is a party have been duly executed and delivered by the Company.
3. The Loan Documents to which the Company is a party constitute legally valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or
injunctive relief, regardless of whether considered in a proceeding in equity or at law.
4. The Company's execution and delivery of, and performance of its obligations under, the Loan Documents to which it is a party do not and will not (i) violate the Company's Certificate of Incorporation or Bylaws, (ii) violate, breach, or result in a default under, any existing obligation of the Company under any other agreement identified in the Company Certificate, or (iii) breach or otherwise violate any existing obligation of the Company under any order, judgment or decree of any California or federal court or governmental authority binding on the Company identified in the Company Certificate.
5. The execution and delivery by the Company of, and performance of its obligations under, the Loan Documents to which it is a party do not violate any California or federal statute or regulation that we have, in the exercise of customary professional diligence, recognized as applicable to the Company in connection with the transactions contemplated by the Loan Documents.
6. No order, consent, permit or approval of any California or federal governmental authority that we have, in the exercise of customary professional diligence, recognized as applicable to the Company in connection with the transactions contemplated by the Loan Documents, is required on the part of the Company for the execution and delivery of, and performance of its obligations under, the Loan Documents to which it is a party[, except for the authorization of __________, which has been obtained].
7. Each Guarantor Subsidiary has been duly incorporated, and is validly existing in good standing under the laws of its state of incorporation, with corporate power to enter into the Loan Documents to which it is a party, and to perform its obligations thereunder.
8. The execution, delivery and performance of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action on the part of each Guarantor Subsidiary, and the Loan Documents to which it is a party have been duly executed and delivered by each Guarantor Subsidiary.
9. The Loan Documents to which each Guarantor Subsidiary is a party constitute legally valid and binding obligations of such Guarantor Subsidiary, enforceable against such Guarantor Subsidiary in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law.
10. Each Guarantor Subsidiary's execution and delivery of, and performance of its obligations under, the Loan Documents to which it is a party do not and will not (i) violate such Guarantor Subsidiary's Articles or Certificate of Incorporation or Bylaws, (ii) violate, breach, or result in a default under, any existing obligation of such Guarantor Subsidiary under any other agreement identified in the Subsidiary Certificate, or (iii) breach or otherwise violate any existing obligation of such Guarantor Subsidiary under any order, judgment or decree of any state or federal court or governmental authority binding on such Guarantor Subsidiary identified in the Subsidiary Certificate.
11. The execution and delivery by each Guarantor Subsidiary of, and performance of its obligations under, the Loan Documents to which it is a party do not violate any state or federal statute or regulation that we have, in the exercise of customary professional diligence, recognized as applicable to such Guarantor Subsidiary in connection with the transactions contemplated by the Loan Documents.
12. No order, consent, permit or approval of any state or federal governmental authority that we have, in the exercise of customary professional diligence, recognized as applicable to any Guarantor Subsidiary in connection with the transactions contemplated by the Loan Documents, is required on the part of such Guarantor Subsidiary for the execution and delivery of, and performance of its obligation under, the Loan Documents to which it is a party[, except for the authorization of __________, which has been obtained].
13. Any outstanding shares of the capital stock of each of the Guarantor Subsidiaries pledged to Administrative Agent pursuant to the Collateral Documents have been duly authorized by all necessary corporate action on the part of such corporation, are validly issued, fully-paid and nonassessable and are owned of record by the Company or another Guarantor Subsidiary.
14. Neither the extension of credit nor the use of proceeds provided in the Agreement will violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System.
15. Neither the Company nor any of the Guarantor Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended.
16. Neither the Company nor any of the Guarantor Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended.
17. Except for those matters described in Schedule 5.6 to the Company Signing Date Disclosure Letter and described on Schedule B attached hereto, we have not, since _______________ given substantive attention on behalf of the Company or any of its Subsidiaries to, or represented the Company or any of its Subsidiaries in connection with, any actions, suits or proceedings pending or threatened against the Company or any of its Subsidiaries before any court, arbitrator or governmental agency, which (i) seek to affect the enforceability of any of the Loan Documents or (ii) seek damages in excess of $____________ or any relief other than damages. We call your attention to the fact that our engagement is limited to specific matters as to which we are consulted by the Company and its Subsidiaries.
18. The Company Security Agreement creates in favor of the Administrative Agent a security interest in such of the Collateral (as defined in the Company Security Agreement) of the Company that is of a type in which a security interest can be created under Division 9 of the Uniform Commercial Code as in effect in the State of California.
19. Upon the filing of the Company UCC-1 Financing Statements with the Company Filing Offices, the Administrative Agent will have a perfected security interest in the Company's interest in the Collateral described therein, to the extent a security interest in such Collateral can be perfected by the filing of a financing statement with the Company Filing Offices under the Uniform Commercial Code as in effect in the State of California.
20. With regard to each deposit account referred to in the Company Security Agreement and the Subsidiary Security Agreement which is maintained with an organization located in the State of California, assuming that either (a) the deposit account is maintained with the Administrative Agent or (b) notice of the Administrative Agent's security interest is given in writing to the organization with which the deposit account is maintained, the Administrative Agent has a perfected security interest in the Company's and any Guarantor Subsidiary's interest in the deposit account to the extent a security interest in the deposit account can be perfected under the Uniform Commercial Code as in effect in the State of California.
21. The Company Pledge Agreement, together with delivery of the Pledged Debt (as defined therein) to the Administrative
Agent in the State of California, create in favor of the Administrative Agent a perfected security interest under the Uniform Commercial Code as in effect in the State of California in the Pledged Debt. Assuming the Administrative Agent maintains possession of the Pledge Debt in the State of California, such security interest will be prior to any other security interest in such Pledged Debt that may be created under the Uniform Commercial Code as in effect in the State of California.
22. The Company Pledge Agreement, together with delivery of the certificates representing the shares of stock identified on Schedule I to the Company Pledge Agreement (the "Pledged Securities") to the Administrative Agent in the State of California, create in favor of the Administrative Agent a perfected security interest under the Uniform Commercial Code as in effect in the State of California in the Pledged Securities. Assuming the Administrative Agent acquires its security interest in the Pledged Securities in good faith and without notice of any adverse claims and that each Pledged Security is a certificated security either in bearer form or in registered form, issued or indorsed in the name of the Administrative Agent or in blank, the Administrative Agent will acquire its security interest in the Pledged Securities free of adverse claims.
23. The Subsidiary Security Agreement creates in favor of the Administrative Agent a security interest in such of the Collateral (as defined in the Subsidiary Security Agreement) of each Guarantor Subsidiary that is of a type in which a security interest can be created under Article 9 of the Uniform Commercial Code as in effect in the State of California.
24. Upon the filing of the Subsidiary UCC-1 Financing Statements with the Subsidiary Filing Offices, the Administrative Agent will have a perfected security interest in each Guarantor Subsidiary's interest in the Collateral described therein, to the extent a security interest in such Collateral can be perfected by the filing of a financing statement with the Subsidiary Filing Offices under the Uniform Commercial Code as in effect in the State of California and the States listed in paragraph (vii) on page [11] below.
25. The Subsidiary Pledge Agreement, together with delivery of the certificates representing the shares of stock identified on Schedule I to the Subsidiary Pledge Agreement (the "Subsidiary Pledged Securities") to the Administrative Agent in the State of California, create in favor of the Administrative Agent a perfected security interest under the Uniform Commercial Code as in effect in the State of California in the Subsidiary Pledged Securities. Assuming the Administrative Agent acquires its security interest in the
Subsidiary Pledged Securities in good faith and without notice of any adverse claims and that each Subsidiary Pledged Security is a certificated security either in bearer form or in registered form, issued or indorsed in the name of the Administrative Agent or in blank, the Administrative Agent will acquire its security interest in the Subsidiary Pledged Securities free of adverse claims.
26. Upon the filing of the Certificate of Merger with the Nevada Secretary of State in accordance with the Merger Agreement, and the acceptance of the Certificate of Merger by the Nevada Secretary of State, the Merger will be validly consummated in accordance with the Merger Agreement and Nevada law, each outstanding share of Greiner's stock will be converted as provided in the Merger Agreement and Greiner will be a wholly-owned Subsidiary of the Company.
Our opinions in paragraphs 3 and 9 above as to the enforceability of the Credit Agreement and the other Loan Documents is subject to:
(i) public policy considerations, statutes or court decisions that may limit the rights of a party to obtain indemnification against its own gross negligence, willful misconduct or unlawful conduct;
(ii) the unenforceability under certain circumstances of waivers of rights granted by law where the waivers are against public policy or prohibited by law or the rights waived are not specifically described;
(iii) the unenforceability under certain circumstances of provisions waiving the right to a jury trial;
(iv) the unenforceability under certain circumstances of provisions imposing penalties, forfeitures, late payment charges or an increase in interest rate upon delinquency in payment or the occurrence of a
(v) the unenforceability under certain circumstances of provisions appointing one party as attorney-in-fact or trustee for an adverse party.
We express no opinion with respect to your ability to collect attorneys' fees and costs in an action involving the Loan Documents if you are not the prevailing party in such action (we call your attention to the effect of Section 1717 of the California Civil Code, which provides that where a contract permits one party thereto to recover attorneys' fees, the prevailing party in any action to enforce any provision of the contract shall be entitled to recover its reasonable attorneys' fees).
We express no opinion as to any provision of the Loan Documents requiring written amendments or waivers of the Loan Documents insofar as it suggests that oral or other modifications, amendments or waivers could not be effectively agreed upon by the parties or that the doctrine of promissory estoppel might not apply.
As to our opinion in paragraph 9, we advise you of California statutory provisions and case law to the effect that, in certain circumstances, a guarantor may be exonerated if the creditor materially alters the original obligation of the principal without the consent of the guarantor, elects remedies for default that impair the subrogation or reimbursement rights of the guarantor against the principal, or otherwise takes, without notifying the guarantor, any action that materially prejudices the guarantor. We express no opinion as to the effect on the Subsidiary Guaranty of: (i) any modification to or amendment of the Company's obligations that materially increases such obligations, or (ii) any other action by Administrative Agent or any Lender that materially prejudices any Guarantor Subsidiary, if, in any such instance, such modification, amendment or action occurs without notice to such Guarantor Subsidiary and without granting to such Guarantor Subsidiary an opportunity to cure any default by such Guarantor Subsidiary. There is also authority (including California Civil Code Section 2856, which has not yet been the subject of judicial interpretation) to the effect that a guarantor may effectively waive statutory suretyship defenses if an express waiver of such defenses is expressly set forth in the guaranty. We express no opinion as to the effectiveness, under California law, of the waivers set forth in the Subsidiary Guaranty.
We express no opinion as to the effect of non-compliance by you with any state or federal laws or regulations applicable to the transactions contemplated by the Loan Documents because of the nature of your business.
We advise you that Section __ of the Subsidiary Pledge Agreement, Section __ of the Subsidiary Security Agreement and Section __ of the Subsidiary Guaranty, which provide for jurisdiction of the courts of California, may not be binding on the courts in the forum(s) selected or excluded.
For purposes of the opinions expressed in paragraphs 4 and 10, we have assumed that neither the Company nor any Guarantor Subsidiary will in the future take any discretionary action (including a decision not to act) permitted by the Loan Documents that would cause the payment of the Loan to violate any California or federal statute, rule or regulation or constitute a violation or breach of or default under any of the agreements, orders, judgments or decrees referred to in clauses (ii) and (iii) of paragraph 4 or 10 or require an order,
consent, permit or approval to be obtained from a California or federal governmental authority.
We have further assumed with your consent that each Lender is a bank incorporated or organized under, or a foreign bank licensed to conduct a banking business through an agency located in the United States of America pursuant to, the laws of the United States of America or any state of the United States of America, within the meaning of Section 1 of Article XV of the California Constitution and Section 1716 of the California Financial Code.
We express no opinion with respect to:
(i) the priority of any liens or security interests except as set forth in paragraphs 20, 21 and 24 relating to the Pledged Debt, the Pledged Securities and the Subsidiary Pledged Securities, respectively;
(ii) any provision of the Collateral Documents that purports to permit the Administrative Agent or any other person to sell or otherwise dispose of any Collateral subject thereto except in compliance with the Uniform Commercial Code and any other applicable federal and state laws, or to impose on the Administrative Agent standards of care of Collateral in the Administrative Agent's possession other than as provided in Section 9207 of the Uniform Commercial Code.
In rendering the opinions in paragraphs 18, 19, 20, 21, 22, 23, 24 and 25, we have assumed with your consent:
(i) that the Company and each Guarantor Subsidiary has, or will have at the relevant time, rights in the Collateral, Pledged Securities or Subsidiary Pledged Securities, as the case may be, in which the Company or such Guarantor Subsidiary, as the case may be, has granted a security interest to the Administrative Agent within the meaning of Section 9203(1)(c) of the Uniform Commercial Code at all times relevant to this
(ii) that the Collateral is reasonably identified in the description of collateral set forth in the Company Security Agreement, the Company UCC-1 Financing Statements, the Subsidiary Security Agreement and the Subsidiary UCC-1 Financing Statements; however this assumption does not apply to Collateral described as "accounts"; "chattel paper" and "inventory";
(iii) that, at all times relevant to this opinion, value has been given within the meaning of Section 9203(1)(b) of the Uniform Commercial Code;
(iv) that none of the Collateral arises out of any transaction described in Section 9104 of the Uniform
(v) that the Collateral does not include motor vehicles or boats subject to the registration provisions of the California Vehicle Code (or other statute enacted in any of the States listed in paragraph (vii) on page [11]), mobile homes or commercial coaches subject to the registration provisions of the California Health and Safety Code (or other statute enacted in any of the States listed in paragraph (vii) on page [11]), any vehicle or other item of tangible personal property subject to a registration or certificate of title statute of a jurisdiction other than California or any of the States listed in paragraph (vii) on page [11], goods which are mobile and which are of a type normally used in more than one jurisdiction, uncertificated securities, real property, fixtures, farm products, consumer goods, or crops, timber, minerals or the like (including oil and gas) or accounts resulting from the sale of an interest in minerals or the like (including oil and
(vi) that all Collateral constituting chattel paper and negotiable documents does or will bear a legend naming the Administrative Agent as secured party.
(i) a security interest in accounts and general intangibles will be subject to the rights of account
(ii) federal and state securities laws may limit the right to transfer or dispose of Collateral which may constitute securities under such laws;
(iii) under certain circumstances described in Section 9306 of the Uniform Commercial Code the rights of a secured party to enforce its security interest in proceeds of Collateral may be limited;
(iv) we have not made or undertaken to make any investigation as to the existence of or state of title to the Collateral and we express no opinion as to the existence, condition, location or ownership of the Collateral or, except as specifically set forth
in paragraphs 21, 22 and 25, the priority of any liens thereon or security interests therein;
(v) a security interest in patents, copyrights and trademarks may have to be filed or recorded in one or more federal registration offices, and our opinion in paragraphs 18, 19, 23 and 24 does not cover the effect of a failure to file in such federal office;
(vi) pursuant to Section 9302(h) of the Uniform Commercial Code, a security interest in any policy of insurance may only be perfected by giving notice thereof in writing to the insurer, and our opinion in paragraphs 19 and 23 does not cover the effect of a failure to
(vii) Our opinion in paragraph 24 with respect to the States of Delaware, Nevada, New York, Washington, Ohio, Colorado, New Jersey, [other states] and Florida is based solely upon a review of Sections 9-103, 9-203, 9-302, 9-303, 9-304, 9-305, 9-306, 9-401, 9-402 and 9-403 of the Uniform Commercial Code as currently in effect in such States, as reported in the [U.C.C. Reporter], and excludes any review of official decisions interpreting these sections or any
(viii) Our opinion in paragraph 7 above that each Guarantor Subsidiary "is validly existing in good standing under the laws of its state of incorporation" is based solely upon a review of Certificates of Good Standing issued by the Secretaries of State in the States where the Guarantor Subsidiaries are incorporated.
We are members of the Bar of the State of California only, and except as provided in the immediately preceding paragraphs (vii) and (viii) express no opinion as to matters of law in jurisdictions other than the State of California and the United States, except as to matters relating to the corporate law of Delaware, Nevada, New York, Washington, Ohio, Colorado, New Jersey and Florida to the extent necessary to render the opinions expressed in paragraphs 1 through 4, 7 through 10 and 13 above. We are not qualified to practice in the States of Delaware, Nevada, New York, Washington, Ohio, Colorado, New Jersey and Florida and do not, in the ordinary course of our practice, have occasion to become familiar with the laws thereof.
This opinion is furnished by us as counsel for the Company and may be relied upon by you only in connection with the Credit Agreement. It may not be used or relied upon by you for any other purpose or by any other person, nor may copies be delivered to any other person, without in each instance our
prior written consent. You may, however, deliver a copy of this opinion to permitted transferees of the Notes in connection with such transfer, and such transferees may rely on this opinion as if it were addressed and had been delivered to them on the date of this opinion.
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
Wells Fargo Bank, National Association
[FORM OF OPINION OF ADMINISTRATIVE AGENT COUNSEL]
[Letterhead of Administrative Agent Counsel]
Wells Fargo Bank, National Association,
The Lenders Party to the Credit
Re: Loans to URS Corporation Ladies and Gentlemen:
We have acted as counsel to Wells Fargo Bank, National Association, as Administrative Agent (in such capacity, "Administrative Agent"), in connection with the preparation and delivery of a Credit Agreement dated as of January 10, 1996 (the "Credit Agreement") among URS Corporation, a Delaware corporation ("Company"), the financial institutions listed therein as lenders, and Administrative Agent and in connection with the preparation and delivery of certain related documents.
We have participated in various conferences with representatives of Company and Administrative Agent and conferences and telephone calls with Sheppard, Mullin, Richter & Hampton, counsel to Company, and with your representatives, during which the Credit Agreement and related matters have been discussed, and we have also participated in the meeting held on the date hereof (the "Closing") incident to the funding of the initial loans made under the Credit Agreement. We have reviewed the forms of the Credit Agreement and the exhibits thereto, including the forms of the promissory notes annexed thereto (the "Notes"), and the opinion of Sheppard, Mullin, Richter & Hampton (the "Opinion") and the
Page 2 - Wells Fargo Bank, National Association, as Administrative Agent - _________, 1996
officers' certificates and other documents delivered at the Closing. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals or copies and the due authority of all persons executing the same, and we have relied as to factual matters on the documents that we have reviewed.
Although we have not independently considered all of the matters covered by the Opinion to the extent necessary to enable us to express the conclusions therein stated, we believe that the Credit Agreement and the exhibits thereto are in substantially acceptable legal form and that the Opinion and the officers' certificates and other documents delivered in connection with the execution and delivery of, and as conditions to the making of the initial loans under, the Credit Agreement and the Notes are substantially responsive to the requirements of the Credit Agreement.
This ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") is dated as of ________________, 199__ between ___________________________________ ("Assignee").
WHEREAS, Assignor is a Lender under the Credit Agreement dated as of January 10, 1996 (as amended, supplemented or otherwise modified to the date hereof and as it may hereafter be amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among URS Corporation, a Delaware corporation ("Company"), the Lenders that are parties thereto, and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used but not defined in this Agreement shall have the meanings set forth in the Credit Agreement. The Credit Agreement and all other agreements, documents and instruments referred to therein or delivered pursuant thereto are collectively called the "Credit Documents".
WHEREAS, Assignor and Assignee wish (a) Assignor to assign to Assignee [all] [a portion] of its rights and obligations under the Credit Agreement, (b) Assignee to assume such obligations, and (c) Assignor to be released from such obligations.
NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:
Effective on the Assignment Effective Date (as defined in Section 3 below), Assignor hereby, without recourse, and without representation or warranty (except as expressly provided in Section 6 below), assigns to Assignee the Assigned Rights and Obligations (as defined below).
[The "Assigned Rights and Obligations" means all of Assignor's rights and obligations under the Credit Agreement on the Assignment Effective Date, including without limitation those relating to its [Revolving Loan] [Tranche A Term Loan] [Tranche B Term Loan] Commitment, its commitment to purchase participations in Letters of Credit, any outstanding [Revolving] [Tranche A Term] [Tranche B Term] Loans and participations in any outstanding Letters of Credit.]
[The "Assigned Rights and Obligations" means (a) [a $______________ portion] [______________] of Assignor's $______________ [Revolving Loan] [Tranche A Term Loan] [Tranche B Term Loan] Commitment on the Assignment Effective Date, (b) the portion of any [Revolving] [Tranche A Term] [Tranche B Term] Loans by Assignor outstanding on the Assignment Effective Date that is attributable to the above portion of Assignor's [Revolving Loan] [Tranche A Term Loan] [Tranche B Term Loan] Commitment, and (c) all of Assignor's other rights and obligations under the Credit Agreement that are attributable to the above portion of Assignor's [Revolving Loan] [Tranche A Term Loan] [Tranche B Term Loan] Commitment, including, without limitation participations in any outstanding Letters of Credit and commitments to purchase participations in Letters of
Effective on the Assignment Effective Date, Assignee hereby accepts the foregoing assignment of, and hereby assumes from Assignor, the Assigned Rights and Obligations.
This Agreement shall become effective on a date (the "Assignment Effective Date") selected by Assignor, which shall be on or as soon as practicable after the execution and delivery of counterparts of this Agreement by Assignor, Assignee, Administrative Agent and Company. Assignor shall promptly notify Assignee, Administrative Agent and Company in writing of the Assignment Effective Date.
4. Payments on Assignment Effective Date. In consideration of the assignment by Assignor to and the assumption by Assignee of the Assigned Rights and Obligations, on the Assignment Effective Date (a) Assignee shall pay to Assignor the principal amount of all Loans made by Assignor pursuant to the Credit Agreement that are attributable to the Assigned Rights and Obligations and outstanding on the Assignment Effective Date, and (b) each of Assignor and Assignee shall pay to the other such amounts (if any) as are specified in any written agreement or exchange of letters between them, and (c) Assignee shall pay to Administrative Agent an assignment processing and recordation fee of $3,500.
5. Allocation and Payment of Interest and Fees. (a) Administrative Agent shall pay to Assignee all interest, commitment fees and other amounts not constituting principal that are paid by or on behalf of Company pursuant to the Credit Documents and are attributable to the Assigned
Rights and Obligations ("Company Amounts"), that accrue on and after the Assignment Effective Date. If Assignor receives or collects any such Company Amounts, Assignor shall promptly pay them to Assignee.
(b) Administrative Agent shall pay to Assignor all Company Amounts that accrue before the Assignment Effective Date. If Assignee receives or collects any such Company Amounts, Assignee shall promptly pay them to Assignor.
(a) Each of Assignor and Assignee represents and warrants to the other as follows:
(i) It has full power and authority, and has taken all action necessary, to execute and deliver this Agreement and to fulfill its obligations under, and to consummate the transactions contemplated by, this Agreement.
(ii) The making and performance of this Agreement and all documents required to be executed and delivered by it hereunder do not and will not violate any law or regulation applicable to it.
(iii) This Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms.
(iv) All approvals, authorizations or other actions by, or filings with, any governmental authority necessary for the validity or enforceability of its obligations under this Agreement have been made or obtained.
(b) Assignor represents and warrants to Assignee that Assignor owns the Assigned Rights and Obligations, free and clear of any lien or other encumbrance.
(c) Assignee represents and warrants to Assignor as follows:
(i) Assignee has made and shall continue to make its own independent investigation of the financial condition, affairs and creditworthiness of Company and any other person or entity obligated under the Credit Documents (collectively, "Credit Parties"), and the value of any collateral now or hereafter securing any of the
undertakings under the Credit Documents ("Collateral"), in connection with its assumption of the Assigned Rights and Obligations.
(ii) Assignee has received a copy of the Credit Documents and such other documents, financial statements and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement.
Assignor makes no representation or warranty and assumes no responsibility to Assignee for:
(a) the execution (by any party other than Assignor), collectibility or sufficiency of the Credit Documents or for any representations, warranties, recitals or statements made in the Credit Documents or in any financial or other written or oral statement, instrument, report, certificate or any other document made or furnished or made available by Assignor to Assignee or by or on behalf of any Credit Party to Assignor or Assignee in connection with the Credit Documents and the
(b) the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Credit Documents or as to the existence or possible existence of any default or event of default under the Credit
(c) the accuracy or completeness of any information provided to Assignee, whether by Assignor or by or on behalf of any Credit Party.
Assignor shall have no initial or continuing duty or responsibility to make any investigation of the financial condition, affairs or creditworthiness of any of the Credit Parties, or the value of any Collateral, in connection with the assignment of the Assigned Rights and Obligations or to provide Assignee with any credit or other information with respect thereto, whether coming into its possession before the date hereof or at any time or times thereafter.
8. Assignee Bound By Credit Agreement. Effective on the Assignment Effective Date, Assignee (a) shall be deemed to be a party to the Credit Agreement, (b) agrees to be bound by the Credit Agreement as it would have been if it had been an original Lender party thereto, and
(c) agrees to perform in accordance with their terms all of the obligations which are required under the Credit Documents to be performed by it as a Lender. Assignee appoints and authorizes Administrative Agent to take such actions as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto.
9. Assignor Released From Credit Agreement. Effective on the Assignment Effective Date, Assignor shall be released from the Assigned Rights and Obligations; PROVIDED, HOWEVER, that Assignor shall retain all of its rights to indemnification under subsections 10.3 of the Credit Agreement and the other Credit Documents for any events, acts or omissions occurring before the Assignment Effective Date.
On or promptly after the Assignment Effective Date, Company, Administrative Agent, Assignor and Assignee shall make appropriate arrangements so that new Notes executed by Company, dated the Assignment Effective Date and in the amount of the Commitment of [Assignor and] Assignee after giving effect to this Agreement, are issued to [Assignor and] Assignee, in exchange for the surrender by Assignor [and Assignee] to Company of any outstanding Note[s] by Company, marked "Exchanged."
(a) Assignee represents and warrants to Administrative Agent, Company and Assignor that, under applicable law and treaties, Assignee is entitled to receive all payments under the Credit Agreement, the Notes and this Agreement payable to it, without deduction or withholding of any taxes imposed by the United States or any political subdivision thereof.
(b) On or before the Assignment Effective Date, Assignee shall deliver to each of Company and Administrative Agent (i) two executed copies of a valid and properly completed United States Internal Revenue Service Form 1001 or 4224 certifying that Assignee is entitled to receive payments under the Credit Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, or (ii) if Assignee is not a "bank" or other Person described in Section 881(i)(3) of the Internal Revenue Code, a Certificate re Non-Bank status and two executed copies of a valid and properly completed Internal Revenue Service Form W-8 or W-9 establishing an exemption from United States backup withholding tax. If any such form is found to be incomplete or incorrect, or must be replaced (on the same or a successor
form) in order to maintain its effectiveness, Assignee shall execute and deliver to each of Company and Administrative Agent two executed copies of a valid, complete and correct replacement form.
(a) This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior and current understandings and agreements, whether written or oral (other than with respect to any fees payable as provided in Section 4 hereof).
(b) No term or provision of this Agreement may be amended, waived or terminated orally, but only by an instrument signed by the parties hereto.
(c) This Agreement may be executed in one or more counterparts. Each set of executed counterparts shall be an original. Executed counterparts may be delivered by facsimile transmission.
(d) Assignor may at any time and from time to time grant to others as provided in the Credit Agreement assignments of or participations in all or part of Assignor's Loans or Commitment, but not with respect to the Assigned Rights and Obligations.
(e) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither Assignor nor Assignee may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the other. The preceding sentence shall not limit the right of Assignee to grant to others assignments of or participations in all or part of the Assigned Rights and Obligations to the extent permitted by the terms of the Credit Agreement.
(f) All payments to Assignor or Assignee hereunder shall, unless otherwise specified by the party entitled thereto, be made in United States Dollars, in immediately available funds, and to the address or account specified on the signature pages of this Agreement. The address of Assignee for notice purposes under the Credit Agreement shall be as specified on the signature pages of this Agreement.
(g) If any provision of this Agreement is held invalid, illegal or unenforceable, the remaining provisions hereof will not be affected or impaired in any way.
(h) Each party shall bear its own expenses in connection with the preparation and execution of this Agreement.
(i) This Agreement shall be governed by and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
ADMINISTRATIVE AGENT: WELLS FARGO BANK, NATIONAL
[Letterhead of Coopers & Lybrand, LLP]
Our Firm has audited, in accordance with generally accepted auditing standards, the financial statements of URS Corporation (URS) as of and for the year ended October 31, 1995. We understand and acknowledge that (a) the Company plans to provide the Lenders party to the Loan Agreement referred to below with a copy of the audited 1995 financial statements and our report thereon, (b) Wells Fargo Bank, as Administrative Agent, has informed you that the Lenders intend to rely upon our report in connection with the Loan Agreement dated January 10, 1996, between URS, the Lenders and Wells Fargo Bank, as Administrative Agent, and (c) you intend for the Lenders to so rely.
Our audit was conducted in accordance with generally accepted auditing standards, the objective of which is to form an opinion as to whether financial statements, which are the responsibility and representations of management of the Company, present fairly, in all material respects, the financial position, results of operations, and cash flows of the Company in conformity with generally accepted accounting principles. Under those standards, we have the responsibility, within the inherent limitations of the auditing process, to design our audit to provide reasonable assurance of detecting errors and irregularities that are material to the financial statements and to exercise due care in the conduct of our audit. The concept of selective testing of the data being audited, which involves judgment regarding both the number of transactions to be audited and the areas to be tested, has been generally accepted as a valid and sufficient basis for an auditor to express an opinion on financial statements. Thus, our audit, based on the concept of selective testing, is subject to the inherent risk that material errors or irregularities, if they exist, were not detected. In addition,
an audit does not address the possibility that material errors or irregularities may occur in the future. The conduct of an audit requires the application of professional judgment and the assessment of materiality in connection with financial statement assertions. Thus, matters may have existed that would have been differently assessed by others, including Administrative Agent, in connection with the Loan Agreement.
We understand that, in connection with their loan the Lenders have (a) reviewed the Company's operations with its management; (b) retained KPMG Peat Marwick LLP to review, and it has reviewed, the Company's tax returns, the Company's own financial records, and our working papers supporting our report on the financial statements referred to above; and (c) directly or through their attorneys or other advisors, performed such other investigations and reviews as a prudent lender would perform in similar circumstances.
Further, we understand that the Lenders recognize that (i) the balance sheet on which we reported speaks only as of October 31, 1995; (ii) the procedures followed by us in performing our audit and rendering our report on the Company's financial statements are designed solely to permit us to express our opinion concerning the Company's financial statements taken as a whole, do not address individual line items contained therein, and therefore may not be appropriate for the Lenders' purposes and should not supplant the inquiries and procedures that the Lenders should undertake for their own purposes; and (iii) we have performed no procedures subsequent to our report to update such report.
This letter is issued in connection with our report on the Company's 1995 financial statements. Our understanding and acknowledgement referred to above does not extend to reports, if any, that might be rendered in connection with future engagements.
Copy to: Wells Fargo Bank, National Association
2001 Ross Avenue, Suite 1800
This letter (this "Letter of Understanding") is being sent to Price Waterhouse, LLP ("CPA") with respect to credit accommodations that certain financial institutions (collectively, "Lenders") may grant to URS Corporation, a Delaware corporation ("Company"), pursuant to that certain Credit Agreement dated as of January 10, 1996 (the "Credit Agreement") by and among Company, Lenders and Wells Fargo Bank, National Association, as Administrative Agent ("Administrative Agent") in connection with the acquisition by Company of Greiner Engineering, Inc., a Nevada corporation ("Greiner").
We wish to confirm that Lenders may use CPA's audit report dated ____________, 199__ on the financial statements of Greiner as of ____________, 199_ (the "Current Audit Report") in connection with Lenders' decision whether or not to extend the following new credit to Company, pursuant to the Credit Agreement, substantially on the following terms:
The Credit Agreement provides for an unsecured term loan facility in the principal amount of $50,000,000 which has a final maturity date of January 31, 2003 and an unsecured revolving credit and letter of credit facility in the maximum principal amount of $20,000,000 which has a final maturity date of April 30, 1999 (collectively, the "Proposed Credit").
Lenders may also use CPA's subsequent audit reports on future financial statements of Greiner (the "Subsequent Audit Reports"; together with the Current Audit Report, the "Audit Reports") in connection with Lenders' provision of credit to
Company so long as there has been no substantial change to the terms of the Proposed Credit as outlined above. CPA may communicate in writing to Administrative Agent that Lenders should no longer use the Audit Reports, in which case Lenders shall no longer have the benefit of this Letter of Understanding with respect to subsequent credit decisions relating to Company.
Lenders' consideration of the Audit Reports may or may not have an impact on Lenders' decision whether or not to extend the Proposed Credit; nor is any Audit Report a representation of creditworthiness. Lenders' credit decisions will not be based solely on the Audit Reports or the accompanying financial statements, but will also be based on the exercise of reasonable due diligence with respect to other potentially relevant factors bearing on Company's and Greiner's creditworthiness as each individual Lender believes appropriate.
Consideration by Lenders of the Audit Reports shall not (a) change CPA's duties to Greiner with respect to the conduct of any audit of Greiner's financial statements, (b) change the limitations of the audits as set forth in the Audit Reports, (c) affect the timeliness of the information contained in the Audit Reports and the accompanying financial statements, or (d) alter the responsibility of management of Greiner for the financial statements accompanying the Audit Reports.
Events may occur after the period covered by any Audit Report which may have an effect on the financial condition of Greiner, and CPA is not responsible under this Letter of Understanding for knowledge or disclosure of such events.
This Letter of Understanding does not authorize Lenders to use any Audit Report in connection with any transaction other than the granting of the Proposed Credit under the Credit Agreement. This Letter of Understanding shall no longer be binding on CPA if the Credit Agreement is not executed within 90 days of the date of this Letter of Understanding. Administrative Agent and Lenders agree to keep the Audit Reports confidential and, except as required by law or regulation, not to disclose any Audit Report to any other party not involved in the Proposed Credit unless such Audit Report becomes generally available to the public.
Kindly confirm your acknowledgement and agreement to this Letter of Understanding by signing the enclosed copy of this Letter of Understanding and returning it promptly to Administrative Agent.
[FORM OF CERTIFICATE RE NON-U.S. BANK STATUS]
CERTIFICATE RE NON-U.S. BANK STATUS
Reference is hereby made to that certain Credit Agreement dated as of January 10, 1996 (said Credit Agreement, as amended, supplemented or otherwise modified to the date hereof, being the "Credit Agreement") by and among URS Corporation, a Delaware corporation, the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent. Pursuant to subsection 2.7B(iii) of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code of 1986, as amended.
[FORM OF COLLATERAL ACCOUNT AGREEMENT]
This COLLATERAL ACCOUNT AGREEMENT (this "Agreement") is dated as of ________________ and entered into by and between URS CORPORATION, a Delaware corporation ("Pledgor"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent on behalf of the Lenders party to the Credit Agreement referred to below (in such capacity herein called "Secured Party").
A. Secured Party and Lenders have entered into a Credit Agreement dated as of January 10, 1996 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Pledgor pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Pledgor.
B. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and issue Letters of Credit under the Credit Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows:
SECTION 1. CERTAIN DEFINITIONS. The following terms used in this Agreement shall have the following meanings:
"Collateral" means (i) the Collateral Account, (ii) all amounts on deposit from time to time in the Collateral Account, (iii) all interest, cash, instruments, securities and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Collateral, and (iv) to the extent not covered by clauses (i) through (iii) above, all proceeds of any or all of the foregoing Collateral.
"Collateral Account" means the restricted deposit account established and maintained by Secured Party pursuant to Section 2(a) hereof.
"Secured Obligations" means all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Credit Agreement and the other Loan Documents and all extensions or renewals thereof, whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy with respect to Pledgor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement.
SECTION 2. ESTABLISHMENT AND OPERATION OF COLLATERAL ACCOUNT.
(a) Secured Party is hereby authorized to establish and maintain at its office at _________________, as a blocked account in the name of Secured Party and under the sole dominion and control of Secured Party, a restricted deposit account designated as "URS Corporation Collateral Account".
(b) The Collateral Account shall be operated in accordance with the terms of this Agreement.
(c) All amounts at any time held in the Collateral Account shall be beneficially owned by Pledgor but shall be held in the name of Secured Party hereunder, for the benefit of Lenders, as collateral security for the Secured Obligations upon the terms and conditions set forth herein. Pledgor shall have no right to withdraw, transfer or, except as expressly set forth herein, otherwise receive any funds deposited into the Collateral Account.
(d) Anything contained herein to the contrary notwithstanding, the Collateral Account shall be subject to such applicable laws, and such applicable regulations of the Board of Governors of the Federal Reserve System and of any other appropriate banking or governmental authority, as may now or hereafter be in effect.
SECTION 3. DEPOSITS OF CASH COLLATERAL.
(a) All deposits of funds in the Collateral Account shall be made by wire transfer (or, if applicable, by intra- bank transfer from another account of Pledgor) of immediately available funds, in each case addressed as follows:
Pledgor shall, promptly after initiating a transfer of funds to the Collateral Account, give notice to Secured Party by telefacsimile of the date, amount and method of delivery of such deposit.
(b) If an Event of Default has occurred and is continuing and, in accordance with Section 8 of the Credit Agreement, Pledgor is required to pay to Secured Party an amount (the "Aggregate Available Amount") equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding under the Credit Agreement, Pledgor shall deliver funds in such an amount for deposit in the Collateral Account in accordance with Section 3(a) hereof. If for any reason the aggregate amount delivered by Pledgor for deposit in the Collateral Account as aforesaid is less than the Aggregate Available Amount, the aggregate amount so delivered by Pledgor shall be apportioned among all outstanding Letters of Credit for purposes of this Section 3(b) in accordance with the ratio of the maximum amount available for drawing under each such Letter of Credit (as to such Letter of Credit, the "Maximum Available Amount") to the Aggregate Available Amount. Upon any drawing under any outstanding Letter of Credit in respect of which Pledgor has deposited in the Collateral Account any amounts described above, Secured Party shall apply such amounts to reimburse the Issuing Lender for the amount of such drawing. In the event of cancellation or expiration of any Letter of Credit in respect of which Pledgor has deposited in the Collateral Account any amounts described above, or in the event of any reduction in the Maximum Available Amount under such Letter of Credit, Secured Party shall apply the amount then on deposit in the Collateral Account in respect of such Letter of Credit (LESS, in the case of such a reduction, the Maximum Available Amount under such Letter of Credit immediately after such reduction) FIRST, to the payment of any amounts payable to Secured Party pursuant to Section 13 hereof, SECOND, to the extent of any excess, to the cash collateral- ization pursuant to the terms of this Agreement of any outstanding Letters of Credit in respect of which Pledgor has failed to pay all or a portion of the amounts described above
(such cash collateralization to be apportioned among all such Letters of Credit in the manner described above), THIRD, to the extent of any further excess, to the payment of any other outstanding Secured Obligations in such order as Secured Party shall elect, and FOURTH, to the extent of any further excess, to the payment to whomsoever shall be lawfully entitled to receive such funds.
SECTION 4. PLEDGE OF SECURITY FOR SECURED OBLIGATIONS. Pledgor hereby pledges and assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the Collateral as collateral security for the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. sec. 362(a)), of all Secured Obligations.
SECTION 5. NO INVESTMENT OF AMOUNTS IN THE COLLATERAL ACCOUNT; INTEREST ON AMOUNTS IN THE COLLATERAL ACCOUNT.
(a) Cash held by Secured Party in the Collateral Account shall not be invested by Secured Party but instead shall be maintained as a cash deposit in the Collateral Account pending application thereof as elsewhere provided in this Agreement.
(b) To the extent permitted under Regulation Q of the Board of Governors of the Federal Reserve System, any cash held in the Collateral Account shall bear interest at the standard rate paid by Secured Party to its customers for deposits of like amounts and terms.
(c) Subject to Secured Party's rights under Section 12 hereof, any interest earned on deposits of cash in the Collateral Account in accordance with Section 5(b) hereof shall be deposited directly in and held in the Collateral Account.
SECTION 6. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants as follows:
(a) OWNERSHIP OF COLLATERAL. Pledgor is (or at the time of transfer thereof to Secured Party will be) the legal and beneficial owner of the Collateral from time to time transferred by Pledgor to Secured Party, free and clear of any Lien except as permitted by the Credit Agreement.
(b) GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or other action by, and no notice to or filing with,
any governmental authority or regulatory body is required for either (i) the grant by Pledgor of the security interest granted hereby, (ii) the execution, delivery or performance of this Agreement by Pledgor, or (iii) the perfection of or the exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Pledgor).
(c) PERFECTION. The pledge and assignment of the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations.
(d) OTHER INFORMATION. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Pledgor with respect to the Collateral is accurate and complete in all material respects.
SECTION 7. FURTHER ASSURANCES. Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Pledgor will: (a) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (b) at Secured Party's request, appear in and defend any action or proceeding that may affect Pledgor's beneficial title to or Secured Party's security interest in all or any part of the Collateral.
SECTION 8. TRANSFERS AND OTHER LIENS. Pledgor agrees that it will not (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral or (b) create or suffer to exist any Lien upon or with respect to any of the Collateral, except as permitted by the Credit Agreement.
SECTION 9. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to file one or more
financing or continuation statements, or amendments thereto, relative to all or any part of the Collateral without the signature of Pledgor.
SECTION 10. SECURED PARTY MAY PERFORM. If Pledgor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13 hereof.
SECTION 11. STANDARD OF CARE. The powers conferred on Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral, it being understood that Secured Party shall have no responsibility for (a) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Collateral) to preserve rights against any parties with respect to any Collateral or (b) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property of like kind.
SECTION 12. REMEDIES. Subject to the provisions of Section 3(b) hereof, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction, as the same may be supplemented from time to time (the "Code") (whether or not the Code applies to the affected Collateral).
SECTION 13. INDEMNITY AND EXPENSES.
(a) Pledgor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction.
(b) Pledgor shall pay to Secured Party upon demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof.
SECTION 14. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Pledgor. Upon any such termination Secured Party shall, at Pledgor's expense, promptly execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Collateral as shall not have been otherwise applied pursuant to the terms hereof.
SECTION 15. SECURED PARTY AS ADMINISTRATIVE AGENT.
(a) Secured Party has been appointed to act as Secured Party hereunder by Lenders. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement.
(b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums held by Secured Party hereunder (which shall be deposited in a new Collateral Account established and maintained by such successor Secured Party), together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder.
SECTION 16. AMENDMENTS; ETC. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.
SECTION 17. NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or three Business Days after depositing it in the
United States mail with postage prepaid and properly addressed. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto.
SECTION 18. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
SECTION 19. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 20. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect.
SECTION 21. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code of the State of California are used herein as therein defined.
SECTION 22. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS
AGREEMENT PLEDGOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. Pledgor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Pledgor at its address provided in Section 17 hereof, such service being hereby acknowledged by Pledgor to be sufficient for personal jurisdiction in any action against Pledgor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of Secured Party to bring proceedings against Pledgor in the courts of any other jurisdiction.
SECTION 23. WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgor and Secured Party each acknowledge that this waiver is a material inducement for Pledgor and Secured Party to enter into a business relationship, that Pledgor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Pledgor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 23 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.
SECTION 24. COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered 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.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
[FORM OF COMPANY PLEDGE AGREEMENT]
This COMPANY PLEDGE AGREEMENT (this "Agreement") is dated as of January 10, 1996 and entered into by and between URS CORPORATION, a Delaware corporation ("Pledgor"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent on behalf of the Lenders party to the Credit Agreement referred to below (in such capacity herein called "Secured Party").
A. Pledgor is the legal and beneficial owner of (i) the shares of stock (the "Pledged Shares") described in Part A of Schedule I annexed hereto and issued by the corporations named therein and (ii) the intercompany indebtedness arising from the transfer of the proceeds of the Term Loans and the Initial Revolving Loans (the "Pledged Debt") described in Part B of said Schedule I.
B. Secured Party and Lenders have entered into a Credit Agreement dated as of January 10, 1996 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Pledgor pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Pledgor.
C. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows:
SECTION 1. PLEDGE OF SECURITY. Pledgor hereby pledges and assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the following (the "Pledged Collateral"):
(a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distrib- uted in respect of or in exchange for any or all of the Pledged
(b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt;
(c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares) to the extent necessary to cause the Pledged Shares to include 100% of the shares of, and 100% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor of any issuer of the Pledged Shares that is a Domestic Subsidiary of Pledgor and the lesser of 100% of the shares of, and 100% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor or 65% of the shares of, and 65% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares that is a Foreign Subsidiary of Pledgor, the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or
(d) if required pursuant to the Credit Agreement, all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash,
instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect or in exchange for any or all of such indebtedness;
(e) if required pursuant to the Credit Agreement, (i) 100% of the shares of, and 100% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Domestic Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), and (ii) the lesser of 100% of the shares of, and 100% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor of or 65% of the shares of, and 65% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes as a result of any occurrence a direct Foreign Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided that in no event shall more than 65% of the shares of any Foreign Subsidiary of Pledgor be pledged to Secured Party under this Agreement or any other Loan Document; and
(f) to the extent not covered by clauses (a) through (e) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to Pledgor or Secured Party from time to time with respect to any of the Pledged Collateral.
SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. sec. 362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or
arising out of or in connection with the Credit Agreement and the other Loan Documents and all extensions or renewals thereof, whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy with respect to Pledgor, would accrue on such obligations, whether or not a claim is allowed against Pledgor for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "Secured Obligations").
SECTION 3. DELIVERY OF PLEDGED COLLATERAL. All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Upon the occurrence and during the continuance of an Event of Default (as defined in the Credit Agreement), Secured Party shall have the right, without notice to Pledgor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 7(a). In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants as follows:
(a) DUE AUTHORIZATION, ETC. OF PLEDGED COLLATERAL. All of the Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default.
(b) DESCRIPTION OF PLEDGED COLLATERAL. The Pledged Shares constitute 100% of the issued and outstanding shares of
stock held by Pledgor of each issuer thereof that is a Domestic Subsidiary of Pledgor and the lesser of 100% of the issued and outstanding shares of stock held by Pledgor or that number of the issued and outstanding shares of stock held by Pledgor which, together with any other shares of stock of such issuer pledged to Secured Party under this Agreement or any other Loan Document, is equal to 65% of the issued and outstanding shares of stock of each issuer thereof that is a Foreign Subsidiary of Pledgor, and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the issuer thereof to Pledgor and arising from any transfer of the proceeds of the Term Loans and the Initial Revolving Loans.
(c) OWNERSHIP OF PLEDGED COLLATERAL. Pledgor is the legal, record and beneficial owner of the Pledged Collateral free and clear of any Lien except as permitted by the Credit Agreement.
SECTION 5. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. Pledgor shall:
(a) not, except as expressly permitted by the Credit Agreement, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except as permitted by the Credit Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless that percentage of the outstanding capital stock of the surviving or resulting corporation equal to the percentage of shares of such issuer set forth opposite the name of such issuer on Schedule I annexed hereto is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; PROVIDED that in the event Pledgor makes an Asset Sale permitted by the Credit Agreement and the assets subject to such Asset Sale are Pledged Shares, Secured Party shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; PROVIDED, FURTHER that, as a condition precedent to such release, Secured Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Secured Party of the Net Asset Sale Proceeds of such Asset
(b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor or to licensed professionals employed by Pledgor in order to comply with state licensing laws, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares to the extent necessary to cause the percentage of shares of such issuer pledged hereunder to equal the percentage of shares set forth opposite the name of such issuer on Schedule I annexed hereto, and (iii) pledge hereunder, if required pursuant to the Credit Agreement, immediately upon its acquisition (directly or indirectly) thereof, 100% of the shares of stock of any Person held by Pledgor that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Domestic Subsidiary of Pledgor and the lesser of 100% of the shares of stock held by Pledgor of or 65% of the shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Foreign Subsidiary of Pledgor; provided that in no event shall more than 65% of the shares of any Foreign Subsidiary of Pledgor be pledged to Secured Party under this Agreement or any other Loan
(c) if required pursuant to the Credit Agreement, (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor;
(d) promptly notify Secured Party of any event of which Pledgor becomes aware causing a material loss or depreciation in the value of the Pledged Collateral;
(e) promptly deliver to Secured Party all written notices received by it with respect to the Pledged Collateral;
(f) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith; PROVIDED that Pledgor shall in any event pay such taxes, assessments, charges, levies or claims not later than five days prior to the date of any proposed sale under any judgement, writ or warrant
of attachment entered or filed against Pledgor or any of the Pledged Collateral as a result of the failure to make such payment.
SECTION 6. FURTHER ASSURANCES; PLEDGE AMENDMENTS.
(a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral.
(b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 5(b) or (c), promptly (and in any event within five Business Days) deliver to Secured Party a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "Pledge Amendment"), in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Secured Party to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Secured Party shall for all purposes hereunder be considered Pledged Collateral; PROVIDED that the failure of Pledgor to execute a Pledge Amendment with respect to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Secured Party therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto.
SECTION 7. VOTING RIGHTS; DIVIDENDS; ETC.
(a) So long as no Event of Default shall have occurred and be continuing:
(i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to
the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement; PROVIDED, HOWEVER, that Pledgor shall not exercise or refrain from exercising any such right if Secured Party shall have notified Pledgor in writing that, in Secured Party's reasonable judgment, such action would have a material adverse effect on the value of the Pledged Collateral or any part thereof; and PROVIDED, FURTHER, that Pledgor shall give Secured Party at least five Business Days' prior written notice of the manner in which it intends to exercise, or the reasons for refraining from exercising, any such right. It is understood, however, that neither (A) the voting by Pledgor of any Pledged Shares for or Pledgor's consent to the election of directors either by written consent or at a regularly scheduled annual or other meeting of stockholders or with respect to incidental matters at any such meeting nor (B) Pledgor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section 7(a)(i), and no notice of any such voting or consent need be given to Secured Party;
(ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; PROVIDED, HOWEVER, that except as permitted by the Credit Agreement any and all
(A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any
(B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-
(C) cash paid, payable or otherwise distributed in respect of principal or in redemption of or in exchange for any Pledged Collateral,
shall be, and shall forthwith be delivered to Secured Party to hold as Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor and be forthwith delivered to Secured
Party as Pledged Collateral in the same form as so received (with all necessary indorsements); and
(iii) Secured Party shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above.
(b) Upon the occurrence and during the continuation of an Event of Default:
(i) upon written notice from Secured Party to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights;
(ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and
(iii) all dividends, principal and interest pay- ments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall forthwith be paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary indorsements).
(c) In order to permit Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 7(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 7(a)(ii) or Section 7(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies, dividend payment orders and other instruments as Secured Party may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to
Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations.
SECTION 8. SECURED PARTY APPOINTED ATTORNEY-IN- FACT. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation:
(a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor;
(b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged
(c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and
(d) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Pledged Collateral.
SECTION 9. SECURED PARTY MAY PERFORM. If Pledgor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under subsection 10.2 of the Credit Agreement.
SECTION 10. STANDARD OF CARE. The powers conferred on Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Pledged Collateral, it being understood that Secured Party shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Secured Party accords its own property consisting of negotiable securities.
(a) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Pledged Collateral), and Secured Party may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Secured Party or any Lender may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and
making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obliga- tions, Pledgor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency.
(b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualifica- tion of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circum- stances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged
Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, agree to so register it.
(c) If Secured Party determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Secured Party all such information as Secured Party may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect.
SECTION 12. APPLICATION OF PROCEEDS. Except as expressly provided in the Credit Agreement with respect to Asset Sales, all proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral may, in the discretion of Secured Party, be held by Secured Party as Pledged Collateral for, and/or then, or at any time thereafter, applied in full or in part by Secured Party against, the Secured Obligations in the following order of priority:
(a) To the payment of costs and expenses of such sale, collection or other realization, including reasonable compensation to Secured Party and its agents and counsel, and all other expenses, liabilities and advances made or incurred by Secured Party in connection therewith, and all amounts for which Secured Party is entitled to indemnification hereunder and all advances made by Secured Party hereunder for the account of Pledgor, and to the payment of all costs and expenses paid or incurred by Secured Party in connection with the exercise of any right or remedy hereunder, all in accordance with this Agreement, the Credit Agreement and
(b) Thereafter, to the extent of any excess such proceeds, to the payment of all other Secured Obligations for the ratable benefit of the holders thereof; and
(c) Thereafter, to the extent of any excess such proceeds, to the payment to or upon the order of Pledgor, or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct.
SECTION 13. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof.
SECTION 14. SECURED PARTY AS ADMINISTRATIVE AGENT.
(a) Secured Party has been appointed to act as Secured Party hereunder by Lenders. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Credit Agreement; PROVIDED that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of Requisite Lenders or all Lenders, as the case may be.
(b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit
Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder.
SECTION 15. AMENDMENTS; ETC. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.
SECTION 16. NOTICES. Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served or sent by tele- facsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement.
SECTION 17. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 18. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided.
SECTION 19. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code of the State of California are used herein as therein defined.
SECTION 20. COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered 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.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
Attached to and forming a part of the Pledge Agreement dated as of January 10, 1996 between URS Corporation, as Pledgor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party.
Stock Class of ficate Par of standing Issuer Stock Nos. Value Shares Shares ------ -------- ------ ------ ------- --------
Debt Issuer Amount of Indebtedness
This Pledge Amendment, dated ___________, 199_, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Pledge Agreement dated January 10, 1996, between the undersigned and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Pledged Shares listed on this Pledge Amendment shall be deemed to be part of the Pledged Shares and shall become part of the Pledged Collateral and shall secure all Secured Obligations.
Stock Class of ficate Par of standing Issuer Stock Nos. Value Shares Shares ------ -------- ------ ------ ------- --------
Debt Issuer Amount of Indebtedness
[FORM OF COMPANY SECURITY AGREEMENT]
This COMPANY SECURITY AGREEMENT (this "Agreement") is dated as of January 10, 1996 and entered into by and between URS CORPORATION, a Delaware corporation ("Grantor"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent on behalf of the Lenders party to the Credit Agreement referred to below (in such capacity herein called "Secured Party").
A. Secured Party and Lenders have entered into a Credit Agreement dated as of January 10, 1996 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Grantor pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Grantor.
B. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Secured Party as follows:
SECTION 1. GRANT OF SECURITY. Grantor hereby assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "Collateral"):
(a) all inventory in all of its forms (including, but not limited to, (i) all goods held by Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process,
finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Grantor's business, (iii) all goods in which Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by Grantor and all accessions thereto and products thereof (all such inventory, accessions and products being the "Inventory") and all negotiable documents of title (including, without limitation, warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory;
(b) all accounts, accounts receivable, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all guaranties, warranties, indemnity agreements, insurance policies, security agreements, leases and other contracts securing or otherwise relating to any such accounts, accounts receivable, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, accounts receivable, chattel paper, documents, instruments, general intangibles and other rights and obligations being the "Accounts", and any and all such guaranties, warranties, indemnity agreements, insurance policies, security agreements, leases and other contracts being
(c) all deposit accounts, including, without limitation, the deposit accounts listed on Schedule I annexed hereto and all other deposit accounts maintained by Grantor;
(d) all trademarks, tradenames, tradesecrets, business names, patents, patent applications, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing;
(e) to the extent not included in any other paragraph of this Section 1, all other general intangibles (including, without limitation, tax refunds, rights to payment or performance, choses in action and judgments taken on any rights or claims included in the Collateral);
(f) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization
(g) all proceeds, and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise
included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral;
PROVIDED, HOWEVER, that there shall be excluded from Collateral all (i) equipment, (ii) leasehold improvements, (iii) furni- ture, (iv) fixtures, (v) software, and (vi) other tangible personal property, in each case, not otherwise specifically included in this Section 1. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, leased, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, including, without limitation, all Accounts, including returned premiums, with respect to any insurance relating to any of the foregoing, and all Accounts with respect to any cause of action relating to any of the foregoing.
SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. sec. 362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Credit Agreement and the other Loan Documents and all extensions or renewals thereof, whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor being the "Secured Obligations").
SECTION 3. GRANTOR REMAINS LIABLE. Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent
as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Grantor represents and warrants as follows:
(a) OWNERSHIP OF COLLATERAL. Except for the security interest created by this Agreement, Grantor owns the Collateral free and clear of any Lien.
(b) LOCATION OF INVENTORY. All of the Inventory is, as of the date hereof, located at the places specified in Schedule II annexed hereto.
(c) ASSIGNABILITY. Except as set forth on Schedule III annexed hereto, no contract entered into by Company and between or among the government of the United States of America, or any agency or division thereof, prohibits the assignment of such contract by Grantor to Secured Party.
(d) OFFICE LOCATIONS; OTHER NAMES. The chief place of business, the chief executive office and the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the addresses set forth on Schedule IV annexed hereto. Grantor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name), except as set forth on Schedule V annexed hereto.
(e) DELIVERY OF CERTAIN COLLATERAL. All notes and other instruments (excluding checks) comprising any and all items of Collateral have been delivered to Secured Party duly endorsed and accompanied by duly executed instruments of transfer or assignment in blank.
(a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the request of Secured Party, each of its records pertaining to the Collateral, with a legend, in form and substance satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the request of Secured Party, deliver and pledge to Secured Party hereunder all promissory notes and other instruments (including checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, and (iv) at Secured Party's request, appear in and defend any action or proceeding that may affect Grantor's title to or Secured Party's security interest in all or any part of the Collateral.
(b) Grantor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions.
(c) Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail.
SECTION 6. CERTAIN COVENANTS OF GRANTOR. Grantor shall:
(a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral;
(b) notify Secured Party of any change in Grantor's name, identity or corporate structure within 15 days of such
(c) give Secured Party 30 days' prior written notice of any change in Grantor's chief place of business, chief executive office or residence or the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts;
(d) if Secured Party gives value to enable Grantor to acquire rights in or the use of any Collateral, use such value for such purposes; and
(e) pay promptly when due all taxes, and governmental charges or levies imposed upon, and all claims against, the Collateral, except to the extent the validity thereof is being contested in good faith; PROVIDED that Grantor shall in any event pay such taxes, assessments, charges, levies or claims not later than five days prior to the date of any proposed sale under any judgment, writ or warrant of attachment entered or filed against Grantor or any of the Collateral as a result of the failure to make such payment.
SECTION 7. SPECIAL COVENANTS WITH RESPECT TO INVENTORY. Grantor shall keep correct and accurate records of the Inventory and keep the Inventory at the places therefor specified on Schedule II annexed hereto or, upon 30 days' prior written notice to Secured Party, at such other places in jurisdictions where all action that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Inventory shall have been taken.
SECTION 8. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS.
(a) Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the
location therefor specified in Section 4 or, upon 30 days' prior written notice to Secured Party, at such other location in a jurisdiction where all action that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Grantor will hold and preserve such records and chattel paper and will permit representatives of Secured Party at any time during normal business hours to inspect and make abstracts from such records and chattel paper, and Grantor agrees to render to Secured Party, at Grantor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. Promptly upon the request of Secured Party, Grantor shall deliver to Secured Party complete and correct copies of each Related Contract.
(b) Grantor shall, for not less than five years from the date on which such Account arose, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto.
(c) Except as otherwise provided in this subsection (c) and subsection (d), Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor under the Accounts and Related Contracts. In connection with such collections, Grantor may take (and, at Secured Party's direction, shall take) such action as Grantor or Secured Party may reasonably deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; PROVIDED, HOWEVER, that upon the occurrence and during the continuation of an Event of Default or a Potential Event of Default and upon written notice to Grantor of its intention to do so, Secured Party shall have the right at any time to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Secured Party and to direct such account debtors or obligors to make payment of all amounts due or to become due to Grantor thereunder directly to Secured Party, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Secured Party and, upon such notification and at the expense of Grantor, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, (i) all amounts and
proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 16, and (ii) Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon.
(d) Grantor shall, upon request of Secured Party, take any action and execute any instrument necessary or advisable, in accordance with the procedures enacted under the Assignment of Claims Act of 1940, to ensure that Secured Party receives any and all proceeds from any contract entered into between or among Grantor and the government of the United States of America or any agency or division thereof. Such action shall include, but not be limited to, filing notices of assignment under the provision of 48 C.F.R. 32.805.
SECTION 9. DEPOSIT ACCOUNTS. Upon the occurrence and during the continuation of an Event of Default, Secured Party may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Secured Party constituting part of the Collateral.
SECTION 10. LICENSE OF PATENTS, TRADEMARKS, COPYRIGHTS, ETC. Grantor hereby assigns, transfers and conveys to Secured Party, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all trademarks, tradenames, copyrights, patents or technical processes owned or used by Grantor that relate to the Collateral and any other collateral granted by Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Secured Party to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Secured Party and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Grantor.
SECTION 11. TRANSFERS AND OTHER LIENS. Grantor shall not:
(a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; or
(b) except as permitted by the Credit Agreement, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person.
SECTION 12. SECURED PARTY APPOINTED ATTORNEY-IN- FACT. Grantor hereby irrevocably appoints Secured Party as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion (a) to file any claims or notices and to take any other action and execute any instrument necessary or advisable, in accordance with the procedures enacted under the Assignment of Claims Act of 1940, in order to receive any and all proceeds from any contract entered into between or among Grantor and the government of the United States of America or any agency or division thereof, and (b) upon the occurrence and during the continuation of an Event of Default, to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation:
(i) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the
(ii) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection
(iii) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral;
(iv) to pay or discharge taxes or Liens levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Grantor to Secured Party, due and payable immediately
(v) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the
(vi) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Grantor's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do.
SECTION 13. SECURED PARTY MAY PERFORM. If Grantor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantor under subsection 10.2 of the Credit Agreement.
SECTION 14. STANDARD OF CARE. The powers conferred on Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property.
SECTION 15. REMEDIES. If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (b) enter onto
the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, and (d) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party or any Lender may be the purchaser of any or all of the Collateral at any such sale and Secured Party, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders or all Lenders, as the case may be, shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency.
SECTION 16. APPLICATION OF PROCEEDS. Except as expressly provided in the Credit Agreement with respect to Asset Sales, all proceeds received by the Secured Party in respect of any sale of, collection from or other realization
upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as Collateral for, and/or then, or at any other time thereafter applied, in full or in part by the Secured Party against the Secured Obligations in the following order of priority:
(a) To the payment of all costs and expenses of such sale, collection or other realization and all other expenses, liabilities and advances made or incurred by the Secured Party in connection therewith and all amounts for which the Secured Party is entitled to indemnification hereunder and all advances made by the Secured Party hereunder for the account of Grantor and for the payment of all costs and expenses paid or incurred by the Secured Party in connection with the exercise of any right or remedy hereunder, all in accordance with this Agreement, the Credit Agreement and the other Loan Documents;
(b) Thereafter, to the extent of any excess such proceeds, to the payment of the Secured Obligations for the ratable benefit of the holders thereof; and
(c) Thereafter, to the extent of any excess such proceeds, to the payment to or upon the order of the Grantor, or whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct.
SECTION 17. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Secured Party will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination.
SECTION 18. SECURED PARTY AS ADMINISTRATIVE AGENT.
(a) Secured Party has been appointed to act as Secured Party hereunder by Lenders. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; PROVIDED that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 15 in accordance with the instructions of Requisite Lenders or all Lenders, as the case may be.
(b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder.
SECTION 19. AMENDMENTS; ETC. No amendment, modification, termination or waiver of any provision of this
Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.
SECTION 20. NOTICES. Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement.
SECTION 21. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 22. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided.
SECTION 23. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code of the State of California are used herein as therein defined.
SECTION 24. COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered 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.
IN WITNESS WHEREOF, Grantor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
Previous and Fictitious Business Names
This SUBSIDIARY GUARANTY is entered into as of January 10, 1996 by THE UNDERSIGNED (each a "Guarantor" and collectively, "Guarantors") in favor of and for the benefit of WELLS FARGO BANK, NATIONAL ASSOCIATION, as agent for and representative of (in such capacity herein called "Guarantied Party") the financial institutions ("Lenders") party to the Credit Agreement referred to below and for the benefit of the other Beneficiaries (as hereinafter defined).
A. URS CORPORATION, a Delaware corporation ("Company"), has entered into that certain Credit Agreement dated as of January 10, 1996 with Guarantied Party and Lenders (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement"; capitalized terms defined therein and not otherwise defined herein being used herein as therein defined).
B. A portion of the proceeds of the Loans may be advanced to Guarantors and thus the Guarantied Obligations (as hereinafter defined) are being incurred for and will inure to the benefit of Guarantors (which benefits are hereby acknowledged).
C. It is a condition precedent to the making of the initial Loans under the Credit Agreement that Company's obligations thereunder be guarantied by Guarantors.
D. Guarantors are willing irrevocably and unconditionally to guaranty such obligations of Company.
NOW, THEREFORE, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Lenders and Guarantied Party to enter into the Credit Agreement and to make Loans and other extensions of credit thereunder, Guarantors hereby agree as follows:
1.1 CERTAIN DEFINED TERMS. As used in this Guaranty, the following terms shall have the following meanings unless the context otherwise requires:
"Beneficiaries" means Guarantied Party and Lenders.
"Guarantied Obligations" has the meaning assigned to that term in subsection 2.1.
"Guaranty" means this Subsidiary Guaranty dated as of January 10, 1996, as it may be amended, supplemented or otherwise modified from time to time.
"payment in full", "paid in full" or any similar term means payment in full of the Guarantied Obligations, including, without limitation, all principal, interest, costs, fees and expenses (including, without limitation, reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents.
(a) References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided.
(b) In the event of any conflict or inconsistency between the terms, conditions and provisions of this Guaranty and the terms, conditions and provisions of the Credit Agreement, the terms, conditions and provisions of this Guaranty shall prevail.
2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Subject to the provisions of subsection 2.2(a), Guarantors jointly and severally hereby irrevocably and unconditionally guaranty, as primary obligors and not merely as sureties, the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. sec. 362(a)). The term "Guarantied Obligations" is used herein in its most comprehensive sense and includes:
(a) any and all Obligations of Company now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however
arising under or in connection with the Credit Agreement and the other Loan Documents, including those arising under successive borrowing transactions under the Credit Agreement which shall either continue the Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy
(b) those expenses set forth in subsection 2.9.
2.2 LIMITATION ON AMOUNT GUARANTIED; CONTRIBUTION BY GUARANTORS. (a) Anything contained in this Guaranty to the contrary notwithstanding, if any Fraudulent Transfer Law (as hereinafter defined) is determined by a court of competent jurisdiction to be applicable to the obligations of any Guarantor under this Guaranty, such obligations of such Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Guarantor (x) in respect of intercompany indebtedness to Company or other affiliates of Company to the extent that such indebtedness would be discharged in an amount equal to the amount paid by such Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of such Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of such Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including, without limitation, any such right of contribution under subsection 2.2(b)).
(b) Guarantors under this Guaranty together desire to allocate among themselves (collectively, the "Contributing Guarantors"), in a fair and equitable manner, their obligations arising under this Guaranty. Accordingly, in the event any payment or distribution is made on any date by any Guarantor under this Guaranty (a "Funding Guarantor") that exceeds its Fair Share (as defined below) as of such date, that Funding
Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of such date. "Fair Share" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors MULTIPLIED BY (ii) the aggregate amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty in respect of the obligations guarantied. "Fair Share Shortfall" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "Adjusted Maximum Amount" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty, determined as of such date in accordance with subsection 2.2(a); PROVIDED that, solely for purposes of calculating the "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder shall not be considered as assets or liabilities of such Contributing Guarantor. "Aggregate Payments" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty (including, without limitation, in respect of this subsection 2.2(b)) MINUS (ii) the aggregate amount of all payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2(b). The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder.
2.3 PAYMENT BY GUARANTORS; APPLICATION OF PAYMENTS. Subject to the provisions of subsection 2.2(a), Guarantors hereby jointly and severally agree, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against any Guarantor
by virtue hereof, that upon the failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. sec. 362(a)), Guarantors will upon demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including, without limitation, interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party:
FIRST, to the payment of the costs and expenses of any collection or other realization under this Guaranty, including reasonable compensation to Guarantied Party and its agents and counsel, and all reasonable expenses, liabilities and advances made or incurred by Guarantied
SECOND, to the payment of all other Guarantied Obligations in such order as Guarantied Party shall elect;
THIRD, after payment in full of all Guarantied Obligations, to the payment to Guarantors, or their respective successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such payments.
2.4 LIABILITY OF GUARANTORS ABSOLUTE. Each Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows:
(a) This Guaranty is a guaranty of payment when due and not of collectibility.
(b) Guarantied Party may enforce this Guaranty upon the occurrence of an Event of Default under the Credit Agreement
notwithstanding the existence of any dispute between Company and any Beneficiary with respect to the existence of such Event of Default.
(c) The obligations of each Guarantor hereunder are independent of the obligations of Company under the Loan Documents and the obligations of any other guarantor (including any other Guarantor) of the obligations of Company under the Loan Documents, and a separate action or actions may be brought and prosecuted against such Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions.
(d) Payment by any Guarantor of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge any Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce any Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release such Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by such Guarantor, limit, affect, modify or abridge any other Guarantor's liability hereunder in respect of the Guarantied Obligations.
(e) Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied Obligations, or any other obligation of any Person (including any other Guarantor) with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and
direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the Credit Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents.
(f) This Guaranty and the obligations of Guarantors hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including, without limitation, the occurrence of any of the following, whether or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including, without limitation, provisions relating to events of default) of the Credit Agreement, any of the other Loan Documents, or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of the Credit Agreement or such Loan Document, or any agreement relating to such other guaranty or security; (iii) the Guarantied Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guaran- tied Obligations; (v) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any
corresponding restructuring of the Guarantied Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vii) any defenses, set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guarantied Obligations.
2.5 WAIVERS BY GUARANTORS. Each Guarantor hereby waives, for the benefit of Beneficiaries:
(a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against Company, any other guarantor (including any other Guarantor) of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power
(b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company, including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the
(c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than
(d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which arises from any Beneficiary's gross
(e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty and any legal or equitable discharge of such Guarantor's obligations hereunder, (ii) the benefit of any statute of limitations affecting such Guarantor's liability
hereunder or the enforcement hereof, (iii) any rights to set- offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any
(f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Credit Agreement or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof; and
(g) any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Guaranty.
2.6 CERTAIN CALIFORNIA LAW WAIVERS. As used in this subsection 2.6, any reference to "the principal" includes Company, and any reference to "the creditor" includes each Beneficiary. In accordance with Section 2856 of the California Civil Code:
(a) each Guarantor agrees (i) to waive any and all rights of subrogation and reimbursement against Company or against any collateral or security granted by Company for any of the Guarantied Obligations and (ii) to withhold the exercise of any and all rights of contribution against any other guarantor of any of the Guarantied Obligations and against any collateral or security granted by any such other guarantor for any of the Guarantied Obligations until the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, all as more fully set forth in subsection 2.7;
(b) each Guarantor waives any and all other rights and defenses available to such Guarantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including without limitation any and all rights or defenses such Guarantor may have by reason of protection afforded to the principal with respect to any of the Guarantied Obligations, or to any other guarantor (including any other Guarantor) of any of the Guarantied Obligations with respect to any of such guarantor's obligations under its guaranty, in either case pursuant to the antideficiency or other laws of the State of California limiting or discharging the principal's indebtedness or such guarantor's obligations, including without limitation
Section 580a, 580b, 580d, or 726 of the California Code of
(c) each Guarantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for any Guarantied Obligation, has destroyed such Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the creditor, such as nonjudicial foreclosure with respect to security for an obligation of any other guarantor (including any other Guarantor) of any of the Guarantied Obligations, has destroyed such Guarantor's rights of contribution against such other guarantor.
No other provision of this Guaranty shall be construed as limiting the generality of any of the covenants and waivers set forth in this subsection 2.6.
2.7 GUARANTORS' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Each Guarantor hereby waives any claim, right or remedy, direct or indirect, that such Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by such Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including, without limitation, under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and, including, without limitation, (a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against Company, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor shall withhold exercise of any right of contribution such Guarantor may have against any other guarantor (including any other Guarantor) of the Guarantied Obligations (including, without limitation, any such right of contribution under California Civil Code Section 2848 or under subsection 2.2(b)). Each Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against Company or
against any collateral or security, and any rights of contribution such Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to any Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof.
2.8 SUBORDINATION OF OTHER OBLIGATIONS. Any indebted- ness of Company now or hereafter held by any Guarantor is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness of Company to such Guarantor collected or received by such Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of such Guarantor under any other provision of this Guaranty.
2.9 EXPENSES. Guarantors jointly and severally agree to pay, or cause to be paid, on demand, and to save Beneficiaries harmless against liability for, any and all reasonable costs and expenses (including reasonable fees and disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty.
2.10 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Each Guarantor hereby irrevocably waives any right (including, without limitation, any such right arising under California Civil Code Section 2815) to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations.
2.11 AUTHORITY OF GUARANTORS OR COMPANY. It is not necessary for any Beneficiary to inquire into the capacity or powers of any Guarantor or Company or the officers, directors or any agents acting or purporting to act on behalf of any of them.
2.12 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to Company or continued from time to time without notice to or authorization from any Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation. No Beneficiary shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor's assessment, of the financial condition of Company. Each Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary.
2.13 RIGHTS CUMULATIVE. The rights, powers and remedies given to Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, or any agreement between any Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy.
2.14 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. (a) So long as any Guarantied Obligations remain outstanding, no Guarantor shall, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Company. The obligations of Guarantors under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankrupt- cy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding.
(a) Each Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which
accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantors and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantors pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantors will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced.
(b) In the event that all or any portion of the Guarantied Obligations are paid by Company, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty.
2.15 NOTICE OF EVENTS. As soon as any Guarantor obtains knowledge thereof, such Guarantor shall give Guarantied Party written notice of any condition or event which has resulted in (a) a Material Adverse Effect with respect to any Guarantor or Company or (b) a breach of or noncompliance with any term, condition or covenant contained herein or in the Credit Agreement, any other Loan Document or any other document delivered pursuant hereto or thereto.
2.16 SET OFF. In addition to any other rights any Beneficiary may have under law or in equity, if any amount shall at any time be due and owing by any Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (any such notice being hereby expressly waived), to set off and to appropriate and to apply any and all deposits (general or special, including but not limited to indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness of such Beneficiary owing to such Guarantor and any other property of such Guarantor held by any Beneficiary to or for the credit or the account of such Guarantor against and on account of the Guarantied Obligations and liabilities of such Guarantor to any Beneficiary under this Guaranty.
2.17 DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the stock of any Guarantor or any of its successors in interest under this Guaranty shall be sold or otherwise disposed of (including by merger or consolidation) in an Asset Sale not prohibited by subsection 7.7 of the Credit Agreement or otherwise consented to by Requisite Lenders, the Guaranty of such Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; PROVIDED that, as a condition precedent to such discharge and release, Guarantied Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Guarantied Party of the applicable Net Asset Sale Proceeds.
SECTION 3. GUARANTOR'S REPRESENTATIONS AND WARRANTIES
Guarantor represents and warrants as follows:
(a) ORGANIZATION AND POWERS. Guarantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Guarantor has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Guaranty and to carry out the transactions contemplated thereby.
(b) QUALIFICATION AND GOOD STANDING. Guarantor is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and will not have a Material Adverse Effect on Guarantor.
(c) AUTHORIZATION. The execution, delivery and performance of this Guaranty have been duly authorized by all necessary corporate action on the part of Guarantor.
(d) NO CONFLICT. The execution, delivery and perfor- mance by Guarantor of this Guaranty and the consummation of the transactions contemplated by this Guaranty do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Guarantor or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Guarantor or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Guarantor or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual
Obligation of Guarantor or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Guarantor or any of its Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Guarantor or any of its Subsidiaries.
(e) GOVERNMENTAL CONSENTS. The execution, delivery and performance by Guarantor of this Guaranty and the consummation of the transactions contemplated by this Guaranty do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body.
(f) BINDING OBLIGATION. This Guaranty has been duly executed and delivered by Guarantor and is the legally valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability.
4.1 SURVIVAL OF WARRANTIES. All agreements, representa- tions and warranties made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents and any increase in the Commitments under the Credit Agreement.
4.2 NOTICES. Any notice or other communications between Guarantied Party and any Guarantor shall be in writing and may be personally served or sent by telefacsimile or United States mail, postage prepaid, or courier service to each such party at its address set forth in the Credit Agreement, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or any Guarantor shall not be effective until received.
4.3 SEVERABILITY. In case any provision in or obligation under this Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
4.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination or waiver of any provision of this Guaranty, and no consent to any departure by any Guarantor therefrom, shall in
any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, each Guarantor against whom enforcement of such amendment or modification is sought. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.
4.5 HEADINGS. Section and subsection headings in this Guaranty are included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect.
4.6 APPLICABLE LAW. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF GUARANTORS AND BENEFICIARIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
4.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and shall be binding upon each Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. No Guarantor shall assign this Guaranty or any of the rights or obligations of such Guarantor hereunder without the prior written consent of all Lenders. Any Beneficiary may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof.
4.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, COUNTY AND CITY OF SAN FRANCISCO. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GUARANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS;
(II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH
(IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GUARANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN
(V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GUARANTOR IN THE COURTS OF
(VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 4.8 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 410.40 OR OTHERWISE.
4.9 WAIVER OF TRIAL BY JURY. EACH GUARANTOR AND, BY ITS ACCEPTANCE OF THE BENEFITS HEREOF, EACH BENEFICIARY EACH HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each Guarantor and, by its acceptance of the benefits hereof, each Beneficiary, each (i) acknowledges that this waiver is a material inducement for such Guarantor and Beneficiaries to enter into a business relationship, that such Guarantor and Beneficiaries have already relied on this waiver in entering into this Guaranty or accepting the benefits thereof, as the case may be, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and represents that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 4.9 AND EXECUTED BY GUARANTIED PARTY AND EACH GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed as a written consent to a trial by the court.
4.10 NO OTHER WRITING. This writing is intended by Guarantors and Beneficiaries as the final expression of this
Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty.
4.11 FURTHER ASSURANCES. At any time or from time to time, upon the request of Guarantied Party, Guarantors shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty.
4.12 ADDITIONAL GUARANTORS. The initial Guarantors hereunder shall be such of the Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Guarantors (each an "Additional Guarantor"), by executing a counterpart of this Guaranty. Upon delivery of any such counterpart to Administrative Agent, notice of which is hereby waived by Guarantors, each such Additional Guarantor shall be a Guarantor and shall be as fully a party hereto as if such Additional Guarantor were an original signatory hereof. Each Guarantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Guarantor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Company to become an Additional Guarantor hereunder. This Guaranty shall be fully effective as to any Guarantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Guarantor hereunder.
4.13 COUNTERPARTS; EFFECTIVENESS. This Guaranty may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes; 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. This Guaranty shall become effective as to each Guarantor upon the execution of a counterpart hereof by such Guarantor (whether or not a counterpart hereof shall have been executed by any other Guarantor) and receipt by Guarantied Party of written or telephonic notification of such execution and authorization of delivery thereof.
4.14 GUARANTIED PARTY AS ADMINISTRATIVE AGENT.
(a) Guarantied Party has been appointed to act as Guarantied Party hereunder by Lenders. Guarantied Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action, solely in accordance with this Guaranty and the Credit Agreement; PROVIDED that Guarantied Party shall exercise, or refrain from exercising, any remedies hereunder in accordance with the instructions of Requisite Lenders or all Lenders, as the case may be.
(b) Guarantied Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Guarantied Party under this Guaranty; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, each of the undersigned Guarantors has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above.
IN WITNESS WHEREOF, the undersigned Additional Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of ______________, 199_.
[FORM OF SUBSIDIARY PLEDGE AGREEMENT]
This SUBSIDIARY PLEDGE AGREEMENT (this "Agreement") is dated as of January 10, 1996 and entered into by and between THE UNDERSIGNED (each a "Pledgor" and collectively, "Pledgors"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent on behalf of the Lenders party to the Credit Agreement referred to below (in such capacity herein called "Secured Party").
A. Pledgor is the legal and beneficial owner of (i) the shares of stock (the "Pledged Shares") described in Part A of Schedule I annexed hereto and issued by the corporations named therein and (ii) the intercompany indebtedness arising from the transfer of the proceeds of the Term Loans and the Initial Revolving Loans (the "Pledged Debt") described in Part B of said Schedule I.
B. Secured Party and Lenders have entered into a Credit Agreement dated as of January 10, 1996 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with URS Corporation, a Delaware corporation ("Company"), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company.
C. Pledgor has executed and delivered that certain Subsidiary Guaranty dated as of January 10, 1996 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Guaranty") in favor of Secured Party for the benefit of Lenders, pursuant to which Pledgor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement.
D. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that
Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows:
SECTION 1. PLEDGE OF SECURITY. Pledgor hereby pledges and assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the following (the "Pledged Collateral"):
(a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distrib- uted in respect of or in exchange for any or all of the Pledged
(b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt;
(c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares) to the extent necessary to cause the Pledged Shares to include 100% of the shares of, and 100% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor of any issuer of the Pledged Shares that is a Domestic Subsidiary of Pledgor and the lesser of 100% of the shares of, and 100% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor or 65% of the shares of, and 65% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares that is a Foreign Subsidiary of Pledgor, the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares, and all
dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or
(d) if required pursuant to the Credit Agreement, all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness;
(e) if required pursuant to the Credit Agreement, (i) 100% of the shares of, and 100% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Domestic Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), and (ii) the lesser of 100% of the shares of, and 100% of securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock held by Pledgor of or 65% of the shares of, and 65% of the securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes as a result of any occurrence a direct Foreign Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided that in no event shall more than 65% of the shares of any Foreign Subsidiary of Pledgor be pledged to Secured Party under this Agreement or any other Loan Document; and
(f) to the extent not covered by clauses (a) and (e) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to Pledgor or Secured Party from time to time with respect to any of the Pledged Collateral.
SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. sec. 362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "Secured Obligations").
SECTION 3. DELIVERY OF PLEDGED COLLATERAL. All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Upon the occurrence and during the continuation of an Event of Default (as defined in the Credit Agreement), Secured Party shall have the right, without notice to Pledgor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 7(a). In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants as follows:
(a) DUE AUTHORIZATION, ETC. OF PLEDGED COLLATERAL. All of the Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default.
(b) DESCRIPTION OF PLEDGED COLLATERAL. The Pledged Shares constitute 100% of the issued and outstanding shares of stock held by Pledgor of each issuer thereof that is a Domestic Subsidiary of Pledgor and the lesser of 100% of the issued and outstanding shares of stock held by Pledgor or that number of the issued and outstanding shares of stock held by Pledgor which, together with any other shares of stock of such issuer pledged to Secured Party under this Agreement or any other Loan Document, is equal to 65% of the issued and outstanding shares of stock of each issuer thereof that is a Foreign Subsidiary of Pledgor, and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the issuer thereof to Pledgor and arising from any transfer of the proceeds of the Term Loans and the Initial Revolving Loans.
(c) OWNERSHIP OF PLEDGED COLLATERAL. Pledgor is the legal, record and beneficial owner of the Pledged Collateral free and clear of any Lien except as permitted by the Credit Agreement.
(d) ORGANIZATION AND POWERS. Pledgor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Pledgor has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Agreement and to carry out the transactions contemplated thereby.
(e) AUTHORIZATION. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of Pledgor.
(f) NO CONFLICT. The execution, delivery and performance by Pledgor of this Agreement and the consummation of the transactions contemplated by this Agreement do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Pledgor or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Pledgor or any of its Subsidiaries or any order,
judgment or decree of any court or other agency of government binding on Pledgor or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Pledgor or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Pledgor or any of its Subsid- iaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Pledgor or any of its Subsidiaries.
(g) GOVERNMENTAL CONSENTS. The execution, delivery and performance by Pledgor of this Agreement and the consum- mation of the transactions contemplated by this Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge by Pledgor of the Pledged Collateral pursuant to this Agreement or (ii) the exercise by Administrative Agent of any rights or remedies in respect of the Pledged Collateral (whether specifically granted or created pursuant to this Agreement or created or provided for by applicable law), except as may be required, in connection with the disposition of any Pledged Collateral, by laws generally affecting the offering and sale of securities.
(h) BINDING OBLIGATION. This Agreement has been duly executed and delivered by Pledgor and is the legally valid and binding obligation of Pledgor, enforceable against Pledgor in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability.
(i) PERFECTION. The pledge of the Pledged Collateral pursuant to this Agreement creates in favor of Administrative Agent for the benefit of Lenders, as security for the Secured Obligations, a valid and perfected First Priority Lien on all of the Pledged Collateral.
(j) MARGIN REGULATIONS. The pledge of the Pledged Collateral pursuant to this Agreement does not violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System.
(k) INFORMATION REGARDING COLLATERAL. All information supplied to Administrative Agent by or on behalf of Pledgor with respect to any of the Pledged Collateral (in each case taken as a whole with respect to the Pledged Collateral) is accurate and complete in all material respects.
SECTION 5. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; ETC. Pledgor shall:
(a) not, except as expressly permitted by the Credit Agreement, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except as permitted by the Credit Agreement, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless that percentage of the outstanding capital stock of the surviving or resulting corporation equal to the percentage of shares of such issuer set forth opposite the name of such issuer on Schedule I annexed hereto is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; PROVIDED that in the event Pledgor makes an Asset Sale permitted by the Credit Agreement and the assets subject to such Asset Sale are Pledged Shares, Secured Party shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; PROVIDED, FURTHER that, as a condition precedent to such release, Secured Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Secured Party of the Net Asset Sale Proceeds of such Asset
(b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor or to licensed professionals employed by Pledgor in order to comply with state licensing laws, (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares to the extent necessary to cause the percentage of shares of such issuer pledged hereunder to equal the percentage of shares set forth opposite the name of such issuer on Schedule I annexed hereto, and (iii) pledge hereunder, if required pursuant to the Credit Agreement, immediately upon its acquisition (directly or indirectly) thereof, 100% of the shares of stock of any Person held by Pledgor that, after the
date of this Agreement, becomes, as a result of any occurrence, a direct Domestic Subsidiary of Pledgor and the lesser of 100% of the shares of stock held by Pledgor of or 65% of the shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Foreign Subsidiary of Pledgor; provided that in no event shall more than 65% of the shares of any Foreign Subsidiary of Pledgor be pledged to Secured Party under this Agreement or any other Loan
(c) if required pursuant to the Credit Agreement, (i) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor;
(d) promptly notify Secured Party of any event of which Pledgor becomes aware causing a material loss or depreciation in the value of the Pledged Collateral;
(e) promptly deliver to Secured Party all written notices received by it with respect to the Pledged Collateral;
(f) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent the validity thereof is being contested in good faith; PROVIDED that Pledgor shall in any event pay such taxes, assessments, charges, levies or claims not later than five days prior to the date of any proposed sale under any judgement, writ or warrant of attachment entered or filed against Pledgor or any of the Pledged Collateral as a result of the failure to make such payment.
SECTION 6. FURTHER ASSURANCES; PLEDGE AMENDMENTS.
(a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices,
as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral.
(b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 5(b) or (c), promptly (and in any event within five Business Days) deliver to Secured Party a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "Pledge Amendment"), in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Secured Party to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Secured Party shall for all purposes hereunder be considered Pledged Collateral; PROVIDED that the failure of Pledgor to execute a Pledge Amendment with respect to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Secured Party therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto.
SECTION 7. VOTING RIGHTS; DIVIDENDS; ETC.
(a) So long as no Event of Default shall have occurred and be continuing:
(i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement; PROVIDED, HOWEVER, that Pledgor shall not exercise or refrain from exercising any such right if Secured Party shall have notified Pledgor in writing that, in Secured Party's reasonable judgment, such action would have a material adverse effect on the value of the Pledged Collateral or any part thereof; and PROVIDED, FURTHER, that Pledgor shall give Secured Party at least five Business Days' prior written notice of the manner in which it intends to exercise, or the reasons for refraining from exercising, any such right. It is understood, however, that neither (A) the voting by Pledgor of any Pledged Shares for or Pledgor's consent to the election of directors either by written consent or at a regularly scheduled annual or other meeting of stockholders or with respect to incidental matters at any such meeting nor
(B) Pledgor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section 7(a)(i), and no notice of any such voting or consent need be given to Secured Party;
(ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; PROVIDED, HOWEVER, that except as permitted by the Credit Agreement any and all
(A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any
(B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-
(C) cash paid, payable or otherwise distributed in respect of principal or in redemption of or in exchange for any Pledged Collateral,
shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor and be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with all necessary indorsements); and
(iii) Secured Party shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above.
(b) Upon the occurrence and during the continuation of an Event of Default:
(i) upon written notice from Secured Party to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights;
(ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and
(iii) all dividends, principal and interest pay- ments which are received by Pledgor contrary to the provi- sions of paragraph (ii) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall forthwith be paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary indorsements).
(c) In order to permit Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 7(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 7(a)(ii) or Section 7(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies, dividend payment orders and other instruments as Secured Party may from time to time reasonably request and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including, without limitation, giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence and during the continuance of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations.
SECTION 8. SECURED PARTY APPOINTED ATTORNEY-IN- FACT. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place
and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation:
(a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor;
(b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged
(c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and
(d) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Pledged Collateral.
SECTION 9. SECURED PARTY MAY PERFORM. If Pledgor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13(b).
SECTION 10. STANDARD OF CARE. The powers conferred on Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Pledged Collateral, it being understood that Secured Party shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged
Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Secured Party accords its own property consisting of negotiable securities.
(a) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Pledged Collateral), and Secured Party may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Secured Party or any Lender may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obliga- tions, Pledgor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency.
(b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Pledged Collat- eral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would agree to so register it.
(c) If Secured Party determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Secured Party all such information as Secured Party may reasonably request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect.
SECTION 12. APPLICATION OF PROCEEDS. Except as expressly provided in the Credit Agreement with respect to Asset Sales, all proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral may, in the discretion of Secured Party, be held by Secured Party as Pledged Collateral for, and/or then, or at any time thereafter, applied in full or in part by Secured Party against, the Secured Obligations in the following order of priority:
(a) To the payment of costs and expenses of such sale, collection or other realization, including reasonable compensation to Secured Party and its agents and counsel, and all other expenses, liabilities and advances made or incurred by Secured Party in connection therewith, and all amounts for which Secured Party is entitled to indemnification hereunder and all advances made by Secured Party hereunder for the account of Pledgor, and to the payment of all costs and expenses paid or incurred by Secured Party in connection with the exercise of any right or remedy hereunder, all in
(b) Thereafter, to the extent of any excess such proceeds, to the payment of all other Secured Obligations for the ratable benefit of the holders thereof; and
(c) Thereafter, to the extent of any excess such proceeds, to the payment to or upon the order of Pledgor, or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct.
SECTION 13. INDEMNITY AND EXPENSES.
(a) Pledgor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agree- ment), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction.
(b) Pledgor shall pay to Secured Party upon demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party
hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof.
SECTION 14. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof.
SECTION 15. SECURED PARTY AS ADMINISTRATIVE AGENT.
(a) Secured Party has been appointed to act as Secured Party hereunder by Lenders. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Credit Agreement; PROVIDED that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of Requisite Lenders, or all Lenders, as the case may be.
(b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of
the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder.
Section 16. ADDITIONAL PLEDGORS. The initial Pledgors hereunder shall be such of the Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Pledgors (each an "Additional Pledgor"), by executing a counterpart of this Agreement. Upon delivery of any such counterpart to Administrative Agent, notice of which is hereby waived by Pledgors, each such Additional Pledgor shall be a Pledgor and shall be as fully a party hereto as if such Additional Pledgor were an original signatory hereof. Each Pledgor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Pledgor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Company to become an Additional Pledgor hereunder. This Agreement shall be fully effective as to any Pledgor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Pledgor hereunder.
SECTION 17. AMENDMENTS; ETC. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor
therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.
SECTION 18. NOTICES. Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served or sent by tele- facsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto.
SECTION 19. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
SECTION 20. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 21. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided.
SECTION 22. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS
OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code of the State of California are used herein as therein defined.
SECTION 23. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, COUNTY AND CITY OF SAN FRANCISCO. BY EXECUTING AND DELIVERING THIS AGREEMENT, PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS;
(II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 18;
(IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN
(V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE COURTS OF ANY
(VI) AGREES THAT THE PROVISIONS OF THIS SECTION 23 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 410.40 OR OTHERWISE.
SECTION 24. WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract
claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgor and Secured Party each acknowledge that this waiver is a material inducement for Pledgor and Secured Party to enter into a business relation- ship, that Pledgor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Pledgor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 24 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.
SECTION 25. COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered 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. This Agreement shall become effective as to each Pledgor upon the execution of a counterpart hereof by such Pledgor (whether or not a counterpart hereof shall have been executed by any other Pledgor) and receipt by Secured Party of written or telephonic notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
IN WITNESS WHEREOF, the undersigned Additional Pledgor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of ______________, 199_.
Attached hereto is Schedule I of this Agreement, completed with respect to the undersigned Additional Pledgor.
Attached to and forming a part of the Pledge Agreement dated as of January 10, 1996 between _____________________, the parties on the signature pages thereof, each as a Pledgor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party.
Stock Class of ficate Par of standing Issuer Stock Nos. Value Shares Shares ------ -------- ------ ------ ------- --------
Debt Issuer Amount of Indebtedness
This Pledge Amendment, dated ____________, 199__, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Pledge Agreement dated January 10, 1996, between the undersigned, the parties on the signature pages thereof, each as a Pledgor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Pledged Shares listed on this Pledge Amendment shall be deemed to be part of the Pledged Shares and shall become part of the Pledged Collateral and shall secure all Secured Obligations.
Stock Class of ficate Par of Issuer Stock Nos. Value Shares ------ -------- ------ ------ -------
Debt Issuer Amount of Indebtedness
[FORM OF SUBSIDIARY SECURITY AGREEMENT]
This SUBSIDIARY SECURITY AGREEMENT (this "Agreement") is dated as of January 10, 1996 and entered into by and between THE UNDERSIGNED (each a "Grantor" and collectively, "Grantors"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent on behalf of the Lenders party to the Credit Agreement referred to below (in such capacity herein called "Secured Party").
A. Secured Party and Lenders have entered into a Credit Agreement dated as of January 10, 1996 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with URS Corporation, a Delaware corporation ("Company"), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company.
B. Grantor has executed and delivered that certain Subsidiary Guaranty dated as of January 10, 1996 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Guaranty") in favor of Secured Party for the benefit of Lenders, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and the other Loan Documents.
C. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Secured Party as follows:
SECTION 1. GRANT OF SECURITY. Grantor hereby assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "Collateral"):
(a) all inventory in all of its forms (including, but not limited to, (i) all goods held by Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Grantor's business, (iii) all goods in which Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by Grantor and all accessions thereto and products thereof (all such inventory, accessions and products being the "Inventory") and all negotiable documents of title (including, without limitation, warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory;
(b) all accounts, accounts receivable, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all guaranties, warranties, indemnity agreements, insurance policies, security agreements, leases and other contracts securing or otherwise relating to any such accounts, accounts receivable, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, accounts receivable, chattel paper, documents, instruments, general intangibles and other rights and obligations being the "Accounts", and any and all such guaranties, warranties, indemnity agreements, insurance policies, security agreements, leases and other contracts being
(c) all deposit accounts, including, without limitation, the deposit accounts listed on Schedule I annexed hereto and all other deposit accounts maintained by Grantor;
(d) all trademarks, tradenames, tradesecrets, business names, patents, patent applications, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing;
(e) to the extent not included in any other paragraph of this Section 1, all other general intangibles (including, without limitation, tax refunds, rights to payment
or performance, choses in action and judgments taken on any rights or claims included in the Collateral);
(f) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization
(g) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing
PROVIDED, HOWEVER, that there shall be excluded from Collateral all (i) equipment, (ii) leasehold improvements, (iii) furni- ture, (iv) fixtures, (v) software, and (vi) other tangible personal property, in each case, not otherwise specifically included in this Section 1. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, leased, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, including, without limitation, all Accounts, including returned premiums, with respect to any insurance relating to any of the foregoing, and all Accounts with respect to any cause of action relating to any of the foregoing.
SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. sec. 362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Guaranty and all extensions or renewals thereof, whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time
decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender as a preference, fraudulent transfer or otherwise and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor being the "Secured Obligations").
SECTION 3. GRANTOR REMAINS LIABLE. Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Grantor represents and warrants as follows:
(a) OWNERSHIP OF COLLATERAL. Except for the security interest created by this Agreement, Grantor owns the Collateral free and clear of any Lien.
(b) LOCATION OF INVENTORY. All of the Inventory is, as of the date hereof, located at the places specified in Schedule II annexed hereto.
(c) ASSIGNABILITY. Except as set forth on Schedule III annexed hereto, no contract entered into by Grantor and between or among the government of the United States of America, or any agency or division thereof, prohibits the assignment of such contract by Grantor to Secured Party.
(d) OFFICE LOCATIONS; OTHER NAMES. The chief place of business, the chief executive office and the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at the addresses set forth on Schedule III annexed
hereto. Grantor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name), except as set forth on Schedule IV annexed hereto.
(e) DELIVERY OF CERTAIN COLLATERAL. All notes and other instruments (excluding checks) comprising any and all items of Collateral have been delivered to Secured Party duly endorsed and accompanied by duly executed instruments of transfer or assignment in blank.
(f) ORGANIZATION AND POWERS. Grantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Grantor has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Agreement and to carry out the transactions contemplated thereby.
(g) AUTHORIZATION OF BORROWING. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of Grantor.
(h) NO CONFLICT. The execution, delivery and performance by Grantor of this Agreement and the consummation of the transactions contemplated by this Agreement and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Grantor or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Grantor or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Grantor or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Grantor or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Grantor or any of its Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Grantor or any of its Subsidiaries.
(i) GOVERNMENTAL CONSENTS. The execution, delivery and performance by Grantor of this Agreement and the consum- mation of the transactions contemplated by this Agreement do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory
body. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Grantor of the Liens purported to be created in favor of Administrative Agent pursuant to this Agreement or (ii) the exercise by Administrative Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to this Agreement or created or provided for by applicable law), except for filings or recordings contemplated by the Credit Agreement.
(j) BINDING OBLIGATION. This Agreement has been duly executed and delivered by Grantor and is the legally valid and binding obligation of Grantor, enforceable against Grantor in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability.
(k) CREATION, PERFECTION AND PRIORITY OF LIENS. This Agreement together with the filing described in the Credit Agreement are effective to create in favor of Administrative Agent for the benefit of Lenders, as security for the Secured Obligations, a valid and perfected First Priority Lien on all of the Collateral, and all filings and other actions necessary or desirable to perfect and maintain the perfection and First Priority status of such Liens have been duly made or taken and remain in full force and effect, other than the periodic filing of UCC continuation statements in respect of UCC financing statements filed by or on behalf of Administrative Agent.
(l) ABSENCE OF THIRD-PARTY FILINGS. Except such as may have been filed in favor of Administrative Agent, no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office.
(m) INFORMATION REGARDING COLLATERAL. All information supplied to Administrative Agent by or on behalf of Grantor with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects.
(a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby
or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the request of Secured Party, each of its records pertaining to the Collateral, with a legend, in form and substance satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the request of Secured Party, deliver and pledge to Secured Party hereunder all promissory notes and other instruments (including checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, and (iv) at Secured Party's request, appear in and defend any action or proceeding that may affect Grantor's title to or Secured Party's security interest in all or any part of the Collateral.
(b) Grantor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions.
(c) Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail.
SECTION 6. CERTAIN COVENANTS OF GRANTOR. Grantor shall:
(a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral;
(b) notify Secured Party of any change in Grantor's name, identity or corporate structure within 15 days of such
(c) give Secured Party 30 days' prior written notice of any change in Grantor's chief place of business, chief executive office or residence or the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts;
(d) if Secured Party gives value to enable Grantor to acquire rights in or the use of any Collateral, use such value for such purposes; and
(e) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Collateral, except to the extent the validity thereof is being contested in good faith; PROVIDED that Grantor shall in any event pay such taxes, assessments, charges, levies or claims not later than five days prior to the date of any proposed sale under any judgment, writ or warrant of attachment entered or filed against Grantor or any of the Collateral as a result of the failure to make such payment.
SECTION 7. SPECIAL COVENANTS WITH RESPECT TO INVENTORY. Grantor shall keep correct and accurate records of the Inventory and keep the Inventory at the places therefor specified on Schedule II annexed hereto or, upon 30 days' prior written notice to Secured Party, at such other places in jurisdictions where all action that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Inventory shall have been taken.
SECTION 8. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS.
(a) Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 4 or, upon 30 days' prior written notice to Secured Party, at such other location in a jurisdiction where all action that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Grantor will hold and preserve such records and chattel paper and will permit representatives of Secured Party at any time during normal business hours to inspect and make abstracts from
such records and chattel paper, and Grantor agrees to render to Secured Party, at Grantor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. Promptly upon the request of Secured Party, Grantor shall deliver to Secured Party complete and correct copies of each Related Contract.
(b) Grantor shall, for not less than five years from the date on which such Account arose, maintain (i) complete records of each Account, including records of all payments received, credits granted and merchandise returned, and (ii) all documentation relating thereto.
(c) Except as otherwise provided in this subsection (c) and subsection (d), Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor under the Accounts and Related Contracts. In connection with such collections, Grantor may take (and, at Secured Party's direction, shall take) such action as Grantor or Secured Party may reasonably deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; PROVIDED, HOWEVER, that upon the occurrence and during the continuation of an Event of Default or a Potential Event of Default and upon written notice to Grantor of its intention to do so, Secured Party shall have the right at any time to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Secured Party and to direct such account debtors or obligors to make payment of all amounts due or to become due to Grantor thereunder directly to Secured Party, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Secured Party and, upon such notification and at the expense of Grantor, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 16, and (ii) Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon.
(d) Grantor shall, upon request of Secured Party, take any action and execute any instrument necessary or advisable in accordance with the procedures enacted under the Assignment of Claims Act of 1940 to insure that Secured Party receives any and all proceeds from any contract entered into between or among Grantor and the Government of the United States of America or any agency or division thereof. Such action shall include, but not be limited to, filing notices of assignment under the provision of 48 C.F.R. 32.805.
SECTION 9. DEPOSIT ACCOUNTS. Upon the occurrence and during the continuation of an Event of Default, Secured Party may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Secured Party constituting part of the Collateral.
SECTION 10. LICENSE OF PATENTS, TRADEMARKS, COPYRIGHTS, ETC. Grantor hereby assigns, transfers and conveys to Secured Party, effective upon the occurrence of any Event of Default, the nonexclusive right and license to use all trademarks, tradenames, copyrights, patents or technical processes owned or used by Grantor that relate to the Collateral and any other collateral granted by Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Secured Party to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Secured Party and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Grantor.
SECTION 11. TRANSFERS AND OTHER LIENS. Grantor shall not:
(a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; or
(b) except as permitted by the Credit Agreement, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person.
SECTION 12. SECURED PARTY APPOINTED ATTORNEY-IN- FACT. Grantor hereby irrevocably appoints Secured Party as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion (a) to file any claims or notices and to take any other action and execute any instrument necessary or advisable, in accordance with the procedures enacted under the Assignment of Claims Act of 1940, in order to receive any and all proceeds from any contract entered into between or among Grantor and the government of, the United States of America or any agency or division thereof and (b) upon the occurrence and during the continuation of an Event of Default, to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation:
(i) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the
(ii) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection
(iii) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral;
(iv) to pay or discharge taxes or Liens levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Grantor to Secured Party, due and payable immediately
(v) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the
(vi) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Grantor's expense, at any time or from time to time, all acts and things that Secured Party deems
necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do.
SECTION 13. SECURED PARTY MAY PERFORM. If Grantor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantor under Section 14.
SECTION 14. STANDARD OF CARE. The powers conferred on Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property.
SECTION 15. REMEDIES. If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, and (d) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party or any Lender may be the purchaser of any or all of the Collateral at any such sale and Secured Party, as agent
for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders or all Lenders, as the case may be, shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency.
SECTION 16. APPLICATION OF PROCEEDS. Except as expressly provided in the Credit Agreement with respect to Asset Sales, all proceeds received by the Secured Party in respect of any sale of, collection from or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as Collateral for, and/or then, or at any other time thereafter applied, in full or in part by the Secured Party against the Secured Obligations in the following order of priority:
(a) To the payment of all costs and expenses of such sale, collection or other realization and all other expenses, liabilities and advances made or incurred by the Secured Party in connection therewith and all amounts for which the Secured Party is entitled to indemnification hereunder and all advances made by the Secured Party hereunder for the account of Grantor and for the payment
of all costs and expenses paid or incurred by the Secured Party in connection with the exercise of any right or remedy hereunder, all in accordance with Section 17;
(b) Thereafter, to the extent of any excess such proceeds, to the payment of the Secured Obligations for the ratable benefit of the holders thereof; and
(c) Thereafter, to the extent of any excess such proceeds, to the payment to or upon the order of the Grantor, or whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct.
SECTION 17. INDEMNITY AND EXPENSES.
(a) Grantor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction.
(b) Grantor shall pay to Secured Party upon demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof.
SECTION 18. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to
Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Secured Party will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination.
SECTION 19. SECURED PARTY AS ADMINISTRATIVE AGENT.
(a) Secured Party has been appointed to act as Secured Party hereunder by Lenders. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; PROVIDED that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 15 in accordance with the instructions of Requisite Lenders or all Lenders, as the case may be.
(b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and
obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder.
SECTION 20. ADDITIONAL GRANTORS. The initial Grantors hereunder shall be such of the Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Grantors (each an "Additional Grantor"), by executing a counterpart of this Agreement. Upon delivery of any such counterpart to Administrative Agent, notice of which is hereby waived by Grantors, each such Additional Grantor shall be a Grantor and shall be as fully a party hereto as if such Additional Grantor were an original signatory hereof. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Company to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder.
SECTION 21. AMENDMENTS; ETC. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given.
SECTION 22. NOTICES. Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto.
SECTION 23. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege
hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
SECTION 24. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 25. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided.
SECTION 26. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (INCLUDING, WITHOUT LIMITATION, SECTION 1646.5 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code of the State of California are used herein as therein defined.
SECTION 27. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, COUNTY AND CITY OF SAN FRANCISCO. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS;
(II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 22;
(IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN
(V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY
(VI) AGREES THAT THE PROVISIONS OF THIS SECTION 27 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 410.40.
SECTION 28. WAIVER OF JURY TRIAL. GRANTOR AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Secured Party each acknowledge that this waiver is a material inducement for Grantor and Secured Party to enter into a business relationship, that Grantor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court.
SECTION 29. COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties
hereto in separate counterparts, each of which when so executed and delivered 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. This Agreement shall become effective as to each Grantor upon the execution of a counterpart hereof by such Grantor (whether or not a counterpart hereof shall have been executed by any other Grantor) and receipt by Secured Party of written or telephonic notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, Grantor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.
IN WITNESS WHEREOF, the undersigned Additional Grantor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of ______________, 199_.
Attached hereto are Schedules I, II, III, IV and V of this Agreement, completed with respect to the undersigned Additional Grantor.
Previous and Fictitious Business Names
[FORM OF FINANCIAL CONDITION CERTIFICATE]
This FINANCIAL CONDITION CERTIFICATE (this "Certificate") is delivered in connection with that certain Credit Agreement dated as of January 10, 1996 (the "Credit Agreement") by and among URS Corporation, a Delaware corporation ("Company"), the financial institutions referred to therein as Lenders ("Lenders") and Wells Fargo Bank, National Association, as Administrative Agent ("Administrative Agent"). Capitalized terms used herein without definition have the same meanings as in the Credit Agreement.
A. I am, and at all pertinent times mentioned herein have been, the duly qualified and acting chief financial officer of Company. I have, together with other officers of Company, acted on behalf of Company in connection with the evaluation and negotiation of the proposed acquisition of Greiner Engineering, Inc., a Nevada corporation ("Greiner"), and the negotiation of the Credit Agreement and I am familiar with the terms and conditions thereof.
B. I have carefully reviewed the contents of this Certificate, and I have conferred with counsel for Company for the purpose of discussing the meaning of its contents.
C. In connection with preparing for the consummation of the acquisition as well as the transactions and financings contemplated by the Credit Agreement (the "Proposed Transactions"), I have participated in the preparation of, and I have reviewed, pro forma projections of net income and cash flows for Greiner and its Subsidiaries for the fiscal years of Company ending October 31, 1996 through October 31, 2003, inclusive (the "Projected Financial Statements"). The Projected Financial Statements, attached hereto as Exhibit A, give effect to the consummation of the Proposed Transactions and assume that the debt obligations of Company will be paid in part from the cash flow generated by the operations of Greiner and its Subsidiaries. The Projected Financial Statements were prepared on the basis of information available at December 31, 1995. I know of no facts that have occurred since such date that would lead me to believe that the Projected Financial Statements are inaccurate in any material respect. The Projected Financial Statements do not reflect (i) any potential changes in interest rates from those assumed in the Projected Financial Statements, (ii) any potential material, adverse
changes in general business conditions, or (iii) any potential changes in income tax laws.
D. I have also participated in the preparation of, and I have reviewed, a pro forma summary balance sheet of Greiner and its Subsidiaries (the "Fair Value Summary Balance Sheet") as of the Initial Funding Date, giving effect to the Proposed Transactions. The Fair Value Summary Balance Sheet is attached hereto as Exhibit B and has been prepared as described in paragraphs F and G below and not in accordance with GAAP.
E. In connection with the preparation of the Projected Financial Statements, I have made such investigations and inquiries as I have deemed necessary and prudent therefor and, specifically, have relied on historical information with respect to revenues, expenses and other relevant items supplied by the supervisory personnel of Company and its Subsidiaries and of Greiner and its Subsidiaries directly responsible for the various operations involved. The assumptions upon which the Projected Financial Statements are based are stated therein. Although any assumptions and any projections by necessity involve uncertainties and approximations, I believe, based on my discussions with other members of management, that the assumptions on which the Projected Financial Statements are based are reasonable. Based thereon, I believe that the projections for Company and its Subsidiaries, taken as a whole, reflected in the Projected Financial Statements provide reasonable estimations of future performance, subject, as stated above, to the uncertainties and approximations inherent in any projections.
F. The Fair Value Summary Balance Sheet has been prepared in a manner which I believe reflects a conservative estimate of the fair value of the assets of Greiner on a parent-company basis (which reflects the estimated fair value of the stock of Greiner's Subsidiaries rather than consolidating the individual assets and liabilities of such Subsidiaries) and the probable liability on all of its debts, contingent or otherwise. For purposes of this Certificate, I understand "fair value" of any assets to mean the amount which may be realized within a reasonable time, either through collection of such assets or through sale of such assets at the regular market value thereof, conceiving of the latter as the amount which could be obtained for the property in question within such period by a capable and diligent businessman from an interested buyer who is willing to purchase under ordinary selling conditions. The specific methodology used by management for valuing Greiner and its Subsidiaries is set forth in paragraph G below.
G. For purposes of constructing the Fair Value Summary Balance Sheet, I have utilized the following procedures:
I have separately estimated the fair value of the stock of each of Greiner's Subsidiaries by calculating the difference between the fair value of the assets of such Subsidiary and the probable liability on all of its debts, contingent or otherwise.
With respect to the asset values reflected in the Fair Value Summary Balance Sheet (including the asset values used to calculate the fair value of the stock of each of Greiner's Subsidiaries), I have included the net working capital of Greiner and its Subsidiaries, calculated as the difference between the current assets and current liabilities reported in their December 31, 1995 financial statements, and I have relied on the capitalization of earnings methodology -- whereby earnings before interest and taxes (EBIT) are capitalized at a specified EBIT multiple -- to arrive at the estimated fair value of the long-term assets of Greiner and its Subsidiaries. For these purposes I have utilized an EBIT multiplier of ____, which reflects a conservative estimate of the EBIT multiplier reflected in acquisition prices paid for total ownership positions in companies whose lines of business are similar to those of Greiner and its Subsidiaries.
With respect to liabilities reflected in the Fair Value Summary Balance Sheet (including liabilities used to calculate the fair value of the stock of Greiner's Subsidiaries), I have included long-term liabilities reported by Greiner and its Subsidiaries in their December 31, 1995 financial statements and the portion of the debts to be incurred by Greiner under the Subsidiary Guaranty and the Proposed Transactions. In addition, with respect to contingent liabilities (such as litigation, guaranties (other than the Subsidiary Guaranties) and pension plan liabilities), I have consulted with legal, financial and other personnel of Greiner and its Subsidiaries and have reflected as liabilities our best judgment as to the maximum exposure that can reasonably be expected to result therefrom in light of all the facts and circumstances existing at this time, recognizing that any such estimation is inherently subject to uncertainties.
Based on the foregoing, I have reached the following conclusions:
1. Greiner is not now, nor will the incurrence of the obligations under the Subsidiary Guaranty and the incurrence of the other obligations contemplated by the Proposed Transactions render Greiner "insolvent" as defined in this paragraph 1. The recipients of this
Certificate and I have agreed that, in this context, "insolvent" means that the present fair value of assets is less than the amount that will be required to pay the probable liability on existing debts as they become absolute and matured. We have also agreed that the term "debts" includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent. My conclusion expressed above is supported by the Fair Value Summary Balance Sheet. Valuation of Greiner on the basis thereof would reflect the net value of Greiner as $__________ representing the difference between asset values of $__________ and liabilities of $__________.
2. By the incurrence of the obligations under the Subsidiary Guaranty and the incurrence of the other obligations contemplated by the Proposed Transactions, Greiner will not incur debts beyond its ability to pay as such debts mature. I have based my conclusion in part on the Projected Financial Statements, which demonstrate that Greiner will have positive cash flow after paying all of its scheduled anticipated indebtedness (including the portion of the debts to be incurred by Greiner under the Subsidiary Guaranty and the Proposed Transactions projected to be paid from the cash flow generated by the operations of Greiner and its Subsidiaries and other permitted indebtedness). I have concluded that the realization of current assets in the ordinary course of business will be sufficient to pay recurring current debt and short-term and long-term debt service as such debts mature, and that the cash flow (including earnings plus non-cash charges to earnings [and the disposition of surplus fixed assets held for sale]) will be sufficient to provide cash necessary to repay the portion of the Loans and other obligations under the Credit Agreement and the other obligations contemplated by the Proposed Transactions projected to be paid pursuant to the Subsidiary Guaranty and other long-term indebtedness as such debt matures.
3. The incurrence of the obligations under the Subsidiary Guaranty and the incurrence of the other obligations contemplated by the Proposed Transactions will not leave Greiner with property remaining in its hands constituting "unreasonably small capital." In reaching this conclusion, I understand that "unreasonably small capital" depends upon the nature of the particular business or businesses conducted or to be conducted, and I have reached my conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by Greiner and its
Subsidiaries in light of the Projected Financial Statements and available credit capacity.
4. To the best of my knowledge, Greiner has not executed the Subsidiary Guaranty or any documents mentioned therein, or made any transfer or incurred any obligations thereunder, with actual intent to hinder, delay or defraud either present or future creditors.
I understand that Administrative Agent and Lenders are relying on the truth and accuracy of the foregoing in connection with the extension of credit to Company pursuant to the Credit Agreement.
I represent the foregoing information to be, to the best of my knowledge and belief, true and correct and execute this Certificate this ___ day of ________, 1996.
[FORM OF FINANCIAL CONDITION CERTIFICATE]
This FINANCIAL CONDITION CERTIFICATE (this "Certificate") is delivered in connection with that certain Credit Agreement dated as of January 10, 1996 (the "Credit Agreement") by and among URS Corporation, a Delaware corporation ("Company"), the financial institutions referred to therein as Lenders ("Lenders") and Wells Fargo Bank, National Association, as Administrative Agent ("Administrative Agent"). Capitalized terms used herein without definition have the same meanings as in the Credit Agreement.
A. I am, and at all pertinent times mentioned herein have been, the duly qualified and acting chief financial officer of Company. In such capacity I have participated actively in the management of its financial affairs and am familiar with its financial statements and those of its Subsidiaries. I have, together with other officers of Company, acted on behalf of Company in connection with the evaluation and negotiation of the proposed acquisition of Greiner Engineering, Inc., a Nevada corporation ("Greiner"), and the negotiation of the Credit Agreement and I am familiar with the terms and conditions thereof.
B. I have carefully reviewed the contents of this Certificate, and I have conferred with counsel for Company for the purpose of discussing the meaning of its contents.
C. In connection with preparing for the consummation of the acquisition as well as the transactions and financings contemplated by the Credit Agreement (the "Proposed Transactions"), I have participated in the preparation of, and I have reviewed, pro forma projections of net income and cash flows for Company and its Subsidiaries for the fiscal years of Company ending October 31, 1996 through October 31, 2003, inclusive (the "Projected Financial Statements"). The Projected Financial Statements, attached hereto as Exhibit A, give effect to the consummation of the Proposed Transactions and assume that the debt obligations of Company will be paid from the cash flow generated by the operations of Company and its Subsidiaries. The Projected Financial Statements were prepared on the basis of information available at October 31, 1995. I know of no facts that have occurred since such date that would lead me to believe that the Projected Financial Statements are inaccurate in any material respect. The Projected Financial Statements do not reflect (i) any potential
changes in interest rates from those assumed in the Projected Financial Statements, (ii) any potential material, adverse changes in general business conditions, or (iii) any potential changes in income tax laws.
D. I have also participated in the preparation of, and I have reviewed, a pro forma summary balance sheet of Company and its Subsidiaries (the "Fair Value Summary Balance Sheet") as of the Initial Funding Date, giving effect to the Proposed Transactions. The Fair Value Summary Balance Sheet is attached hereto as Exhibit B and has been prepared as described in paragraphs F and G below and not in accordance with GAAP.
E. In connection with the preparation of the Projected Financial Statements, I have made such investigations and inquiries as I have deemed necessary and prudent therefor and, specifically, have relied on historical information with respect to revenues, expenses and other relevant items supplied by the supervisory personnel of Company and its Subsidiaries and of Greiner and its Subsidiaries directly responsible for the various operations involved. The assumptions upon which the Projected Financial Statements are based are stated therein. Although any assumptions and any projections by necessity involve uncertainties and approximations, I believe, based on my discussions with other members of management, that the assumptions on which the Projected Financial Statements are based are reasonable. Based thereon, I believe that the projections for Company and its Subsidiaries, taken as a whole, reflected in the Projected Financial Statements provide reasonable estimations of future performance, subject, as stated above, to the uncertainties and approximations inherent in any projections.
F. The Fair Value Summary Balance Sheet has been prepared in a manner which I believe reflects a conservative estimate of the fair value of the assets of Company on a parent-company basis (which reflects the estimated fair value of the stock of Company's Subsidiaries rather than consolidating the individual assets and liabilities of such Subsidiaries) and the probable liability on all of its debts, contingent or otherwise. For purposes of this Certificate, I understand "fair value" of any assets to mean the amount which may be realized within a reasonable time, either through collection of such assets or through sale of such assets at the regular market value thereof, conceiving of the latter as the amount which could be obtained for the property in question within such period by a capable and diligent businessman from an interested buyer who is willing to purchase under ordinary selling conditions. The specific methodology used by management for valuing Company and its Subsidiaries is set forth in paragraph G below.
G. For purposes of constructing the Fair Value Summary Balance Sheet, I have utilized the following procedures:
I have separately estimated the fair value of the stock of each of Company's Subsidiaries by calculating the difference between the fair value of the assets of such Subsidiary and the probable liability on all of its debts, contingent or otherwise.
With respect to the asset values reflected in the Fair Value Summary Balance Sheet (including the asset values used to calculate the fair value of the stock of each of Company's Subsidiaries), I have included the net working capital of Company and its Subsidiaries, calculated as the difference between the current assets and current liabilities reported in their October 31, 1995 financial statements, and I have relied on the capitalization of earnings methodology -- whereby earnings before interest and taxes (EBIT) are capitalized at a specified EBIT multiple -- to arrive at the estimated fair value of the long-term assets of Company and its Subsidiaries. For these purposes I have utilized an EBIT multiplier of ____, which reflects a conservative estimate of the EBIT multiplier reflected in acquisition prices paid for total ownership positions in companies whose lines of business are similar to those of Company and its Subsidiaries.
With respect to liabilities reflected in the Fair Value Summary Balance Sheet (including liabilities used to calculate the fair value of the stock of Company's Subsidiaries), I have included long-term liabilities reported by Company and each of its Subsidiaries in their October 31, 1995 financial statements and the portion of the debts to be incurred by Company under the Credit Agreement and the Proposed Transactions. In addition, with respect to contingent liabilities (such as litigation, guaranties (other than the Subsidiary Guaranties) and pension plan liabilities), I have consulted with legal, financial and other personnel of Company and its Subsidiaries and have reflected as liabilities our best judgment as to the maximum exposure that can reasonably be expected to result therefrom in light of all the facts and circumstances existing at this time, recognizing that any such estimation is inherently subject to uncertainties.
Based on the foregoing, I have reached the following conclusions:
1. Company is not now, nor will the incurrence of the obligations under the Credit Agreement and the incurrence of the other obligations contemplated by the Proposed Transactions render Company "insolvent" as
defined in this paragraph 1. The recipients of this Certificate and I have agreed that, in this context, "insolvent" means that the present fair value of assets is less than the amount that will be required to pay the probable liability on existing debts as they become absolute and matured. We have also agreed that the term "debts" includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent. My conclusion expressed above is supported by the Fair Value Summary Balance Sheet. Valuation of Company on the basis thereof would reflect the net value of Company as $__________ representing the difference between asset values of $__________ and liabilities of $__________.
2. By the incurrence of the obligations under the Credit Agreement and the incurrence of the other obligations contemplated by the Proposed Transactions, Company will not incur debts beyond its ability to pay as such debts mature. I have based my conclusion in part on the Projected Financial Statements, which demonstrate that Company will have positive cash flow after paying all of its scheduled anticipated indebtedness (including the portion of the debts to be incurred by Company under the Credit Agreement and the Proposed Transactions and other permitted indebtedness). I have concluded that the realization of current assets in the ordinary course of business will be sufficient to pay recurring current debt and short-term and long-term debt service as such debts mature, and that the cash flow (including earnings plus non-cash charges to earnings [and the disposition of surplus fixed assets held for sale]) will be sufficient to provide cash necessary to repay the portion of the Loans and other obligations under the Credit Agreement and the other obligations contemplated by the Proposed Transactions and other long-term indebtedness as such debt matures.
3. The incurrence of the obligations under the Credit Agreement and the incurrence of the other obligations contemplated by the Proposed Transactions will not leave Company with property remaining in its hands constituting "unreasonably small capital." In reaching this conclusion, I understand that "unreasonably small capital" depends upon the nature of the particular business or businesses conducted or to be conducted, and I have reached my conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by Company and its Subsidiaries in light of the Projected Financial Statements and available credit capacity.
4. To the best of my knowledge, Company has not executed the Credit Agreement or any documents mentioned therein, or made any transfer or incurred any obligations thereunder, with actual intent to hinder, delay or defraud either present or future creditors.
I understand that Administrative Agent and Lenders are relying on the truth and accuracy of the foregoing in connection with the extension of credit to Company pursuant to the Credit Agreement.
I represent the foregoing information to be, to the best of my knowledge and belief, true and correct and execute this Certificate this ___ day of ________, 1996. | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-12T17:40:46 |
0000278002-96-000001 | 0000278002-96-000001_0001.txt | You have requested my opinion in connection with the registration by Federated Tax-Free Trust ("Trust") of an additional 3,338,819,597 Shares of Beneficial Interest ("Shares") pursuant to Post-effective Amendment No. 36 to the Trust's registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933 (File No. 2-63343). The subject Post-effective Amendment will be filed pursuant to Paragraph (b) of Rule 485 and become effective pursuant to said Rule immediately upon filing.
As counsel I have participated in the preparation and filing of the Trust's amended registration statement under the Securities Act of 1933 referred to above. Further, I have examined and am familiar with the provisions of the Declaration of Trust dated November 20, 1978, ("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 that:
1. The Trust is duly organized and validly existing under the laws of the Commonwealth of Massachusetts. 2. The Shares which are currently being registered by the Registration Statement referred to above may be legally and validly issued from time to time in accordance with the Declaration of Trust upon receipt of consideration sufficient to comply with the Declaration of Trust and subject to compliance with the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and applicable state laws regulating the sale of securities. Such Shares, when so issued, will be fully paid and non-assessable by the Trust.
I hereby consent to the filing of this opinion as a part of the Trust's registration statement referred to above and as a part of any application or registration statement filed under the securities laws 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. | 485B24E | EX-99.OPINIONLETTER | 1996-01-16T00:00:00 | 1996-01-16T13:37:18 |
0000310056-96-000002 | 0000310056-96-000002_0000.txt | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1995 Commission File No. 1-7939
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.)
525 Broad Hollow Road, Melville, New York 11747 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 293-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01
(Name of each exchange on which registered)
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 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.
The aggregate market value of Common Stock held by non-affiliates of the registrant as of December 22, 1995 was approximately $3,500,000.
The number of shares outstanding of the registrant's Common Stock as of December 22, 1995 was 2,762,828.
Vicon Industries, Inc. (the "Company"), incorporated in New York in October, 1967, designs, manufactures, assembles and markets a wide range of closed circuit television ("CCTV") components and CCTV systems for security, surveillance, safety, process and control applications by end users. The Company sells CCTV components and systems directly to distributors, dealers and original equipment manufacturers, principally within the security industry. The U.S. security industry is a multi-billion dollar industry which includes guard services, armored carrier, electronic alarms and sensing equipment, safes, locking devices and access systems, as well as CCTV. The nature of the Company's business and the general security market it serves has not changed materially in the past five years.
Users of the Company's products typically utilize them as a visual crime deterrent, for visual documentation, observing inaccessible or hazardous areas, enhancing safety, obtaining cost savings (such as lower insurance premiums), managing control systems, and improving the efficiency and effectiveness of personnel. The Company's products are marketed under its own brand names and registered trademarks. In fiscal 1995, no customer represented more than 10% of consolidated revenues.
The Company's product line consists of approximately 600 products, of which about a third represent model variations. The Company's product line consists of various elements of a video surveillance system, including video cameras, display units (monitors), cassette recorders, switching equipment for video distribution, digital video and signal processing units (which perform character generation, multi screen display, video insertion, intrusion detection, source identification and alarm processing), motorized zoom lenses, remote camera positioning devices, manual and computer based system controls, environmental camera enclosures and consoles for system assembly. In 1995, the Company introduced a new product called ProTech which is a Windows based command and control software package. ProTech allows personal computers (p.c.) users to graphically program and operate from a P.C. all of the Company's digital control and video processing systems. The Company expects to further enhance the capabilities of ProTech. The Company maintains a large line of products due to the many varied climatic and operational environments under which the products are expected to perform. In addition to selling from a standard catalog line, for significant orders, the Company will produce to specification or modify an existing product to meet a customer's requirements. The Company's products range in price from $10 for a simple camera mounting bracket to approximately one hundred thousand dollars (depending upon configuration) for a large digital control and video switching system.
The Company's products are sold worldwide, principally to independent distributors, dealers and integrators of various types of security-related systems. Sales are made by in-house customer service representatives, field sales engineers and by independent sales representatives in certain areas of the United States. The sales effort is supported by several in-house application engineers.
Although the Company does not sell directly to end users, much of its sales promotion and advertising is directed at end user markets. The Company's products are employed in video system installations by: (1) commercial and industrial users, such as office buildings, manufacturing plants, warehouses, apartment complexes, shopping malls and retail stores; (2) federal, state, and local governments for national security purposes, municipal facilities, prisons, and military installations; (3) financial institutions, such as banks, clearing houses, brokerage firms and depositories, for security purposes; (4) transportation departments for highway traffic control, bridge and tunnel monitoring, and airport, subway, bus and seaport surveillance; (5) gaming casinos, where video security is often mandated by local statute; and (6) health care facilities, such as hospitals, particularly psychiatric wards and intensive care units. The Company estimates that approximately 50 percent of its total revenues are sales for commercial and industrial uses.
The Company's principal sales offices are located in Melville, New York; Atlanta, Georgia and Segensworth, England.
The Company sells internationally by direct export to dealers and distributors, and, in Europe through the Company's United Kingdom (U.K.) subsidiary. In fiscal 1995, the operating profit and identifiable assets for the Company's U.K. subsidiary amounted to approximately $573,000 and $5.2 million, respectively. For more information regarding foreign operations, see Note 7 of Notes to Consolidated Financial Statements included elsewhere herein. Direct export sales and sales from the Company's U.K. subsidiary amounted to $17.5 million, $16.7 million and $16.1 million or 40%, 35% and 35% of consolidated revenues in fiscal years 1995, 1994, and 1993, respectively. Export sales are made through a wholly-owned subsidiary, Vicon Industries Foreign Sales Corporation, a tax advantaged foreign sales corporation. The Company's principal foreign markets are Europe and the Far East, which together accounted for approximately 83 percent of international sales in fiscal 1995. Additional information is contained in the discussion of foreign currency activity included in Item 7.
The Company competes in areas of price, service, product performance and availability with several large and small public and privately-owned companies in the manufacture and distribution of CCTV systems and components (excluding cameras, monitors and video cassette recorders "Video Products") within the security industry. The Company's Video Products compete with many large companies whose financial resources and scope of operations are substantially greater than the Company's. The Company is one of a few domestic market suppliers that design, assemble, manufacture, market and support an extensive line of products offering a comprehensive system capability in a wide range of applications. Many competitors, including manufacturers of cameras, monitors and recorders, typically produce a limited product line since components and accessories are low volume items. The Company believes a broad product line is desirable since many customers prefer to obtain a complete video system from one supplier with the assurance of product compatibility and reliability. In recent years, price competition has intensified limiting the amount of cost increases the Company can pass on to customers and in some instances requiring price reductions.
The Company is engaged in ongoing research and development activities in connection with new or existing products. Changes in CCTV technology have incorporated the use of advanced electronic components and new materials which add to product life and performance. Twenty-one professional employees devote full time to the development of new products and to improving the qualities and capabilities of existing products. Further, the Company engages the services of others to assist in the development of new products. Expenditures for research and development amounted to approximately $1,900,000 in 1995, $1,600,000 in 1994, and $1,600,000 in 1993 or approximately 4.2% of revenues in 1995, 3.4% of revenues 1994, and 3.5% of revenues in 1993.
Source and Availability of Raw Materials
The Company has not experienced shortages or significant difficulty in obtaining its raw materials, components or purchased finished products. Raw materials are principally aluminum, steel and plastics, while components are mainly motors, video lenses and standard electronic parts. In 1995, the Company procured directly and indirectly approximately 19% of its product purchases from Chun Shin Electronics, Inc., its Korean joint venture (see Item 13 for further discussion of the Korean joint venture). The Company is not dependent upon any other single source for a significant amount of its raw materials, components or purchased finished products.
The Company owns a limited number of design and utility patents expiring at various times and has several patent applications pending with respect to the design and/or mechanical function of its products. The Company has certain trademarks registered and several other trademark applications pending both in the United States and in Europe. The Company has no licenses, franchises or concessions with respect to any of its products or business dealings. The Company does not deem its patents and trademarks, or the lack of licenses, franchises and concessions, to be of substantial significance or to have a material effect on its business.
The Company maintains an inventory of finished products sufficient to accommodate its customers' requirements, since most sales are to dealer/contractors who do not carry large stock inventories. Parts and components inventories are also carried in sufficient quantities to permit prompt delivery of certain items. The Company would rather carry adequate inventory quantities than experience shortages which detract from the production process and sales effort. The Company's business is not seasonal.
The backlog of orders believed to be firm as of September 30, 1995 and 1994 was approximately $2.7 million and $3.0 million, respectively. All orders are cancelable without penalty at the option of the customer. The Company prefers that its backlog of orders not exceed its ability to fulfill such orders on a timely basis, since experience shows that long delivery schedules only encourage the Company's customers to look elsewhere for product availability.
At September 30, 1995, the Company employed 175 full-time employees, of whom five are officers, 50 administrative personnel, 65 employed in sales capacities, 25 in engineering, and 30 production employees. At September 30, 1994, the Company employed 185 persons categorized in similar proportions to those of 1995. There are no collective bargaining agreements with any of the Company's employees and the Company considers its relations with its employees to be good.
In January 1988, the Company sold and subsequently leased back its 108,000 square foot headquarters facility in Melville, New York, which accommodates the Company's sales, distribution, administration, product development and limited assembly and manufacturing operations. Currently, the Company subleases 28,000 sq. ft. of its facility under an agreement which expires on February 28, 1997. In November 1994, the Company entered into a sublease agreement dated as of January 1, 1993, which gives a company affiliated with its landlord the right to occupy approximately 25,000 sq. ft. of its primary operating facility with two months notice in exchange for specified rent payments through the expiration of the primary lease in 1998. In connection with such agreement, the landlord and the subtenant were each granted an option to ask the Company to vacate the entire premises with six months notice and the landlord agreed to release the Company from all future obligations under its lease in exchange for a lease termination payment by the Company. (See Notes 3 and 10 of Notes to Consolidated Financial Statements included elsewhere herein for further information). The Company believes that this facility is adequate to support its near term operating plans. The Company also operates, under lease, a regional sales office in Atlanta, Georgia. In addition, the Company owns a 14,000 square foot sales, service and warehouse facility in southern England which services the U.K. and European Community markets.
ITEM 3 - LEGAL PROCEEDINGS
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
The Company's stock is traded on the American Stock Exchange under the symbol (VII). The following table sets forth for the periods indicated, the range of high and low prices for the Company's Common Stock on the American Stock Exchange:
The Company has not declared or paid cash dividends on its Common Stock for any of the foregoing periods. Additionally, under the current loan agreement, the Company may not declare dividends. The approximate number of holders of Common Stock at December 22, 1995 was 1,500.
* Includes a provision of $2.7 million for discontinuance of certain products and product lines.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Fiscal Year 1995 Compared with 1994
Net sales for 1995 were $43.8 million, a decrease of 8.1%, compared with $47.7 million in 1994. The sales decline was the result of lower domestic shipments, while foreign sales increased $.8 million to $17.5 million. Domestic sales were affected by several factors such as direct end user selling by competition; lack of competitiveness of certain products whose cost is denominated in yen; and shortened product life cycles which made certain of the Company's key control systems less competitive. The backlog of orders was $2.7 million at September 30, 1995 compared with $3.0 million at September 30, 1994.
Gross profit margins were 21.8% of net sales in 1995, compared with 22.5% in 1994. The margin decline was due principally to the impact of lower sales in relation to a substantially fixed overhead structure. In addition, the value of the dollar declined significantly against the Japanese yen for most of the year which lowered margins of those products sourced in Japan.
Operating expenses in 1995 totaled $9.8 million compared with $9.9 million in 1994. Operating expenses, as a percent of sales, amounted to 22.4% and 20.7% in 1995 and 1994, respectively. The increase in expenses as a percent of sales is due in part to higher bad debt expense, severance pay, bank and professional fees.
During 1994, the Company incurred an unrealized foreign exchange gain of $45,000. This gain resulted from the Company's revaluation of its yen denominated mortgage obligation into U.S. dollars as the value of the British pound sterling gained against the Japanese yen during the year.
Interest expense increased $230,000 as a result of higher interest rates.
The net loss of $1.3 million compared with a profit of $45,000 was the result of lower sales and gross margins and higher interest expenses as discussed above.
Fiscal Year 1994 Compared with 1993
Net sales for 1994 were $47.7 million, an increase of 3.9%, compared with $45.9 million in 1993. The sales growth resulted primarily from increased sales in Europe. The backlog of orders was $3.0 million at September 30, 1994 compared with $4.1 million at September 30, 1993. This decline is the result of lower domestic and export sales bookings in 1994.
Gross profit margins were 22.5% of net sales in 1994, compared with 20.2% in 1993. In 1993, the Company's cost of products sourced in Japan increased significantly as a result of a severe decline in the value of the U.S. dollar compared with the Japanese yen. Also, a decline in the value of the British pound versus the U.S. dollar further reduced margins on U.S. sourced product sales in Europe. In 1994, the value of the dollar continued to weaken against the Japanese yen but to a lesser extent than in 1993. The Company was able to substantially offset the effects of this further decline by securing U.S. dollar based purchase agreements to cover most of the year's yen based product purchase commitments. During 1994, the Company began shifting product sourcing to suppliers transacting in more stable and favorable currencies. Further, the value of the British pound increased against the U.S. dollar in 1994 which increased margins on U.S. sourced product sales in Europe. The Company was also able to reduce its indirect manufacturing expenses in 1994 while increasing product production, thus increasing product margins. Finally, prior year margins were adversely impacted by the recognition of a $450,000 provision to the estimated realizable value of certain discontinued product parts and components. Such provision accounted for approximately 1% of the 1994 increase in gross profit margins.
Operating expenses in 1994 totaled $9.9 million compared with $10.3 million in 1993. Operating expenses, as a percent of sales, amounted to 20.7% and 22.5% in 1994 and 1993, respectively. The decline in expenses was principally the result of an ongoing cost control program.
During 1994, the Company incurred an unrealized foreign exchange gain of $45,000 compared with a loss of $262,000 in 1993. This gain or loss results from the Company's revaluation of its yen denominated mortgage obligation into U.S. dollars. The decrease in the loss was due to the relative stability of the British pound sterling against the Japanese yen during the year.
Interest expense increased by $224,000 in 1994 as a result of higher interest rates and higher borrowing levels.
Pretax income improved approximately $1.9 million as a result of increased sales, higher gross margins and lower operating expenses as discussed above.
September 30, 1995 Compared with 1994
Total shareholders' equity was approximately $8.6 million at September 30, 1995, despite a net loss of $1.3 million in fiscal 1995. Working capital declined by approximately $2.6 million to $10.7 million at September 30, 1995. The decline was principally due to the operating loss and accelerated paydown of $.9 million of long term bank debt.
Accounts receivable decreased approximately $1.4 million to $8.4 million at September 30, 1995. The decrease was the result of lower fourth quarter sales and improved receivable turnover. Inventories declined $1.4 million to $12.1 million at September 30, 1995. Finished products at the Company's U.K. subsidiary decreased $.8 million while raw material and component inventories accounted for the remaining inventory decline as the Company moved production to its off-shore plant and domestic contract manufacturers. Accounts payable to a related party, Chugai Boyeki Co., Ltd., increased approximately $1.2 million to $6.9 million at September 30, 1995 in support of the Company's repayment of bank debt.
The Company has a revolving line of credit of 700,000 pounds sterling (approx. $1.1 million) in the U.K. to support local cash requirements. At September 30, 1995, borrowings under this agreement were approximately $907,000, which was used for general working capital purposes.
In December 1994, the Company extended its bank revolving credit agreement to October 1995. Borrowings under such agreements amounted to approximately $2.8 million and $4.5 million, respectively, at September 30, 1995 and 1994, which was used principally for U.S. working capital purposes. At September 30, 1995, the Company was in default of certain covenants under the agreement and on December 28, 1995 repaid the entire loan with the proceeds of a new bank loan.
The new two year loan agreement provides for maximum borrowings of $3,250,000 through June 30, 1996 and $4,000,000 thereafter, subject to an availability formula based on accounts receivable and inventories. Concurrent with the new loan agreement, the Company amended its $2,000,000 secured promissory note with Chugai Boyeki Co., Ltd., a related party, to defer all scheduled installments to July 1998. The Company believes that the new loan agreement and its other sources of credit provide adequate funding to meet its near term cash requirements.
The Company's foreign exchange exposure is principally limited to the relationship of the U.S. dollar to the Japanese yen and the British pound sterling.
Japan sourced products denominated in Japanese yen accounted for approximately 19 percent of product purchases in fiscal 1995. In recent years the dollar has weakened dramatically in relation to the yen, resulting in increased costs for such products. When market conditions permit, cost increases due to currency fluctuations are passed on to customers through price increases. The Company also attempts to reduce the impact of an unfavorable exchange rate condition through cost reductions from its suppliers, lowering production cost through product redesign, and shifting product sourcing to suppliers transacting in more stable and favorable currencies. During the period from the second half of 1993 through July 1994, the Company was granted dollar based pricing through Chugai Boyeki Co., Ltd., its Japanese supplier. Subsequent to this period, the Company's purchases have been denominated in Japanese yen. However, this supplier, at the Company's direction, has entered into foreign exchange contracts on behalf of the Company to hedge the currency risk on these product purchases.
Sales to the Company's U.K. subsidiary, which approximated $4.3 million in fiscal 1995, are made in pounds sterling and include products sourced from the Far East. In the years when the pound has weakened significantly against the U.S. dollar and Japanese yen, the cost of U.S. and Japanese sourced product sold by the Company's U.K. subsidiary has increased. When market conditions permitted, such cost increases were passed on to the customer through price increases. The Company attempts to minimize its currency exposure on intercompany sales through the purchase of forward exchange contracts to cover unpaid receivables.
The Company intends to increase prices and seek lower prices from suppliers to mitigate exchange rate exposures, however, there can be no assurance that such steps will be effective in limiting foreign currency exposure.
The impact of inflation on the Company has lessened in recent years as the rate of inflation declined. However, inflation continues to increase costs to the Company. As operating expenses and production costs increase, the Company, to the extent permitted by competition, recovers these increased costs by increasing prices to its customers.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14, for an index to consolidated financial statements and financial statement schedules.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company are as follows:
Donald N. Horn, age 66 Chairman of the Board (since 1967); Kenneth M. Darby, age 49 President, Chief Executive Officer, (since 1987); term ends April, 1997 Arthur D. Roche, age 57 Executive Vice President, Chief Financial Officer, Secretary, Member of the Office of the President and Director (since 1992); term ends April 1996 Peter F. Barry, age 66 Director since 1984; term ends April Milton F. Gidge, age 66 Director since 1987; term ends April Michael D. Katz, age 57 Director since 1993; term ends April Peter F. Neumann, age 61 Director since 1987; term ends April W. Gregory Robertson, age 51 Director since 1991; term ends April Kazuyoshi Sudo, age 53 Director since 1987; term ends April Arthur V. Wallace, age 70 Director since 1974; term ends April
Peter A. Horn, age 40 Vice President, Compliance and Quality Yacov A. Pshtissky, age 44 Vice President, Engineering Kevin D. Whitley, age 39 Vice President, U.S. Sales
Mr. D. Horn founded the Company in 1967 and has served as Chairman of the Board since its inception. He also served as Chief Executive Officer from the Company's inception until April 1992 and as President to September, 1991.
Mr. Darby has served as Chief Executive Officer since April, 1992 and as President since October, 1991. Mr. Darby also served as Chief Operating Officer and as Executive Vice President, Vice President, Finance and Treasurer of the Company. He first joined the Company in 1978 as Controller after more than nine years at KPMG Peat Marwick, a major public accounting firm.
Mr. Roche joined the Company as Executive Vice President and co-participant in the Office of the President in August 1993. For the six months earlier, Mr. Roche provided consulting services to the Company. In October, 1991 Mr. Roche retired as a partner of Arthur Andersen & Co., an international accounting firm whom he joined in 1960.
Mr. Barry is a retired executive of Grumman Corp., an aerospace manufacturer, for whom he served from August 1988 to March 1991 as Senior Vice President of Washington D.C. operations. Previously, he served since 1974 as President of Hartman Systems, Inc., a manufacturer of electronic controls and display devices for military applications. Mr. Barry currently acts as a consultant to private industry on government relations.
Mr. Gidge is a retired executive officer of Lincoln Savings Bank (1976-1994) and served as its Chairman, Credit Policy. He has also served as a director since 1980 of Interboro Mutual Indemnity Insurance Co., a general insurance mutual company and since 1988 as a director of Intervest Corporation of New York, a mortgage banking company.
Mr. Katz is a physician practicing in New York. He is the President of Katz, Rosenthal, Ganz, Snyder & PDC. He has served in that capacity for 25 years.
Mr. Neumann has been President of Flynn-Neumann Agency, Inc. an insurance brokerage firm, since 1971. He has also served since 1978 as a director of Reliance Federal Savings Bank.
Mr. Robertson is President of TM Capital Corporation, a financial services company, an organization he founded in 1989. From 1985 to 1989, he was employed by Thomson McKinnon Securities, Inc. as head of investment banking and public finance.
Mr. Sudo has been Treasurer of Chugai Boyeki (America) Corp., a distributor of electronic, chemical and optical products, for the past ten years.
Mr. Wallace, who joined the Company in 1970, was Executive Vice President from 1979 until he retired in September, 1990.
Mr. P. Horn joined the Company in January, 1974 and has been employed in various technical capacities. In 1986 he was appointed as Vice President, Engineering; in May, 1990 as Vice President, New Products and Technical Support Services; in September 1993, he was appointed Vice President, Marketing; in 1994 as Vice President, Product Management; and in 1995 as Vice President, Compliance and Quality Assurance.
Mr. Pshtissky, who joined the Company in September 1979, as an Electrical Design Engineer, was promoted to Director of Electrical Product Development in March, 1988 and to Vice President, Engineering in May, 1990.
Mr. Whitley joined the Company in March, 1987 as a Sales Engineer. He was promoted to Midwest Regional Manager in 1989 and Vice President, U.S. Sales in August, 1993.
There are no family relationships between any director, executive officer or person nominated or chosen by the Company to become a director or officer except for the relationship between Peter A. Horn, an officer of the Company, and Donald N. Horn, Chairman of the Board. Peter A. Horn is the son of Donald N. Horn.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended September 30, 1995 and Form 5 and amendments thereto furnished to the Company with respect to the year ended and certain written representations, no person, who, at any time during the year ended September 30, 1995, was a director, officer or beneficial owner of more than 10 percent of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act failed to file on a timely basis, as disclosed in the above forms, reports required by Section 16 of the Exchange Act during the year ended September 30, 1995.
ITEM 11 - EXECUTIVE COMPENSATION
The following information is set forth with respect to all compensation paid by the Company to its Chief Executive Officer and its most highly compensated executive officers other than the CEO whose annual compensation exceeded $100,000, for each of the past three fiscal years.
No listed officer received other non-cash compensation amounting to more than 10% of salary.
(1) Represents life insurance policy payment.
(2) Includes a $28,000 cash distribution pursuant to the cancellation of a deferred compensation agreement and a $3,000 life insurance policy payment.
No options were exercised by any of the above-named officers during the year ended September 30, 1995.
(1) Calculated based on $1.875 per share closing market value at September 30, 1995.
Mr. Darby has entered into an employment contract with the Company that entitles him to receive an annual salary of $195,000 through fiscal year 2000. Additionally, Mr. Darby's agreement provides for payment in an amount up to three times his average annual compensation for the previous five years if there is a change in control (as defined in the agreement).
Mr. Roche, who joined the Company on August 1, 1993, has an agreement with the Company that provides an annual salary of $150,000 through September 30, 1997. The agreement also provides for a payment, at Mr. Roche's option, if there is a change in control, as defined, equal to the unpaid salary under his agreement.
Messrs. D. Horn and Wallace (a former executive and a current director) each have insured deferred compensation agreements with the Company which provide that upon reaching retirement age total payments of $917,000 and $631,000, respectively, will be made in monthly installments over a ten year period. The full deferred compensation payment is subject to such individuals' adherence to certain non-compete covenants. Mr. Wallace, who retired in September 1990, began receiving payments under the agreement in October, 1990 and Mr. Horn began receiving payments under the agreement in January, 1994.
Directors, except the Chairman of the Board and employee directors, are each compensated at the rate of $600 per Board meeting and $300 per committee meeting attended in person. The Chairman of the Board is compensated at the rate of $1,000 per Board meeting and $300 per committee meeting attended in person.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs. Neumann, Robertson and Wallace, none of whom are or ever have been officers of the Company, except Mr. Wallace who retired in 1990 as Executive Vice President. See the section entitled "Certain Relationships and Related Transactions" included elsewhere herein, for a discussion of certain other relationships maintained by Mr. Neumann and Mr. Robertson with the Company.
The Compensation Committee's compensation policies applicable to the Company's executive officers for the last completed fiscal year were to pay a competitive market price for the services of such officers, taking into account the overall performance and financial capabilities of the Company and the officer's individual level of performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base salary and incentive compensation of all executive officers other than Mr. Darby. The Committee reviews these recommendations with Mr. Darby, and after such review, determines compensation. In the case of Mr. Darby, the Compensation Committee makes its determination after direct negotiation with such officer. For each executive officer, the Committee's determinations are based on the committee's conclusions concerning each officer's performance and comparable compensation levels in the CCTV Industry and the Long Island area for similarly situated officers at other companies. The overall level of performance of the Company is taken into account but is not specifically related to the base salary of these executive officers. Also, the Company has established an incentive compensation plan for all of its executive officers, which provides a specified bonus to each officer upon the Company's achievement of certain annual profitability targets.
The Compensation Committee grants options to executive officers to connect compensation to the performance of the Company. Options are exercisable in the future at the fair market value at the time of grant, so that an officer granted an option is rewarded by the increase in the price of the Company's stock. The Committee grants options based on significant contributions of an executive officer to the performance of the Company.
In addition, in determining the salary compensation of Mr. Darby as CEO, the Committee considered the responsibility assumed by him in formulating and implementing a management and operating restructuring plan.
Peter F. Neumann, Chairman, W. Gregory Robertson
This graph compares the return of $100 invested in the Company's stock on October 1, 1990, with the return on the same investment in the AMEX Market Value Index and the AMEX High Technology Index.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth information as to each person, known to the Company to be a "beneficial owner" (as defined in regulations of the Securities and Exchange Commission) of more than five percent of the Company's Common Stock outstanding as of December 1, 1995 and the shares beneficially owned by the Company's Directors and by all Officers and Directors as a group.
(1) The nature of beneficial ownership of all shares is sole voting and investment power. (2) Includes currently exercisable options to purchase 5,000 shares. (3) Includes currently exercisable options to purchase 140,714 shares.
(4) Includes currently exercisable options to purchase 4,543 shares. (5) Includes currently exercisable options to purchase 37,500 shares. (6) Includes currently exercisable options to purchase 250,302 shares.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Chugai Boyeki Company, Ltd. (Chugai), a Japanese corporation, which owns 19.9% of the outstanding shares of the Company, have been conducting business with each other for approximately sixteen years whereby the Company imports certain video products and lenses through Chugai and also sells its products to Chugai who resells the products in certain Asian and European markets. In fiscal 1995, the Company purchased approximately $11.6 million of products through Chugai and sold products to Chugai for resale totaling approximately $3.4 million. Kazuyoshi Sudo, a director, is Treasurer of Chugai Boyeki (America) Corp., a U.S. subsidiary of Chugai.
Chu S. Chun, who controls 6.1% of the outstanding shares of the Company, also owns Chun Shin Industries, Inc. (CSI). CSI is a 50% partner with the Company in Chun Shin Electronics, Inc. (CSE), a joint venture company which manufactures and assembles certain Vicon products in South Korea. In fiscal 1995, CSE sold approximately $5.1 million of product to the Company through I.I.I. Companies, Inc. (I.I.I.), a U.S. based company controlled by Mr. Chun. The Company entered into a supplier agreement with I.I.I. during 1994 whereby I.I.I. arranges the importation and provides short term financing on all the Company's product purchases from CSE. CSE also sold approximately $1.2 million of product to CSI which sells Vicon product exclusively in Korea. In addition, I.I.I. purchased approximately $900,000 of products directly from the Company during fiscal 1995 for resale to CSI.
Peter F. Neumann, a director of the Company, is President and the principal shareholder of Flynn-Neumann Agency, Inc., an insurance brokerage firm, which is the agent for a majority of the Company's commercial insurance. The premium paid for such insurance amounted to approximately $94,000 in fiscal 1995.
W. Gregory Robertson, a director of the Company, is President of TM Capital Corporation, an investment banking firm which provides investment banking services to the Company on a periodic basis. Services rendered to the Company during fiscal 1995 but paid subsequent to year end amounted to $25,000.
During 1995, the Company purchased approximately $50,000 of products from Pro/Four Video Products, Inc., in which Donald N. Horn and Arthur V. Wallace, directors of the Company, have an ownership interest.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
Included in Part IV, Item 14:
Consolidated Statements of Operations, fiscal years ended September 30, 1995, 1994, and 1993
Consolidated Balance Sheets at September 30, 1995 and 1994
Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 1995, 1994, and 1993
Consolidated Statements of Cash Flows, fiscal years ended September 30,
Notes to Consolidated Financial Statements, fiscal years ended September 30, 1995, 1994, and 1993
(a) (2) Financial Statement Schedule
Included in Part IV, Item 14:
Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 1995, 1994, and 1993
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted.
3 Articles of Incorporation and Incorporated by reference By-Laws, as amended to the 1985 Annual Report on Form 10-K; Form S-2 Exhibit A, B and C of the
(.1) Credit and Security Agreement 10.1 IBJ Schroder Bank and Trust
(.2) Promissory Note dated 10.2 October 5, 1993 as amended Boyeki Company, Ltd.
(.3) Mortgage Loan Agreement dated Incorporated by June 2, 1989 between the reference to the 1989 Registrant and Chugai Boyeki Annual Report on
(.4) Employment contract dated 10.4 October 1, 1995 between the Registrant and Kenneth M. Darby
(.5) Letter Agreement dated October 10.5
(.6) Employment Agreement dated June 10.6 1, 1995 between Registrant and
(.7) Employment Agreement dated June 10.7 1, 1995 betwen Registrant and
(.8) Deferred Compensation Agreements Incorporated by dated November 1, 1986 between the reference to the 1992 Registrant and Donald N. Horn and Annual Report on Arthur V. Wallace Form 10K
(.9) Agreement of lease dated Incorporated by January 18, 1988 between the reference to the 1988 Registrant and Allan V. Rose Annual Report on Form
(.10) Sublease Agreement dated Incorporated by reference as of January 1, 1993 between to the 1994 Annual Report the Registrant and AVR on Form 10-K Mart Inc.
(.11) Consent of Overlandlord and Incorporated by reference Release Agreement (undated) to the 1994 Annual Report between the Registrant and on Form 10-K
(.12) Sublease Agreement dated 10.12 as of September 1, 1995 between the Registrant and New York
(.13) Amended and restated 1986 Incorporated by Incentive Stock Option Plan reference to the 1990
(.14) 1994 Incentive Stock Incorporated by reference Option Plan to the 1994 Annual Report
(.15) 1994 Non-Qualified Stock Option Incorporated by reference Plan for Outside Directors to the 1994 Annual Report
22 Subsidiaries of the Registrant Incorporated by
24 Independent Auditors' Consent 24
No other exhibits are required to be filed.
14(b) - REPORTS ON FORM 8-K
No reports on Form 8-K were required to be filed during the last quarter of the period covered by this report.
Other Matters - Form S-8 Undertaking
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892 (filed June 30, 1986), 33-34349 (filed April 1, 1990) and 33-90038 (filed February 24, 1995):
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 Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by 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.
The Board of Directors and Shareholders Vicon Industries, Inc.:
We have audited the consolidated financial statements of Vicon Industries, Inc. and subsidiaries as listed in Part IV, item 14(a)(1). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Part IV, item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vicon Industries, Inc. and subsidiaries at September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended 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 consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
November 16, 1995, except as to note 6, which is as of
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 1995, 1994, and 1993
NOTE 1. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Vicon Industries, Inc. (the Company) and its wholly owned subsidiaries, Vicon Industries Foreign Sales Corp., a Foreign Sales Corporation (FSC) and Vicon Industries (U.K.), Ltd. after elimination of intercompany accounts and transactions.
Revenues are recognized when products are sold and title is passed to a third party, generally at the time of shipment.
Inventories are valued at the lower of cost (on a moving average basis which approximates a first-in, first-out method) or market. When it is determined that a product or product line will be sold below carrying cost, affected on hand inventories are written down to their estimated net realizable values.
Property, plant, and equipment are recorded at cost and include expenditures for replacements or major improvements. Depreciation, which includes amortization of assets under capital leases, is computed by the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and on an accelerated basis for income tax purposes. Machinery, equipment and vehicles are being depreciated over periods ranging from 2 to 10 years. The Company's building is being depreciated over a period of 40 years and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term.
Product research and development costs are charged to cost of sales as incurred, and amounted to approximately $1,900,000, $1,600,000 and $1,600,000 in fiscal 1995, 1994, and 1993, respectively.
Earnings per share are computed based on the weighted average number of shares outstanding and equivalent shares from dilutive stock options, if any, of 2,763,000 in 1995, 1994, and 1993, respectively.
Foreign currency translation is performed utilizing the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, while revenues, costs, and expenses are translated at the average exchange rate for the reporting period. The resulting translation adjustment of $(125,056) and $(62,595) at September 30, 1995 and 1994, respectively, is recorded as a component of shareholders' equity. Intercompany balances not deemed long-term in nature at the balance sheet date resulted in a translation gain of $46,893, $46,216, and $43,527 in 1995, 1994, and 1993, respectively, which is reflected in cost of sales.
In fiscal 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets 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 be recovered or settled (see Note 5).
Certain prior year amounts have been reclassified to conform with current year presentation.
NOTE 2. Investment in Affiliate
The Company's 50 percent ownership in Chun Shin Electronics, Inc., a joint venture company which assembles certain Vicon products in South Korea, is accounted for using the equity method which reflects the cost of the Company's investment adjusted for the Company's proportionate share of earnings or losses. Such earnings or losses have been insignificant during each of the three years ended September 30, 1995. Assets and sales of the joint venture were approximately $2.6 million and $6.6 million, respectively, for the fiscal year ended September 30, 1995. The significant portion of joint venture product sales were to related parties including approximately $19,000 directly to the Company; approximately $5.1 million indirectly to the Company through I.I.I. Companies, Inc., a related party; and approximately $1.2 million to Chun Shin Industries, Inc., also a related party (see Note 11).
NOTE 3. Deferred Gain on Sale and Leaseback
In fiscal 1988, under a sale and leaseback agreement, the Company sold its principal operating facility in Melville, New York for approximately $11 million and leased it back under a ten-year lease agreement. The transaction resulted in a net gain of $3,321,000 which was deferred and is being amortized over the ten-year lease period.
Borrowings under the Company's revolving credit agreement represent short term borrowings by the Company's U.K. subsidiary. Maximum borrowings during 1995, 1994 and 1993 amounted to approximately $1,083,000, $1,123,000, and $494,000, respectively. The weighted-average interest rate on borrowings during these years was 8 1/2% in 1995, 7 1/4% in 1994, and 8 1/4% in 1993.
At September 30, 1995 and 1994, Accounts Payable - related party included approximately $4.5 million and $4.3 million, respectively, of extended accounts payable balances due Chugai Boyeki Company, Ltd. The extended accounts payable balance at September 30, 1995 includes approximately $4.0 million of purchases denominated in Japanese yen which bear interest at the related party's internal lending rate (4.25% at September 30, 1995). The remaining balances are denominated in U.S. dollars and bear interest at their U.S. bank's prime rate (8.75% at September 30,1995).
At September 30, 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $5,700,000 which are available to offset future federal taxable income, if any, through 2010. The Company also had general business tax credit carryforwards for federal income tax purposes of approximately $186,000 which are available to reduce future federal income taxes, if any, through 2003. Pretax domestic and foreign (loss) income in fiscal 1995 amounted to approximately $(1,626,000) and $291,000, respectively.
In October 1993, the Company issued a $2,000,000 secured promissory note to Chugai Boyeki Co., Ltd., a related party. The note is subordinated to senior bank debt with regard to liens and interest under certain conditions. Subsequent to year end, the Company amended the note to defer all scheduled installments to July 1998. Accordingly, such amounts have been classified as long-term in the accompanying Consolidated Balance Sheets.
At September 30, 1995, the Company was a party to a secured Revolving Credit Agreement with two banks which provided for aggregate maximum borrowings of $2,800,000 subject to an availability formula based on accounts receivable. Borrowings under the Credit Agreement were due in October, 1995, with interest at 3% above the banks' prime rate (11.75% at September 30, 1995), and required no compensating balances. At September 30, 1995, the Company was in default of certain financial covenants under this agreement. Such debt was repaid on December 28, 1995 with the proceeds received under a new two year credit agreement with another bank which provides for maximum borrowings of $3,250,000 through June 30, 1996 and $4,000,000 thereafter, subject to an availability formula based on accounts receivable and inventory balances. Borrowings under the agreement bear interest at the bank's prime rate plus 1.25% (9.75% at December 27, 1995).
The bank debt contains restrictive covenants which, among other things, require the Company to maintain certain levels of net worth, earnings and ratios of interest coverage and debt to net worth. Borrowings under these agreements are secured by substantially all assets of the Company.
Long-term debt maturing in each of the four years subsequent to September 30, 1995 approximates $221,000 in 1996, $220,000 in 1997, $4,973,000 in 1998 and $145,000 in 1999, respectively.
At September 30, 1995, future minimum annual rental commitments under the non-cancellable capital lease obligations were as follows: $68,556 in 1996, $68,556 in 1997, and $28,308 in 1998, which includes imputed interest of $12,235 in 1996, $6,355 in 1997 and $782 in 1998.
The Company operates one foreign entity, Vicon Industries (U.K.), Ltd., a wholly owned subsidiary which markets and distributes the Company's products principally within the United Kingdom and Europe.
U.S. sales include $7,987,000, $8,358,000, and $9,144,000 for export in fiscal years 1995, 1994, and 1993, respectively. Operating profit (loss) excludes unrealized foreign exchange gain/loss, interest expense and income taxes. U.S. assets include $1,127,000, $888,000, and $826,000 in fiscal years 1995, 1994, and 1993, respectively, of cash for general corporate use.
NOTE 8. Stock Options and Stock Purchase Rights
Stock option plans include both incentive and non-qualified options covering a total of 554,174 shares of common stock reserved for issuance to key employees, including officers and directors. Such amount includes a total of 200,000 options reserved for issuance in 1994 under an Incentive Stock Option Plan, as well as a total of 50,000 options reserved for issuance in 1994 under a Non-Qualified Stock Option Plan for Outside Directors. Both of these plans were approved by the Company's shareholders in April 1994. All options are issued at fair market value at the grant date and are exercisable in varying installments according to the plans. There were 254,513 and 123,000 shares available for grant at September 30, 1995 and 1994, respectively. As of September 30, 1995, 1994, and 1993, options exercisable pursuant to the plans amounted to 198,783, 268,054 and 291,738, respectively.
In November 1986, the Board of Directors declared a dividend of one Stock Purchase Right for each share of common stock outstanding on December 1, 1986. In addition, 385,715 Rights were distributed with certain new shares subsequently issued by the Company. The Rights entitle the holder to purchase for $15 one share of common stock subject to adjustment under certain conditions. The Rights are redeemable by the Company until the occurrence of certain events at $.05 per Right.
NOTE 9. Industry Segment and Major Customer
The Company operates in one industry and is engaged in the design, manufacture, assembly, and marketing of closed-circuit television (CCTV) equipment and systems for the CCTV segment of the security products industry. The Company's products include all components of a video surveillance system such as remote positioning devices, cameras, monitors, video switchers, housings, mounting accessories, recording devices, manual and motorized lenses, controls, video signal equipment, and consoles for system assembly. No customer represented sales in excess of ten percent of consolidated revenues during any of the three fiscal years presented.
In January 1988, the Company entered into a sale and leaseback agreement involving its principal operating facility (see Note 3). The ten-year lease provides for rent of $1,128,000 in the first year, increasing 4 percent annually through 1998.
In November 1994, the Company entered into a sublease agreement, dated January 1, 1993, with an affiliated company of the landlord which provides for minimum sublease payments to the Company of $120,000 in calendar year 1993; $180,000 in 1994; $240,000 in 1995 and $300,000 per year from January 1, 1996 through January 19, 1998, in exchange for the right to occupy a total of approximately 25,000 sq. ft. of office and warehouse space in the Company's primary operating facility. At the same time, the Company entered into an agreement with its landlord and subtenant whereby the Company has agreed to vacate its principal operating facility at anytime after January 1995, at the landlord's or subtenant's option, and the landlord has agreed to release the Company from its future lease obligations in consideration of a lease termination payment by the Company to the landlord of $1,000,000. Such option, if exercised, would also require the landlord to provide the Company with at least six months notice prior to the required vacate date. The lease termination payment will be reduced by $27,778 for each month after January 31, 1995 that the Company remains obligated under the primary lease. Should the landlord or subtenant exercise its option, the potential charge to earnings will consist of relocation costs and the write-off of abandoned leasehold improvements. The lease termination payment will be substantially offset by the then remaining carrying value of the deferred sale and leaseback gain.
Additionally, the Company occupies certain other facilities, or is contingently liable, under long-term operating leases which expire at various dates through 1998. The leases, which cover periods from one to four years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment (net of sublease rental) at September 30, 1995 was $2,406,000 with minimum rentals for the fiscal years shown as follows: 1996--$900,000; 1997--$1,121,000; 1998--$385,000.
The Company is a party to employment agreements with four executives which provide for, among other things, the payment of compensation if there is a change in control (as defined in the agreements). The contingent liability under these change in control provisions at September 30, 1995 was approximately $1,485,000. The total compensation payable under these agreements aggregated $1,675,000 at September 30, 1995. The Company is also a party to insured deferred compensation agreements with two retired officers. The aggregate remaining compensation payments of approximately $1,114,000 as of September 30, 1995 are subject to the individuals adherence to certain non-compete convenants, and are payable over a ten year period commencing upon retirement.
Sales to the Company's U.K. subsidiary are denominated in British pounds sterling. The Company attempts to minimize its currency exposure on these intercompany sales through the purchase of forward exchange contracts to cover unpaid receivables. These contracts generally involve the exchange of one currency for another at a future date and specified exchange rate. At September 30, 1995, the Company had approximately $872,000 of outstanding forward exchange contracts to sell British pounds. Such contracts expire at varying dates and exchange rates through December 27, 1995.
The Company's purchases of Japanese sourced products through Chugai Boyeki Co., Ltd., a related party, are denominated in Japanese yen. At September 30, 1995, Chugai had purchased, on the Company's behalf, forward exchange contracts to purchase approximately 380 million Japanese yen to hedge the currency risk on accounts payables denominated in Japanese yen. Such contracts expire at varying dates and exchange rates through June 1996.
NOTE 11: Related Party Transactions
As of September 30, 1995 and 1994, Chugai Boyeki Company, Ltd. ("Chugai") owned 548,715 shares of the Company's common stock (19.9% of the total outstanding shares). The Company, which has been conducting business with Chugai for approximately 16 years, imports certain finished products and components through Chugai and also sells its products to Chugai who resells the products in certain Asian and European markets. The Company purchased approximately $11.6, $14.1, and $14.6 million of products and components from Chugai in fiscal years 1995, 1994, and 1993, respectively, and the Company sold $3.4, $3.5, and $4.5 million of product to Chugai for distribution in fiscal years 1995, 1994, and 1993, respectively. At September 30, 1995 and 1994, the Company owed $6.9 million and $5.8 million, respectively, to Chugai and Chugai owed $92,000 and $157,000, respectively, to the Company resulting from purchases of products. The amounts owed to Chugai are secured by a subordinated lien on substantially all the Company's assets. During fiscal 1989, Chugai made a mortgage loan to the Company in the amount of $1,026,000 to partially finance the construction of a new sales/distribution facility in the U.K. In October 1993, the Company borrowed $2 million from Chugai under a promissory note agreement. See Note 6 for a further discussion of this transaction.
As of September 30, 1995, Mr. Chu S. Chun controlled 168,957 shares of the Company's common stock (6.1% of the total outstanding shares). Mr. Chun owns Chun Shin Industries, Inc., the Company's 50% Korean joint venture partner, and Chun Shin Electronics. (CSE) which purchases product from the joint venture (see Note 2). During 1994, the Company entered into a supplier agreement with I.I.I. Companies, Inc. (I.I.I.), a U.S. based company controlled by Mr. Chun, whereby I.I.I. arranges the importation and provides short term financing on all the Company's product purchases from Chun Shin Electronics, Inc. During fiscal years 1995 and 1994, the Company purchased approximately $5.1 million and $3.1 million of products from I.I.I. under this agreement. Further, the Company sold approximately $900,000 and $1.1 million of its products to I.I.I. during fiscal years 1995 and 1994, respectively. At September 30, 1995 and 1994, I.I.I. owed the Company approximately $422,000 and $289,000, respectively.
The Company has not declared or paid cash dividends on its common stock for any of the foregoing periods. Additionally, certain loan agreements restrict the payment of any cash dividends in future periods.
Because of changes in the number of common shares outstanding and market price fluctuations affecting outstanding stock options, the sum of quarterly earnings per share may not equal the earnings per share for the full year.
Pursuant to the requirements of the 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 Kenneth M. Darby By Arthur D. Roche By John M. Badke Kenneth M. Darby Arthur D. Roche John M. Badke President Executive Vice President Controller (Chief Executive Officer) (Chief Financial Officer) (Chief Acctg.Offr.)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
Donald N. Horn January 12, 1996 Donald N. Horn Chairman of the Board Date
Kenneth M. Darby Director January 12, 1996
Arthur D. Roche Director January 12, 1996
Arthur V. Wallace Director January 12, 1996
Peter F. Barry January 12, 1996 Peter F. Barry Director Date
Milton F. Gidge January 12, 1996 Milton F. Gidge Director Date
Michael D. Katz January 12, 1996 Michael D. Katz Director Date
Peter F. Neumann January 12, 1996 Peter F. Neumann Director Date
W. Gregory Robertson January 12, 1996 W. Gregory Robertson Director Date
Kazuyoshi Sudo January 12, 1996
Pursuant to the requirements of the 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 ------------------------ By ------------------------ By --------------------- Kenneth M. Darby Arthur D. Roche John M. Badke President Executive Vice President Controller (Chief Executive Officer) (Chief Financial Officer) (Chief Acctg. Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
Donald N. Horn Chairman of the Board Date
Peter F. Barry Director Date
Milton F. Gidge Director Date
Michael D. Katz Director Date
Peter F. Neumann Director Date
W. Gregory Robertson Director Date | 10-K | 10-K | 1996-01-16T00:00:00 | 1996-01-16T14:42:05 |
0000912057-96-000542 | 0000912057-96-000542_0001.txt | The Nuclear Metals, Inc. Directors' Stock Option Plan as adopted November 20, 1995:
The purpose of this Plan is to enhance the ability of NUCLEAR METALS, INC. (the "Corporation") to attract and retain skilled and competent members of its Board of Directors. The class of persons eligible to receive options under the Plan shall consist of all outside (non-management) directors of the Corporation and its subsidiaries.
2. MAXIMUM NUMBER OF SHARES TO BE OPTIONED
The maximum number of shares of common stock which may be optioned and sold under this Plan is 35,000 shares of common stock of the Corporation (the "Common Stock"), except as such number of shares shall be adjusted in accordance with provisions of Section 5 hereof. Such shares shall be shares of the authorized but unissued common stock or shares of Common Stock purchased as treasury stock as may from time to time be determined by the Board of Directors of the Corporation. Any shares which are reserved for issuance upon the exercise of an option and which for any reason are not so issued may after the expiration of the option, again be optioned under this Plan.
3. ADMINISTRATION OF THE PLAN
This Plan shall be administered by a Stock Option Committee (the "Committee") selected from time to time by the Board of Directors and initially consisting of the entire Board of Directors of the Corporation. Subject to the express provisions of this Plan, the Committee shall supervise and administer this Plan and grant all options hereunder. The Committee shall have full authority, consistently with this Plan from time to time to determine the directors of the Corporation to receive options under this Plan, the number of shares to be subject to each option, and the time or times when each option may be exercised in whole or in part; to determine the provisions of options to be granted (which need not be identical); to construe and interpret this Plan and such options; and to make all other determinations which it may deem necessary and advisable for administering this Plan. All such actions and determinations of the Committee shall be final, conclusive and binding upon all parties interested.
No member of the Committee shall be liable for any action or determination made by him in good faith.
4. TERMS AND CONDITIONS OF OPTIONS
Options granted under this Plan shall be evidenced by written agreements subject to the following terms and conditions and not inconsistent therewith as the Committee shall from time to time determine.
The Committee shall determine the purchase price under each option, provided that (i) the purchase price under each option shall not be less than one hundred (100%) percent and not more than one hundred and twenty-five (125%) percent of the fair market value of the common stock on the date the option is granted, (ii) the fair market value shall be determined by the Committee (provisions are made in Section 5 for adjustment of the price in certain events).
The period during which an option may be exercised shall be determined by the Committee, but shall be for a period of not more than ten years from the date such option is granted. Such period may be reduced only as specifically provided in this Plan.
Each option may provide that it may not be exercised for a specific period after the date of the granting of the option as the Stock Option Committee in each case may determine. Shares which may be purchased in any one year and are not purchased in full may be purchased in any subsequent year during the period of the option.
(d) PAYMENT FOR AND DELIVERY OF STOCK
Payment for shares purchased upon exercise of an option shall be made in full in cash, or in common stock of the Corporation, valued at fair market value on the date of exercise. Certificates for fully paid shares shall be issued in the name of the optionee as the Corporation from time to time receives payment in full for the purpose price thereof.
The Corporation shall not be obligated to deliver any shares of stock until there has been compliance with any federal or State laws or regulations which the Corporation may deem applicable.
No holder of any option or his legal representatives, legatees or distributees, as the case may be, will be, or will be deemed to be a holder of any shares subject to an option unless and until certificates for such shares are issued to him or them under the provisions of this Plan.
No option under the Plan shall be transferable, and except as otherwise provided herein, options shall be exercisable only by the optionee. No option shall be subject to execution, attachment or similar process.
At the time each option is exercised, the optionee shall represent in writing to the Corporation that he is of full age and that stock purchased by him under the option is to be and is being purchased for investment and not with a view to the distribution thereof.
If an optionee dies at a time when he is entitled to exercise an option, then at any time or times within twelve months after his death, but in no event after ten years from the date such option is granted, such option may be exercised, as to all or any of the shares which the optionee was entitled to purchase and had not purchased at the time of his death, by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such option shall expire at the end of such twelve months or at the end of such ten years, whichever is earlier, provided however, any such exercise of such an option shall be expressly subject to any restrictions on transfer of stock of the Corporation found in the Articles of Organization and the executor, administrator or person or persons so exercising said option shall be required to comply with any restrictions on transfer of stock of the Corporation in the same manner as if the optionee had died owning stock of the Corporation.
5. ADJUSTMENT IN NUMBER OF SHARES AND PURCHASE PRICE
The aggregate number of shares of common stock on which options may be granted hereunder, the number of shares of common stock covered by each such option, shall all be appropriately and equitably adjusted by the Board of Directors in it discretion to prevent dilution or any enlargement of rights under such option, by reason of any increase or decrease in the number of issued shares of common stock resulting from a subdivision or consolidation of shares or capital readjustment, or the payment of a stock dividend or other increase or decrease in such shares effected without receipt of compensation by the Corporation. Any fractional shares resulting from any such adjustment shall be eliminated from the option.
Subject to any required action by the stockholders, if the Corporation shall be the surviving corporation in any merger or consolidation, any option granted hereunder shall cover the securities to which a holder of the number of shares of common stock covered by the option would have been entitled; but a sale of substantially all the assets of the Corporation, or a dissolution or liquidation of the Corporation, or a merger or consolidation in which the Corporation is not the surviving corporation, shall cause (i) all outstanding options hereunder to become exercisable in full effective as of the date of dissolution, liquidation, merger or consolidation, and (ii) all outstanding options hereunder immediately thereafter to terminate.
The Board of Directors may at any time amend, suspend or terminate this Plan. No action by the Board of Directors may, except as provided in Section 5, without the consent of the holder of an existing option, materially and adversely affect his rights under such option.
7. DURATION OF THE PLAN
This Plan became effective on November 20, 1995 and shall terminate on November 20, 2000 unless sooner terminated by the Board of Directors. Options may be granted under this Plan at any time and from time to time prior to its termination. Any option outstanding under this Plan at the time of the termination or a suspension of this Plan shall remain in effect until such option shall have been exercised or shall have expired in accordance with its terms and conditions. | 10-K | EX-4 | 1996-01-16T00:00:00 | 1996-01-16T17:13:10 |
0000950109-96-000236 | 0000950109-96-000236_0011.txt | <DESCRIPTION>DEBENTURE CERTIFICATE - 12% SENIOR
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
Polyphase Corporation, a corporation duly organized and existing under the laws of the State of Nevada (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to) for value received, hereby promises to pay to Bridge Rope & Co., or registered assigns, the principal sum of Five Hundred Thousand Dollars on December 1, 1997, and to pay interest thereon from December 1, 1995 or from the most recent Interest Payment Date to which interest has been paid, semi-annually on December 1 and June 1 in each year, commencing June 1, 1996, at the rate of 12% per annum, until the principal hereof is paid. In the event that, (i) the Company shall have received a written request to effect a registration of securities under the Securities Act pursuant to Section 2.1 of the Registration Rights Agreement and, for any reason whatsoever, (ii) either (A) the Company shall not have filed with the Commission a registration statement with respect to such registration in accordance with Section 2.1 and the other applicable provisions of the Registration Rights Agreement or (B) such registration statement shall have been so filed but shall not have been declared effective by the Commission, in either case on or before the 90th day following the receipt by the Company of such written request, the interest rate in respect of the Bonds shall, on such date, increase to 12 1/4% per annum, and shall further increase on the last day of each consecutive fiscal quarter of the Company thereafter by an additional 1/4%; provided, however, that the interest rate shall revert to 12% per annum when such registration statement has been filed as aforesaid and declared effective by the Commission. The interest so payable, and punctually paid, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Bond (or one or more Predecessor Bonds) is registered at the close of business on the Record Date immediately preceding such Interest Payment Date. The Company shall pay interest on overdue principal (and premium, if any) at the interest rate then in effect plus 1% per annum, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. Interest on this Bond shall be computed on the basis of a 360-day year of twelve 30-day months.
The principal of (and premium, if any) and interest on this Bond shall be payable at the Corporate Trust Office of the Trustee and at the office or agency of the Company at 16885 Dallas Parkway, the City of Dallas, the State of Texas, maintained for such purpose and at any other office or agency maintained by the Company for such purpose; provided, however, that at the option of the Company payment of interest may be made at the Corporate Trust Office of the Trustee, by check mailed to the address of the Person entitled thereto as such address shall appear in the Bond Register or by wire transfer of immediately available funds to an account previously designated to the Company by such Person at least three Business Days prior to the Interest Payment Date.
Reference is hereby made to the further provisions of this Bond set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Bond shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its seal.
TRUSTEE'S CERTIFICATE OF AUTHENTICATION Attest:
IBJ SCHRODER BANK & TRUST __________________________ COMPANY, as Trustee, certifies Secretary that this is one of the Bonds referred to in the Indenture.
1. The Indenture. This Bond is one of a duly authorized issue of Bonds of the Company designated as its 12% Senior Convertible Debentures due December 1, 1997 (herein called the "Bonds"), limited in aggregate principal amount to $1,500,000, issued and to be issued under an Indenture, dated as of December 1, 1995 (herein called the "Indenture"), between the Company and IBJ Schroder Bank & Trust Company, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Bonds and of the terms upon which the Bonds are, and are to be, authenticated and delivered. The terms of the Bonds include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 as amended and in effect on the date of the Indenture. All terms used in this Bond that are defined in the Indenture shall have the meanings assigned to them in the Indenture.
Initially, IBJ Schroder Bank & Trust Company, as 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.
The Company will furnish to any Holder upon written request and without charge a copy of the Indenture which has in it the text of the Bond. Requests may be made to: Polyphase Corporation, 16885 Dallas Parkway, Dallas, Texas 75248, Attention: Corporate Secretary.
2. Optional Redemption. Subject to the conditions set forth below, the Company may, at its option, redeem the Bonds, in whole at any time or in part from time to time, at the following redemption prices (expressed as a percentage of principal amount), payable in cash, in each case together with accrued interest to the Redemption Date:
of the date hereof 105%
Notwithstanding the preceding provisions of this Paragraph 2, the Company shall not have the right to redeem any Bonds pursuant to this Paragraph 2 unless (a) the Average Price per share of Common Stock for each of any 40 Trading Days occurring in a period of 60 consecutive Trading Days during the First Contingent Redemption Period shall have exceeded 250% of the Conversion Price in effect on such day and (b) the Company shall have given to each Holder, in accordance with SECTION 105 of the Indenture, within 10 days following the last day of such 60- day period (the "Trigger Date"), written notice of such event, in which case the Company shall have the right to redeem the Bonds as hereinabove described at any time during the period commencing on the 51st day after the Trigger Date and ending on November 30, 1997.
3. Notice of Redemption. Notice of redemption pursuant to Paragraph 2 hereof will be given at least 30 days but not more than 60 days before the Redemption Date to each Holder of Bonds to be redeemed at its registered address. If money sufficient to pay the Redemption Price of and accrued interest on all Bonds (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent on or before the Redemption Date, on and after the Redemption Date, interest will cease to accrue on such Bonds or portions thereof.
4. Use of Proceeds Put Provision. In the event that the Company uses any of the proceeds of the issuance of the Bonds other than to fund the purchase price for the Acquisition, the Company shall immediately provide the Holders with written notice of such other use. In such event, the Holders shall have the right for a period of 90 days from the date such notice is received, at its option, to require the Company to purchase all or any portion of such Holder's Bonds at a price equal to the Purchase Price plus accrued but unpaid interest through the date such Bonds are purchased by the Company.
5. Put Provision. In the event of a Change of Control or a Delisting (each as hereinafter defined), each Holder shall have the right, at its option, to require the Company to purchase all or any portion of such Holder's Bonds at a price equal to the greater of (a) the Current Market Price per share of Common Stock (determined with reference to the date described in the following clause (i) or (ii), as applicable) multiplied by the number of shares of Common Stock into which the aggregate principal amount of such Bonds is convertible at the Conversion Price in effect on (i) in the event of a merger or consolidation described in clause (d)(i) or (d)(ii) of the definition of Change of Control set forth below, the earlier of (A) the date of execution of the definitive merger or consolidation agreement in respect of such merger or consolidation and (B) the date any of the principal terms of such merger or consolidation are publicly announced or (ii) in the event of any other Change of Control, the date such Change of Control occurs, and (b) the Redemption Price in effect on the date of such event, plus accrued and unpaid interest to the Purchase Date, as provided in, and subject to the terms of, the Indenture.
A "Change of Control" shall be deemed to have occurred if and at the time that:
(a) any Person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act), other than Current Management (which for purposes of this clause (a) shall include any Person to whom Current Management may transfer Common Stock pursuant to SECTION 1401 of the Indenture) or their Affiliates, is or becomes the beneficial owner, directly or indirectly, of outstanding shares of stock of the Company entitling such Person or Persons to exercise 50% or more of the total voting power of all classes of stock of the Company entitled to vote in the election of directors (the term "beneficial owner" shall be determined in accordance with Rules 13d-3 and 13d-5 promulgated by the Commission under the Exchange Act);
(b)(i) Current Management (including their Affiliates, other than the Company, and any Person to whom Current Management may transfer Common Stock pursuant to SECTION 1401 of the Indenture) cease to be the beneficial owner, directly or indirectly, in the aggregate, of shares of Common Stock having a fair market value (based on the most recent Closing Price per share of the Common Stock) of at least $12,500,000; (ii) any member of Current Management ceases to be a director or executive officer (within the meaning of Rule 3b-7 promulgated by the Commission under the Exchange Act) of the Company; or (iii) any member of Current Management ceases to devote a substantial part of his time
(c) the Company conveys, transfers or leases all or substantially all of its assets to any other Person; or
(d) the Company consolidates or merges with or into any other Person and (i) the Company is not the surviving corporation, (ii) the Company's earnings per share of Common Stock determined on a pro forma basis, giving effect to such merger or consolidation, for its fiscal year most recently ended and any subsequent interim period with respect to which financial statements are required to be delivered pursuant to SECTION 1201 of the Indenture, shall be less than the Company's historical earnings per share for either such period, which determination shall be made by the Board of Directors, as evidenced by a Board Resolution, within five (5) days following the consummation of such consolidation or merger, or (iii) at any time prior to the last day of the 36th full calendar month following such consolidation or merger, persons who have continuously served as officers or directors of the Company for a period of at least 24 months immediately prior to the effective date of such consolidation or merger cease to constitute a majority of the board of directors of the Person formed by such consolidation or into or with which the Company is merged.
A "Delisting" shall be deemed to have occurred if and at such time as the Common Stock is neither (a) listed on the New York Stock Exchange or the American Stock Exchange nor (b) admitted for trading and traded through the NASDAQ/NMS.
Notice of each Change of Control and each Delisting shall be given to each Holder no later than ten (10) days following the occurrence of such event.
6. Optional Conversion. Any Holder shall have the right, at its option, at any time prior to the close of business on December 1, 1997 to convert, subject to the terms and provisions of the Indenture, the principal amount of any Bond (or any portion of the principal amount thereof that is $1,000 or an integral multiple of $1,000) into such number of fully paid and non-assessable shares of Common Stock as is equal to (i) the principal amount of the Bond divided by (ii) $5.00, subject to adjustment as provided in the Indenture (such price, as so adjusted, is referred to herein as the "Conversion Price"), except that (a) with respect to any Bond, or any portion thereof, which shall be called for redemption pursuant to Paragraph 2 of the Bonds, such right shall terminate at the close of business on the Redemption Date for such Bond, or such portion, unless in any such case the Company shall default in payment of the Redemption Price due upon such redemption and (b) with respect to any Bond, or any portion thereof, delivered by a Holder for purchase by the Company pursuant to Paragraph 4 of the Bonds, such right shall terminate at the close of business on the Purchase Date for such Bond, or such portion, unless in any such case the Company shall default in payment of the Purchase Price therefor. Such conversion right shall be exercised by the surrender of the Bond or Bonds, the principal amount of which is so to be converted, to the Trustee at its Corporate Trust Office any time during usual business hours, accompanied by written notice that the Holder elects to convert such Bond or Bonds or any portion thereof and specifying the name or names (with addresses) in which a certificate or certificates for shares of Common Stock are to be issued and (if so required by the Company) by a written instrument or instruments of transfer in form reasonably satisfactory to the Trustee duly executed by the Holder or its duly authorized legal representative and transfer tax stamps or funds therefor, if required pursuant to the Indenture.
Upon conversion of any Bond or portion thereof, the Holder thereof shall be entitled to receive payment of all accrued and unpaid interest on such Bond or portion thereof through the date of conversion. The Company will deliver a check in the amount of such accrued and unpaid interest plus any amount in lieu of any fractional share.
7. Defaults and Remedies. If an Event of Default shall occur and be continuing, the principal of (and premium, if any) and accrued interest on the Bonds may be declared due and payable immediately in the manner and with the effect provided in the Indenture.
8. Amendments and Waivers. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Bonds under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Bonds at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Bonds at the time Outstanding, on behalf of the Holders of all the Bonds, to waive compliance by the Company 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 Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond 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 Bond.
9. Obligations Unconditional. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Bond at the times, place and rate, and in the coin or currency, herein prescribed.
10. Denominations, Transfers, Exchange. The Bonds are issuable only in registered form in denominations of $1,000 and any integral multiple thereof. A Holder may transfer or exchange Bonds in accordance with the Indenture. The Bond Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes permitted by the Indenture.
11. Persons Deemed Owners. Prior to due presentment of this Bond for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.
12. Governing Law. The Indenture and this Bond shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of law rules of such State.
13. No Recourse Against Others. No recourse shall be had for the payment of the principal of (or premium, if any) or the interest on any Bonds, or any part thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement of the Indenture, against any incorporator, or against any stockholder, officer or director, as such, past, present or future, of the Company. By accepting a Bond, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Bonds.
14. Authentication. This Bond shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Bond.
15. Abbreviations. Customary abbreviations may be used in the name of Holder or an assignee, such as TEN COM (=tenants in common), TENENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act).
I or we assign and transfer this Bond to:
(Insert assignee's social security or tax I.D. number)
(Print or type name, address and zip code of assignee)
Agent to transfer this Bond on the books of the Company. The Agent may substitute another to act for him.
[_] (a) this Bond is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144 or Rule 144A thereunder.
[_] (b) this Bond is being transferred other than in accordance with (a) above and documents are being furnished that comply with the conditions of transfer set forth in this Bond and the Indenture.
If none of the foregoing boxes is checked, the Trustee or Registrar shall not be obligated to register this Bond in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 305 of the Indenture shall have been satisfied.
(Sign exactly as your name appears on the other side of this Bond)
(Signature must be guaranteed by a member firm of a national securities exchange or of the National Association of Securities Dealers, Inc. or by a commercial
OPTION OF HOLDER TO ELECT PURCHASE/CONVERSION
If you want to elect to have all or any part of this Bond purchased by the Company pursuant to Paragraph 4 herein or converted into Common Stock pursuant to Section 1301 of the Indenture, check the appropriate box:
[_] Purchase/Paragraph 4 [_] Convert/Section 1301
If you want to have only part of the Bond purchased or converted by the Company pursuant to the above Sections, state the amount you elect to have purchased/converted:
If you want the stock certificate made out in another person's name, complete the following:
(Insert other person's social security or tax I.D. number)
(Print or type other person's name, address and zip code)
(Sign exactly as your name appears on the other side of this Bond)
(Signature must be guaranteed by a member firm of a national securities exchange or of the National Association of Securities Dealers, Inc. or by a commercial | 10-K | EX-10.36 | 1996-01-16T00:00:00 | 1996-01-16T17:28:22 |
0000313794-96-000001 | 0000313794-96-000001_0005.txt | (As Amended, effective January 1, 1996) Service Agreement, dated as of January 1, 1980
As used in this Schedule, the following terms have the meanings indicated:
"generating companies" - those System operating companies which own facilities for the production of electricity by means of steam generation.
"coal companies" - those active System companies engaged in the mining, preparation, and sale of coal to the System generating companies.
Except as defined above, whenever any term defined in Instruction 01-8 of the Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies prescribed by the Securities and Exchange Commission is used herein, such term shall have the meaning assigned thereto in such Uniform System of Accounts.
DETERMINATION AND ALLOCATION OF COSTS
A. All disbursements and expenses of the Company for services performed for Clients shall be billed to such Clients. The Company will maintain a work order system for accumulating all costs on a job, project or functional basis, as appropriate. All employees, including officers, of the Company shall keep, within reasonable cost benefit standards, time records which permit ready identification of hours worked, account numbers charged and work order numbers charged. Charges for salaries will be determined from the time records of employees and will be computed on the basis of each employee's hourly rate. Records of employee related expenses, overheads and other indirect expenses will be maintained for each functional service group of the Company (hereinafter referred to as a "Group") by the Company and such expenses shall be allocated to work orders in the same manner as the salaries of the Group are allocated.
B. Each work order request shall be initiated by the Company either upon the request of a particular Group or upon the request of a Client. Each work order request must be approved in the following manner:
1. A work order request must be approved by a manager of the Group that sponsors the work.
2. A work order request must be reviewed and approved by the Company's Accounting Department.
3. The terms of a work order must be agreed upon by the Client. Acceptance will be denoted by approval of the person appointed by the Client to approve work orders.
C. Each work order will specify the Client to be charged and, where more than one Client is to be charged, the method of allocation of such charges determined in accordance with paragraph D. of this Article II.
D. Costs accumulated on Company work orders shall be billed to Clients as follows:
1. Costs accumulated on job, project or functional work orders for services performed for a single Client will be billed to that Client.
2. Costs accumulated on job or project work orders for services performed for two or more Clients will be allocated among and billed to such Clients. The appropriate method of allocation will be determined by the Company at the time each such work order is initiated and notice of such allocation method will be given to the Clients affected.
3. Costs accumulated on functional work orders for services of a general nature which are applicable to all Clients or to a class or classes of Clients will be allocated among and billed to such Clients by application of one or more of the allocation ratios described in paragraph E. of this Article II. Article III specifies the method or methods of allocation which shall be used by each Group to allocate costs accumulated on such functional work orders for services of a general nature.
E. The following ratios shall be applied, as specified in Article III, to allocate costs accumulated on functional work orders for services of a general nature, unless another method of allocation previously approved by the Securities and Exchange Commission is specified in the particular work order:
A ratio the numerator of which is the total Kwh sales of each Client operating company, both billed and unbilled, during the last twelve months and the denominator of which is the sum of the Kwh sales, both billed and unbilled, of all such Clients during the same twelve months. Firm intra-System sales, exclusive of the Interchange Power Pool, between the Clients shall be eliminated from a Client's Kwh sales. This ratio will be revised semi-annually, based on figures as of June 30 and December 31.
A ratio the numerator of which is the "maximum demand" in effect for a calendar month for each Client generating company and the denominator of which is the "maximum demand" in effect for a calendar month for all Client generating companies. The "maximum demand" in effect for a calendar month for a particular Client shall be equal to the maximum "load obligation", determined on a clock-hour integrated kilowatt basis, experienced by said Client during the twelve consecutive calendar months next preceding such calendar month. "Load obligation" is a Client's internal load plus any firm power sales to non-affiliated companies and to affiliated companies other than Clients.
3. Number of Electric Customers Ratio
A ratio the numerator of which is the number of firm electric customers of each Client operating company and the denominator of which is the sum of the number of firm electric customers of all such Clients. This ratio will be revised semi-annually, based on figures at June 30 and December 31.
4. Number of Client Employees Ratio
A ratio the numerator of which is the number of employees (exclusive of certain union employees, where applicable) of each Client and the denominator of which is the sum of the number of employees (exclusive of certain union employees, where applicable) of all Clients. This ratio will be revised semi-annually, based on figures at June 30 and December 31.
5. Number of Company Employees By Group Ratio
A ratio the numerator of which is the number of employees of each Group and the denominator of which is the sum of the number of employees of all Groups. This ratio will be revised semi-annually, based on figures at June 30 and December 31.
A ratio the numerator of which is the investment in utility plant of each Client (including capital leases and coal mining assets), net of accumulated provisions for depreciation, depletion and amortization, and the denominator of which is the sum of such net investments of all Clients. This ratio will be revised semi-annually, based on figures at June 30 and December 31.
7. Level of Construction Ratio
A ratio the numerator of which is the "defined construction expenditures" of each Client operating company during the last twelve months and the denominator of which is the sum of "defined construction expenditures" of all such Clients during the same twelve months. "Defined construction expenditures" for this Ratio are all construction expenditures in the following construction classifications: all production plant accounts except land and land rights; all transmission plant accounts except land and land rights; all distribution plant accounts except land and land rights, line transformers, services, meters and leased property on customers' premises; and the following general plant accounts: Structures and Improvements, Shop Equipment, Laboratory Equipment and Communication Equipment; all exclusive of construction expenditures accumulated on work orders of a Client to which charges by the Company are being made. This ratio will be revised semi-annually, based on figures as of June 30 and December 31.
8. Level of Construction - Production Ratio
A ratio the numerator of which is the "defined construction expenditures" of each Client generating company during the last twelve months and the denominator of which is the sum of "defined construction expenditures" of all such Clients during the same twelve months. "Defined construction expenditures" for this Ratio are all construction expenditures in all "production" plant accounts except land and land rights and nuclear accounts, and exclusive of construction expenditures accumulated on work orders of a Client to which charges by the Company are being separately made. This ratio will be revised semi- annually, based on figures as of June 30 and December 31.
9. Level of Construction - Transmission Ratio
A ratio the numerator of which is the "defined construction expenditures" of each Client operating company during the last twelve months and the denominator of which is the sum of "defined construction expenditures" of all such Clients during the same twelve months. "Defined construction expenditures" for this Ratio are all construction expenditures in all "transmission" plant accounts except land and land rights, and exclusive of construction expenditures accumulated on work orders of a Client to which charges by the Company are being separately made. This ratio will be revised semi-annually, based on figures as of June 30 and December 31.
10. Level of Construction - Distribution Ratio
A ratio the numerator of which is the "defined construction expenditures" of each Client operating company during the last twelve months and the denominator of which is the sum of "defined construction expenditures" of all such Clients during the same twelve months. "Defined construction expenditures" for this Ratio are all construction expenditures in all "distribution" plant accounts except land and land rights, line transformers, services, meters and leased property on customers' premises, and exclusive of construction expenditures accumulated on work orders of a Client to which charges by the Company are being separately made. This ratio will be revised semi-annually, based on figures at June 30 and December 31.
11. Tons of Fuel Acquired Ratio
A ratio the numerator of which is the number of tons of coal acquired for or on behalf of each Client generating company by the Company during the last twelve months and the denominator of which is the sum of the number of tons of coal acquired for or on behalf of all Client generating companies by the Company during the same twelve months. This ratio will be revised semi-annually, based on figures at June 30 and December 31.
12. Computer Resource Unit Ratio
A ratio the numerator of which is the number of computer resource units (these units measure the demands made by computer jobs on the total computer facility by first measuring the demands made on individual components of the facility and then converting each of these measurements to a common base) associated with each work order for the last month and the denominator of which is the sum of all the computer resource units associated with all work orders for the same month. This ratio will be revised monthly.
13. Coal Company Combination Ratio
A ratio the numerator of which is the sum of each Client coal company's gross payroll for the last twelve months, original cost of fixed assets, original cost of leased assets, and gross revenues for the last twelve months and the denominator of which is the sum of the same factors of all Client coal companies. This ratio will be revised semi-annually, based on figures at and as of June 30 and December 31.
14. Coal-Fired Kilowatt Hours Generation Ratio
A ratio the numerator of which is the coal-fired kilowatt hours generation of each Client generating company for the last twelve months and the denominator of which is the sum of the coal-fired kilowatt hours generation of all Client generating companies for the same twelve months. This ratio will be revised semi-annually, based on figures as of June 30 and December 31.
15. Transmission and Sub-Transmission Pole Miles Ratio
A ratio the numerator of which is the transmission and sub-transmission pole miles of each Client operating company and the denominator of which is the sum of the transmission and sub-transmission pole miles of all such Clients. This ratio will be revised annually, based on figures at December 31.
16. Plant Megawatt Capability Ratio
A ratio the numerator of which is the total megawatt capability of all fossil and hydro generating plants of each Client generating company and the denominator of which is the total megawatt capability of all fossil and hydro generating plants of all Client generating companies. This ratio will be revised annually, based on figures at December 31.
17. Fossil Plant Combination Ratio
A ratio the numerator of which is the sum of (1) the percentage derived by dividing the total megawatt capability of all fossil generating plants of each Client generating company by the total megawatt capability of all fossil generating plants of all Client generating companies and (2) the percentage derived by dividing the total scheduled maintenance outages at all fossil generating plants of each Client generating company for the last three years by the total scheduled maintenance outages at all fossil generating plants at all Client generating companies during the same three years and the denominator of which is the factor 2. This ratio will be revised annually, based on figures at and as of December 31 respectively.
F. The following ratios, in addition those listed in E. above, shall be applied to allocate costs accumulated on job or project work orders for services performed for two or more Clients:
A ratio the numerator of which is a known, pertinent and measurable factor applicable to the specific job or project (e.g., number of units delivered, ownership percentages, number of electric customers to be affected, etc.) for a Client and the denominator of which is the sum of the same factor for all participating Clients. This ratio will be revised for each factor at least once annually, based on figures as of the measurement dates.
A ratio the numerator of which is one (representing each participating Client) and the denominator of which is the sum of all participating Clients. This ratio will be revised monthly.
3. Hydro Kilowatt Hours Generation Ratio
A ratio the numerator of which is the gross kilowatt hours generated by a Client generating company at its hydro and pumped-storage facilities during the last twelve months and the denominator of which is the gross kilowatt hours generated by all Client generating companies at their hydro and pumped-storage facilities during the same twelve months. This ratio will be revised semi-annually, based on figures as of June 30 and December 31.
4. Number of Purchase Orders Written Ratio
A ratio the numerator of which is the number of purchase orders written for a Client during the last twelve months and the denominator of which is the sum of the number of purchase orders written for all Client's during the same twelve months. This ratio will be revised semi-annually, based on figures as of June 30 and December 31.
5. Number of Invoices Processed Ratio
A ratio the numerator of which is the number of invoices processed for a Client during the last twelve months and the denominator of which is the sum of the number of invoices processed for all Clients during the same twelve months. This ratio will be revised semi-annually, based on figures as of June 30 and December 31.
Nothing contained in this Article shall preclude the Company from revising the ratios more frequently than stated herein in response to changed circumstances. Nor shall anything contained in this Article preclude the Company from including or excluding Clients from the ratios based on the known scope of a particular work order for any month, or relative to the Clients within any particular Region or Division.
DESCRIPTION OF GROUPS AND DESIGNATION OF METHODS OF ALLOCATION
A general description of each Group's activities, which may be modified from time to time by the Company without notice, is set forth in paragraph a. under the name of each Group. The method or methods of allocation to be used by a Group for costs accumulated on functional work orders for services of a general nature are set forth in paragraph b. under the name of each Group. No substitution or change will be made in the methods of allocation hereinafter specified unless a new method of allocation has been approved by the Securities and Exchange Commission. Notice of any change in the method of allocation applicable to a work order shall be given to the Clients affected.
a. Description of Group's Activity
This Group performs the following activities:
(1) Accounting Policy and Research
Prepares various reports used by projects and formulates overall System accounting policy.
Performs payroll, accounts payable, and other accounting services for the Company and other AEP companies.
Maintains the general and subsidiary ledgers along with other related records for the Company, American and associate companies.
(4) Financial and Regulatory Reporting
financial reports. Other duties include information of a non-financial nature.
(1) Services benefitting other Company Groups - allocated to other Groups based on Number of Employees by Group Ratio and then to Clients on the same basis as the work orders of the other Company Groups.
(2) Services related to operations - allocated to the operating companies based on the Kwh Sales Ratio.
(3) Services related to coal companies - allocated to the coal companies based on the Coal Company Combination Ratio.
a. Description of Group's Activity
Prepares and disseminates information on all phases of the business of a Client, including company goals, plant expansion, fuel energy management and technological advances. Also provides assistance with media relations, news releases, advertising, news letters and answers to inquiries from the public.
Allocated to the operating companies based on the Kwh Sales Ratio and to the coal companies based on the Coal Company Combination Ratio.
3. Corporate Planning and Budgeting
a. Description of Group's Activity
Renders services relating to operational construction budgets, and rates proceedings.
(1) Services related to construction budgeting - allocated to the operating companies based on the Level of Construction Ratio.
(2) Services related to coal companies - allocated to the coal companies based on the Coal Company Combination Ratio.
(3) Other services related to operations - allocated to the operating companies based on the Kwh Sales Ratio.
a. Description of Group's Activity
Provides office space and communication facilities and such services as mail room, general supplies, general files and office services, which services will generally benefit other Groups within the Company. In for security at all AEP locations and for the planning and administration related to the construction of office and service buildings. Acquires vehicles and certain mining equipment. Analyzes the vehicle and equipment proposed for acquisition and monitors performance after acquisition from an and equipment leasing.
(1) Services benefitting other Company Groups - allocated to other Groups based on the Number of Employees by Group Ratio and then to Clients on the same basis as the work orders of the other Company Groups.
(2) Services related to operations - allocated to operating companies based on the Kwh Sales Ratio.
(3) Services related to coal companies - allocated to the coal companies based on the Coal Company Combination Ratio.
a. Description of Group's Activity
and customer support systems, and extra development.
(1) Services related to telecommunications - allocated to all companies with employees based on the Number of Client Employees Ratio.
(2) All other general services - allocated to the operating companies based on the Kwh Sales Ratio.
a. Description of Group's Activity
Manages customer services activities and provides engineering, operations and data systems support to Clients' regional distribution organizations.
(1) Services related to construction - allocated to the operating companies based on the Level of Construction - Distribution Ratio.
(2) Services related to customer services and other general activities - allocated to the operating companies based on the Number of Electric Customers Ratio.
a. Description of Group's Activity
Manages and provides transmission system engineering, and manages transmission system construction, operations and maintenance.
(1) Services related to construction - allocated to the operating companies based on the Level of Construction - Transmission Ratio.
(2) Services related to operations and maintenance - allocated to the operating companies based on the Transmission and Sub-Transmission Pole Miles Ratio.
a. Description of Group's Activity
Provides engineering, technical and scientific assistance to the generating, operating, and coal companies to assure that those companies comply with local, state, and federal the need, the content required, and the engineering input necessary for environmental permits and assists in the acquisition of those permits from the appropriate agencies. Also provides technical assistance and guidance in the audit of environmental protection performance and in specialized environmental training.
(1) Services of related to coal mining - allocated to the coal companies based on the Coal Company Combination Ratio.
(2) Services related to generating plants - allocated to the generating companies based on the Plant Megawatt Capability Ratio or the Coal-Fired Kilowatt Hours Generation Ratio.
(3) Services related to operations and maintenance - allocated to the operating companies based on the Kwh Sales Ratio.
a. Description of Group's Activity
This Group, consisting of the Chairman of the Board, the Executive Vice Presidents of the Company and their immediate staffs, provides and strategic planning services to the Clients.
Allocated to the operating companies based on the Kwh Sales Ratio and to the coal companies based on the Coal Company Combination Ratio.
a. Description of Group's Activity
Renders services in the areas of financings, cash management, investor relations, rates proceedings, and leasing activities. Responsible for the maintenance and renewal of all types of insurance coverage for all System companies and oversight of pension plan and trust investments.
(1) Services related to coal companies - allocated to the coal companies based on the Coal Company Combination Ratio.
(2) Services related to insurance activities - allocated to all companies based on the Plant Investment Ratio.
(3) Services related to pensions and other employee benefits - allocated to all companies with employees based on the Number of Client Employees Ratio.
(4) Other general services related to operating companies - allocated to the operating companies based on the Kwh Sales Ratio.
11. Fossil and Hydro Production
a. Description of Group's Activity
Manages all Client fossil and hydro generating performance. Also provides project, outage maintenance and other support services.
(1) Services related to construction - allocated to the generating companies based on the Level of Construction - Production Ratio.
(2) Services related to scheduled maintenance outages - allocated to the generating companies based on the Fossil Plant Combination Ratio.
(3) Services related to production - allocated to the generating companies based on the Plant Megawatt Capability Ratio.
12. Fuel Supply and Business Support
a. Description of Group's Activity
Renders services to the coal companies in their mining and preparation of coal and to the generating companies in their procurement and transportation of coal. Also performs business planning and financial management for the coal companies and generating companies.
(1) Services related to coal procurement - allocated to the generating companies based on the Tons of Fuel Acquired Ratio.
(2) Services related to coal mining - allocated to the coal companies based on the Coal Company Combination Ratio.
(3) Services related to planning - allocated to the generating companies based on the Plant Megawatt Capability Ratio and to the coal companies based on the Coal Company Combination Ratio.
a. Description of Group's Activity
administers the human resources policies of all Clients as well as the Company.
The responsibilities of the Group include:
(1) Establishment of policies regarding compensation and benefits.
(2) Supervision of compliance with legal requirements in the areas of equal employment practices, safety and health, among others.
(3) Establishment of management and employee development programs.
(4) Providing legal counsel to the operating interpretations of labor laws, and supervising the activities of outside legal counsel.
(5) Supervision of labor negotiations and establishment of policies with labor unions.
(1) Services benefitting other Company Groups - allocated to other Groups within the Company based on the Number of Company Employees By Group Ratio and then to Clients on the same basis as the work orders of the other Company Groups.
(2) Services related to Client Human Resources and pensions and other employee benefits - allocated to all companies with employees based on the Number of Client Employees Ratio.
a. Description of Group's Activity
Provides electronic data processing services to Clients and to other Groups of the Company.
The activities of the Group include:
(1) Machine related computer activity - services such as data processing for customer accounting, payroll and general purchasing and stores studies, forecasts and various other administrative and engineering applications.
(2) Computer applications activity - services such as feasibility studies for new applications and other related activity.
(1) Machine related computer activities:
(a) Capacity used by other Company Groups - allocated to work orders based on the Computer Resource Unit Ratio and then to Client's on the same basis as the work orders of the other Company Groups.
(b) Capacity used by Information Services - allocated to work orders based on the distribution of direct charges for capacity used by other Company Groups and then to Clients on the same basis as the work orders of the other Company Groups.
(2) Services related to data administration - allocated to the operating companies based on the Kwh Sales Ratio.
a. Description of Group's Activity
Performs independent appraisals of significant activities carried out within AEP through application of financial, operational and compliance audit techniques.
Allocated to the operating companies based on the Kwh Sales Ratio and to the coal companies based on the Coal Company Combination Ratio.
a. Description of Group's Activity
Renders services relating to financings, contracts, real estate, leasing and other legal matters.
Allocated to the operating companies based on the Kwh Sales Ratio and to the coal companies based on the Coal Company Combination Ratio.
a. Description of Group's Activity
Advises the operating companies in their relations with electric customers and oversees marketing of the products and services of those Clients. Also performs economic and community development within the areas served by the Operating Companies.
Allocated to the operating companies based on the Number of Electric Customers Ratio.
a. Description of Group's Activity
Manages and oversees the operations of the Donald C. Cook Nuclear Generating Plant.
Allocated directly to Indiana Michigan Power Company, operator of the Donald C. Cook Nuclear Generating Plant.
a. Description of Group's Activity
Provides integrated engineering and design services to all AEP fossil and hydro plants and to the plant regional support organizations.
(1) Services related to construction - allocated to the generating companies based on the Level of Construction - Production Ratio.
(2) Services related to operations and maintenance - allocated to the generating companies based on the Plant Megawatt Capability Ratio.
20. Procurement and Supply Chain Services
a. Description of Group's Activity
Provides services in connection with the procurement of equipment and stores items, including market research, preparation of preparation of bid summaries, and materials management.
Allocated to the operating companies based on the Kwh Sales Ratio and to the coal companies based on the Coal Company Combination Ratio.
a. Description of Group's Activity
Monitors and participates in rates activities for the operating companies. Performs services related to rates research and design.
Allocated to the operating companies based on the Kwh Sales Ratio.
a. Description of Group's Activity
Forecasts electric demand and energy requirements for Client operating companies; identifies cost-effective demand side measures to be pursued and the resultant level of customer load modification that can be achieved; and develops plans to provide and integrate the production and transmission facilities needed to service the electricity requirements of customers of the operating companies.
(1) Services related to operations - allocated to the operating companies based on the Kwh Sales Ratio.
(2) Services related to generating activities - allocated to the generating companies based on the Client Load Ratio.
a. Description of Group's Activity
Operates the AEP electrical system in an efficient and reliable manner, negotiates the terms, conditions and rates for wholesale power and transmission services.
Allocated to the generating companies based on the Client Load Ratio.
a. Description of Group's Activity
Ensures compliance with all federal, state and local tax laws. Prepares and files applicable returns and coordinates the issuance of tax accounting instructions to AEP companies.
Allocated to the operating companies based on the Kwh Sales Ratio and to the coal companies based on the Coal Company Combination Ratio.
All accounts and records of the Company shall be kept in accordance with the General Rules and Regulations promulgated by the Securities and Exchange Commission pursuant to the 1935 Act, in particular, the Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies in effect from and after the date hereof.
A. Information To Be Furnished To Clients
The Company will furnish each Client with a work order describing the work to be performed, the method of allocation, and the accounts to be charged as a result of cost incurred within each work order. The Company will also furnish each Client at the end of each calendar year a statement showing the calculation of the amount of interest on borrowed capital billed to each Client for the previous twelve months.
B. Monthly Bills and Detailed Statement of Charges
As soon as practicable after the close of each month the Company will issue to each Client an invoice and detail of charges which will itemize by work order number the amounts due from the Client for services, overhead and expenses for such month. All amounts so billed shall be paid by the Client within thirty (30) days after receipt of the bill.
Subject to Rule 91 of the Rules and Regulations of the Securities and Exchange Commission, interest cost on borrowed capital shall be allocated to Clients based on a ratio the numerator of which is the total annual costs, exclusive of such interest cost, charged by the Company to a Client and the denominator of which is the sum of the total annual costs, exclusive of such interest cost, charged by the Company to all Clients. This ratio will be revised annually, based on figures as of December 31.
C. Information To Be Furnished By Clients
The Client will forward to the Company from time to time, as requested, such financial and statistical information as the Company may need to compute the charges payable by such Client.
Charges to the work orders may be made upon the basis of estimated costs to the Client which shall conform as nearly as may be practicable to actual costs, provided that at stated intervals adjustments of the estimated costs to actual costs shall be made. Invoices to the Client shall clearly indicate any adjustments to estimated costs previously billed. Such adjustments may be made at intervals during the fiscal year, but final adjustments shall be made at the end of such year. Overbillings or underbillings arising from these adjustments shall be cleared through the appropriate work order and offset by adjustments to other work orders involved.
The Company agrees to keep its books and records available for inspection at all reasonable times by representatives of the Client in order that the correctness of the charges made by the Company for services to the Client may be verified by the Client. | U-1 | EX-99 | 1996-01-16T00:00:00 | 1996-01-16T10:57:28 |
0000950112-96-000062 | 0000950112-96-000062_0000.txt | <DESCRIPTION>MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1996
SECURITIES ACT FILE NO. 33-36472 INVESTMENT COMPANY ACT FILE NO. 811-6156 (PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. (Name of Person(s) Filing Statement)
SHARES OF COMMON STOCK, PAR VALUE $.10 PER SHARE (Title of Class of Securities)
(CUSIP Number of Class of Securities)
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC. (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Person(s) Filing Statement)
(a) Calculated as the aggregate estimated maximum purchase price to be paid for 4,000,000 shares in the offer, based upon the net asset value per share ($11.16) at January 11, 1996.
(b) Calculated as 1/50th of 1% of the Transaction Valuation.
Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
Form or Registration No.: ______________________________________________________
ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer is Merrill Lynch High Income Municipal Bond Fund, Inc., a closed-end investment company organized as a Maryland corporation (the "Fund"). The principal executive offices of the Fund are located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
(b) The title of the securities being sought is shares of common stock, par value $0.10 per share (the "Shares"). As of December 31, 1995 there were in excess of 18 million Shares issued and outstanding.
The Fund is seeking tenders for 4,000,000 Shares (the "Offer"), at net asset value per Share calculated on the day the tender offer terminates, less any "Early Withdrawal Charge," upon the terms and subject to the conditions set forth in the Offer to Purchase dated January 16, 1996 (the "Offer to Purchase"). A copy of each of the Offer to Purchase and the related Letter of Transmittal is attached hereto as Exhibit (a)(1)(ii) and Exhibit (a)(2), respectively. Reference is hereby made to the Cover Page and Section 1 "Price; Number of Shares" of the Offer to Purchase, which are incorporated herein by reference. The Fund has been informed that no Directors, officers or affiliates of the Fund intend to tender Shares pursuant to the Offer.
(c) The Shares are not currently traded on an established trading market.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) Reference is hereby made to Section 9 "Source and Amount of Funds" of the Offer to Purchase, which is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
Reference is hereby made to Section 7 "Purpose of the Offer," Section 8 "Certain Effects of the Offer" and Section 9 "Source and Amount of Funds" of the Offer to Purchase, which are incorporated herein by reference. The Fund currently is engaged in a continuous public offering of its Shares. The Fund otherwise has no plans or proposals which relate to or would result in (a) the acquisition by any person of additional securities of the Fund or the disposition of securities of the Fund; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Fund; (c) a sale or transfer of a material amount of assets of the Fund; (d) any change in the present Board of Directors or management of the Fund, including, but not limited to, any plans or proposals to change the number or the term of Directors, or to fill any existing vacancy on the Board or to change any material term of the employment contract of any executive officer; (e) any material change in the present dividend rate or policy, or indebtedness or capitalization of the Fund; (f) any other material change in the Fund's corporate structure or business, including any plans or proposals to make any changes in its investment policy for which a vote would be required by Section 13 of the Investment Company Act of 1940, as amended; or (g) changes in the Fund's articles of incorporation, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Fund by any person. Paragraphs (h) through (j) of this Item 3 are not applicable.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
There have not been any transactions involving the Shares of the Fund that were effected during the past 40 business days by the Fund, any executive officer or Director of the Fund, any person controlling the Fund, any executive officer or Director of any corporation ultimately in control of the Fund or by any associate or subsidiary of any of the foregoing including any executive officer or Director of any such subsidiary, except that within the past 40 business days pursuant to a continuous public offering of its Shares, the Fund has sold approximately 261,000 Shares at a price equal to the net asset value ("NAV") of the Fund on the date of each such sale .
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE ISSUER'S SECURITIES.
The Fund does not know of any contract, arrangement, understanding or relationship relating directly or indirectly, to the Offer (whether or not legally enforceable) between the Fund, any of the Fund's executive officers or Directors, any person controlling the Fund or any executive officer or Director of any corporation ultimately in control of the Fund and any person with respect to any securities of the Fund (including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss, or the giving or withholding of proxies, consents or authorizations).
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
No persons have been employed, retained or are to be compensated by the Fund to make solicitations or recommendations in connection with the Offer.
(a) Reference is hereby made to the financial statements attached hereto as Exhibits (g)(1) and (g)(2) which are incorporated herein by reference.
(b) Reference is made to Section 11 "Certain Information About the Fund" of the Offer to Purchase, which is incorporated herein by reference.
(e) The Offer to Purchase, attached hereto as Exhibit (a)(1)(ii), is incorporated herein by reference in its entirety.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
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.
MERRILL LYNCH HIGH INCOME MUNICIPAL BOND FUND, INC.
By /s/ TERRY K. GLENN
(a)(1)(i) Advertisement to be printed in The Wall Street Journal (a)(2) Form of Letter of Transmittal (g)(1) Audited Financial Statements of the Fund for the fiscal year ended (g)(2) Audited Financial Statements of the Fund for the fiscal year ended | SC 13E4 | SC 13E4 | 1996-01-16T00:00:00 | 1996-01-16T11:17:56 |
0000910647-96-000004 | 0000910647-96-000004_0000.txt | You are invited to attend the Annual Meeting of Stockholders of Armatron International, Inc., which will be held at the Company's principal executive offices, Two Main Street, Melrose, Massachusetts 02176, on Thursday, January 25, 1996 at 11:00 a.m., Eastern Standard Time.
The accompanying Proxy Statement contains information about the two nominees for election as Directors and a proposal to ratify the selection of the Company's independent auditors.
We hope that you will be able to attend the meeting. However, if you cannot do so, it is very important that your shares be represented. We urge you to mark, sign, date and return your proxy promptly.
NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS To Be Held on Thursday, January 25, 1996
The Annual Meeting of Stockholders of Armatron International, Inc., a Massachusetts corporation, will be held at the Company's principal executive offices, Two Main Street, Melrose, Massachusetts, on Thursday, January 25, 1996 at 11:00 a.m., Eastern Standard Time, for the following purposes, as is more fully described in the accompanying Proxy Statement.
1. To elect two nominees as Directors, to serve for the term described
2. To ratify the selection, by the Board of Directors, of independent auditors for the fiscal year ending September 30, 1996; and
3. To transact such other business as may properly come before the Annual Meeting or any adjournments thereof.
The above matters are more fully described in the accompanying Proxy Statement.
Only stockholders of record at the close of business on December 1, 1995, the Record Date fixed by the Board of Directors for determining stockholders who are entitled to notice of and to vote at the Annual Meeting, will be entitled to vote at the Annual Meeting. The stock transfer books will not be closed.
The Annual Report for the fiscal year ended September 30, 1995 has been enclosed with the accompanying Proxy Statement, but is not a part thereof.
By Order of the Board of Directors,
IT IS ESPECIALLY IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE ANNUAL METING. IF YOU ARE NOT ABLE TO BE PRESENT AT THE ANNUAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE. BECAUSE OF THE AMOUNT OF WORK NECESSARY TO PREPARE FOR THE MEETING, THE IMMEDIATE RETURN OF YOUR PROXY WILL BE APPRECIATED.
To Be Held Thursday, January 25, 1996
This Proxy Statement, to be mailed on or about January 10, 1996, is furnished in connection with the solicitation by the Board of Directors of Armatron International, Inc. (the "Company" or "Armatron") of proxies to be voted at the Annual Meeting of Stockholders (the "Annual Meeting"), to be held on January 25, 1996 at 11:00 a.m., Eastern Standard Time, at the Company's principal executive offices, Two Main Street, Melrose, Massachusetts. (Telephone No. 617-321-2300; FAX No. 617-324-8403). The Company's Annual Report to Stockholders for the fiscal year ended September 30, 1995, while not incorporated as a part of this Proxy Statement, is also included in this mailing.
If you sign and return the enclosed proxy in time for the Annual Meeting, your shares of the Company's Common Stock, $1 par value per share ("Common Stock"), will be voted (unless you otherwise instruct) on all matters that may properly come before the meeting. The proxy contains spaces in which you may insert instructions as to how your shares are to be voted in the election of two Directors and ratification of the selection of independent auditors. If you specify instructions with respect to any of the proposals, your shares will be voted in accordance with your instructions, applicable law and the Company's Articles of Organization and By-Laws. If no instructions are specified, your shares will be voted FOR the election of the nominated Directors and FOR the ratification of the selection of independ-ent auditors by the Board of Directors. If any other matter properly comes before the Annual Meeting, the persons named as proxy holders on your proxy will vote your shares with respect to any such other matter in accordance with their best judgment.
The cost of solicitation will be paid by the Company. In addition to solicitation by mail, solicitation of proxies may be made personally or by telephone or FAX machine by the Company's regular employees, and arrangements may be made with brokerage houses and other custodians, nominees and fiduciaries to send proxy materials to, and to obtain proxies from, their principals. If the enclosed proxy is properly executed and returned in time for voting, the shares represented thereby will be voted as specified thereon. Any stockholder giving a proxy may revoke it by giving notice of revocation in writing to the Clerk of the Company at any time prior to the time it is voted.
VOTING SECURITIES AND VOTES REQUIRED
As of December 1, 1995 (the "Record Date"), there were outstanding and entitled to vote 2,459,749 shares of Common Stock (exclusive of 146,732 treasury shares). Holders of record at the close of business on December 1, 1995, the Record Date, will be entitled to vote on all matters properly coming before the Annual Meeting. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Common Stock entitled to vote, is necessary to constitute a quorum at the Annual Meeting. Each stockholder will have one vote for each share of Common Stock held at the close of business on the Record Date. To the knowledge of the Board of Directors, no person other than those identified below under "Election of Directors; Security Ownership of Management" and "Principal Shareholder" owns of record or beneficially more than five percent of the outstanding shares of Common Stock of the Company.
Of the proposals stated in the accompanying Notice of Annual Meeting of Stockholders, approval of Proposal 1 (i.e., the election of two Directors) will require the favorable vote of the holders of a plurality of the shares of Common Stock outstanding on the Record Date and represented at the Annual Meeting; and approval of Proposal 2 will require the favorable vote of at least a majority of the shares of Common Stock outstanding on the Record Date and represented at the Annual Meeting.
With respect to tabulation of the proxies, abstentions are treated as votes against a proposal and non-votes have no effect on the vote.
ELECTION OF DIRECTORS; SECURITY OWNERSHIP OF MANAGEMENT
The Company's By-Laws provide for a Board of Directors to consist of not less than three or more than nine persons who are to be divided as nearly equally in number as possible into three classes (A, B and C). Each class of Directors is to be elected for a three-year term ending in three successive years with the members of each class to serve until the third succeeding annual meeting of stockholders after their election and until their respective successors are duly elected and qualified.
The Board of Directors has determined that the term of two Directors (the "Class A" Directors) will expire in January 1996 and has nominated those individuals for a term to expire in January 1999 and until their successors are duly elected and qualified. The proposal requires the favorable vote of the holders of a plurality of the stockholders of record represented at the meeting.
If a nominee is unable to serve, an event which the management does not anticipate, proxies not otherwise specifying will be voted for a substitute nominee to be named by the Board of Directors. In no event will proxies be voted for more than two nominees. If no instructions are specified on your proxy, your shares will be voted FOR the election of the nominees to the Board of Directors named herein. The following table sets forth certain information as to the nominees for Director and the other current Directors of the Company. The nominees and each Director named below have been engaged in their present principal occupation for at least five years, unless otherwise stated. Also shown are the number of shares of the Common Stock beneficially owned on December 1, 1995 by the nominees, by each Director, by each of the Company's three most highly compensated executive officers, and by all of the executive officers and Directors of the Company as a group. All shares are owned of record and the owner possesses sole voting and investment power, except as otherwise stated below:
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 1, THAT IS, THE ELECTION OF THE NOMINEES AS DIRECTORS NAMED IN THIS PROXY STATEMENT.
There are no beneficial owners of more than 5% of the Company's Common Stock, known to the Company, in addition to the Directors of the Company.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
Audit Committee. During the past year, the Audit Committee was composed of Messrs. Spangenberg and Welsh, neither of whom was an employee of the Company. The Audit Committee met once during the year. The duties of the Audit Committee are to review and approve the scope of the annual audit of financial statements by the independent auditors prior to public release of the annual financial statements; consult with the independent auditors and the accounting staff of the Company with respect to the adequacy of internal controls; and make a recommendation to the Board as to which public accounting firm should be engaged as independent auditors for the forthcoming year. The Audit Committee also has the authority to review any other financial matters which it deems appropriate to its function and to report its findings to the Board.
Other Committees. The Company does not have a Nominating Committee, nor a Compensation Committee. The Board of Directors will consider recommendations submitted to it by shareholders received within one year prior to the date a vacancy is to be filled. In order for a recommendation by a shareholder to be considered, it must meet the following requirements: (1) the shareholder making the recommendation must be a registered shareholder of record; (2) the recommendation must be submitted in writing; (3) the recommendation must include a description of the nominee, including the person's qualifications to serve as a Director, and (4) the recommendation must include a statement indicating the nominee's willingness to serve.
Meetings. The Board of Directors met four times in fiscal 1995 and all Directors attended at least 75% of the aggregate number of meetings of the Board and the Committees on which they serve.
The following table sets forth all cash compensation paid or accrued by the Company to each of its three most highly compensated executive officers for services rendered during the three fiscal years ended September 30, 1995:
Benefits. The Company provides medical and dental benefits to the executive officers that are generally available to Company employees. The amount of perquisites, as determined in accordance with the rules of the Securities & Exchange Commission relating to executive compensation, did not exceed the lesser of $50,000 or 10% of salary for fiscal 1995.
Stock Options & Related SARs. The Company's 1981 Non-Qualified Stock Option Plan which terminated on December 1, 1990, provided for the granting of options to purchase the Company's Common Stock and related stock appreciation rights (SARs) to the salaried officers and other employees of the Company. No options or stock apprecation rights were granted after the plan terminated.
For the period October 1, 1994 to September 30, 1995, no stock options were granted or exercised. None of the options held by any named executive officer were in-the-money as of September 30, 1995.
The Armatron Executive Retirement Plan ("Retirement Plan") provides for the payment of retirement benefits to certain senior executives of the Company. Under the Retirement Plan, upon reaching age 65, an eligible employee will receive an annual retirement benefit payment in an amount equal to 1-1/2% of his final average compensation multiplied by the number of years of benefit service (not to exceed thirty years) minus 1-2/3% of his primary Social Security benefit, multiplied by the number of years of benefit service (not to exceed thirty years). Final average compensation is defined in the Retirement Plan as the average of the five highest calendar years of salary during the ten years preceding retirement. Years of benefit service includes all years and months of service completed with the Company after October 1, 1983. Payments under the Retirement Plan will be made during the life of the eligible employee, provided that a minimum of ten years of payments shall be made during the life of the eligible employee or, in the event the employee dies, to a designated beneficiary. In the event an employee terminates his employment prior to reaching age 65, he will be entitled to receive payments under the Retirement Plan at age 65 if he has completed ten years of vesting service. Vesting service is defined as all years and months of service completed with the Company after September 30, 1978. As of March 1, 1994 the Executive Retirement Plan has been temporarily suspended. As of September 30, 1995 no date has been established for removing the suspension.
The following table shows the estimated annual benefits payable under the Retirement Plan to persons in specified average compensation and years of service classifications. The amounts shown have not been reduced to reflect the offset amounts based upon primary Social Security benefits. Average compensation for purposes of computing benefits under the Retirement Plan, age, years of benefit service and years of vesting service as of September 30, 1995, for the three officers named in the compensation table are as follows: Charles J. Housman--$110,000, age 68, 10 years and 15 years; Sal DeYoreo-- $101,000, age 70, 10 years and 15 years; and Edward L. Housman--$92,000, age 74, 10 years and 15 years.
Armatron International, Inc. Dreyfus 401(k) Profit Sharing Plan On July 1, 1989, the Company established a 401(k) Profit Sharing Plan and Trust (the "Profit Sharing Plan"), which plan qualifies under Section 401(k) of the Internal Revenue Code for favorable tax treatment as long as the Profit Sharing Plan annually meets a special, non-discrimination test. This test is designed to assure a fair mix of contributions among employees at all income levels. In November 1994 the Company changed the plan name to and adopted the Armatron International, Inc./Dreyfus 401(k) Profit Sharing Plan and Trust.
Since the Company does not have a Compensation Committee, the Board of Directors establishes the executive compensation policies of the Company and establishes both the compensation plans and specific compensation levels of executive officers. It also supervises the administration of the 1981 Non- Qualified Stock Option Plan by the Stock Option Committee.
The executive compensation program is comprised of base salary, and various benefits, including an executive retirement plan, life insurance, health insurance, and another retirement plan generally available to employees of the Company.
Chief Executive Officer Compensation. Mr. Charles Housman was appointed Chief Executive Officer in 1987. As of March 1, 1995, Mr. Housman has waived his base salary as a part of the temporary salary freeze program.
Compensation Committee Interlocks and Inside Participation In Compensation Decisions. The following Officers of the Company served on the Board of Directors for the 1995 fiscal year:
Charles J. Housman Elliot J. Englander
By the Board of Directors: Charles J. Housman, Chairman of the Board Elliot J. Englander, Director Edward L. Housman, Director Craig Spangenberg, Director
The Company paid to the firm of Englander, Finks, Ross, Cohen & Brander, P.C., a total of $60,000, $21,000, and $110,000, respectively, for legal services rendered to the Company during the fiscal years ended September 30, 1995, 1994 and 1993. The Company anticipates that fees to that firm will be approximately $60,000 during fiscal 1996. Elliot J. Englander, Clerk and a Director of the Company, is a member of that firm.
During fiscal year 1994, the Company renewed a $7,000,000 line of credit from a realty trust operated for the benefit of the Company's principal shareholders. This line of credit, with interest payable at 10%, requires monthly payments of interest only, is payable in full on October 1, 1997 and is collateralized by all assets of the Company. The Company had $4,715,000 outstanding under this line of credit at September 30, 1995.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN for the year ended September 30, 1995
The following graph shows a five-year comparison of cumulative total returns for the Company, the AMEX Market Index and Peer Group Index. The Peer Group is comprised of the following securities: Adage, Inc.; Armatron International, Inc.; Aseco, CP; Datakey, Inc.; ECC International, CP; Evans & Sutherland Company; First Alert, Inc.; Fusion Systems, CP; Ion Laser Technology, Inc.; Isomet, CP; Knogo North Amer, Inc.; Laser, CP; Lasertechnics, Inc.; Philips Electronics, NV; Quad Systems, CP; Reflectone, Inc.; Satcon Technology, CP; Spatializer Audio LB, Inc.; Standard Motor Prods.; and United Industrial, CP.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN AMEX MARKET INDEX AND SIC CODE INDEX
ASSUMES $100 INVESTED ON OCT. 1, 1990 FISCAL YEAR ENDING SEP.30, 1995
The Board of Directors, upon the recommendation of its Audit Committee, has selected the firm of R. J. Gold & Company, P. C. to serve as the Company's independent auditors for the fiscal year ending September 30, 1996, a service they presently perform. Although it is not required to do so, the Board of Directors is submitting the selection of R. J. Gold & Company, P.C. for ratification in order to assess the views of stockholders. If the selection is not ratified, the Board of Directors will reconsider its selection. This proposal requires the favorable vote of at least a majority of the shares of Common Stock outstanding on the Record Date and represented at the Annual Meeting.
The Company's financial statements for the previous fiscal year ended September 30, 1995 were audited by R. J. Gold & Company, P.C. In connection with the audit function, R. J. Gold & Company P.C. also reviewed the Company's annual report and its filings with the Securities and Exchange Commission ("SEC").
R. J. Gold & Company, P.C. provided all professional services indicated at customary rates and terms.
The Audit Committee of the Board of Directors has established a policy regarding services which may be provided by the Company's independent auditors. This policy states that the Company's independent auditors may be engaged by management to perform any services normally provided by accounting firms for SEC-registered audit clients, provided that the independence requirements of the American Institute of Certified Public Accountants have been considered and that the fees for such non-audit services do not exceed a certain level of the fees for audit services rendered during the year. Fees for non-audit services in excess of this level would require pre-approval by the Audit Committee.
It is expected that representatives of R. J. Gold & Company, P.C. will be present at the Annual Meeting with the opportunity to make a statement if they so desire and to answer appropriate questions relating to the audit performed.
On March 1, 1994, the Board of Directors of the Company, acting upon the recommendation of the Audit Committee of the Board, approved the engagement of the firm of R. J. Gold & Company, P.C. as its independent accountants as of March 1, 1994 to replace the firm of Coopers & Lybrand, whose engagement as independent accountants of the Company was terminated effective February 28, 1994.
The report of Coopers & Lybrand on the Company's financial statements for the year ended September 1993 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audit of the Company's financial statements for the year ended September 1993, there were no disagreements with Coopers & Lybrand on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedures which, if not resolved to the satisfaction of Coopers & Lybrand, would have caused Coopers & Lybrand to make reference to the matter in connection with its report. Also, during the year ended September 1993, there was no "reportable events" as defined in subparagraph (a)(1)(v) of Item 304 of Regulation S-K.
During the year ended September 1993, neither the Company nor anyone else on its behalf consulted R. J. Gold & Company, P.C. regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or (ii) the type of audit opinion that might be rendered on the Company's financial statements.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL 2.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Directors and offi-cers, and persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Directors, officers and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of the above-mentioned reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended September 30, 1995 all Section 16(a) filing requirements applicable to its Directors and officers and greater than ten percent beneficial owners were complied with.
In accordance with the By-Laws of the Company, the annual meeting of stockholders following the Annual Meeting of Stockholders to which this Proxy Statement relates, is scheduled to be held on Thursday, January 16, 1997. If there is no change in the date of such annual meeting, proposals of security holders intended to be presented by or on behalf of a security holder at such annual meeting must be received by the Company at its offices in Melrose, Massachusetts on or before September 19, 1996.
The Board of Directors does not intend to bring any other business before the Annual Meeting and is not aware that anyone else intends to do so. However, if any other business properly comes before the Annual Meeting, it is the intention of the holders of proxies solicited by the Board of Directors to vote in accordance with their best judgment on any such matter. | DEF 14A | DEF 14A | 1996-01-16T00:00:00 | 1996-01-16T11:42:00 |
0000889812-96-000028 | 0000889812-96-000028_0001.txt | <DESCRIPTION>MARK SOLUTIONS, INC. 1993 STOCK OPTION PLAN
2.6 Fair Market Value..................... 1 2.17 Ten Percent Shareholder............... 3
Section 3. SHARES SUBJECT TO OPTIONS............... 3
Section 4. EFFECTIVE DATE.......................... 3
Section 7. GRANT OF OPTIONS........................
Section 8. OPTION PRICE............................ 5
Section 9. EXERCISE PERIOD......................... 5
Section 11. SECURITIES REGISTRATION AND RESTRICTIONS 7
Section 12. LIFE OF PLAN............................ 7
Section 14. SALE OR MERGER OF THE CORPORATION....... 8
Section 15. AMENDMENT OR TERMINATION................ 9
16.1 No Shareholder Rights............... 9 16.2 No Contract of Employment........... 10
The purpose of this Plan is to promote the interests of the Corporation by granting Options to purchase Stock to Key Employees in order to (a) attract and retain Key Employees; (b) provide an additional incentive to each Key Employee to work to increase the value of the Stock; and (c) provide each such Key Employee with a stake in the future of the Corporation which corresponds to the stake of each of the Corporation's shareholders.
Each term set forth in this Section 2 shall have the meaning set forth opposite such term for purposes of this Plan and for any Option granted under this Plan. For purposes of such definitions, the singular shall include the plural and the plural shall include the singular. Unless otherwise expressly indicated, all Section references herein shall be construed to mean references to a particular Section of this Plan.
2.1 Board means the Board of Directors of the Corporation.
2.2 Code means the Internal Revenue Code of 1986, as amended.
2.3 Committee means the committee or either of the committees appointed by the Board to administer this Plan as contemplated by Section 5.
2.4 Corporation means Mark Solutions, Inc., a Delaware corporation, and any successor to such corporation.
2.5 Exchange Act means the Securities Exchange Act of 1934, as amended.
2.6 Fair Market Value means the price which the Committee acting in good faith determines through any reasonable valuation method that a share of Stock might change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts.
2.7 Key Employee means any employee of the Corporation or a Subsidiary, who, in the judgment of the Committee acting in its absolute discretion, is a key to the success of the Corporation or a Subsidiary.
2.8 Option means any option granted under this Plan to purchase Stock which satisfies the requirements of Section 422 of the Code.
2.9 Option Certificate means the written agreement or instrument which sets forth the terms of an Option granted to a Key Employee under this Plan.
2.10 Option Price means the price which shall be paid to purchase one share of stock upon the exercise of an Option granted under this Plan.
2.11 Parent Corporation means any corporation which is a parent corporation of the Corporation within the meaning of Section 424(e) of the Code.
2.12 Plan means this Mark Solutions, Inc. 1993 Stock Option Plan, as amended from time to time.
2.13 Principal Officer means the Chairman of the Board (if the Chairman of the Board is a payroll employee), the Chief Executive Officer, the President, any Executive Vice President, any Senior Vice President, any Vice President and the Treasurer of the Corporation and any other person who is an "officer" of the Corporation as that term is defined in Rule 16a-1(f) under the Exchange Act or any successor rule thereunder.
2.14 Securities Act means the Securities Act of 1933, as amended.
2.15 Stock means the Common Stock, $.01 par value per share, of the Corporation.
2.16 Subsidiary means any corporation which is a subsidiary corporation of the Corporation within the meaning of Section 424(f) of the Code.
2.17 Ten Percent Shareholder means a person who owns after taking into account the attribution rules of Section 424(d) of the Code more than ten percent (10%) of the total combined voting power of all classes of stock of either the Corporation, a Subsidiary or a Parent Corporation.
Section 3. SHARES SUBJECT TO OPTIONS
There shall be 1,000,000 shares of Stock reserved for issuance in connection with Options under this Plan. Such shares of Stock shall be reserved to the extent that the Corporation deems appropriate from authorized but unissued shares of Stock and from shares of Stock which have been reacquired by the Corporation. Any shares of Stock subject to an Option which remain after the cancellation expiration or exchange of such Option for another Option thereafter shall again become available for use under this Plan.
The effective date of this Plan shall be the date it is originally approved and adopted by the Board of the Corporation, subject to approval by the shareholders of the Corporation acting at a duly called meeting of such shareholders or acting by unanimous written consent in lieu of a meeting, provided such shareholder approval occurs within twelve (12) months after the date the Board approves and adopts this Plan.
This Plan shall be administered by the Committee. The Committee acting in its absolute discretion shall exercise such powers and take such action as expressly called for under this Plan. Furthermore, the Committee shall have the power to interpret this Plan and to take such other action in the administration and operation of this Plan as the Committee deems equitable under the circumstances, which action shall be binding on the Corporation, on each affected Key Employee, and on each other person directly or indirectly affected Key Employee, and on each other person directly or indirectly affected by such action. The Board may designate one Committee, all of the members of which are members of the Board.
Only Key Employees shall be eligible for the grant of Options under this Plan.
Section 7. GRANT OF OPTIONS
7.1 Committee Action. The Committee in its absolute discretion shall grant Options to Key Employees under this Plan from time to time to purchase shares of Stock and, further, shall have the right to grant new Options in exchange for outstanding Options. Each grant of an Option shall be evidenced by an Option Certificate, and each Option Certificate shall:
(a) specify that the Option is an "incentive stock option";
(b) incorporate such other terms and conditions as the Committee acting in its absolute discretion deems consistent with the terms of this Plan, including, without limitation, a limitation on the number of shares subject
to the option which first became exercisable or subject to surrender during any particular period.
In connection with the termination for any reason of employment by or service to the Corporation or any Subsidiary of any particular holder of any Option, the Committee may, in its discretion, determine to modify the number of shares of Stock as to which such Option first becomes exercisable during any particular period as provided in the related Option Certificate; provided, however, that the Committee may not extend any such period with respect to any shares of Stock subject to such Option.
7.2 $100,000 Limit. To the extent that the aggregate Fair Market Value of the stock with respect to which Options satisfying the requirements of Section 422 of the Code granted a Key Employee under this Plan and under any other stock option plan adopted by the
Corporation, a Subsidiary or a Parent Corporation first become exercisable in any calendar year exceeds $100,000 (based upon the Fair Market Value on the date of the grant), such Options shall be treated as non-qualified options.
The Option Price for each share of Stock subject to an Option shall not be less than the Fair Market Value of a share of Stock on the date the Option is granted, or if the Key Employee is a Ten Percent Shareholder, the Option Price for each share of Stock subject to such Option shall not be less than 110% of the Fair Market Value of a share of Stock on the date the Option is granted. The Option Price shall be payable in cash in full upon the exercise of any Option.
Each Option granted under this Plan shall be exercisable in whole or in part at such time or times as set forth in the related Option Certificate, but no Option Certificate shall provide that:
(a) an Option is exercisable before the date such Option is
(b) an Option is exercisable after the date which is the tenth anniversary of the date such option is granted.
If an Option is granted to a Key Employee who is a Ten Percent Shareholder the Option Certificate shall provide that the Option is not exercisable after the expiration of five years from the date the Option is granted. An Option Certificate may provide for the exercise of an Option after the employment of a Key Employee has terminated only as provided below.
Upon the occurrence of the Key employee's ceasing for any reason to be employed by the Corporation (such occurrences being a "termination of employment"), the Option, the extent not previously exercised, shall terminate
and become null and void immediately upon such termination of employment, except in a case where the termination of the
Key Employee's employment is by reason of retirement, disability or death.
Upon a termination of employment by reason of retirement, disability or death, the Option may be exercised during the following periods, but only to the extent that the Option was outstanding and exercisable on any such date of retirement, disability or death: (i) the one-year period following the date of such termination of employment in the case of a disability (within the meaning of Section 22(e)(3) of the Code), (ii) the six-month period following the date of issuance of letters testamentary or letters of administration to the executor or administrator of a deceased Key Employee, in the case of death during his employment by the Corporation, but not later than one year after the Key Employee's death, and (iii) the three-month period following the date of such termination in the case of retirement on or after attainment of age 65, or in the case of disability other than as described in (i) above. In no event, however, shall any such period extend beyond the original exercise period.
A transfer of the Key Employee's employment between the Corporation and any Subsidiary, or between any Subsidiaries, shall not be deemed to be a termination of the Key Employee's employment.
Notwithstanding any other provisions set forth herein or in the Plan, if the Key Employee shall (i) commit any act of malfeasance of wrongdoing affecting the Corporation or any Subsidiary, (ii) breach any covenant not to compete, or employment contract, with the Corporation or any Subsidiary, or (iii) engage in conduct that would warrant the Key Employee's discharge for cause (excluding general dissatisfaction with the performance of the Key Employee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon the Corporation or any Subsidiary), any unexercised portion of the Option shall immediately terminate and be void.
No Option granted under this Plan shall be transferable by a Key Employee otherwise than by will or by the laws of descent and distribution, and such Option shall be exercisable during a Key Employee's lifetime only by the Key Employee. The person or persons to whom an Option is transferred by will or by the laws of descent and distribution thereafter shall be treated as the Key Employee for purposes of this Plan.
Section 11. SECURITIES REGISTRATION AND RESTRICTIONS
Each Option Certificate shall provide that, upon the receipt of shares of Stock as a result of the exercise of an Option, the Key Employee shall, if so requested by the Corporation, hold such shares of Stock for investment and not with a view toward resale or distribution to the public and, if requested by the
Corporation, shall delvier to the Corporation a written statement to that effect satisfactory to the Corporation. Each Option Certificate shall also provide that, if so requested by the Corporation, the Key Employee shall represent in writing to the Corporation that he or she will not sell or offer to sell any such shares of Stock unless a registration statement shall be in effect with respect to such Stock under the Securities Act and any applicable state securities law or unless he or she shall have furnished to the Corporation an opinion, in form and substance satisfactory to the Corporation, of legal counsel acceptable to the Corporation, that such registration is not required. Certificates representing the Stock transferred upon the exercise of an Option granted under this Plan may at the discretion of the Corporation bear a legend to the effect that such Stock has not been registered under the Securities Act or any applicable state securities law and that such Stock may not be sold or offered for sale in the absence of (i) an effective registration statement as to such Stock under the Securities Act and any applicable state securities law or (ii) an opinion, inform and substance satisfactory to the Corporation, of legal counsel acceptable to the Corporation, that such registration is not required. Furthermore, the Corporation shall have the right to require a Key Employee to enter into such shareholder or other related agreements as the Corporation deems necessary or appropriate under the circumstances as a condition to the issuance of any Stock under this Plan to a Key Employee.
Section 12. LIFE OF PLAN
No Option shall be granted under this Plan on or after the earlier of
(a) the tenth anniversary of the original effective date of this Plan as determined under Section 4; provided, however, that after such anniversary date this Plan otherwise shall
continue in effect until all outstanding Options have been exercised in full or no longer are exercisable, or
(b) the date on which all of the Stock reserved under Section 3 of this Plan has, as a result of the exercise of Options granted under this Plan, been issued or no longer is available for use under this Plan, in which event this Plan also shall terminate on such date.
The number of shares of Stock reserved under Section 3 of this Plan, and the number of shares of Stock subject to Options granted under this Plan and the Option Price of such Options shall be adjusted by the Board in an equitable manner to reflect any change in the capitalization of the Corporation, including, but not limited to, such changes as stock dividends or stock splits. Furthermore, the Board shall have the right to adjust in a manner which satisfies the requirements of Section 424(a) of the Code the number of shares of Stock reserved under Options granted under this Plan and the Option Price of such Options in the event of any corporate transaction described in Section 424(a) of the Code that provides for the substitution or assumption of such
Options. If any adjustment under this Section 13 would create a fractional share of Stock or a right to acquire a fractional share of Stock, such fractional share shall be disregarded and the number of shares of Stock reserved under this Plan and the number subject to any Options granted under this Plan shall be the next lower number of shares of Stock, rounding all factions downward. An adjustment made under this Section 13 by the Board shall be conclusive and binding on all affected persons and, further, shall not constitute an increase in "the number of shares reserved under Section 3" within the meaning of Section 15(a) of this Plan.
Section 14. SALE OR MERGER OF THE CORPORATION
If the Corporation agrees to sell all or substantially all of its assets for cash or property or for a combination of cash and property or agrees to any merger, consolidation, reorganization, division or other corporate transaction in which Stock is converted into another security or into the right to receive securities or property and such agreement does not provide for the assumption or substitution of the Options granted under this Plan, each then outstanding Option at the direction and discretion of the Board may be canceled unilaterally by the Corporation as of the effective date of such transaction in exchange for the same net consideration which each Key Employee would have received if each such Option had been exercisable in full on such date and each Key Employee had exercised each such Option for Stock under Section 11 on such date and then sold such Stock on such date.
Section 15. AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent that the Board deems necessary or appropriate; provided, however, that no such amendment shall be made absent the approval of the shareholders of the Corporation (a) to increase the aggregate number of shares reserved under Section 3, (b) to extent the maximum life of the Plan under Section 12 or the maximum exercise period under Section 9, (c) to decrease the minimum option price under Section 8, (d) to change the class of persons eligible for Options under Section 6 or to otherwise materially modify the requirements as to eligibility for participation in this Plan, or (e) to otherwise materially increase the benefits accruing under this Plan. The Board also may suspend the granting of Options under this Plan at any time and may terminate this Plan at any time; provided, however, that the Corporation shall not have the right unilaterally to cancel or, in a manner which would materially adversely affect the holder, amend or modify any Option granted before such suspension or termination unless (i) the Key Employee consents in writing to such modification, amendment or cancellation or (ii) there is a dissolution or liquidation of the Corporation or a transaction described in Section 13 or Section 14 of this Plan.
16.1 No Shareholder Rights. No Key Employee shall have any rights as a shareholder of the Corporation as a result of the grant of an Option to him or
to her under this Plan or his or her exercise of such Option pending the actual delivery of Stock subject to such Option to such Key Employee.
16.2 No Contract of Employment. The grant of an Option to a Key Employee under this Plan shall not constitute a contract of employment and shall not confer on a Key Employee any rights upon his or her termination of employment or service in addition to those rights, if any, expressly set forth in the Option Certificate which evidences his or her Option.
16.3 Withholding. The exercise of any Option granted under this Plan shall constitute a Key Employee's full and complete consent to whatever action the Committee elects to satisfy the federal and state tax withholding requirements, if any, which the Committee in its discretion deems applicable to such exercise or surrender.
16.4 Construction. This Plan and the Option Certificates shall be construed under the laws of the State of New Jersey. | S-8 | EX-4.1 | 1996-01-16T00:00:00 | 1996-01-16T16:20:02 |
0000893877-96-000008 | 0000893877-96-000008_0002.txt | THIS PATENT PURCHASE AGREEMENT (this "Agreement") is entered into as of this 24th day of October, 1995 (the "Effective Date"), by and between PCT HOLDINGS, INC., a Washington corporation ("PCTH"), SEISMIC SAFETY PRODUCTS, INC., a Washington corporation (the "Subsidiary"), and JAMES C. McGILL ("McGill"), of Glendale, California, and ANTONIO F. FERNANDEZ, of Quezon City, Philippines, ("Fernandez"), in their individual capacities. McGill and Fernandez are together referred to as the "Sellers."
WHEREAS, McGill and Fernandez jointly hold one United States Letter Patent, U.S. Patent No. 5,409,031, granted on April 25, 1995, one United States Patent Application, U.S. Patent Application No. 08/403,098, filed on March 13, 1995, and one International Patent Application, International Application No. PCT/US95/04830, filed on April 24, 1995
WHEREAS, the Sellers are the holders of certain Intellectual Property, including but not limited to licenses, royalties, trademarks and trade names, copyrights, trade secrets, know-how, proprietary information, inventions, developments, innovations or techniques relating to the Patents or products developed thereunder (the "Related Intellectual Property"); and
WHEREAS, PCTH has offered to cause the Subsidiary to purchase from the Sellers their respective interests in the Patents and the Related Intellectual Property (including but not limited to the right to sue for past infringements), so as to acquire full and unencumbered title and interest in the Patents and Related Intellectual Property, as set forth in the attached disclosure (the "Disclosure Schedule"), for an aggregate consideration of $400,000 and otherwise upon the terms and subject to the conditions hereinafter set forth; and
WHEREAS, the Sellers desire to sell to the Subsidiary all of the Patents and Related Intellectual Property, based upon the terms and subject to the conditions hereinafter set forth; and
WHEREAS, to induce PCTH to enter into this Agreement the Sellers have agreed to enter into a noncompetition agreement and to grant other rights to PCTH and the Subsidiary;
NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto covenant and agree as follows:
1.1 Agreement to Sell and Purchase. Upon the basis of the representations and warranties, for the consideration, and subject to the terms and conditions set forth in this Agreement, the Sellers hereby agree to sell, transfer, assign and convey, and the Subsidiary hereby agrees to purchase, the Patents and the Related Intellectual Property, including but not limited to the right to sue for all past infringements, free and clear of all liens, encumbrances and rights of others.
1.2 Purchase Price. The total purchase price for the Patents and Related Intellectual Property (the "Purchase Price") shall be $400,000, $370,000 of which shall be paid to Fernandez and $30,000 of which shall be paid to McGill, as provided in Section 1.3 hereof.
1.3 Payment of Purchase Price. The Purchase Price shall be payable to the Sellers by the Subsidiary or PCTH as follows:
(a) $185,000 to be paid by wire transfer to Fernandez at the Closing hereof and $15,000 to be paid by wire transfer or company check to McGill at the Closing hereof; and
(b) $185,000 to be paid by wire transfer to Fernandez on the first anniversary of the Closing hereof (the "Second Payment Date") and $15,000 to be paid by wire transfer or company check to McGill on the Second Payment Date.
1.4 Transfer Documents. Provided that all conditions precedent have been fulfilled or waived, the Sellers shall deliver to the Subsidiary, upon payment of the $200,000 due on the Closing Date (as defined in Section 1.5), patent assignments and such other instruments of transfer (in form and substance satisfactory to PCTH and the Subsidiary) as may be necessary to transfer to the Subsidiary all of the right, title and interest of each of the Sellers in and to the Patents and Related Intellectual Property, free and clear of any liens, claims or encumbrances of any kind.
1.5 Closing. The closing of the transaction contemplated in this Agreement (the "Closing") shall take place on November 30, 1995 (the "Closing Date") at the offices of Stoel Rives, 3600 One Union Square, Seattle, Washington, or at such other time and place as the parties may agree.
2.1 Right to Terminate. Notwithstanding anything to the contrary in this Agreement, this Agreement may be terminated and the transactions contemplated herein abandoned at any time prior to the Closing:
(a) Mutual Consent. By mutual consent of PCTH and the Sellers.
(b) Delay. By either PCTH or the Sellers, if the Closing shall not have occurred by December 31, 1995; provided, however, that the right to terminate this Agreement under this Section 2.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date.
(c) Breach by PCTH. By Sellers, if PCTH breaches any of PCTH's representations and warranties in any material respect or fails to comply in any material respect with any of its agreements contained here.
(d) Breach by Sellers. By PCTH, if either of the Sellers breaches any of his representations and warranties in any material respect or fails to comply in any material respect with any of his agreements contained herein.
2.2 Obligations to Cease. If this Agreement is terminated pursuant to Section 2.1, all obligations of the parties to this Agreement shall terminate and there shall be no liability of any party hereto to any other party except (i) as set forth in Sections 6.4 and 8.6 and (ii) that nothing herein will relieve any party from liability for any willful breach of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLERS.
The Sellers jointly and severally represent and warrant to PCTH and the Subsidiary that:
3.1 Due Authorization. The Sellers each have full power and authority to execute and deliver this Agreement and to perform and to carry out their obligations under this Agreement. This Agreement has been duly and validly executed and delivered by the Sellers and is binding upon and enforceable against them in accordance with its terms, except as such enforcement may be limited by equitable principles or by applicable bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally. The execution and delivery of this Agreement (as well as all instruments, agreements, certificates, or other documents contemplated hereby) by the Sellers, or either of them, and the performance of their obligations thereunder, will not (a) violate any federal, state, county, or local law, rule, or regulation or any applicable decree or judgment of any court or governmental authority or (b) violate or conflict with, or permit the cancellation of, or constitute a default under, any agreement to which either of the Sellers is a party or by which either of them or their property is bound.
3.2 Title to Patents and Related Intellectual Property. The Patents and Related Intellectual Property constitute all of the intellectual property subject to this Agreement (the "Intellectual Property"). Except as otherwise provided in the Disclosure Schedule, McGill and Fernandez have good and marketable legal and equitable title to all of the Intellectual Property, including without limitation the exclusive right to bring actions for infringement thereof, free and clear of all security interests, liens, encumbrances, claims or rights of any kind, except as described on the Disclosure Schedule. The Sellers each individually own an undivided, one-half interest and jointly own unencumbered legal and equitable title to U.S. Patent No. 5,409,031 and U.S. Patent Application No. 08/403,098 and
Application No. PCT/US95/04830. Except as described on the Disclosure Schedule, the Sellers have not licensed to others, or agreed to license, any of the Intellectual Property, or entered into any contracts with respect thereto.
3.3 No Infringement. There has been no assertion or claim that any manufacture, use or sale of any product by any third party infringes any of the claims of the Patents, and neither of the Sellers believes or has any reason to believe that any manufacture, use or sale of any product by any third party infringes any of the claims of the Patents. There has been no assertion or claim that any other duplication or use by any third party infringes or violates any Related Intellectual Property rights, and neither of the Sellers believes or has any reason to believe that any duplication or use by any third party infringes or violates the Related Intellectual Property. There is no claim, dispute, action, proceeding or lawsuit asserting infringement of the rights of any third party by the products and methodologies claimed in the Patents or by any Related Intellectual Property, no threat of such action, and no basis exists for any such action.
3.4 Validity of Patents. All materials and information of which disclosure to the United States Patent and Trademark Office is required pursuant to United States Patent Law and Regulations during the prosecution of the Patents have been submitted thereto. There has been no misrepresentation and, to the best knowledge and belief of the Sellers, there is no information or prior art reference that would render the Patents invalid or raise material questions regarding their validity.
3.5 Consents and Approvals. No consent, approval or authorization of, or filing or registration with, any court, regulatory authority, governmental body, or any other third party is required for the consummation of the transaction contemplated in this Agreement.
3.6 Brokers. Neither Seller has entered into any arrangement with any broker, finder or investment banker or will incur a fee or any liability for any brokerage or investment banking fee, commission, or finder's fee in connection with the transactions contemplated in this Agreement.
3.7 Reliance. The Sellers recognize and agree that, notwithstanding any investigation by PCTH, PCTH is relying upon the representations and warranties made by the Sellers in this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF PCTH AND THE SUBSIDIARY.
PCTH and represents and warrants to the Sellers as follows:
4.1 Due Organization. PCTH is a corporation duly organized, validly existing, and in good standing under the laws of the State of Washington and has full corporate power and authority to enter into and perform its obligations under this Agreement. The Subsidiary is a corporation duly organized, validly existing, and in good standing under the laws of the State of Washington and has full corporate power and authority to perform its obligations under this Agreement.
4.2 Due Authorization. PCTH and the Subsidiary each have full corporate power and authority to execute and deliver this Agreement and to perform and carry out their obligations under this Agreement. The execution and delivery of this Agreement and performance of PCTH's obligations and the obligations of the Subsidiary contemplated hereby have been duly and validly authorized by all necessary corporate action of PCTH and the Subsidiary. This Agreement has been duly and validly executed and delivered by PCTH and the Subsidiary and constitutes the valid and binding obligation of PCTH and the Subsidiary, enforceable against them in accordance with its terms, except as such enforcement may be limited by equitable principles or by applicable bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally. The execution and delivery of this Agreement (as well as all instruments, agreements, certificates or other documents contemplated hereby) by PCTH and the Subsidiary, and their performance of their obligations thereunder, will not (a) violate any federal, state, county, or local law, rule, or regulation or any decree or judgment of any court or governmental authority applicable to PCTH or the Subsidiary or their property or (b) violate or conflict with, or permit the cancellation of, or constitute a default under, any agreement to which PCTH or the Subsidiary is a party or by which they or their property is bound.
5.1 Indemnification. The Sellers jointly and severally agree to indemnify and hold harmless PCTH and the Subsidiary, and any of the affiliates, officers, directors, employees, successors, assigns or agents of PCTH and the Subsidiary, from and against any losses, damages, liabilities, costs and expenses, including without limitation any attorneys' fees, technical expert fees and any other expenditures for defense, and damages and settlement disbursements that may be incurred as a result of any claim, dispute, proceeding or lawsuit out of or related to any breach of, misrepresentation or inaccuracy in, or intentional or reckless omission from, any representation or warranty made by McGill or Fernandez in this Agreement or related agreements or documents.
(a) Claim Notice. In the event that an indemnified person reasonably determines that it is entitled to indemnification pursuant to Section 5.1, the indemnified person shall provide written notice to the Sellers, specifying in reasonable detail the nature and estimated amount of the claim.
(b) Third-Party Claims. If the claim specified in the claim notice relates to a third-party claim, the Sellers shall have 15 days after their receipt of the claim notice to notify the indemnified person whether the Sellers agree that the claim is subject to indemnification pursuant to this Section 5 and whether the Sellers elect to defend such third-party claim at their own expense. If the claim relates to a third-party claim that the Sellers elect to defend, the indemnified person shall reasonably cooperate with such defense. The indemnified person shall, however, be entitled to participate in the defense or settlement of such a third-party claim through its own counsel and at its own expense and shall be entitled to approve or disapprove any proposed settlement that would impose a duty or obligation on the indemnified person. If the Sellers do not timely elect to defend a third-party claim, or if the Sellers fail to conduct such defense with reasonable diligence, the indemnified party may conduct the defense of, or settle, such claim at the risk and expense of the Sellers.
(c) Claims Other Than Third-Party Claims. If the claim does not relate to a third-party claim, the Sellers shall have 30 days after receipt of the claim notice to notify the indemnified party in writing whether the Sellers accept liability for all or any part of the claim and the method and timing of any proposed payment. If the Sellers do not so notify the indemnified party, the Sellers shall be deemed to have accepted liability for all damages described in the claim notice.
5.3 Set-Off During First Year. Notwithstanding anything to the contrary in Section 5.2, in the event that PCTH or the Subsidiary reasonably determines at any time prior to the Second Payment Date that PCTH or the Subsidiary is entitled to indemnification pursuant to Section 5.1, PCTH shall be entitled to pay the amount of any such claim to an escrow agent instead of to the Sellers as part of the $200,000 payment due on the Second Payment Date. In the event that PCTH pays any such disputed amount to an escrow agent and the parties are not able to mutually resolve the dispute within 10 business days after the Second Payment Date, the parties shall submit the dispute to arbitration. Arbitration under this section shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association, in King County, Washington, by one attorney arbitrator selected by mutual agreement, or by three arbitrators if the parties are unable to agree on a single arbitrator within 20 days of the first demand for arbitration. All arbitrators are to be selected from a panel provided by the American Arbitration Association. The arbitrators shall have the authority to permit discovery, to the extent deemed appropriate by the arbitrators, upon request of a party. The arbitrators shall have no power or authority to add to or detract from the agreements of the parties. The cost of the arbitration shall be borne equally pending the arbitrator's award. The arbitrators shall have no authority to award punitive or consequential damages. The resulting arbitration award may be enforced by all lawful remedies, including without limitation injunctive or other equitable relief obtained in any applicable court located in King County, Washington.
6.1 Noncompetition Covenant. Both McGill and Fernandez agree that, for five years following the Closing Date, they will not directly or indirectly engage in or perform any services to, or provide individuals to perform such services to, whether on an employment, a consulting or an advisory basis, or own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation or control of, any business or undertaking that competes with any business of PCTH or the Subsidiary or any affiliate thereof in an area of technology that is related to earthquake gas shutoff apparatus that are activated by seismic activity, this area of technology specifically excluding, without limitation, technology related to leak-detecting shutoff systems, electro-magnetic actuators, earthquake alarms and P wave alarms.
6.2 Right of First Refusal. For five years following the Closing Date, PCTH and the Subsidiary shall have the right of first refusal to purchase any technology, product, prototype or concept ("Subsequent Technology") related to the subject matter claimed in the Patents which McGill or Fernandez develop, which right may be exercised on an exclusive basis within three months after PCTH or the Subsidiary receives written notice from McGill or Fernandez of the existence of the Subsequent Technology. The terms of any such exercise shall be agreed upon by PCTH or the Subsidiary and either or both of McGill and/or Fernandez (individually if one has rights to the Subsequent Technology and the other does not, or together if they have joint rights). Prior to and during the three-month exclusive period, neither of the Sellers will entertain offers from any third party for the Subsequent Technology. PCTH and the Subsidiary shall have the further right, after expiration of any such three-month exclusive period, to match any other offer made for the Subsequent Technology, within one month of receiving notice of such offer, by giving written notice of its intention to match such offer. The Sellers agree to notify PCTH and the Subsidiary promptly upon determining that any Subsequent Technology is available and to notify PCTH and the Subsidiary promptly in the event that any offer for Subsequent Technology is received from a third party. If no terms are agreed upon by PCTH or the Subsidiary and McGill and/or Fernandez, or no matching offer is made by PCTH or the Subsidiary within the applicable time periods, McGill and/or Fernandez will be free to manufacture, market, sell, distribute, license or otherwise dispose of the Subsequent Technology at their discretion and notwithstanding any other provisions of this Agreement. In the event that a person other than McGill or Fernandez has rights to Subsequent Technology because such person is a co-inventor or co-developer thereof, the Sellers will use their best efforts to provide to PCTH and the Subsidiary the rights described in this Section with respect to such person's interest.
6.3 Further Assurances. Both of the Sellers agree that, from time to time and after execution of this Agreement, they will, upon the request of PCTH or the Subsidiary and without further consideration, take all steps reasonably necessary to place the Subsidiary in possession of full record and actual title to the Patents and Related Intellectual Property and full operating control of all rights to make, use and sell the products embodying the Patents and Related Intellectual Property, and each of them will do or have done, execute or have executed, and deliver or have delivered, all further acts, assignments, powers of attorney, and acknowledgements or assurances as reasonably required to assign to and vest in the Subsidiary all of the respective rights, titles, and interests of the Sellers in the Patents and Related Intellectual Property Rights.
6.4 Confidentiality. The terms and conditions of this Agreement and all information and materials, including all financial statements and business information, know-how, techniques and other proprietary materials and intellectual property used in the conduct of the respective businesses of the parties hereto as now conducted or as proposed to be conducted, that have been divulged or provided during the negotiation of this Agreement are the confidential information of the party owning such information and materials (the "Confidential Information"). Unless the owner of the relevant Confidential Information consents in writing to the contrary, no Confidential Information shall be divulged, except on a need to know basis to directors, officers or key employees involved in the transactions contemplated hereby and such third party consultants as need the Confidential Information for tax, accounting, or similar purposes, or as required by applicable law; provided that this obligation will not apply to PCTH or the Subsidiary after the Closing Date.
6.5 Disclosure. Any press release or public disclosure regarding the execution of this Agreement or the terms hereof will be made at the sole discretion of PCTH or the Subsidiary.
6.6 Maintenance After Closing. PCTH and the Subsidiary shall be responsible for all costs, services and fees involved with prosecution, allowance, registration and maintenance of the Patents and Related Intellectual Property that arise after Closing.
6.7 Performance of Subsidiary Obligations. Subject to the consummation of the Closing, PCTH agrees to carry out the obligations of the Subsidiary in the event that the Subsidiary fails to carry out any of its obligations to Sellers under this Agreement, including any obligations pursuant to Sections 1.2 or 1.3, above.
7. CONDITIONS PRECEDENT TO CLOSING.
7.1 Conditions Precedent to the Obligations of PCTH and the Subsidiary. The obligations of PCTH and the Subsidiary to close the transaction contemplated in this Agreement are subject to the fulfillment, at or prior to Closing, of the following conditions (unless waived in writing by PCTH):
(a) Representations and Warranties. The representations and warranties of the Sellers contained herein shall be true and correct in all material respects as of Closing as if made at Closing;
(b) License Agreement. The License Agreement between the Sellers and Seismic Safety Products, Inc., dated April 24, 1995, shall have been terminated, and thereby rendered null and void in its entirety; and
(c) Noncompetition Agreements. Noncompetition agreements shall have been procured from any person, in addition to the Sellers, who has been involved in the design or development of any product, prototype or concept claimed in or derived from the patents, on terms substantially similar to the provisions of Section 6.1.
(d) Closing Documents. The Sellers shall have executed and delivered to PCTH and the Subsidiary all documents required to be delivered by the Sellers pursuant to this Agreement, in form reasonably satisfactory to PCTH and its counsel.
7.2 Conditions Precedent to the Obligations of the Sellers. The obligations of the Sellers to close the transaction contemplated in this Agreement are subject to the fulfillment, at or prior to Closing, of the following conditions (unless waived in writing by the Sellers):
(a) Representation and Warranties. The representations and warranties of PCTH and the Subsidiary contained herein shall be true and correct in all material respects as of Closing as if made at Closing; and
(b) Purchase Price. PCTH shall have delivered the first half of the Purchase Price.
7.3 Condition Precedent to the Obligations of All Parties. The obligations of all parties to close the transaction contemplated in this Agreement are subject to the closing, prior to or simultaneously with the Closing, of the purchase by PCTH or the Subsidiary of substantially all of the assets of Seismic Safety Products, Inc., a Florida corporation.
8.1 Waiver or Modification of Agreement. No modification or waiver of any provision of this Agreement, nor any consent to any departure by either party herefrom, shall in any event be effective unless the same shall be in writing and signed by the party against which enforcement of such modification or waiver is sought, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
8.2 Amendment of Agreement. This Agreement may be amended with respect to any provision contained herein by a written instrument duly executed on behalf of each party hereto.
8.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when personally delivered, or three days after deposited in the United States mail, first-class, postage prepaid, or by facsimile addressed to the respective parties hereto as follows:
If to PCTH or the Subsidiary:
36th Floor, One Union Square
If to McGill, or Fernandez:
or to such other address as to any party hereto as such party shall designate by like notice to the other parties hereto.
8.4 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original but all of which counterparts collectively shall constitute one instrument, and in making proof of this Agreement, it shall never be necessary to produce or account for more than one such counterpart.
8.5 Survival of Representations and Warranties. The representations and warranties of the parties contained in this Agreement shall survive the Closing.
8.6 Expenses. Each of the parties hereto will bear all costs, charges and expenses incurred by such party in connection with this Agreement and the consummation of the transactions contemplated herein.
8.7 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of PCTH, the Subsidiary, McGill, Fernandez, and their representatives, successors, and permitted assigns, in accordance with the terms hereof. PCTH and the Subsidiary agree that any sale, transfer, assignment or conveyance of the Patents and Related Intellectual Property to another party shall be made expressly subject to the terms, conditions and provisions of this Agreement.
8.8 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, representations, warranties, statements, promises, information, arrangements and understandings, whether oral or written, express or implied, with respect to the subject matter hereof.
8.9 Governing Law. This Agreement and its validity, construction, enforcement, and interpretation shall be governed by the substantive laws of the State of Washington.
8.10 Attorneys' Fees. If suit, action or appeal is filed by any party to enforce the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and expenses.
8.11 Invalid Provisions. If any provision of this Agreement is deemed or held to be illegal, invalid or unenforceable, this Agreement shall be considered divisible and inoperative as to such provision to the extent it is deemed to be illegal, invalid or unenforceable, and in all other respects this Agreement shall remain in full force and effect; provided, however, that if any provision of this Agreement is deemed or held to be illegal, invalid or unenforceable there shall be added hereto automatically a provision as similar as possible to such illegal, invalid or unenforceable provision and be legal, valid and enforceable. Further, should any provision contained in this Agreement ever be reformed or rewritten by any judicial body of competent jurisdiction, such provision as so reformed or rewritten shall be binding upon all parties hereto.
8.12 Remedies Cumulative. The remedies of the parties under this Agreement are cumulative and shall not exclude any other remedies to which any party may be lawfully entitled.
8.13 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 further exercise thereof or the exercise of any other right, power, or privilege.
8.14 Headings. The descriptive section headings are for convenience of reference only and shall not control or affect the meaning or construction of any provision of this Agreement.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly executed as of the date and year first above written.
PCT HOLDINGS, INC., a Washington
By /s/ DONALD A. WRIGHT
SEISMIC SAFETY PRODUCTS, INC., a
By /s/ DONALD A. WRIGHT
The Patents are subject to a License Agreement dated April 24, 1995, pursuant to which the Patents are licensed to Seismic Safety Products, Inc., a Florida corporation. | 10QSB | EX-10.2 | 1996-01-16T00:00:00 | 1996-01-16T17:17:04 |
0000912057-96-000479 | 0000912057-96-000479_0001.txt | MEMPHIS, January 12, 1996 ... Federal Express Corporation today announced that recent severe weather, coupled with the impact of earlier storms, will reduce the Company's third quarter operating profit significantly below current consensus Wall Street estimates. The third quarter will end February 29, 1996.
Chief Financial Officer Alan B. Graf, Jr. said, "Earlier this week, snowstorms shut down 18 airports in the Northeast and many businesses were closed. This part of the country accounts for 25-30% of our worldwide package volume, and these closures could mean as much as a $20 million loss of revenues this week. We have also incurred additional expenses dealing with the aftermath of the storm."
William J. Razzouk, Executive Vice President Worldwide Customer Operations, said, "In addition to the storms, the weakness in international airfreight traffic is also adversely affecting current period results. We've been able to make some operational adjustments and short-term expense improvements, but not enough to overcome the effects of a weak international economy."
Graf concluded, "Our yield management actions are continuing to have a positive influence domestically, and we are confident in the long-term soundness of our international strategy."
Federal Express is the world's largest express transportation company, providing fast and reliable services for important documents, packages and freight. The company delivers more than 2.4 million items each working day. It employs more than 119,000 people, and operates 531 aircraft and almost 37,000 vehicles in its integrated system. Federal Express reported revenues of $9.4 billion for its fiscal year ended May 31, 1995.
Contact: Tom Martin 901-395-3490 or | 8-K | EX-20.1 | 1996-01-16T00:00:00 | 1996-01-16T08:41:28 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.